China's overseas investment frenzy drops as government checks 'irrational investments'

Chinese companies' enthusiasm for overseas investment has declined since the beginning of 2017, after the government tightened scrutiny over what it calls "irrational" outbound investments, in a bid to stop capital flight.

China's outbound, non-financial investment slumped 41.8 percent in January-August from a year earlier to $68.7 billion, statistics released by the Ministry of Commerce showed in September. The ministry said that "irrational" overseas investment has been effectively curbed, as the authorities have kept a tight grip on overseas investment in areas of property, hotel, entertainment and sports clubs.

The clampdown on "irrational" overseas investment projects has discouraged an array of big Chinese companies intending to expand their global footprint by making overseas investment, with Dalian Wanda Group's Chairman Wang Jianlin explicitly saying that his company "will follow the national call" to keep its major investment in China, shortly after he sold big domestic leisure properties in July.

Wanda's high-profile property assets transfer came after China's banking regulator required domestic banks to assess the systematic risks presented by some big enterprises involved in overseas buying spree in June, when Wanda's six foreign investment projects including the acquisition of Legendary Entertainment last year and the buyout of AMC Entertainment in 2012 came under scrutiny.

Last month, the property conglomerate announced the suspension of plans to buy Nine Elms Square in London, in a latest sign of retreat from overseas acquisitions.

What's more, the crackdown on overseas investment has spilled over to the state sector. In August, the Ministry of Finance called for stricter oversight of overseas investment by the state-owned enterprises with a new regulation that requires state-owned enterprises to explain the financial viability and assess the political risks before making investment, while urging a harsher auditing mechanism. The state-owned enterprises were also ordered to better document foreign currency transactions.

At least two of HNA Group's overseas deals have hit a hurdle as the Chinese conglomerate struggles to take money out of China, Reuters reported in September, citing four people familiar with the process.

US screening of Chinese investment

Meanwhile, Chinese outbound capital has been attracting close attention in the United States, a popular investment destination for Chinese companies.

Some foreign investment experts said that the Committee on Foreign Investment in the United States (CFIUS), a statutory body responsible for reviewing the national security implications of foreign investment in US companies or operations and comprised of a dozen or so US government agencies chaired by the Department of the Treasury, had already heightened scrutiny on Chinese companies investing in the United States.

Alibaba Group's Ant Financial has resubmitted its application for CFIUS review of its deal to buy American company MoneyGram International for $1.2 billion after it failed to secure it within an assessment period after the first application, according to a Reuters report published in September.

Global investors have long criticized the CFIUS for using obscure vetting procedure.

Over the past several years, many planned Chinese investments in the United States have been blocked by the CFIUS due to national security concerns.

In September this year, US President Donald Trump issued an order to block Canyon Bridge Capital Partners, which is backed by a Chinese venture capital firm, from buying US chip maker Lattice Semiconductor, citing national security concerns. It marks only the fourth time in 27 years that a US president has blocked a deal like this.

In 2012, Ralls, which is owned by Chinese industrial conglomerate Sany Group, sued the US government, including then-President Barack Obama, for squashing its bid to build wind farms adjacent to a naval training base.

Worse still, US Senator Chuck Schumer is reportedly preparing legislation that would require the CFIUS to consider economic and even political factors in its review process. In August, Schumer urged President Trump to ban all Chinese acquisition projects in the United States as part of efforts to pressure Beijing to curb North Korea's nuclear ambition.

What foreign investment is encouraged by Beijing?

Despite strict restrictions on Chinese companies' overseas investment, Beijing has left itself a leeway, as it is positively pushing forward with its ambitious Belt and Road initiative and plans to become the world's innovation center.

In August, the National Development and Reform Commission, the Ministry of Commerce, the People's Bank of China and the Ministry of Foreign Affairs issued a document to guide and standardize overseas investment. The document encourages overseas investment that can help promote infrastructure construction and connectivity in countries involved in the Belt and Road initiative. Besides, overseas investment projects which involve scientific research cooperation with foreign high technology and advanced manufacturing enterprises are also welcomed by the government.

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