MACRO AND MARKETS, REGULATION, TRADE FINANCE
China and the EU: enduring partners
11 February 2021
As China recovers from 2020 and enters the Year of the Ox, what does 2021 have in store for EU corporates in the country? Upcoming agreements and regulations look set to forge a path for greater investment opportunities and improved cross-border processes. A Deutsche Bank webinar provided a progress report
In February 2020, China was sat at the epicentre of the Covid-19 pandemic, the impact of which saw its economy contract for the first time in four decades.1 Today, China has recovered well and has enjoyed its strongest growth in two years – a testament to the country’s success in containing the impact of the virus.2 What a difference a year makes.
As China targets a continued recovery, the country has implemented a series of agreements and regulations to further encourage foreign direct investment (FDI) from the EU. In a 28 January 2021 webinar, titled Gear up for 2021: Gaining the edge in the reviving year, Deutsche Bank Corporate Bank China provided updates and insights on these latest developments.
EU investment in China: A brief history
Since May 1975, when diplomatic relations were first established, the evolving relationship between the European Union (EU) has helped China fuel its rapid economic growth.3
Throughout the 1980s and 1990s, China’s trade barriers remained high, leading some companies to utilise foreign direct investment (FDI) as a means to circumvent them. China also began signing bilateral investment agreements with the majority of European countries – encouraging a period of rapid growth and limited competition for investors into China.
China’s admittance to the World Trade Organisation (WTO) in 2001 tore down the traditional trade barriers, while integrating China into the global supply chain and enabling export-oriented FDI to grow throughout the decade.4
Between 2010 and 2017, the Chinese government’s efforts to liberalise its foreign investment policies stalled, precipitated by an economic rebalancing in which China’s domestic market took precedence. In 2017, however, the gears on the country’s liberalisation initiative were reactivated, in part a result of growing trade tensions with the US. Since then, reports Yi Xiong, Chief Economist, China, at Deutsche Bank, China has continued to ramp up its efforts – cumulating most recently in the January 2021 announcement of the Comprehensive Agreement on Investment (CAI) between China and the EU.
The Comprehensive Agreement on Investment (CAI)
In December 2020, the EU and China began the next chapter of their relationship by concluding – in principle – terms for the CAI.5 Following seven years and 35 rounds of negotiations, the agreement, which has been described by the European Commission as the “most ambitious agreement China has ever concluded with a third country”,6 sets a high benchmark in terms of transparency, a level playing field, market access commitments and sustainable development. Through the agreement, China is bound to the liberalisation of its investment policy and commits to providing defined conditions of market access for European companies.
To put the agreement into perspective, Xiong explains that “The EU and China are the biggest bilateral trading partners in the world. Yet, since 2010, EU manufacturing subsidiaries in China have sold more goods than the EU exports to China, with the growth rate for subsidiaries standing at about 9% per year, compared to 7% for trade. As such, the CAI covers an area that is not only bigger than trade, but also growing faster than trade.”
"The Comprehensive Agreement on Investment, covers an area that is not only bigger than trade, but also growing faster than trade"
Most importantly, Xiong adds, the agreement directly addresses the manufacturing industries that the EU has the most interest in, as well as where they have the best growth potential (See Figure 1). For example, in the automotive sector – by far the largest in terms of sales – China has agreed to remove joint venture requirements and to grant market access for new energy vehicles.
Figure 1: EU manufacturing subsidiaries sales in China, breakdown by sector
Source: Deutsche Bank Research
The CAI could also provide an opportunity to explore the untapped potential of China’s services sector, which, outside of wholesale and retail services, is currently limited. According to Xiong, “the limited growth of EU subsidiaries in China’s services sector is not a result of a lack of growth overall”. In fact, the services sector is actually growing faster than manufacturing; the problem is market restrictions.
Figure 2 shows the breakdown of EU foreign subsidiaries sales for China and the world (excluding the EU) across the services and manufacturing sectors. It demonstrates that the subsidiary sales for services in China is much lower than manufacturing, and this split is disproportionately weighted in favour of manufacturing when compared to the sales split shown across the world.
Figure 2: EU subsidiaries sales by sector
Source: Deutsche Bank Research
EU subsidiaries in China are most under-represented in two sectors: financial services and information and communication. Work is underway to liberalise the financial services sector, with joint venture requirements and foreign equity caps having already been removed for banking, trading in securities and insurance (including reinsurance), as well as asset management. The agreement provides a guarantee that this commitment will continue.7 For information and communication services, the CAI includes a promise to lift the investment ban on cloud services, which will now be open to EU investors subject to a 50% equity cap.
The CAI seeks to establish a level playing field for European enterprises in China, helping to ensure that state-owned enterprises operate in accordance with commercial considerations and do not discriminate in their purchases and sales of goods or services. This ties in with broader efforts in China to ensure a clampdown on monopolistic practices from local companies, to open the door to local competition.
Anti-monopoly policy, specifically against the big, platform economies, is a new subject for China – and for regulators globally. In a sector where being number one is everything, the competition is predictably fierce. As a result, monopolistic practices such as offering different prices for the same product or services, or forcing customers to choose a single provider, have become the norm.
In February 2020, the State Administration for Market Regulation (SAMR) formalised a set of anti-monopoly guidelines that clarify and codify monopolistic practices in China. SAMR said the latest guidelines would “protect fair competition in the market” by preventing companies from price fixing, restricting technologies and using data and algorithms to manipulate the market.8
These guidelines, says Xiong, are part of China’s long-term vision, which aims to strengthen the domestic market by ensuring it is not dominated by monopolies, and improve income distribution and ensure that growth and capital allocation is friendly to employment.
