Chinese State Council Imposes Restrictions On Overseas Investments
The Chinese government "has served notice on the country's foreign investment spree in football clubs, skyscrapers and Hollywood as it moves to curb rising levels of debt among domestic companies," according to Richard Partington of the London GUARDIAN. The announcement of restrictions in a range of sectors "follows a buying spree around the globe during which Chinese firms and business tycoons have taken control of assets" including U.S. film producer Legendary Entertainment, buildings such as the Cheesegrater in London and English football clubs including Southampton and Aston Villa. The curbs were announced in a document released on Friday by China's state council "in the latest move to halt a string of foreign acquisitions." Raising concerns that some of the companies involved may be taking on too much debt, the council said, "There are great opportunities for our nation's companies to embark on foreign investment, but they also face numerous risks and challenges" (GUARDIAN, 8/18). In Sydney, Kirsty Needham reported Chinese companies bought 38% of all the residential property development sites sold in Australia last year, spending A$2.4B, according to a Knight Frank report this year. But China's National Development & Reform Commission declared on Friday that the property sector was "not the real economy" and companies investing overseas in real estate "could be harming China's financial stability by increasing capital outflows." Chinese regulators recently put the four biggest Chinese offshore private investors, HNA, Dalian Wanda, Fosun Int'l and Anbang, under "greater scrutiny." But Friday's rules "signal for the first time the crackdown on overseas property development and hotel purchases would extend beyond these big four" (SYDNEY MORNING HERALD, 8/20).
'PRECAUTIONARY PACKAGE': BLOOMBERG reported the authorities set out three categories -- banned, restricted and encouraged -- "outlawing investments in gambling and sex industries," while backing companies to support the nation's "Belt and Road" initiative backed by Chinese President Xi Jinping. China "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." Morgan Stanley Chief China Economist Robin Xing said that the recent changes are "part of the precautionary package to prevent a rebound in capital outflows." He added, "Policy makers are also concerned about the potential investment loss and financial risk related to the takeover of 'trophy assets,' a lesson they might have learned from corporate Japan in late 1980s" (BLOOMBERG, 8/18). The AP reported the "Belt and Road" project is Xi's "signature foreign policy initiative." It seeks to "link China with other parts of Asia and eastern Europe" through multi-billion dollar investments in ports, highways, railways, power plants and other infrastructure (AP, 8/19). REUTERS' Brenda Goh reported law firm Alston & Bird partner Tony Balloon said that the "new rules and heightened scrutiny" surrounding foreign investment in China "adds another layer of uncertainty and complexity to Chinese deals." Balloon: "As early numbers indicate, cross-border deal activity among Chinese companies has dropped in the first half of 2017 from the same period last year" (REUTERS, 8/19).
EUROPEAN EFFECT: BLOOMBERG also reported while the clampdown has been "building for months," the announcement is the "clearest sign yet that government is serious about reversing the flood of Chinese money" that has poured into an estimated 29 foreign football clubs -- including AC Milan and League Championship side Birmingham City -- in the past four years. Mergers and acquisitions specialist Blackbridge Cross Borders Chair Alexander Jarvis said, "A lot of them will be looking to make a sale," in reference to Chinese companies or individuals that have invested in European teams. He added that deals are "likely to be derailed because of the new restrictions, though some may find ways to get around the rules" (BLOOMBERG, 8/18). In London, Mitchell & Wildau reported "many of the curbs" will be maintained for the "foreseeable future." Renmin University finance professor Zhao Xijun said, "This shows that Chinese government is determined to implement existing policies even more strictly." Outbound investment in non-financial companies by Chinese groups totaled $57B in the first seven months of this year, down from $103B during the same period in '16, according to China's Ministry of Commerce. Alternate data from Rhodium Group in N.Y., which maintains a database of Chinese outbound transactions of $5M or more, shows a "more modest annual decline" of 20% through the first half of this year. But Rhodium noted that deal activity in May and June "accelerated markedly after a weak first quarter" (FINANCIAL TIMES, 8/18).