Beijing Flags Crackdown on Risky Outbound Foreign Investment

The central government has indicated that it will step up its scrutiny of Chinese outbound foreign investment due to risk concerns, particularly in the real estate, hospitality, entertainment and fitness sectors.

Chinese outbound investment has seen surging growth since the Great Financial Crisis, with domestic companies drawn abroad by low asset prices in advanced Western economies, as well as abetted by China’s huge war chest of foreign reserves.

In 2014 China’s outbound foreign investment surpassed inbound investment for the time, resulting in net capital outflows, while last year it hit a record level of USD$170.1 billion.

While the surge in foreign investment by Chinese companies is in keeping with the recent policy prescription of “expanding abroad” that was first submitted by Premier Wen Jiabao, it has also triggered concern about potential risk amongst regulators.

Starting from the end of last year, the senior leaders of the National Development and Reform Commission, the Ministry of Commerce, the People’s Bank of China and the State Administration of Foreign Exchange flagged heightened regulation and scrutiny of outbound investment.

Overseas investment has since seen a drop of 45.8% in the first half of this year, with certain popular sectors especially hard hit.

Chinese outbound investment in the real estate, culture, fitness and the entertainment sectors has plunged by as much as 82.5%.

This drop saw a moderate reverse towards the end of the first half, with outbound foreign direct investment rising to its highest level since December in June, hitting $13.6 billion.

While this amount marked a drop of 11.3% compared to the same period last year, it also signified an surge of 65.5% compared to May, for the second consecutive month of positive growth.

The central government has now signalled that it will maintain its heavy scrutiny of overseas investment due to risk concerns, with key departments issuing several statements to similar effect within just the past week.

Wang Chunying, spokesperson for SAFE, said on 20 July that the forex regulator will closely cooperate with other departments to “effectively prevent foreign investment risk, and expedite the healthy and stale development of foreign investment.”

NDRC spokesperson and head of the policy research office Yan Pengcheng said a day previously that the relevant departments will continue to focus “irrational overseas investment” in the real-estate, hospitality, movie theatre, entertainment and fitness sectors, in order to prevent foreign investment risk.

On 13 July, Ministry of Commerce spokesperson Gao Feng said that since the end of last year the authority had worked with related departments to strengthen inspections of the veracity and compliance of outbound investments, as well as effectively curb irrational overseas investment, resulting in a large-scale decline in Chinese investment in the real-estate, hospitality, movie theatre, entertainment and fitness club sectors.

The policy signals from China’s central departments arrive in tandem with directives issued to Chinese banks to stop financing overseas acquisition deals by real-estate giant Dalian Wanda, due to concerns over debt risk.

SAFE head Fan Gongsheng has said that a significant volume of acquisitions capital is derived from highly-leveraged domestic sources.

Policymakers have also expressed concern about the potential for rapid, ongoing outflows of capital to disrupt the balance of payments, increasing the risk of financial instability, as well as put pressure on China’s foreign reserves and exchange rates.

Senior government figures have said that the intention of stepped up regulation is not to reduce outbound foreign investment levels, but to instead improve the quality and forestall risk.

Bai Ming, vice-head of the international market research institute of the Ministry of Commerce, said that China will continue to firmly pursue its policy of “going abroad”, by supporting high-quality overseas investment projects that are of benefit to Beijing’s global strategic imperatives.

According to Bai greater focus should be placed on the level and quality of overseas investment projects, with less emphasis given to pace or scope.

“High-level investment must first guarantee profits and security, and from a macroeconomic perspective be of assistance to establishing China’s leading position within the global division of labour, raising China’s position and voice within global industry chains,” said Bai. “At the same time it must ensure the financial security of the nation.”

 

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