Yue Wang - Forbes - 16 March 2017
Chinese businesses went on a global shopping frenzy last year, buying assets ranging from property to entertainment studios worth hundreds of billions of dollars.
This year, however, foreign executives are unlikely to see Chinese buyers lining up at their doors. Outbound investments and projects are being called off as Beijing’s recent restrictions make it increasingly hard to transfer funds overseas.
Chinese companies take a hit amid crackdown
China started to crack down on foreign investments towards the end of last year, as companies and individuals rushed to invest abroad amid a weaker Chinese economy. To ease pressure on the struggling yuan without burning through the country’s foreign exchange reserve too fast, authorities have implemented a series of capital control measures, including additional procedures for citizens seeking to convert the yuan into foreign currencies and extra vetting of foreign investments worth $5 million or more.
Chinese companies are taking a hit. The latest involves real estate developer Country Garden, which has closed showrooms in China for its flagship $40 billion Forest City housing project in Malaysia. The move was made to “better fit with current foreign exchange policies and regulations,” the company said in a statement. Mainland Chinese represent about 70% of the project’s total buyers so far.
Even China’s business tycoons aren’t exempt. Billionaire Wang Jianlin’s $1 billion deal to buy Dick Clark Productions, the studio behind the Golden Globe Awards and the Billboard Music Awards, was terminated earlier this week after his Wanda Group “failed to honor its contractual obligations," according to the production company’s owner Eldridge industries. The deal fell apart simply because Wanda couldn’t secure the needed foreign exchange quota, analysts said.
“They [Chinese officials] are very concerned about the RMB,” said Christopher Balding, an associate professor at Peking University’s HSBC Business School. “So basically they are cracking down on outflows of all types.”
A slowdown in deals
In the first quarter, 27 outbound deals worth a total of $16 billion were either cancelled or rejected, according to Dealogic. Over the same period, China announced 121 outbound deals worth $25 billion, a pace far slower than last year when the country witnessed 794 foreign investments worth a whopping $226 billion.
Made with Chartbuilder Source: Dealogic
“There will be a big drop in terms of volume compared with 2016 for the simple reasons that large deals will not be approved,” said Dealogic’s global head of M&A research Chunshek Chan.
Authorities have also made it clear that they don’t like companies’ overseas sports and media purchases anymore. Chinese central bank governor Zhou Xiaochuan singled out these investments for criticism at a press conference during last week’s National People’s Congress, saying that they bring little benefit to China.
“Some people [invested offshore] blindly and were in a rush to do so,” Zhou said. “Some of this outbound investment was not in line with our own policies and had no real gain for China.”
Backlash from businesses
Meanwhile, China’s capital control measures have triggered a strong backlash from some of the country’s corporate chiefs. They complain that the restrictions are thwarting their expansion abroad.
“To say that capital controls don’t have any impact—it’s a lie. As a result, yuan funds can only give up, and not invest (outside),” said Zhang Yichen, chairman of China’s CITIC Capital, at the sidelines of a NPC press briefing, according to Bloomberg. “Yuan funds are now changing their focus to the domestic market.”
But there is little chance that the restrictions will loosen up in the near future. Although the yuan’s downward pressure has eased, authorities won’t hesitate to implement additional capital control measures—a move running against China’s long-term goal of freeing its currency and encouraging its companies to go global.
“They are still keen to defend the RMB to preserve stability and they aren’t afraid to use capital control to that end,” said Julian Evans-Pritchard, an economist at Singapore-based research firm Capital Economics. “They feel the crackdown at the end of last year is justified.”
The deals that have a chance
That means only deals in strategically important sectors—such as biotechnologies, robotics and semiconductors—stand a good chance of passing muster. China National Chemical Corp.’s $43 billion takeover of seed giant Syngenta AG, for example, will likely get the blessing of the country’s foreign exchange officials.
“The practice of companies buying non-related investment overseas will continue to be outlawed,” said Jonas Short, head of Beijing office at boutique investment bank NSBO.
“But the Syngenta deal solves China's aim of creating a globally competitive company. Those kinds of deals are a lot less likely to be stopped.”