Beijing Has “New Rules” for Outbound Investment

Beijing Has “New Rules” for Outbound Investment

Beijing Has “New Rules” for Outbound Investment

China has codified its rules on overseas investments, making explicit its campaign against irrational acquisitions of assets in industries ranging from real estate to hotels and entertainment.

The authorities set out 3 categories: Banned, Restricted and Encouraged (see the lists below)

Beijing has outlawed investments in gambling and sex industries, while backing companies to support the nation’s ambitious “Belt and Road” initiative backed by President Xi Jinping, the State Council said in a statement Friday.

Property, hotel, film, entertainment and sports investments are now subject to restrictions, the statement said.

“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 in its statement.

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 Co., Fosun International Ltd., Dalian Wanda Group Co. the owner of US movie exhibitor AMC Entertainment Holdings (NYSE:AMC) and HNA Group Co. have already been required by the government pressure to scale back their foreign activities.

The state is saying that it wants more to say over where China’s resources are going abroad. Now it is de jure policy while previously it was de facto policy.

The People’s Bank of China (PBOC) imposed controls as the amount of money flowing out last year topped $816-B, according to the data.

In the presence of controls, China’s capital account and foreign exchange reserves have stabilized this year.

Chinese officials are wary that business activity could undermine the stability of the capital account, as well as introduce risks into the banking sector. China’s banking regulator have asked lenders to provide loan information on the country’s top deal-making companies, and is examining examples of acquisitions gone awry by those firms to assess potential risks to the financial sector, people familiar with the matter have told HeffX-LTN.

Chinese policy makers are concerned about the potential investment loss and financial risk related to the takeover of trophy assets, a lesson they learned from corporate Japan in late 1980’s.

The National Development and Reform Commission (NDRC), the Top economic planning body, criticized irrational overseas investment in some sectors, while encouraging projects linked to the Belt and Road initiative.

The Banned Lot:  Core military technology, gambling, sex industry, investments contrary to national security

The Restricted Lot: Property, hotels, film, entertainment, sports, obsolete equipment, investments that contravene environmental standards

The Encouraged Lot: Investments that further Belt and Road framework, enhance China’s technical standards, research and development, oil and mining exploration, agriculture and fishing

There have been problems with overseas investments, the NDRC said, adding that some companies made rash decisions and sustained losses.

“Some companies focused on property rather than the real economy, which, instead of boosting the domestic economy, triggered capital outflows and shook financial security,” it said. Some companies disregarded the environment, energy and safety regulations in target countries, which resulted in disputes and impaired China’s image, it said.

In 1-H of this year China’s outbound investment declined about 40% from a year earlier as policy makers imposed brakes on companies’ foreign acquisition following a record spending spree in Y 2016.

It is clear from this “new rules” policy that China wants its money to focus on specific sectors that can help boost long-term growth potential. The new policy also tries to close the loophole of suspicious capital outflows and possible money laundering.

Stay tuned…

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Paul Ebeling

Paul A. Ebeling, polymath, excels in diverse fields of knowledge. Pattern Recognition Analyst in Equities, Commodities and Foreign Exchange and author of “The Red Roadmaster’s Technical Report” on the US Major Market Indices™, a highly regarded, weekly financial market letter, he is also a philosopher, issuing insights on a wide range of subjects to a following of over 250,000 cohorts. An international audience of opinion makers, business leaders, and global organizations recognizes Ebeling as an expert.

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