China to tighten outbound investment regulations

Chinese gov't to support ODI, especially in high-tech industries: experts

Chinese authorities encourage companies going out, but will tighten rules and regulations on outbound direct investment (ODI) for speculative purposes, following rapid growth in mergers and acquisitions (M&As) overseas, industry insiders noted on Monday.

Some Chinese companies are seeing stricter rules on capital outflows, which may dampen their enthusiasm for investing overseas, an industry representative based in Guangzhou, South China's Guangdong Province, told the Global Times on Monday. He noted that his company has been considering an equity investment in a French fashion brand since last year and that the potential deal is estimated to reach 250 million euros ($267 million).

"We've noticed that there might be tightened rules on oversea transactions and we have been communicating with relevant authorities frequently," he said, noting that a person cannot even purchase foreign currency above $10,000 per month.

The country's capital controls which helped alleviate pressure on the Chinese yuan have weighed on companies' acquisitions deals, Bloomberg reported on March 7. For instance, a $1 billion bid by Dalian Wanda Group, a Chinese conglomerate, for a U.S. entertainment company faced hurdles when the company couldn't get money out of China to pay for the deal, people familiar with the matter were quoted as saying in the Bloomberg report.

A PR representative from Wanda told the Global Times on Monday that the company does not have a comment on the matter.

The authorities have introduced additional restrictions on capital account transactions and overseas investment, Moody's Investors Service said in a report published on Monday.

However, more rigorous capital controls will not substantially affect rated banks or non-financial companies, the report stated.

For companies that invest overseas and have to raise funds through issuing bonds, the impact of the current controls is "manageable," said Lillian Li, an analyst at Moody's.

"It is mainly because the volume of those bonds that will mature in 2017 is limited, and our rated companies' overseas financing channels have remained unimpeded," she told the Global Times on Monday, adding that "their levels of foreign currency exposure are still within control," Li noted.

China has recorded a rapid growth in ODI in recent years. In 2016, the total ODI in non-financial sectors overseas grew 44.1 percent on a year-on-year basis to $170.1 billion, according to a post published on the central government's website in January. In addition, M&As by Chinese companies reached $148.7 billion last year, accounting for 87.4 percent of the total ODI, according to the post.

More cautious investment

Considering the rapid growth of ODI, Chinese officials called for more rational investment when they talked to the press during the Fifth Session of the12th National People's Congress.

Increasing ODI in the second half of 2016 has triggered fluctuations in foreign exchange rates, Zhou Xiaochuan, the governor of the People's Bank of China, the country central bank, said on Friday.

Some ODI deals were irrational, blinded and made in a rush, Zhou noted. For instance, investment in sectors such as sport clubs and entertainment has brought little favorable outcomes, which require more policy guidelines.

"M&As from last year were distributed among various sectors, which diluted risks. But scrutiny is likely to target speculations in sectors such as real estate and sports," Li, the Moody's analyst noted.

Chinese investment overseas will not be affected, Zhong Shan, the head of Chinese Ministry of Commerce, told a press conference on Saturday. "It's incorrect to say that the government is not encouraging ODI, as the government has always supported Chinese companies participating in international cooperation and competition," he noted.

The central government will encourage more ODI in sectors like high-end technologies, which will boost the development of industries, Xiang Junyong, a researcher from the Chongyang Institute for Financial Studies of Renmin University of China, told the Global Times on Monday. "Those investments are also expected to help improve the global value chain, like Midea Group's purchase of German robotics maker KUKA," Xiang said.

Chinese electronic appliance giant Midea Group announced the purchase deal of KUKA in December 2016. Midea will own 94.55 percent of Kuka after the bid is settled.

More efforts should be made in building ODI deal systems and enhancing scrutiny in some sectors to help Chinese companies better integrate into the global market, Xiang noted. "Some Chinese companies have pocket profits in applying for loans from overseas investment without launching concrete projects, which should be further cracked down on," he added.