Date:03-02 11:47 Source：未知 Authour：Shi Jie
With the auto market becalmed, any news that seems less than favorable to the carmakers is likely to set off an outbreak of jitters in the industry, especially for the luxury brands. Recently, an item of news concerning BMW and “foreign exchange controls” has created a lot of fuss.
A recent posting on Sina Weibo claimed that “Word has it that BMW China haven’t been able to remit their car sales profits out of China since November. Now HSBC is advancing money to BMW’s overseas suppliers on their behalf, and claims that it can only sustain this for 6 months. Similar things are also happening to other multinational companies and anxiety is starting to set in.” Though deleted immediately, the post immediately turned “foreign exchange control” into a hot topic, and also caused a certain amount of panic.
“Foreign exchange controls” is supposed to be an economic term, but judging from the way this topic trends and the lack of logic in it, it’s more like a source of entertainment.
Three Stakeholders Deny The Rumor
“BMW China cannot remit its profits out of China due to foreign exchange controls”. At first sight, this looks like a really enticing topic – capital flight, RMB appreciation and the plight of carmakers… any one of these is enough to cause a big debate. But most people seem to have no interest in finding out whether there is any truth behind it.
When I heard the news, the first thing that crossed my mind was “In China, aren’t joint ventures supposed to make payments to the suppliers?” BMW saw sales of 516,355 vehicles in China in 2016, a year-on-year increase of 11.3%. The BMW Brilliance contributed 310,000 of these, accounting for about 60% of the sales. So whether in terms of sales share or the relationship with suppliers, the joint venture is no doubt playing the leading role. However, the “foreign exchange control” rumor made no suggestion that the JV was affected at all. So it’s plain to see that even if the rumor was true, it would be impossible that BMW could not repatriate any of its profits from China operations.
I did some research into the source of the rumor and found that it came from an overseas media report. Last December, Handelsblatt quoted a statement from Anton Börner, the Chairman of the German Trade Union: “With German companies already feeling the strain in China’s business environment, the Chinese government releasing this policy is no doubt a signal to discourage investment.” Declining foreign investment in China will take a further hit. “Imposing foreign exchange controls will have a long-term negative impact on bilateral economic relations, which does not comply with China’s interests…”
However, if you check the messages posted by “SAFE Release”, the official Weibo account of the State Administration of Foreign Exchange (SAFE), you will find that it has clarified more than once that “there are no foreign exchange controls”. According to an official statement from SAFE, “It is not true that China will limit foreign companies’ profit repatriation, and there has been no change in the relevant policies; regular international payments and transfers that are genuine and compliant, including goods and service trades, dividends, and other external payments and transfers, can be directly processed in commercial banks with the presentation of authentic and valid transaction documents, and are subject to no restriction.”
I also checked with BMW China and its associated banks. BMW has not yet given any response, but some bank staff contradicted the rumor on Weibo, saying “Our bank has just processed the foreign exchange transaction for BMW’s profit remittance.”
With denials coming from both the government and the bank, most analysts have concluded that it is a “false alarm”. Sang Zhiwei, an expert from CADA, reveals that other carmakers currently remit their profits every three months, and does not accept the possibility that any carmaker “cannot make the remittance”. Yesheng, Deputy Director of Ipsos Automotive, and Zhong Shi, an auto analyst, both indicate that they have heard nothing of carmakers being subject to foreign exchange controls. Ye Sheng also agrees with me that JVs should have the primary responsibility for making payments to suppliers. He points out that there is no logic in this rumor because BMW Brilliance, as a joint venture, will not have any problem with foreign exchange remittance.
The key to preventing capital flight does not lie in restricting profit repatriation
According to some local media speculation, one of the reasons why BMW ran up against foreign exchange controls was that China’s foreign exchange reserves were dropping and that its overseas investment was falling, affecting the exchange rate, so China was anxious to restrict capital outflow.
Indeed, compared with a high of 4 trillion USD in 2014, China’s foreign exchange reserves have now dropped below 3 trillion USD. According to a Goldman report, from August 2015 to November 2016 a total of $1.1 trillion in foreign currency left China; and according to Bloomberg, an estimated $762 billion flowed out of the country in the first 11 months of 2016. With this capital outflow and the RMB’s inclusion in the SDR basket, an RMB depreciation is highly likely, which would provide the rationale for imposing foreign exchange controls.
But are China and its auto industry really so afraid of capital outflow? At the moment there are not too many markets that can adapt well to capital inflow. The new US President Donald Trump is claiming that he will “save the US manufacturing sector”, but with the US dollar being so strong, if substantial amounts of capital flow back to the United States, they are likely to end up in the US stock and housing markets. It is true that dragged down by the shale oil and gas junk stocks, the American stock market really needs an injection of capital, but there must be limits to these economic bubbles. So the United States will not keep the bar so low for capital inflow for very long. As for other markets, compared with China, there is no obvious advantage in industrial scale and growth.
