China tightens supervision over overseas investment #China Newsweek#-Sino-US


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China tightens supervision over overseas investment #China Newsweek#
 
The tightening supervision of Chinese companies’ foreign investments, however, does not mean a change in China’s major direction of encouraging companies’ overseas investments. Photo: Bloomberg
 
While encouraging Chinese enterprises to “go out” is one of China’s efforts to promote its global economic strategy, the government is now paying more attention in regulating Chinese companies’ overseas investments, in particular “irrational” investments, since the beginning of this year, in order to stem capital outflows and rein in risks.
 
But tightening supervision on overseas investment does not mean discouraging companies to “go out”. Instead, real and regular overseas investments are still welcomed, analysts say. The challenge now is how the government should conduct its supervision on “irrational” overseas investments and what banks and enterprises should do to avoid “irregular” investments. 
 
In the 29th issue of China Newsweek, the magazine ran a cover story on the country’s ongoing efforts to regulate Chinese companies’ expanding overseas investments in recent years, and below is an excerpt of the article. 
 
Regulatory tightening 
 
Chinese companies’ overseas investments have entered the “fast lane” since 2008, with a record high of more than $170 billion coming in 2016. But the consequences brought by the rapid overseas expansion, such as capital outflows, fluctuation of yuan exchange rate as well as domestic financial risk, have captured the attention of Chinese authorities who worry this may further threaten financial security. 
 
According to a report by Hurun Research Institution, announced and documented Chinese companies’ overseas investments in 2016 reached 438, an increase of 21% compared with that in 2015, and the transaction amount stood at $215.8 billion, increasing by 148% compared with the previous year. 
 
Following China’s efforts in regulating overseas investments beginning early this year, there is a 45.8% year-on-year drop in the country’s non-financial overseas investments in the first half of this year, which is $48.19 billion. Among that, overseas investments in real estate dropped by more than 82% on year and those in cultural, sports and entertainment sectors dropped by 82.5% on year.
 
Recently, the Ministry of Commerce announced that several sectors would be restricted in terms of overseas investments, which include property, hotel, film studios, entertainment as well as sports clubs, suggesting relevant departments be prudent in making decisions. 
 
Earlier this year, China’s central bank Governor Zhou Xiaochuan said that part of the foreign investments is actually not in compliance with China’s overseas investment policy, such as sports, entertainment, and clubs, which actually benefit China very little and are also triggering complaints outside. 
 
“It cannot be simply put that the overseas investments on real estate, hotels, entertainment and sports clubs are irrational investments. After all those are companies’ own decisions as to which sectors they want to invest. But even when companies can make money through investment in those sectors, little money would be brought back to China. Even if the money would flow back to China, those sectors actually have thin profits and might threaten financial stability of the domestic market,” noted Tu Xinquan, deputy dean at the China Institute for WTO Studies at the Beijing-based University of International Business and Economics. 
 
Commenting on the latest supervision on foreign investment, Yu Yongding, an economist of the Chinese Academy of Social Sciences, said that it’s a little bit late, but still better than never as a large amount of capital has flown outside. 
 
During June 2014 and January 2017, China’s foreign exchange reserve fell from $3,993.2 billion to $2,998.2 billion, which, according to the State Administration of Foreign Exchange (SAFE), is mainly due to the central bank’s efforts to stabilize the yuan’s exchange rate. 
 
“Decrease in the foreign exchange reserves is the most direct reason for authorities to tighten supervision on capital outflows, while a high domestic debt rate which can also create financial risks is another reason,” said Tu.
 
Support to overseas investments
 
The tightening supervision of Chinese companies’ foreign investments, however, does not mean a change in China’s major direction of encouraging companies’ overseas investments. 
 
The National Development and Reform Commission (NDRC) and Commerce Ministry have said that the country will support capable and qualified companies to make investments in compliance with the law, and encourage overseas investments chosen by companies, guided by the market and in accordance with business principles and international investment norms. 
 
Early this year, Pan Gongsheng, deputy governor of the People's Bank of China and the head of the State Administration of Foreign Exchange, said in an interview that China will never go back to the path of capital control and “an opened window will never be closed again.”
 
Analysts say, while the main direction of encouraging Chinese companies’ overseas investments will not change, “the operation would be optimized and more detailed.”
 
“From the perspective of economic globalization, both Chinese yuan’s internationalization and companies’ internationalization need to be realized through overseas investments, which will not be changed. But there will be some structural adjustments,” said Tu.
 
“While the current supervision on overseas investments is mainly aimed at maintaining financial safety, the starting point of the NDRC and Commerce Ministry in terms of approving and recording overseas investment projects is actually industry-oriented,” Tu added. “From the perspective of approval, restrictions are actually easing. There is no point in tightening the restrictions again, but controls on financial risks are getting tightened.” 
 
The fact that it is hard to define capital outflow is why Chinese authorities use the term “irrational” investment, according to Tu. But it is also hard to define “rational” and “irrational” investment. 
 
Some researchers are warning that there should be clearer standards for the evaluation of “rational” and “irrational” overseas investments, instead of taking action afterwards, which may trigger negative media coverage and thus affect normal investments in the “Belt and Road” projects.
 
In fact, while China is tightening companies’ overseas investments in some developed countries, it is encouraging investments in “Belt and Road” countries. 
 
“While developed countries may have safer investment environments, the investment return may be larger in ‘Belt and Road’ countries,” Tu said.
 
“Generally, investments tend to be focused on safe areas, which means the country not only needs to have stable income increase and economic growth, but also export growth. If there were less exports, there would be less foreign exchange which is used to pay debt,” noted Yu.

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