Beijing is set to clarify its new regulations on overseas investment sometime this year after confusion reigned in the market arising from its ‘unofficial’ restriction of funds outflow since end 2016.
After the big uncertainty surrounding China’s capital controls imposed in January, and dire predictions of the end of Chinese property buying spree worldwide as a result, Beijing through its media mouthpiece, Xinhua reported on 21st March that the government will introduce new regulations on overseas investment this year.
The regulations will provide guidance on investment in other countries and regions, while identifying the industries that the government will encourage or ban.
To be initiated by the Ministry of Commerce and National Development and Reform Commission, the regulations will integrate existing rules and fine-tune or amend them, giving more certainty on overseas investments, approval procedures, financing, profit-sharing and tax policies.
Investments that bring good social and economic benefits, and conform to the One Belt, One Road Initiative will be encouraged, while ‘blind and irrational’ investments will be discouraged and strictly regulated. The regulations will also mete out punishments to investors who violate domestic and foreign law.
It is widely believed that Beijing would restrict any overseas deals worth over USD10 bil and also overseas property and non-core acquisitions valued at over USD1 bil. ‘Non-core’ assets in the case of developers would likely include football clubs, cinemas or movie production houses.
Five days after the announcement, Guangzhou R&F Properties, which was the first conglomerate to complain about the capital controls, revealed its acquisition of a London residential site for £60 million ($74.8 million).
R&F’s maiden foray into the UK came soon after the Hong Kong-listed developer had openly complained that China’s capital controls had delayed funding for its ventures in Cambodia and Africa.
Analysts speculated that those ventures weren’t considered the core business of R&F, hence were likely categorised by the government as ‘blind and irrational’ investment (hence the delay in approving the foreign exchange).
CAPITAL CONTROLS WORKED
Since late last year, Beijing has tightened outflows from the country as a result of the country’s declining foreign reserves due to massive capital outflows. China’s non-financial outbound direct investment (ODI) in 2016 soared 44.1% year on year to USD170 billion, according to official data.
The increased outflow is due to the sharp depreciating yuan which sparked fears that the currency will depreciate further. As a result of the tighter rules, outbound investments on real estate deals have plunged by 74% compared to a year ago. Meanwhile, its foreign exchange reserves rose to US$3 trillion in February, breaking an eight-month run of declines and proving that its capital controls had worked.
R&F’s complaint came at about the same time that Dalian Wanda’s attempted USD1 billion acquisition of Hollywood’s Dick Clark Productions failed, also due to an inability to transfer funds out of China. Wanda’s attempted acquisition of the TV production house was a departure from the company’s core business as mall developer.
Similarly, Country Garden, China’s third largest developer, has overhauled its sales centre within mainland China including closing some of its Forest City showrooms, due to changes in the central government’s rules on funds outflow. It will now be targeting more investors from the United States, Europe, Southeast Asia, Japan, India and the Middle East.
While some analysts are of the view that it is too early to tell the extent to which the new credit controls will impact on the market, others are more optimistic, viewing the move as a “healthy response in which the government is trying to build resilience from a macro prudential policy framework for future benefit. If the currency weakness continues, Beijing will likely exercise more forceful policing of the regulations as social and economic stability is still its priority”.
Meanwhile, for many Chinese firms which have already been active in offshore investment markets, their overseas subsidiaries will now play a bigger role in conducting deals, predicts Knight Frank. Some may also choose to raise funds abroad thereby circumventing the capital controls entirely.
What is clear is that Beijing needs to come up with the new regulations with very clear guidelines as soon as possible, for example, what constitutes “core business” and “blind and irrational investments” in order to restore business confidence and prevent the Yuan from sliding further against the US dollar.
DETAILS AND MORE DETAILS …
China’s State Administration of Foreign Exchange (SAFE) had on December 31st, 2016, said all buyers of foreign exchange must now sign a pledge that they won’t use their USD50,000 quotas for offshore property investment. Violators will be added to a government watch list, denied access to foreign currency for three years and subjected to money-laundering investigations.
For individuals, the following applies:
Customers must pledge the money won’t be used for overseas purchases of property, securities, life insurance or investment-type insurance.
Customers must give a more detailed account of the planned use of funds, such as details of travel itineraries or university admissions, business travel, family visits, medical treatment, merchandise trade or purchases of non-investment insurance policies, including the timing, by year and month.
Customers must now confirm they aren’t lending or borrowing quotas to or from other citizens.
Notably, the form includes a specific warning: “Do not use it to purchase property overseas.” Banks are also now required to report transfers of over ¥200,000 (US$29,000).
Companies face even more onerous requirements – they will need to declare the source of their funding as well as give additional details on their overseas spending.