China tightens grip on outbound deals by Chinese firms

HONG KONG • China just made investment bankers' lives more difficult.

Any hope that the country's semi-freeze on outbound investments would let up after the end of the five-yearly Communist Party Congress was crushed yesterday when the economic planning agency said it would expand its oversight to offshore units of Chinese companies.

Under draft rules being drawn up by the National Development and Reform Commission, firms will have to report acquisitions exceeding US$300 million (S$409 million) made through offshore arms. The commission also added a list of "sensitive" areas, such as weapons, news media and water resources, where investments will require approval.

The rules threaten to close the last major loophole that Chinese companies and the bankers that advise them have used to skirt restrictions on capital outflows.

Many firms have been using offshore bases, particularly Hong Kong, to buy trophy assets such as overseas real estate, football clubs and entertainment businesses. Overseas acquisitions by Chinese buyers have tumbled from last year's record levels after the government made it harder to move yuan out of the country on concerns that the buying spree was adding to financial risks. 

Recent examples of acquirers going the offshore route include: Chinese investors used companies registered in Luxembourg and Hong Kong for the US$788 million purchase of AC Milan soccer club in April and HNA Group secured financing to buy Singapore warehousing firm CWT through Hong Kong-listed HNA Holding Group.

Shanghai-based conglomerate Fosun Group is in talks to buy a stake in Russian miner Polyus PJCS though Hong Kong-listed Fosun International. 

Purchases of assets that meet Beijing's strategic objectives - such as semiconductor or pharmaceutical companies, or projects tied to President Xi Jinping's One Belt One Road initiative - will not have any trouble getting approval. The rub is that these are precisely the type of acquisitions that are likely to run foul of foreign governments.

That leaves bankers chasing a narrowing window of targets that meet Beijing's approval yet do not raise the ire of overseas regulators. It looks like they will remain between a rock and a hard place for some time.

BLOOMBERG

A version of this article appeared in the print edition of The Straits Times on November 04, 2017, with the headline 'China tightens grip on outbound deals by Chinese firms'. Print Edition | Subscribe