China clamps down on foreign M&A in battle against capital flight

Posted on November 29, 2016

China’s government is poised to impose new restrictions on outbound foreign investment in a bid to curb capital outflows that are putting downward pressure on the renminbi and draining foreign exchange reserves, according to sources.

The State Council, China’s cabinet, will ban outbound investment deals worth more than $10bn or mergers and acquisitions above $1bn if they are outside the Chinese investor’s core business, according to two sources who have seen a draft document outlining the new rules. State-owned enterprises will also not be allowed to invest more than $1bn in foreign real estate, according to the sources. 

Separately, the State Administration of Foreign Exchange, which approves conversion of renminbi into foreign exchange, held meetings with bankers in multiple cities to inform them of new approval requirements for large outbound deals, China Business News reported. 

China’s foreign dealmaking has surged this year. Non-financial outbound investment by Chinese companies totalled $146bn in the first 10 months of 2016, above the record-high $121bn total for all of 2015, according to commerce ministry data. 

Due largely to capital outflows, the renminbi has fallen 5.8 per cent this year, on track for its worst year on record. China has sold dollars from its foreign exchange reserves to try to curb downward pressure on the currency, with reserves hitting $3.12tn at the end of October, the lowest level since March 2011. 

If formally issued, the State Council document would make explicit a policy shift already under way informally. Bankers have said in recent months that Safe has applied existing rules more strictly in order to delay or reject forex approvals that were once routine. 

In a joint statement by four agencies including Safe and the central bank on Monday, the government said it would “combine increased convenience of outbound foreign investment with prevention of foreign investment risks”. 

China is on pace to record its first ever net foreign direct investment deficit this year, according to balance of payments data. Inbound FDI exceeded outbound flows every quarter from 1998 until the midpoint of last year but China has reported FDI deficits for four of the last five quarters, including a record $31bn deficit in the third quarter of 2016. 

Despite the increase in FDI outflows, such investments remain only a small slice of China’s broader capital outflow. Excluding FDI, China suffered a capital and financial account deficit of $176bn in the third quarter — much higher than the $31bn of FDI outflows. These so-called “hot money” outflows include investment in stocks and bonds, as well as trade credit and other bank loans. 

Additional reporting by Lucy Hornby 

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