Beijing Steps Up Crackdown on Outbound Investment

Sources cited by Reuters say that China’s central government plans to intensify official curbs on foreign acquisitions as well as funding from banks for such deals.

Several sources close to regulators in Beijing said to Reuters said that China’s National Development and Reform Commission and Ministry of Commerce are currently in the process of scrutinising the overseas investment plans of acquisitive Chinese companies.

The two bodies have reportedly requested that companies provide justification for the terms surrounding their acquisitions of overseas assets, including valuations and financing arrangements, and are focusing in particular upon those companies that are not considered by the authorities to be “strategic.”

According to the sources this process has thus far assumed the form of informal consultation between regulators and companies, with no official directives yet issued.

While it has long been established practice for NDRC to review overseas acquisitions of companies, the latest round of consultations marks the first time that pricing and funding have been so heavily scrutinised.

“The level of inquiry has gone a lot deeper than the past – who you are as a buyer and what you are buying are of important focus,” said one source to Reuters. 

In addition to heightened scrutiny of overseas acquisition plans, China’s State Administration of Foreign Exchange and the China Banking Regulatory Commission plan to make it more difficult for companies to borrow funds abroad by pledging their domestic assets.

It has become increasingly common for Chinese companies to obtain financing from either foreign banks or the offshore branches of Chinese banks by using China-based assets such as real estate as collateral.

Government officials have becoming increasingly concerned, however, about the quality of the assets pledged, and whether they would be capable of offsetting any losses incurred by borrowers defaulting on their loans.

The news arrives following a plunge in outbound direct investment by China for the first half of 2017, as regulators sought to curb capital outflows following a record-breaking $221 billion in foreign acquisitions by Chinese companies last year, as well as efforts by Beijing to block the overseas acquisition spree of stalwart corporations such as Dalian Wanda and HNA.

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