The show's over. It's time for the details.
With China’s 19th Communist Party Congress out of the way, Beijing is beginning to put out details of the policies that will shape the country's future over the next five year.
China’s top policymaker on Friday issued a set of draft guidelines on Chinese companies’ overseas purchase. The guidelines will see a relaxation of administrative requirements on outbound investment while stepping up oversight of deals done via Chinese companies’ overseas subsidiaries.
The draft rules, on which the public can give feedback until December 3, build on a set of regulations implemented in 2014. They come after the State Council announced in August a move to update and formalise the nation’s approach to overseas dealmaking, according to a post by National Development and Reform Commission (NDRC).
Investors need to realise Beijing is taking a carrot-and-stick approach: it is easing administrative requirements in the run up to deals but is expecting more after the deal is struck in terms of reporting and monitoring. It's a move that fleshes out comments made by senior regulators in recent months.
Under the proposed regime, Chinese acquirers would face fewer administrative hurdles. For example, companies now need to give details of an overseas project to the NDRC before starting working on the potential deal. But the draft guidelines propose scrubbing that requirement if the sum involved is less than $300 million, with exceptions for “sensitive industries” such as weapons manufacturing, cross-jurisdiction water resource exploitation, or news media.
Additionally, local corporates would no longer have to report via provincial NDRC bureaus first for the case to be passed up the chain to Beijing; they will be able to go directly to the central NDRC office.
In a velvet glove, there is always an iron hand – NDRC is broadening the range of activities subject to its rules on overseas investment. Even if a Chinese business is involved in an outbound deal only as provider of financing or collateral, or is conducting a transaction via its overseas entity that involves no cross-border flow of money, it will be subject to the proposed new rules.
Dealmakers like HNA and Fosun have been more reliant on their offshore entities and vehicles for acquisitions of late, because in general these do not require regulatory clearance from Beijing. But under the new regime mulled by NDRC, deals would have to go through the Chinese regulator, whether done from onshore or purely offshore.
Transactions by state companies or deals worth $300 million and above need to be registered with the NDRC’s central office in Beijing, whereas smaller deals need to be registered only at local NDRC bureaus.
This is a clear sign Chinese regulators are looking beyond issues like capital movement and towards the general quality and type of deals they will allow.
For the past year, Beijing has many times voiced concerns over outbound investment in property, hotels, entertainment, sports clubs and cinemas, which it suspects to be more speculative. It moved to put these types of deals into a “restricted list”, to which policymakers will give limited support, if any at all.
Chinese dealmakers have been long known for creative ways to find regulatory loopholes, and get around deal scrutiny and capital constraints. Among other options, there is Nei Bao Wai Dai, which is the Chinese pinyin for an offshore loan guaranteed by domestic collateral.
In August, the State Administration of Foreign Exchange, China’s forex market watchdog, released a notice to clamp down the use of fake collateral or collateral with inflated valuations in the practice. Observers said this was a warning to companies that use cross-border guaranteed financing to get around the requirement for ODI [outbound direct investment] approval. M&A bankers and lawyers say in private that the use of Nei Bao Wai Dai had become more popular amid tighter capital controls where an ODI approval had become harder to obtain.
Like with investment via an overseas entity, there are no actual cross-border capital flows involved in Nei Bao Wai Dai, given the loans are issued by offshore lending entities.
As the NDRC put it in a supplementary note to the announcement, “some foreign investment activities are drifting outside the current supervision’s boundaries, which [means there are] some hidden risks".