Fresh rules to check hot money inflows
South China Morning Post
The mainland is drawing deals and money from developed economies, expanding the country's industrial and consumer base. Reverse mergers are on the upswing on the mainland. But the scale is so huge as to cause concern.
Last year, more than one-third of reverse-merger deals recorded on the United States' OTC Bulletin Board were Chinese companies going public in the US. That was a 30 per cent year-on-year increase, with 28 mergers in the fourth quarter valued at an aggregate of almost US$1.5 billion.
Tightened monetary policies on the mainland to control inflation created a lack of liquidity, which makes going public an attractive way to obtain operating capital.
Mainland companies often seek to list on American exchanges because of the global efficiency of these markets for mid-market, fast-growing companies. Typically, mainland businesses go public on the OTCBB and then up-list to the Nasdaq. Americans want to invest in the mainland because they see many companies there growing organically at 20 to 30 per cent - which is rare in other markets.
Beijing has taken a series of measures in the past few months to cool the impact of hot money, since the inflows have been so massive as to raise alarm over the country's financial security.
To control capital flows, Beijing is implementing important new measures. Three central governmental departments - the State Administration of Foreign Exchange (SAFE), the Ministry of Commerce and the General Administration of Customs - jointly issued "Measures for the Online Inspection of the Collection and Settlement of Foreign Exchange in Export", effective last Monday.
Under these measures, the foreign currency that a mainland enterprise collects in exporting shall first be put in the to-be-inspected export-foreign-currency account, which is opened in the name of the enterprise at a bank. The range of income and payments shall be provided for foreign-exchange administration.
The collection and settlement of foreign exchange in exports will be more rigorous and subject to the inspection of electronic data of exports through the online inspection system for collection and settlement of foreign exchange in exports.
To improve foreign debt monitoring and to prevent risks in the payment of foreign debts, SAFE issued the "Notice on the Issues Concerning the Implementation of Registration of Foreign Debts under the Trade in Goods of Enterprises".
The regulator will prevent overseas funds from flowing into the mainland by monitoring enterprises' advance-export receipts and actual exports. These regulations will reduce the hot money flows into the mainland that contribute to asset bubbles and the rising inflation.
Barriers to entry on both sides of the Pacific have created challenges over the past few years, but investment bankers, private equity managers and venture capitalists are still eager to participate in the gold rush. And the unique cocktail of limited access to ever-tightening bank lending and the remarkable demand for growth capital have created extraordinary demand for small- and middle-market investment professionals.
Joseph Meuse is founder and president of Belmont Partners
Monday 21st of July 2008