China’s government is planning to introduce new restrictions on foreign investment deals in a bid to stem capital outflows, a move that will be felt across the globe as Chinese companies have been on a buying spree this year.
While Beijing will still support outbound investments that fit with the operations of a company and their international expansion plans, it will take a tougher stance on financial investments, according to Xu Hongcai, deputy chief economist at the China Centre for International Economic Exchanges, a government think-tank.
“We will strengthen investigations and checks on big investments,” Mr Xu told the Australian Financial Review.
His comments come after it was reported that Beijing was planning to ban overseas investments of more than $US10 billion and mergers and acquisitions valued at more than $US1 billion if they are not part of a company’s core business.
State-owned companies would also be banned from foreign real estate deals involving investment of over $US1 billion, according to the South China Morning Post.
The expected introduction of stricter controls on outbound investment come as China’s foreign exchange reserves have dropped to their lowest level since March 2011, at $US3.12 trillion. This is well down from the peak of $US4 trillion reached in June 2014,.
Capital outflows have been edging up again as Chinese investors, concerned about the weakening trend in the yuan, are looking to protect the value of their assets.
The yuan has weakened by 5.8 per cent against the US dollar this year. Last week, it slumped to its weakest level in more than eight years.
The weak exchange rate “has a psychological impact”, said Mei Xinyu, a senior researcher with China’s Ministry of Commerce.
“It causes nervousness among the public.”
Mr Mei said the government’s tougher stance on foreign deals would affect Chinese investors buying property overseas but would not dampen “real investment” by companies.
Speculation about the government plans prompted the Ministry of Commerce to release a statement on its web site on Monday saying China would maintain its “go overseas” strategy but would also safeguard against risks related to foreign investment.
Liu Li-Gang, the chief China economist at Citi, said the changes were a “tactical tightening” of Beijing’s decade-long policy of encouraging its companies to go abroad.
“I don’t think it’s a reversal of the so-called going out policy,” he said via phone from Hong Kong.
Mr Liu said at a time of strong capital outflows the central bank was “tweaking” its policy.
He believed the policy was squarely aimed at limiting capital outflows which are continuing to place pressure on China’s currency, the yuan as the US dollar strengthens. “They [authorities] are saying that companies need to be more cautious in going abroad.”
“The central bank is cracking down on capital outflows,” he said.
Any strengthening of controls will reverberate in investment banking circles around the world as China’s total overseas direct investment jumped more than 50 per cent to $US146 billion in the first nine months of this year from the same period a year earlier.
In Australia last year, Chinese investment clocked up its second largest inflow, as renewed interest in commercial property and agriculture made up for subdued activity in resources.
Overall actual investment jumped by a third to more than $US15 billion, which included seven deals of more than half a billion dollars each, according to a KMPG report. It was the second biggest investment inflow since 2008, when Chinese money poured into the country at the height of the resources boom.
Between 2005 and 2015, Australia was the second-largest recipient of Chinese investment, behind the United States, attracting $US78.7 billion. A KPMG business survey found Chinese companies liked Australia because of the shared time zone and also looked at the market as a launching pad for their offshore investment strategies.
Figures released by the Foreign Investment Review Board earlier this year showed Chinese investors were planning to spend $46.6 billion in Australia, almost twice as much as the amount pledged in 2014.
These are expected future investments based on applications made to invest lodged in 2015 – which may have multiple applications for the same investment target and may or may not proceed to completion.
Real estate investments made up the bulk of Chinese investment plans, with a total of $24 billion. This is twice as much as the amount approved in 2014.