Over the last two days, several government agencies issued a number of new policies/rules related to FX conversion, travel, and SOE financial management.
1) SAFE rule to limit hot money inflows
The State Administration of Foreign Exchange (SAFE) issued a notice this afternoon in an obvious attempt to limit hot money inflows by tightening the restrictions on FX conversion by individuals. Currently, any Chinese citizen is allowed to convert up to USD50,000 to RMB per year. However, many people (mainly overseas Chinese) have used multiple names (some time as many as 10 or 20 of friends and relatives) to convert large amounts of foreign exchange into RMB for the purpose for purchasing properties and stocks in China. Today’s SAFE rule prohibits any overseas individual or institution from transferring FX to more than five different individuals in China for FX conversion purposes. This policy will make it less convenient for overseas investors to use the above-mentioned channel to invest in China.
This is one of the initial steps that the government uses to limit hot money inflows. Other options, some of which were used before, include identifying and penalizing fake FDIs, over-invoicing of exports and under-invoicing of imports, the black market, and underground exchange bureaus. At some point, especially when property bubbles become evident, the government will probably tighten the restrictions on property purchases by foreigners (the implementation of which was relaxed in many localities over the past one and half years).
We do not think today’s mini step by SAFE will have an material impact on the market, but it does signal the government’s intention to take further actions as asset bubbles develop further. If the restrictions on foreigners’ purchase of properties in China are re-imposed, it would be a significant negative to sentiment on property stocks.
2) State Council decision to promote the travel industry
The State Council meeting today approved a set of policies to promote the development of the travel industry. The key policies include (1) permit private and foreign investors to enter the travel sector; (2) encourage the restructuring of state-owned companies in the travel industry; (3) increase investments in travel infrastructure such as transportation and service facilities. Beneficiaries should include airports, airlines, hotels and travel agencies (including on-line travel service providers).
3) SASAC notice on SOE accounts receivables
The State Assets Supervision and Administration Commission (SASAC) issued a notice yesterday requiring central and local SOEs to cleanup accounts receivables, as such receivables rose 14% yoy vs a 2% drop in revenue for Jan-Sep 09. A specific trigger is that some local governments (especially governments below the provincial level) that have launched projects without sufficient funds are accumulating arrears to suppliers and/or service providers. It appears to be a risk to the materials and construction sectors, but our analysts covering listed SOEs in the steel, cement, nonferrous, and construction service companies say that their companies do not see visible increases in receivables. We think the reason is that most of the listcos that we cover deal with the largest project owners, typically at the central and provincial levels, and thus are less exposed to the default risk from smaller project owners.