China expanding overseas investment oversight to state sector

Euro, Hong Kong dollar, US dollar, Japanese yen, British pound and Chinese 100-yuan banknotes. Photo: Reuters 

China's financial regulator has called for an oversight of overseas investment by the state-owned enterprises, as part of its long-term crackdown on capital flight and efforts to improve investment efficiency.

Last week, the country's finance ministry strengthened its role in managing the outbound investment of SOEs by issuing a new regulation that requires them to explain the financial viability and assess the political risks before making overseas investment, while urging a stricter auditing mechanism.

The finance ministry said that the regulation aims to standardize the financial management of overseas investment of SOEs to avoid risks, as the Chinese government has encouraged the country's SOEs to take part in the "Going Out" strategy and the "Belt and Road" initiative.

As President Xi Jinping's landmark strategy to enhance China's global influence, the ongoing "Belt and Road" initiative has given SOEs opportunities to invest in more overseas projects involving strategic energy, telecommunications, high technologies and infrastructure construction.

However, some experts suspect the diversification of overseas investment channels and the increase in number of outbound investment projects have led to thoughtless approval of many financially risky and unprofitable investment projects, thus exposing underperforming SOEs to bigger credit and political risks and creating fears that their overseas investments might worsen capital outflows.

In light of it, the regulation asks for the establishment of a vetting system, under which SOEs must take into account the financial viability before making decisions, while requiring all state companies to better document foreign currency transactions.

SOEs should also establish a mechanism to evaluate overseas investment efficiency, on which future assets and resources allocation will be based, according to the regulation.

Tighter oversight on overseas investment of state companies dates back to January this year, when China's State-owned Assets Supervision and Administration Commission unveiled a "negative list" that summarizes sectors off-limits to investment by SOEs, which are undergoing a reorganization under which underperforming SOEs are merged with stronger ones. The move came at a time when the Chinese currency was facing devaluation pressure and the country's foreign exchange reserves dropped below the level of $3 trillion.

Last week's regulation targeting SOEs came just days after Qian Keming, China's vice commerce minister, announced that the irrational overseas investment of domestic companies had been efficiently curbed in the first half of 2017, with outbound direct investment falling 43 percent on year to $49 billion (331 billion yuan) in the first half.

Since the end of last year, the Chinese government has issued a series of policies to rein in what it called irrational outbound investment in property, hotels, cinemas, entertainment and sports clubs, hinting at several domestic conglomerates such as Dalian Wanda Group and Anbang Insurance.

Last month, Wanda Group signed a jaw-dropping agreement to sell 77 hotels and 91 percent equity in 13 tourism projects valued at $9.4 billion to two domestic rivals. It is an unprecedented move widely seen as a major part of the group's transformation to asset-light operation as Chairman Wang Jianlin has vowed to rebuild the company into a genuine multinational that does not rely on property development and can earn money through brand management and project operation. To achieve this goal, Wanda Group has been engaging in an overseas investment spree, buying properties, cinemas and film studios in the US.

However, there has been another speculation that Wanda Group's notable assets transfer signifies the corporate giant's inability to repay the loans and signals the beginning of its breaking away from its global investment. And in June, the banking regulator publically named Wanda Group, ordering domestic banks to scrutinize its six foreign investment projects including the acquisition of Legendary Entertainment last year and the buyout of AMC Entertainment in 2012. What's more, the speculation could also be corroborated in a statement sent to Caixin, a leading business news outlet in China, in which Wang said that Wanda Group "will follow the national call and has decided to keep its major investment in China."

Recently, the National Development and Reform Commission, China's top economic planner, said that the Chinese government would continue to closely watch the irrational investment in overseas property, hotel, entertainment and sports sectors in an attempt to reduce the potential financial risks, with some experts from the state-backed think tanks explicitly saying that some domestic companies which borrow money to buy overseas assets might harbor ulterior motives of capital transfer and money laundering.

On July 28, China's State Administration of Foreign Exchange published a notification on its website, criticizing 9 banks for breaking the rules to help domestic companies illegally move capital of more than $10 million out of the country.

In March, Zhou Xiaochuan, governor of the People's Bank of China, the country's central bank, pointed out that some of the overseas investments made by Chinese companies did not meet the requirements of the Chinese industrial policy for outbound investment, stressing that overseas investments in sports clubs and entertainment were much less beneficial to China.

However, in a recent interview with the Consumer News and Business Channel, Cao Wenlian, director general of the International Cooperation Center of the NDRC, said that the Chinese government has no intent to ban overseas investment, adding that the stricter rules on outward investment are just the beginning of tightened supervision.

 


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