Politics, not rules, will direct China's dealmaking

Don't read too much into China's formal regulations on M&A. An imminent leadership shuffle is more likely to weigh on dealmaking, at least for now.

After nine months of baring its teeth at “irrational” foreign investments, the Chinese government has formalised guidelines to list types of overseas dealmaking it will encourage, limit and prohibit.

China’s State Council announced late on Friday it had approved a “further” set of guidelines (see table below) from National Development and Reform Commission (NDRC), Ministry of Commerce (Mofcom), People’s Bank of China (PBoC) and Ministry of Foreign Affairs (MoFA) on overseas investments.

It confirmed what has been apparent from months of leaked unofficial memos, government announcements and state media reports circulating among the financial community, some of which saw the most acquisitive Chinese conglomerates – including the likes of Anbang, Dalian Wanda, Fosun and HNA – get called out by name.

Under the guidelines, the authorities will punish companies that violate the regulations and establish a blacklist of companies that don't play by the rules. The statement also sets out sectors in which overseas acquisitions are unwelcome, including real estate, hotels, movie studios, entertainment and sports clubs, as well as deals in countries that China is on bad terms with.

Although the announcement marks a rare formal consolidation of the most recent investment policies, details of how it will be executed remain typically vague. Market participants say only with test cases will the true scope of the new rules become clear.

Devil in the detail

According to a Beijing-based CFO at one of the biggest state-owned conglomerates, one of the most important changes – which isn't set out in black and white – is a switch back towards forcing dealmakers to seek "approval" for their purchases, rather than merely "registering" them.

“Deals below $1 billion were once turned to requiring registrations only, and they were encouraged,” he said.

In December 2013, amid an investment boom after the 18th National Congress, the State Council modified the “government approved list of investment projects”. In effect, this meant the NDRC no longer had to approve any outbound investment worth less than $1 billion, whether from the state-owned or private sector.

With the exception of deals in "sensitive" industries, countries and regions, companies merely had to complete a registration process.

“Now, they all need approvals,” the CFO said.

According to widely-reported briefing note (link in Chinese) from the PBoC in late November, Chinese regulators would not approve any overseas purchase worth more than $1 billion that was outside the buyer’s core business area, and SOEs would be banned from investing more than $1 billion in any individual real estate project.

In a complimentary Q&A on August 18, the State Council said it would push for legislation on foreign investment rules (link in Chinese), but did not specify a timeline.

Withheld firepower

Despite all that, some still believe dealmaking won't be stamped out completely, as investment from offshore locations funded by offshore money are clearly getting through.

Indeed, there's a danger in reading too much in to what is essentially a confirmation of well-known government curbs; perhaps the bigger and more critical issue for China's outbound M&A flow is which way the political wind is blowing.

Chinese SOEs "are still accumulating their resources” this year, according to Jeffrey Sun, a partner of law firm Orrick who advises on Chinese firms investing abroad.

That is in line with a point Lu Ciqiang, general manager of Greater China at National Australia Bank, recently shared with FinanceAsia. Lu pointed to the experience of companies owned by the central government in the wake of a move by the State Administration of Foreign Exchange (Safe) in November. The currency watchdog said it would review again deals that it had approved but for which not all the money had been remitted overseas, if the unremitted amount surpassed $50 million.

Lu said central government-owned companies had since faced little difficulty in again obtaining Safe's approval to move money out under the outbound direct investment (ODI) quota.

“The [large SOE] clients I met, no one had any real difficulty to get the approval again,” he said.  But for smaller state firms and private companies, although Safe might give a “verbal promise”, formal approval had been slow to come or, more often, didn't arrive at all.

What’s holding back their deal execution, according to Sun, is the level of uncertainty approaching the 19th National Congress meeting, which is due this autumn. The congress, which happens only once every five years, is a landmark political event for China, as it sees a reshuffle of leadership roles at all levels – including at key SOEs.

To be sure, SOEs are putting a lot of deals in the pipeline – some might even be negotiating and signing the term sheet. But as to when we see a significant pickup in dealmaking, “I think it will be next year, especially in terms of the closing stage,” said Sun. That's with the exception of state strategic investment under the Belt and Road Initiative.

“During this uncertain period, SOEs in fact have fewer incentives to complete the deals for now,” Sun said. This is due to, among other factors, the potential replacement and reshuffle of key personnel at the SOEs. It’s “a typical Chinese characteristic … but after that meeting, I think we will have more visibility of SOE deals.”

The three-fold classification


  • strongly supporting infrastructure investment to aid the development of the “Belt and Road” and join up the surrounding infrastructure;
  • supporting stable investment aimed at exporting the capacity of China’s competitive industries, quality equipment and technical standards;
  • strengthening investment collaboration between Chinese enterprises and high-tech and advanced manufacturing enterprises in overseas markets, and supporting the establishment by Chinese enterprises of overseas R&D centres;
  • exploring and developing overseas oil and gas, mineral and other resources on the basis of sound economic assessment;
  • promoting international agri-business co-operation including investments in farming, forestry, livestock and fishing and related secondary industries; and
  • developing services sector investments including business and trade services, culture and logistics, and supporting qualified financial institutions in establishing overseas branch networks.


  • investments in sensitive countries and regions: having no diplomatic relations with China; in a state of war or turmoil; or restricted by the terms of China’s international treaties;
  • investments in real estate, hotels, cineplexes, entertainment industries and sports clubs;
  • setting up investment funds and investment platforms with no operating business in overseas jurisdictions;
  • deploying lagging production equipment in outbound investments that does not comply with the host jurisdiction’s technical standards; and
  • investments in breach of host jurisdiction environmental, energy efficiency or safety standards.

The guidelines specifically require regulatory approval of investments in the first three categories.


  • export from China of core military industrial technology or products that have not been approved by the government;
  • the overseas deployment of technology, knowhow and products that are prohibited for export;
  • gaming and pornography;
  • investments prohibited by the terms of China’s international treaties; and
  • other outbound investments that endanger or may endanger national interests and national security

Translation: Linklaters

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