Why China is cracking down on outbound deals

Posted on November 30, 2016

China is preparing to impose new restrictions on outbound mergers and acquisitions, amid a wave of foreign dealmaking that has fuelled capital outflow and exerted downward pressure on the renminbi.

What is the new policy? 

The State Council, China’s cabinet, has circulated a draft document that requires government agencies to sign off on foreign acquisitions valued above $10bn, or $1bn if they are outside the acquirer’s core business. The document also calls for a halt to foreign real estate purchases above $1bn by state-owned enterprises. The government has not yet announced any new rules.

Even before the document began circulating, bankers were saying the State Administration of Foreign Exchange was applying existing rules more strictly and calling bankers and companies in for meetings to explain their transactions and delaying approvals for some large deals. 

Why is this happening now? 

As China’s economy slows, investors and business owners are diversifying into foreign assets. President Xi Jinping’s anti-corruption campaign creates an additional incentive for some wealthy Chinese to transfer assets out of reach of Communist party investigators. 

According to commerce ministry data, Chinese companies’ overseas purchases have surged past last year’s record of $121bn for non-financial outbound investments, reaching $146bn in the first 10 months of 2016. The flow of money out of China is creating downward pressure on the renminbi, which has depreciated 5.8 per cent in 2016, on track for its worst year to date. 

Depreciation pressure has prompted the central bank to draw down its foreign exchange reserves to support the currency. Official reserves fell to $3.12tn at the end of October, their lowest level since March 2011.

Will new restrictions halt all foreign dealmaking? 

No. Authorities still want China Inc to acquire intellectual property and consumer brands that will help the country move up the industrial value chain, compete with western multinationals and promote emerging consumer and service sectors at home. 

Bankers and analysts say Beijing is targeting deals that lack clear commercial or strategic logic. They say many recent acquisitions, especially by private companies, appear to be motivated mainly by the desire to move money abroad. Examples include a Chinese miner’s purchase of a UK video game developer and a Chinese food additive entrepreneur buying a UK football club.

Safe on Tuesday said it would crack down on “fake” transactions, while continuing to clear genuine ones.

Will the new restrictions halt the renminbi’s slide? 

Probably not. Despite rapid growth in outbound foreign direct investment in recent years, such investment still accounts for only a small fraction of China’s overall capital flows.

Excluding FDI, China reported a net capital and financial account deficit of $176bn in the third quarter — much higher than the $31bn of net FDI outflows. Non-FDI capital outflows include Chinese companies repaying foreign debt, Chinese investment in foreign stocks and bonds, and a pullback in cross-border bank lending into China. 

For investors determined to skirt China’s capital channels by any means necessary, FDI is only one of various channels available. 

Twitter: @gabewildau

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