…In the cards…
(AFR) The Chinese government has moved to halt “irrational” overseas investments by restricting purchases of real estate and entertainment assets, a decision which could dent demand for Australian assets.
The move, designed to curb capital outflows and lessen downward pressure on the Chinese currency, also compels mainland companies to align themselves more closely with Beijing’s foreign policy objectives.
The State Council said it would encourage companies to invest in the $1 trillion One Belt One Road infrastructure initiative, which aims to improve China’s trade links with
Europe, Africa, South East Asia and the Middle East.
The Turnbull government has not formally signed up to the initiative despite a desire by Beijing to link it with Canberra’s $5 billion Northern Australia Infrastructure Facility.
The new investment guidelines formalised a series of edicts issued by regulators over recent months and included a list of “banned, encouraged and restricted” areas for investment.
Hotels, sporting teams, cinemas and the broader entertainment sector were on the restricted list, while investments in casinos and defence technology were banned.
However it has encouraged deals in high technology, advanced manufacturing, agriculture, some areas of the service sector and oil and gas.
More rational investments
“This will lead to more rational investments … after a period of crazy acquisitions at any cost,” said Zhang Yansheng, chief economist at the Beijing-based China Centre for
International Economic Exchanges.
“In the short term there will be fluctuation in China’s investment in Australia, but I’m sure over the longer term there will be a steady increase.”
The move comes at a time of heightened trade tensions between Beijing and Washington, after the Trump Administration said on Friday it would formally launch an investigation into China’s alleged theft of intellectual property.
China for its part has called on the US to look at the progress made around the protection of intellectual property rights and solve the issue through dialogue.
On the investment front Beijing has signalled it is increasingly worried that an acquisition binge by private entrepreneurs in recent years now threatens the stability of
its financial system, if loans extended by from state-owned banks sour.
Tighter scrutiny of offshore deals over the last six months has already forced the Dalian Wanda Group to restructure its overseas assets, including nearly $2 billion worth of projects in Sydney and the Gold Coast.
In a statement the country’s top economic planning agency, The National Development and Reform Commission (NDRC), accused some Chinese companies of “blindly” going overseas.
“This has resulted in operational difficulties and caused significant losses,” it said.
The NDRC also highlighted the negative aspects of overseas property deals.
“Some companies have put their investment focus on fields that are not necessarily in the ‘real economy’, such as the property sector,” it said.
“While these investments failed to drive economic growth, they led to increased capital outflows, which could negatively impact China’s financial stability.”
The radical action to curb foreign investment comes after Beijing was spooked by record levels of capital outflows last year.
Foreign reserves, which had long been a source of pride for China and usually provide a buffer in times in economic turmoil, tumbled from just under $US4 trillion in June 2014, to slightly less than $US3 trillion in January.
They have since bounced back above that important comfort level but it was seen as a wake-up call for Beijing and authorities responded by strengthening capital controls and increasing oversight of foreign exchange transactions.
The government warned potential acquirers against buying “non-core” assets overseas and demanded state-owned companies explain valuations and financing arrangements for any potential
The tighter controls have had an immediate impact. Total outbound investment dropped nearly 46 per cent to $US48.19 billion in the first half of the year, according to the Chinese Ministry of Commerce. Offshore property investment plunged 82 per cent over the same period.
This followed Beijing directing lenders to review their exposures to the country’s most aggressive corporate players.
Those targeted include Wanda, Anbang Insurance, which bought New York’s Waldorf Astoria in 2014, HNA, which holds a 13 per cent stake in Virgin Australia and Fosun Group, which has made a string of European acquisitions and is developing apartments in Brisbane and Sydney.
These companies are all headed up by executives with high-level connections in Beijing and have spearheaded China’s push overseas.
On August 10, the Hong Kong-listed Wanda Hotel Development said it would sell a 60 per cent interest in its Sydney and Gold Coast developments to a company controlled by the group’s founder, Wang Jianlin.
The sale is seen as the first step in offloading the assets to third parties.
The deal should allow the Hong Kong-listed company to reduce its debt load and provide Mr Wang time to reorganise the assets away from the glare of the public market.
The move to force Chinese companies to reduce their debts levels comes after the International Monetary Fund said last week that China’s debt levels would reach nearly 300 per cent of GDP by 2022 at the current trajectory.
The fund said this threatened the stability of the financial system and that reform was need.
“Reform progress needs to accelerate to secure medium-term stability and address the risk that the current trajectory of the economy could eventually lead to a sharp adjustment,” it said.