Chinese companies have been on a buying spree this year, pushing outbound M&A volumes to record levels. But some of these deals have left bankers scratching their heads, appearing motivated less by strategic imperatives and more by an abundance of liquidity — and a willingness to buy almost anything.
The Chinese government has clearly noticed. On Tuesday evening, four major regulators offered a subtle confirmation that they were clamping down on “irregular” offshore purchases.
“We support capable corporations to conduct legitimate and compliant outbound investments … in the mean time, we’ve been closely watching a tendency where some companies make irrational investments in the areas such as real estate, hotel, movie studios, entertainment and sports clubs,” according to the statement.
The People’s Bank of China, the State Administration of Foreign Exchange, the National Development and Reform Commission and the Ministry of Commerce issued the statement (link in Chinese) amid public pressure, which followed widespread speculation after a tentative list of new rules circulated online.
The quartet went further than in brief statements on November 28 and 29, in which they said only that they would “adhere to relevant rules to vet some foreign investment projects by companies” and target "fake" transactions". However they stopped short of confirming details of the curbs, which have been widely reported by media including FinanceAsia.
“While promoting the convenience of [companies'] overseas investment, we should keep a look-out on the risks involved…promote a healthy and orderly development of the market of outbound investment, and maintain the balance of payments,” the four said in summary on December 6.
Chinese outbound M&A volumes have hit $146 billion this year, up 53.3% from the same period last year, according to data from the Ministry of Commerce.
Quality control
According to a widely-reported briefing note (link in Chinese), which circulated in late November, China's State Council will roll out a series of temporary rules on Chinese companies’ outbound direct investment (ODI) and M&A transactions.
Under the rules, which will stay in place until the end of September 2017, regulators would not approve purchases of more than $1 billion that fall outside the buyer's core business area. State-owned enterprises will also be banned from investing more than $1 billion in an individual real estate project. Further, regulators are unlikely to approve outbound investments worth more than $10 billion.
And, as FinanceAsia reported last week, Safe ordered banks to report to the capital account management department of its Beijing bureau before executing any capital account transaction of a corporate client if the deal size reaches or exceeds $5 million. Such a transaction can be an FX purchase or settlement, as well as an outbound payment in the form of renminbi or foreign currencies.
Compared to the previous benchmark, which made transfers worth $50 million or more in foreign currencies subject to reporting, the new rule shackles firms’ ability to make big-ticket transfers under the capital account.
In a joint effort to stem capital outflows, the PBoC also order banks to limit companies’ outbound intercompany lending to less than 30% of the onshore operation’s owners’ equity, further limiting channels for moving money offshore.
ANZ analysts said in a November 30 research note that, although the PBoC seems to be increasingly tolerant of exchange rate flexibility, “the authorities seem to be targeting the quantity of cross-border flows."
China’s FX reserves declined for a fourth consecutive month to $3.12 trillion as of the end of October, the lowest level since March 2011, as the government continues to sell dollars from its FX reserves to defend the renminbi. The Chinese currency has lost approximately 5.8% of its value against the dollar this year, due to factors including capital outflows triggered by fears over further drops in the renminbi.
It is hard to fully map the impact of these new rules on companies, but some treasurers in China have expressed concerns that even current account transactions could face tighter scrutiny and longer execution times, harming the efficiency of treasury operations.
One Shanghai-based treasurer told FinanceAsia he had been advised by banks to hold off on any large cross-border transactions for now to avoid catching the attention of regulators.
The original version of this story appeared on The Corporate Treasurer, FinanceAsia’s sister publication.
