The Forex Nitty Gritty

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China Foreign Investment Limits

Posted by TFNG Admin On December - 21 - 2011  
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Will an increase in China foreign investment limits lead to a wave of Chinese acquisitions worldwide? If the relevant Chinese authority gives the go ahead individual Chinese investors will be able to purchase and use increased amounts of foreign currencies. Considering the country’s mammoth currency reserves an increase in China foreign investment limits could greatly widen the range of investments available to wealthy Chinese. As Chinese exports decline Forex traders expect less upward pressure on the Yuan. The Euro crisis and the US debt dilemma are far from resolved. Continued slow economic growth in North America and a new recession in Europe are likely to further reduce demand for Chinese exports although trader surpluses are likely to continue into the far distant future. While there threatens to be a run on French banks and a Moody downgrade of European nation debt ratings China may be extending its foreign investments and internationalizing the Yuan.

China has been under increasing pressure to let the Yuan float versus other currencies. The rationale of both European and North America leaders is that if allowed to float to its true value the Yuan will go up significantly in price. The rationale continues that a higher priced Yuan will make Chinese products less competitive and those of the EU, USA, and other nations more competitive. The goal of leaders in the West is to staunch the perpetual red ink in their balances of payments with the Chinese. For the Forex trader deciding how China foreign investment limits fit into the picture may spell the difference between profit and loss. It may be with an eventual increase of the Yuan that China is talking about allowing more of its citizens to convert Yuan to US dollars, Euros, Yen, and other major currencies in order to diversify the wealth of the nation. However, China has done spectacularly well in the last forty years since opening up to the rest of the world and done so under a very strictly controlled regime. It can be argued that they would have done better with less control. However, things as they are, China’s financial leaders may be concerned about too much capital escaping their direct control. Thus any moves to increase China foreign investment limits may be slow. Of course, if recession returns to Euro and North America, Chinese exports will suffer and in the Forex markets one may need to trade a declining Yuan.

In order to make purchases of foreign products, parts, or services, Chinese companies must purchase foreign exchange from the Central Bank and other institutions. A measure of Chinese foreign trade is the net value of foreign exchange sold by banks in a given month. When companies make a profit in a foreign currency that must sold back to the Central Bank or other financial institutions. Most recent available figures show $4.4 Billion US dollar value in sales of Yuan. This is the highest in four years. China has the world’s largest foreign currency reserves valued at over $3 Trillion USD. Because the Central bank recently sold more foreign currency that it has purchased it appears that there has been a net exit of capital from China in the last month or so which has also been seen in a diminished China current account surplus. All of this is pertinent in sorting out the end Forex result of increased China foreign investment limits.

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