China further limits overseas investment in push to cut risk

The State Council said outbound investment will be judged according to three categories: banned, restricted and encouraged.
The State Council said outbound investment will be judged according to three categories: banned, restricted and encouraged. PHOTO: REUTERS

BEIJING/SHANGHAI (BLOOMBERG, REUTERS) - China has laid down explicit rules restricting overseas investments, stepping up its campaign against what it described to be “irrational” acquisitions of assets in industries ranging from real estate to hotels and entertainment.

The authorities set out three categories – banned, restricted and encouraged – outlawing investments in gambling and sex industries, while encouraging firms to support the Belt and Road Initiative (BRI) backed by President Xi Jinping, the State Council said on Friday (Aug 18).

Property, hotel, film, entertainment and sports investments will now be subject to restrictions.

“Profound changes are taking place in international and domestic situations, and Chinese enterprises face not just relatively good opportunities but also various risks and challenges in overseas investments,” the State Council, China's Cabinet, said.

China has embarked on a drive to reduce leverage in financial markets and snuff out systemic risks ahead of a Communist Party leadership transition later this year, while remaining vigilant for accelerated capital outflows that threaten to weaken the nation’s currency.

Some of the country’s most aggressive dealmakers – Anbang Insurance Group, Fosun International, Dalian Wanda Group and HNA Group – have scaled back investments abroad or sold assets amid regulatory pressure.

Earlier this year, property developer Country Garden Holdings closed all its mainland China showrooms promoting its Forest City mega-development in Johor, Malaysia, as it looked to update its sales strategy and adapt to Beijing’s clampdown on capital outflows.

The recent changes are “part of the precautionary package to prevent a rebound in capital outflows amid further Fed rate hikes”, said Mr Robin Xing, chief China economist at Morgan Stanley in Hong Kong. “Policy makers are also concerned about the potential investment loss and financial risk related to the takeover of ‘trophy assets’, a lesson they might have learnt from corporate Japan in late 1980s.”

The People’s Bank of China imposed controls as the amount of money flowing out last year topped US$816 billion (S$1 trillion), according to data compiled by Bloomberg, with Macau casinos considered a primary exit used by private citizens and corrupt government officials.

The banking regulator this year asked lenders to provide loan information on the country’s top deal-making firms, and is examining examples of acquisitions gone awry by those firms to assess potential risks to the financial sector, people familiar with the matter said.

China’s outbound investment slumped 44.3 per cent in the first seven months from a year earlier as policy makers imposed brakes on firms’ foreign acquisition following a record spending spree in 2016.

In a separate statement, the National Development and Reform Commission (NDRC) said it sees "irrational" overseas investment in some sectors, while others more appropriate to the BRI are encouraged.

The NDRC, in an online statement, lauded the BRI, saying that it would provide better guidance on risks to companies investing overseas in order to prevent "vicious" competition and corruption.

The NDRC did not give more details about how it planned to strengthen current rules or why it was concerned about corruption and unhealthy competition between companies.

Mergers and acquisitions by Chinese companies in countries linked to the BRI have been growing at a rapid rate, even as Beijing takes aim at China's acquisitive conglomerates to restrict capital outflows.

Unveiled in 2013, the BRI aims to boost trade and investment along two routes - one along the ancient Silk Road, connecting China by land and sea through Central Asia and the Middle East to Europe, and the second linking it to Southeast Asia and Africa.

However, the initiative has also come with some security concerns for China. This year, militants in Pakistan, a key BRI partner, killed 10 workers and two teachers from China.

Lawyers and dealmakers had told Reuters that companies were enjoying a relatively smooth approval process for BRI-related deals as regulators tended to classify them differently when reviewing outbound investments.