The global corporate world can learn a lesson or two from the Chinese regime on what constitutes good public relations. After being hemmed in from all sides by the Google fracas, Rio Tinto trial and yuan appreciation demands, China is back to dangling succulent carrots for overseas investors eyeing its financial markets.
Last week, the State Council, China's Cabinet, brought out a special directive dishing out more measures that will widen market access to foreign investors.
In a complete first, China will encourage foreign companies to participate in the reorganisation and reform of its domestic enterprises through mergers and acquisitions, paving the way for foreign entities to take a strategic stake in Chinese companies.
The government will also support a move by qualified foreign-domiciled companies to sell shares publicly, issue corporate bonds and medium-term notes on the mainland.
The measures coincided with the historic launch of index futures on April 16, even as the Shanghai Stock Exchange gives finishing touches to its plans to create an international board this year.
The international board would allow foreign companies to sell shares to Chinese investors on the mainland for the first time. Foreign companies would soon be allowed to list in the city via initial public offerings or China Depository Receipts.
Commodities expert Jim Rogers, reacting to the developments, said, "These are good measures and will help. There will be some interest, but the real interest will come if and when China makes the currency convertible."
Extreme caution
Thus, at every turn, China runs up against the yuan convertibility factor in its dash to be a global player. And it is proceeding with extreme caution.
This time, the regulators have opened a parallel flank in its "open door policy" and allowed the Shanghai municipal government to take a small step toward clearing private equity hurdles for foreign investors.
The Shanghai government is planning to launch a pilot qualified foreign limited partnership (QFLP) scheme that would make it easier for foreign investors to access local private equity funds. Under this, foreign investors can invest in RMB-denominated private equity funds.
Limited scope
If approved, the pilot programme would allow certain trusted investors, such as big private equity funds and institutional investors, to invest a pool of yuan without needing to go to the government to convert funds each time.
Under the rules, foreign capital raised by QFLPs should not exceed 50 per cent of the total asset value of the fund. Shanghai's ‘trial plan' is now very limited in scope and is planned to be released sometime this month. It will first be implemented in Pudong New Area of Shanghai which can be called the city's Wall Street. It will be applicable only to foreign-invested yuan fund management companies founded in this particular area.
Also, quota limitations mandate that aggregate quota for foreign exchange convertible into yuan shall not exceed 50 per cent of the size of the fund or $100 million (Dh367 million).
Analysts are describing this move as "the most important development to date for foreign investors in the Chinese private equity market". That is because it would help overcome one of the main hurdles for overseas firms investing in China — the difficulty of converting foreign currency into yuan.
According to a report by Ashurst Hong Kong and Guantao Law Firm, there are several legal uncertainties about the QFLP program.
The issue of converting and repatriating foreign currency has not been fully worked out. It is not clear whether the foreign-invested yuan funds introduced through QFLP system will still be treated as ‘foreign investment institutions' subject to the intricate laws and regulations governing foreign-invested enterprises.
For this reason, foreign capital may adopt a wait-and-watch stance. Despite the slow progress, the new pilot programme is being seen as a breakthrough of sorts. Ultimately, the new system shall provide the ‘green channel' for free foreign exchange settlement.
The writer is a freelance journalist based in China.
