New Regulations Curtail Individual Outbound Investment

The traditional misidentification of China as the “Middle Kingdom,” a literal translation of ?? (zhong-guo), leads many modern observers to claim, as did their 19 century counterparts, that China has been an historically insular nation which sees itself as the “center of the world.”
Originally, more than two millennia ago, the term was understood to have several meanings, none of which encompassed that of the English translation. It has never meant what we have ascribed to it.
Furthermore, several dynasties of yore were cosmopolitan in a very modern sense. The Tang (?) dynasty is the cosmo poster boy most often trotted out by Sinologists. Our recent burgeoning of Sino-Western contact is hardly a new phenomenon.
So let us dump on the ash heap of historiography the fantasy of a timeless “Middle Kingdom” which, because it sees itself as the center of the universe, is predisposed to disregard the rest of the world. Chinese do not see themselves to be anymore at the center of the international world than do Americans.
And yet, Chinese often blithely wander their own way with scant regard for the international sphere, and, it would appear, to their detriment. We have a timely example, in fact, that takes us to Korea on our way to the mainland.
Korea, having seen Japan’s threat to change its currency mix fail to move the Bush administration to strengthen the dollar, issued notice of a surprising policy change. Korea will now encourage outbound investment in an attempt to move offshore much its massive foreign currency reserves of $205.4 billion. As the Korea Times article notes,
“The policy shift is considered a big step to slow the pace of the won’s appreciation against the U.S. dollar and reduce the widening deficit in the service account as well as stabilize the domestic real estate market.”
The Chinese government, on the other hand, steadfastly maintains its RMB to USD peg, is unable to contain rampant property speculation and continues to accumulate foreign currency reserves (foreboding grave consequences, including inflation). A recent World Bank report warns of the potential for large capital losses to those countries with excessive foreign currency reserves.
In October, 2004, Chinese regulation was promulgated to make it somewhat easier for businesses, as opposed to individuals, to invest overseas, given the requirement of specific approvals. See page 3 of this document.
Contradictorily, and despite the economic risks, China has this past month decided to place severe constraints upon individual, as opposed to business, outbound investment. As Barbara Mok of Jones Day writes, “Outbound investment by domestic residents becomes more difficult, if not impossible.”
The impetus for the State Administration of Foreign Exchange (SAFE) regulation on individual investment may have been rooted in an attempt to curtail the pilfering of state assets. But is it any less difficult for a business to manipulate the approvals system?
The contradiction embodied by these regulations — allowing business while curtailing individual investment — may perhaps have originated in a disagreement among the various ministries involved. But, I am unsure of the validity of this assessment.
Chinese individuals have virtually no investment options. The Chinese stock markets continue their 6 year slide. Other than the very scary real property markets or the boringly unremunerative savings account in a state bank, gold bullion and postage stamps are what is laughably left.
If individuals were allowed to invest overseas, money would explosively drain out of China to places where it would find its higher return. The plug must stick in the drain, it seems, for fear that a freer flow of capital will wash it away.

UPDATE (June 1, 2005)
In a commentary on the subject of restrictions surrounding inbound (as opposed to outbound) investment, Doug Markel, an attorney with Freshfields in Beijing writes:
“Sceptics believe the government’s real intent is to put an end to offshore investments in Chinese businesses. What troubles the Chinese authorities most is the “valuation gap” in these deals. Typically, owners move their interests offshore at net asset value, before selling them at a significantly higher price.
The proceeds of such deals – including capital gains and significant foreign exchange earnings – are beyond the reach of Chinese tax and monetary authorities. The Chinese government has lost track of just how much value is leaving the country through these transactions.” [Pay site.]

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