He adds that platform companies are, on balance, fairly positive for China’s economy. “They can improve market efficiency, promote competition, create employment and help small businesses grow. The issue is not with the platforms themselves, but with how they are using their dominant position to avoid competition.”
Optimising cross-border regulations
Positive steps forward are also being made in the cross-border payments field, with international settlement in RMB, as well as RMB investment and financing, set to be further streamlined. On 4 January 2021, the People’s Bank of China (PBOC), together with five national bureaus, issued the “Notice on Further Optimising Cross-border RMB Policy and Supporting Foreign Trade and Foreign Investment Stabilisation”, otherwise known as the Circular 330.9 Consisting of five parts and a total of 15 articles, Circular 330, which came into effect on 4 February, revises existing regulations related to cross-border RMB to further optimise cross-border RMB management. It covers three key areas:
The facilitation of cross-border renminbi (RMB) settlement
- Trade and investment pilot: Having first been trialled across 18 free trade zones in China in 2019, the Circular 330 extends a trade and investment pilot nationwide.10 As part of this, banks can now perform cross-border RMB settlements for trade in goods and services, as well as handle RMB revenues that fall under the capital account for qualified companies (based on their cross-border RMB settlement declarations or payment/receipt instructions).
- Enabling offshore funds: The Circular 330 also enables the non-resident account (NRA) of an overseas institution to be used to receive RMB funds remitted from an overseas accounts with the same name.
Further simplification of the cross-border RMB settlement process
- Optimising the key priority list: Corporates put on the key priority list can find themselves either unable to continue operating or subject to heavy regulation. Together with the relevant departments, PBOC will update the identification standards used to draw up the list, improve the list formation system and process, and support the development of foreign trade enterprises.
- Support e-verification of supporting documents: Banks will be allowed to utilise electronic collection and payment instructions for cross-border RMB settlement handling.
- Optimise cross-border RMB centralised payment/collection mechanism: A company can now nominate an entity as the leading entity – regardless of its registered location – to set up an RMB settlement account according to its real needs.
Enhancement to cross-border RMB investment and financing
- Relaxing business scope restrictions: RMB income from the capital account of domestic institutions can now be used for a greater scope of business needs, as approved by the relevant state departments.
- Convenience for reinvestment in China: If a foreign investor decides to use their income from domestic RMB profits for domestic reinvestment, they are no longer required to open a deposit account for the RMB reinvestment funds or for the invested company’s RMB capital.
- Relaxing special account requirements: If foreign investors use domestic RMB profits for domestic reinvestment, they can transfer RMB funds directly to the accounts of invested enterprises or equity transferors without having to open special accounts.
- Optimising foreign loans: Depending on their needs, domestic enterprises can open multiple foreign loan accounts for a single RMB foreign loan or a single foreign loan account for multiple RMB foreign loans under the same name.
The Circular 330 also adjusts the outstanding balance calculation for outbound lending. The new formula introduces a currency conversion factor of 0.5 for non-RMB lending. This means that if a company provided a non-RMB loan, its overseas loan calculation would come out higher than if it had lent out the equivalent amount in RMB – meaning RMB loans are now more favourable than non-RMB loans.
Subsequently, on 5 January 2021 and 7 January 2021 respectively, the PBOC and the State Administration of Foreign Exchange (SAFE) announced that the lending quota for corporate overseas loans would increase from 30% of net assets to 50% of net assets and the upper limit of the cross-border financing quota would be lowered. For Jingwen Pan, Senior Product Manager, Greater China Corporate Cash Management, Deutsche Bank, the key message is clear: “this can be seen as an attempt to encourage the outflow of RMB and promote internationalisation”.
New product and service offering
With prospects for EU companies to invest in China or continue doing business in the country looking good, Deutsche Bank is continuing to expand its product offering in the region:
- e-tax solution: Launched in December 2020, Deutsche Bank’s e-tax solution facilitates tax payments via the Treasury Information Process System – an e-tax system built by the PBOC and the tax bureau, which covers taxes/fees collected by the relevant government departments. The solution offers real-time tax payments, enabling clients to more effectively manage their cash flows.
- Liquidity portal: Deutsche Bank’s liquidity portal provides clients with access to real-time data from the bank, as well as third-party banks, globally. The platform offers access to enhanced self-service capabilities to manage their liquidity flows. The key features include: real-time liquidity information through the liquidity dashboard; seamless execution for a number of treasury actions, including inter-company transfers and FX hedging, and self-service capabilities for liquidity management, including a diagrammatic overview of liquidity structures and virtual account structures.
Deutsche Bank China’s online webinar, Gear up for 2021: Gaining the edge in the reviving year, was presented on 28 January 2021
1 See https://on.ft.com/3rG7ARx on ft.com
2 See https://bit.ly/2OrrUYI on theguardian.com
3 See https://bit.ly/2MMu9FE on inter-security-forum.org
4 See https://bit.ly/2MQMQaY on ec.europa.eu
5 See https://bit.ly/3cYPW7F on trade.ec.europa.eu
6 See https://bit.ly/3qag1Ex on ec.europa.eu
7 See https://bit.ly/3qag1Ex on ec.europa.eu
8 See https://cnb.cx/3pfFtHy on cnbc.com
9 See https://bit.ly/3aQPaa0 on rmb.bk.mufg.jp
10 See https://bit.ly/2ZibVyt on rmb.bk.mufg.jp
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