Go with the flow

New plan to restrict the deluge of overseas acquisitions by Chinese firms


Exit here?

The struggle to stem the flood of cash leaving China is unrelenting. Last week WiC reported how the authorities have made it harder for tourists from the mainland to buy insurance policies by the bucket-load in Hong Kong (see WiC347) using their UnionPay bank cards. And now regulators look prepared to turn their attention back to the bigger fish with proposals to derail deals for overseas assets that look speculative or too highly leveraged.

The plan hasn’t been formally announced but the Wall Street Journal reported that the State Council is insisting on subjecting overseas deals to “strict control”.

Foreign acquisitions valued at $10 billion or more per deal, real estate investments by state firms above $1 billion and investments of $1 billion or more by any Chinese company in an overseas entity unrelated to the investor’s core business will all need an official nod and extra approvals, the Journal reported.

On Monday four key agencies including the central bank put out a statement that the measures would “combine increased convenience of outbound foreign investment with prevention of foreign investment risks”. The subtext is that Beijing is targeting cases in which companies have been buying assets abroad as a means to get their cash out of China.

On a smaller scale, the focus has been similar in Shanghai’s free trade zone (FTZ), which is wrestling with how to loosen financial restrictions without relinquishing control over capital outflows. In particular, officials at the Shanghai branch of the People’s Bank of China are said to be looking closely at how money from other provinces is heading overseas via the much-vaunted FTZ.

News of the State Council’s plan comes at a time when the yuan has been weakening against the dollar (see WiC347) despite intervention to support the currency. Meanwhile China’s foreign exchange reserves fell by more than half a trillion dollars in 2015 and they have continued to decline this year, with a drop of another $46 billion in October.

At the same time Chinese firms have stepped up their global spending. Overseas direct investment increased by more than half to $146 billion in the first nine months of this year. Much of this spree has the government’s blessing, such as the Belt and Road Initiative which has prioritised outbound investments in energy, rail and infrastructure.

Julia Wang, an economist at HSBC, says the new rules will mean more scrutiny of blockbuster bids by the largest state-owned firms. They won’t have the same effect on the private sector’s dealmaking (which accounts for about 70% of the overseas investment), because these purchases are much smaller in size. For instance, she highlights that the $10 billion cap is too large to invite scrutiny of any bids in the past as none of China’s private sector firms have made offers of that size.

Nor is there much sign that regulators are planning to restrict investment over the longer term. The block on big-ticket purchases is staying in place until next September, which makes it look like more of a temporary tool to alleviate the downward pressure on the yuan, bolstering confidence in the currency ahead of next year’s leadership reshuffle.

Concerns about capital outflows has also been reported as a factor in holding up the launch of the Shenzhen-Hong Kong Stock Connect, which has just got the green light for its debut on December 5 (next Monday). In fact, both the Shenzhen and Shanghai Stock Connects are designed as closed-loop systems in which investors in China exchange their yuan into Hong Kong dollars through designated offshore accounts. Investors can only deploy their dollars to buy stocks in Hong Kong under the scheme, and once the shares are sold, the proceeds must be converted back into yuan in their mainland accounts.

The rules prevent Stock Connect participants from siphoning their cash into other areas, although investors are still getting the chance to hedge against depreciation risk by buying shares that are Hong Kong dollar-denominated.

That is leading some analysts to predict a rush into the 314 Hong Kong stocks soon to be made available under the link from Shenzhen, especially blue-chip property and utility shares.

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