China is Controlling Offshore Investments
China’s controlling offshore investments makes sense, but that does not mean it is smart.
It is tempting to see all manner of conspiracies behind the Chinese government’s recent crack down on companies that have expanded rapidly abroad. In fact, the reasoning behind the campaign is straightforward.
The real problem is that it is likely to damage China in the long run.
Chinese regulators’ increased scrutiny of formerly high-flying companies Dalian Wanda Group Co.owner of US entertainment company AMC (NYSE:AMC), Anbang Insurance Group Co., HNA Group Co. and Fosun International Ltd. may have been sparked by an internal government report warning of parallels between China’s situation and Japan’s just before its bust 30+ years
One similarity exists that I see.
There have been a number of flashy overseas acquisitions. China’s financial officials appear to have concluded that such deals created vulnerabilities for the Japanese economy, a weaknesses they are keen to avoid.
China’s leaders’ fear repeating others’ mistakes.
But, he fact that the ‘Heavy Hand’ has pulled in some of China’s most politically connected firms has left many China watchers searching for alternative motivations.
There are 4 Key theories.
Some believe the crackdown is political.
This is a critically important year for China and its leader Xi Jinping, with a Politburo reshuffle this fall set to cement his hold on power. In such a charged environment, Chinese leaders could be looking to settle scores by targeting companies linked to their political rivals.
Others see personal forces at work.
Despite his speeches in defense of free trade and globalization, Xi has notbeen the most business-friendly Chinese leader. He comes from a family with a stellar revolutionary pedigree, and it is possible he does not like China’s tycoons, whom some Chinese officials believe have gotten rich off the backs of the Chinese State.
Or currency could be the decisive factor.
The run of capital outflow reached alarming proportions in Y 2016, and only a tightening of capital controls around the turn of the year staved off downward pressure on the RMB Yuan. Regulators might feel they need to continue such tightening to prevent depreciation pressure from reemerging, so they are monitoring every way by which capital might leave China.
And lastly, some analysts wonder if a “debt bomb” may be in 1 or more of these companies. Regulators could be undertaking a forced deleveraging while they assess the companies’ financial linkages to the Chinese banking system.
These explanations are not mutually exclusive.
But they do not get to the fundamental purpose of the recent crackdown.
The purpose: The Chinese government is trying to assert greater control over where and how the country’s assets are managed. That is what the Japanese did not do right.
In March PBOC Governor Zhou Xiaochuan warned that overseas investments in sports, leisure and entertainment were no longer in favor as they had no national benefit, signaling the fear that Chinese companies are/were directing assets overseas.
The government is now actively encouraging both private and state-owned firms to undertake investments in line with its industrial and geopolitical policies.
Funding for and acquisitions of businesses that undertake research on artificial intelligence are welcome, as is anything that can be conceivably linked to Xi’s ballyhooed Belt and Road infrastructure push.
That’s why China’s $1.1-B lease on the Sri Lankan port of Hambantota could be inked very soon, even as the government pressures Anbang to sell its overseas assets, which include New York’s Waldorf Astoria hotel.
The state’s influence over the domestic economy has expanded under Xi, so the assertion of control over foreign investment is not surprising.
The fact that these companies are nominally private entities, some linked to the PLA, has no bearing on the leadership’s desire to manage their spending.
In fact, it may well make officials more eager to stymie deals. Once private entities have successfully moved assets abroad, it’s hard for Chinese regulators to force them to bring money back.
What can happen
Instead of inspiring confidence among the foreign business and investment communities, these policies can do the direct opposite.
Politically motivated investment decisions are what brought China to the point of fearing a Japan-style bust in the 1st place.
China’s Key economic challenge is weak productivity growth, an issue that can only be solved by deploying the country’s resources more efficiently.
We are watching this to see how it plays out.