China
Trump’s currency war without a cause
Author: Yiping Huang, Peking University
The greatest economic damage of the ongoing trade war between China and the United States is caused by policy uncertainty, not import tariffs. In early August 2019, US President Donald Trump introduced some new shocks. Amidst the new round of trade talks between the two countries, Trump announced that the United States will start putting tariffs of 10 per cent on the remaining US$300 billion of goods imported from China. Quickly following that, the US Treasury Department designated China as a ‘currency manipulator’.
This currency war reminds me of an old Chinese saying: ‘Even when right a scholar cannot win an argument with a soldier’ — because it defies any common sense about currency manipulation. At one of the earlier G20 meetings, a US official warned that the United States would name China a currency manipulator if it did not intervene to hold up the value of Chinese renminbi (RMB). In fact, it would have been more appropriate to label China the ‘currency non-manipulator’.
The US Treasury Department usually follows three criteria to determine if a trading partner is a currency manipulator — the first is a bilateral trade surplus with the United States of more than US$200 billion; the second is a current account surplus of more than 3 per cent of GDP; and the third is a total purchase of foreign exchange equivalent to more than 2 per cent of GDP within 12 months.
Of these, China only satisfies the first criterion. And even this one needs to be looked at with caution. It is widely known that China’s bilateral trade surplus with the United States is a result of the global supply chain, as its overall trade account is almost balanced. And even this bilateral surplus is shrinking rapidly.
The US Treasury’s action might have been triggered by the weakening of the RMB on 5 August, with its bilateral exchange rate against the US dollar (USD) exceeding 7.0 for the first time in more than ten years. But this depreciation was a direct result of Trump’s announcement of additional tariffs that could deteriorate China’s external account. Several months ago, a senior IMF official suggested to me a hypothetical scenario, in which Trump would push down the value of the RMB by escalating trade tensions and then would call China a currency manipulator. This was exactly what happened.
If there was a cause for the new currency war, it was single-handedly created by Trump.
In July 2005, China started the managed floating exchange rate regime with reference to a basket of currencies. The People’s Bank of China (PBoC) pursues a policy agenda trying to make the exchange rate more market-determined over time but attempting to avoid excessive volatility in the short term. The RMB appreciated gradually before mid-2014 but suffered from periodical depreciation pressures after that. But since the beginning of 2017, the PBoC has avoided intervening heavily in the foreign exchange markets.
‘Management’ of the exchange rate is done mainly through the application of the ‘counter-cyclical factor’ by setting central parity at the start of trading days. The 12-month moving average of exchange rate volatility of the RMB increased steadily from late 2010 and was already close to those of major global currencies — such as the US dollar, the Euro and the Japanese yen — in early 2019.
By and large, the purpose of the ‘management’ is to reduce excessive exchange rate volatility, not to lower the currency value. The perception that a weaker currency strengthens economic growth is also outdated since it only considers the trade channel of the exchange rate effect on growth. But the effect of the finance channel could be the opposite — a weaker currency encourages capital outflow and weakens economic growth. During the second half of 2015, for instance, RMB depreciation was accompanied by sharp declines of net capital inflow.
Empirical analyses also confirm that, in China today, the finance channel already dominates the trade channel. Therefore, it is no longer in China’s own interest to single-mindedly pursue a policy of a weak RMB.
Likewise, a US policy of a weak US dollar would likely be futile, because US comparative advantages are more concentrated in the service sectors rather than in manufacturing industries. As C Fred Bergsten pointed out, Trump’s trade wars with China and many other countries reduced US imports, but did not boost US exports or bring back manufacturing facilities from overseas.
Unfortunately, such an unreasonable currency war would…
China
New Publication: A Guide for Foreign Investors on Navigating China’s New Company Law
The sixth revision of China’s Company Law is the most extensive amendment in history, impacting foreign invested enterprises with stricter rules on capital injection and corporate governance. Most FIEs must align with the New Company Law by July 1, 2024, with a deadline of December 31, 2024 for adjustments. Contact Dezan Shira & Associates for assistance.
The sixth revision of China’s Company Law represents the most extensive amendment in its history. From stricter capital injection rules to enhanced corporate governance, the changes introduced in the New Company Law have far-reaching implications for businesses, including foreign invested enterprises (FIEs) operating in or entering the China market.
Since January 1, 2020, the Company Law has governed both wholly foreign-owned enterprises (WFOEs) and joint ventures (JVs), following the enactment of the Foreign Investment Law (FIL). Most FIEs must align with the provisions of the New Company Law from July 1, 2024, while those established before January 1, 2020 have bit more time for adjustments due to the five-year grace period provided by the FIL. The final deadline for their alignment is December 31, 2024.
In this publication, we guide foreign investors through the implications of the New Company Law for existing and new FIEs and relevant stakeholders. We begin with an overview of the revision’s background and objectives, followed by a summary of key changes. Our in-depth analysis, from a foreign stakeholder perspective, illuminates the practical implications. Lastly, we explore tax impacts alongside the revisions, demonstrating how the New Company Law may shape future business transactions and arrangements.
If you or your company require assistance with Company Law adjustments in China, please do not hesitate to contact Dezan Shira & Associates. For more information, feel free to reach us via email at china@dezshira.com.
This article is republished from China Briefing. Read the rest of the original article.