Now let’s talk about the RMB exchange rate, which many people are so concerned about. The weakening of the RMB does not mean that everything will fall apart. When China’s foreign exchange reserves were high, instead of being happy, economic circles were worried about the pressure from domestic appreciation, because the ratio between the total amount of foreign exchange and that of RMB is the determining factor. To some extent, the weakening of RMB is good news for export-oriented companies. If we look back at the period from 2011-2013 when the Yen was weakening, we can see that Japanese carmakers enjoyed high profitability at that time. With similar sales and revenues, Toyota’s profits were twice those of Volkswagen. When the Yen strengthened in 2016, the profit margins of the Japanese carmakers fell. With growing exports of Chinese automobiles and spare parts, moderate depreciation of RMB might actually be good news for the Chinese auto industry.
Of course, I’m not saying that “China is not afraid of capital flight”. I just don’t think it’s time to panic. China would not take such extreme measures just to retain funds, so the idea that foreign companies cannot remit profits out of China is implausible. In fact, moderate controls should be the proper solution. The documents and circulars issued from the end of last year to the beginning of this year serve to confirm the Chinese government’s plan, especially the Circular of the State Council on Several Measures concerning the Expansion of Opening-up and the Active Use of Foreign Capital issued on January 17th, 2017.
Even if Chinese government wanted to stop capital flight, restricting profit repatriation would never be a key measure, because foreign companies invest more in China than they take out. A favorable environment will attract higher investment from foreign companies. Take GM for example. From 2014 to 2018 its JV invested 14 billion USD in China, an average of 3.5 billion USD per year. In 2016, GM’s JV gained a net profit of 4.117 billion USD, of which 1.973 billion USD was attributed to GM. It’s clear to see that the investment made by GM was at least 50% higher than its net profit.
So even if China wants to restrict capital outflow, it cannot just restrict it indiscriminately. That would mean saving a little (restricting profit remittance) to lose a lot (discouraging foreign companies from investing)
What should we worry about?
There is no doubt that some local media have exaggerated China’s anxiety over its falling foreign exchange reserves and RMB depreciation while they were trying to interpret the news. So what is the truth about these supposed foreign exchange controls?
Now if we review the reports released by the overseas media, we can clearly see that there is some flexibility in how to interpret the word “restriction”. If BMW had some trouble repatriating its profits, was this really due to some hard and fast rules on foreign exchange remittance, or just a stricter review and approval process and a longer audit period? I’ll wager that the latter is the answer, and that is something totally different from a restriction. So instead of worrying about China closing the door on foreign exchange, we should probably pay more attention to the implementation of new processes.
It was pointed out in China Strengthening Review of Forex Activities in the Wall Street Journal Chinese Online Edition on January 27th that according to the notice released by SAFE the previous Thursday, if a company wants to remit profits amounting to more than 50,000 USD out of China, it must submit the appropriate audited financial statements and tax files to the bank. Apparently, this kind of control is only procedural, requiring that the relevant documents must be audited. As for how high the government will raise the bar for audit, just for the sake of national interest, I don’t think the government will intentionally make things too difficult. As I’ve already talked about the reasons in the preceding paragraphs, I won’t elaborate further here.
So instead of worrying about things on the national strategy level, we would be better employed considering whether there is a problem of inefficiency or something similar that could hold back foreign companies’ cash flow in the specific implementation, because this kind of problem interferes with China’s stated intention of encouraging good foreign investments. After all, even a perfect policy can go wrong in the implementation.
For the auto industry, this kind of “flexible constraint” can actually bring benefits in terms of capital and technology.
It is stated in Article 18 of Circular of the State Council on Several Measures concerning the Expansion of Opening-up and the Active Use of Foreign Capital:
Promote the reform of centralized operations and management of local and foreign currency funds of foreign multinational companies. Actively attract multinational companies to establish regional headquarters and functional agencies like procurement centers and settlement centers in China, and allow foreign multinational companies to carry out centralized operation of local and foreign currency funds to promote the two-way flow of funds, improve efficient capital use, and better facilitate investment.
Actually cases like BMW’s profit remittance problem are not new. Restricted by its shareholding in the JV, the foreign side could not remit too much profit out of China, so it used its funds to establish an R&D base or technology center in China.
So what the government needs to do now is figure out how to optimize these two factors and at the same time make sure that foreign companies don’t get too frustrated.