China Briefing is written and produced by Dezan Shira & Associates. The practice assists foreign investors into China and has done since 1992 through offices in Beijing, Tianjin, Dalian, Qingdao, Shanghai, Hangzhou, Ningbo, Suzhou, Guangzhou, Dongguan, Zhongshan, Shenzhen, and Hong Kong. Please contact the firm for assistance in China at china@dezshira.com.
China
Lingang New Area in Shanghai Opens First Cross-Border Data Service Center to Streamline Data Export Process
The Lingang New Area in Shanghai has launched China’s first Cross-Border Data Service Center to facilitate data export for companies in Shanghai. The center will help with applications, data catalogs, and management, aiming to provide legal and safe cross-border data transfer mechanisms.
The Lingang New Area in Shanghai’s Pilot Free Trade Zone has launched a new cross-border data service center to provide administrative and consulting services to companies in Shanghai that need to export data out of China. The service center will help facilitate data export by accepting applications from companies for data export projects and is tasked with formulating and implementing data catalogs to facilitate data export in the area. The Shanghai cross-border data service center will provide services to companies across the whole city.
The Lingang New Area in the Shanghai Pilot Free Trade Zone has launched China’s first Cross-Border Data Service Center (the “service center”). The service center, which is jointly operated by the Cybersecurity Administration of China (CAC) and the local government, aims to further facilitate legal, safe, and convenient cross-border data transfer (CBDT) mechanisms for companies.
The service center will not only serve companies in the Lingang New Area but is also open to companies across Shanghai, and will act as an administrative service center specializing in CBDT.
In January 2024, the local government showcased a set of trial measures for the “classified and hierarchical” management of CBDT in the Lingang New Area. The measures, which have not yet been released to the public, seek to facilitate CBDT from the area by dividing data for cross-border transfer into three different risk categories: core, important, and general data.
The local government also pledged to release two data catalogs: a “general data” catalog, which will include types of data that can be transferred freely out of the Lingang New Area, and an “important data” catalog, which will be subject to restrictions. According to Zong Liang, an evaluation expert at the service center, the first draft of the general data catalog has been completed and is being submitted to the relevant superior departments for review.
In March 2024, the CAC released the final version of a set of regulations significantly facilitating CBDT for companies in the country. The new regulations increase the limits on the volume of PI that a company can handle before it is required to undergo additional compliance procedures, provide exemptions from the compliance procedures, and clarify the handling of important data.
Also in March, China released a new set of technical standards stipulating the rules for classifying three different types of data – core, important, and general data. Importantly, the standards provide guidelines for regulators and companies to identify what is considered “important” data. This means they will act as a reference for companies and regulators when assessing the types of data that can be exported, including FTZs such as the Lingang New Area.
This article is republished from China Briefing. Read the rest of the original article.
China Briefing is written and produced by Dezan Shira & Associates. The practice assists foreign investors into China and has done since 1992 through offices in Beijing, Tianjin, Dalian, Qingdao, Shanghai, Hangzhou, Ningbo, Suzhou, Guangzhou, Dongguan, Zhongshan, Shenzhen, and Hong Kong. Please contact the firm for assistance in China at china@dezshira.com.
China
A Concise Guide to the Verification Letter of Invitation Requirement in the China Visa Process
The application procedures for business visas to China have been simplified, with most foreigners now able to apply for an M/F visa using only an invitation letter from a Chinese company. Some countries are eligible for visa-free entry. However, a Verification Letter of Invitation may still be needed in certain cases. Consult the local Chinese embassy for confirmation.
In light of recent developments, the application procedures for business visas to China have undergone substantial simplification. Most foreigners can now apply for an M/F visa using only the invitation letter issued by a Chinese company. Additionally, citizens of certain countries are eligible to enter China without a visa and stay for up to 144 hours or even 15 days.
However, it’s important to note that some applicants may still need to apply for a “Verification Letter of Invitation (邀请核实单)” when applying for an M/F visa to China. In this article, we will introduce what a Verification Letter of Invitation is, who needs to apply for it, and the potential risks.
It’s important to note that in most cases, the invitation letter provided by the inviting unit (whether a public entity or a company) is sufficient for M/F visa applications. The Verification Letter for Invitation is only required when the Chinese embassies or consulates in certain countries specifically ask for the document.
Meanwhile, it is also essential to note that obtaining a Verification Letter for Invitation does not guarantee visa approval. The final decision on granting a visa rests with the Chinese embassy abroad, based on the specific circumstances of the applicant.
Based on current information, foreign applicants in Sri Lanka and most Middle East countries – such as Turkey, Iran, Afghanistan, Syria, Pakistan, and so on – need to submit a Verification Letter for Invitation when they apply for a visa to China.
That said, a Verification Letter for Invitation might not be required in a few Middle East countries, such as Saudi Arabia. Therefore, we suggest that foreign applicants consult with their the local Chinese embassy or consulate to confirm in advance.
This article is republished from China Briefing. Read the rest of the original article.
China Briefing is written and produced by Dezan Shira & Associates. The practice assists foreign investors into China and has done since 1992 through offices in Beijing, Tianjin, Dalian, Qingdao, Shanghai, Hangzhou, Ningbo, Suzhou, Guangzhou, Dongguan, Zhongshan, Shenzhen, and Hong Kong. Please contact the firm for assistance in China at china@dezshira.com.
- New Publication: A Guide for Foreign Investors on Navigating China’s New Company Law
- Lingang New Area in Shanghai Opens First Cross-Border Data Service Center to Streamline Data Export Process
- A Concise Guide to the Verification Letter of Invitation Requirement in the China Visa Process
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