Since the end of 2016, China’s National Development and Reform Commission (NDRC), Ministry of Commerce (MOFCOM), People’s Bank of China (PBOC) and the State Administration of Foreign Exchange (SAFE) have expressed their concerns over overseas acquisitions by the Chinese firms in certain sectors, underlining government’s new drive to rein in offshore spending by some of the country's biggest companies.
MOFCOM has recently reiterated its warnings that the Chinese companies should exercise “prudent” decision making regarding overseas investments, especially in real estate, hotels, film studios, entertainment and sports clubs. Meanwhile, the four agencies indicated that they would step up scrutiny on “authenticity and policy compliance” of new overseas investment projects. The State-owned Assets Supervision and Administration Commission (SASAC) also announced that it would step up its review of investment by SOEs and in principle it would not approve SOEs to invest abroad in their non-core industries.
In June, China’s Banking Regulatory Commission issued an urgent statement requesting for an investigation over the “irrational” offshore investment undertaken by HNA, Anbang, Wanda, Fosun, and Zhejiang Rosen Neri. This has brought a knock-on effect on the stock and bond market performance of these companies.
These new policy changes reflect government’s increasing concerns over capital flight and “asset transfers”, and rising financial risks brought by the shoddy investments as many relied heavily on loans from the Chinese banks. Rapid outflow of cross-border capital has exacerbated the difficulty of maintaining an equilibrium of balance of payments and brought more pressure on China’s foreign reserves and RMB’s exchange rate.
According to MOFCOM, China’s overseas investment reached a record level of USD170.1 billion in 2016. But thanks to the government’s recent efforts, China’s overseas investment in real estate sector dropped by 82% in the first half of 2017 while investment in cultural, sports and entertainment industries declined by 82.5% over the same period of last year.
With all these developments underway, however, the Chinese government is adamant that its policy of encouraging overseas investment remains unchanged. It will “continue to guard against risks of outbound investment and ensure the healthy and orderly development of investment overseas." China will support companies investing overseas according to market and international rules, especially in 'Belt and Road' developments.
China's Politburo, the Communist Party's top decision-making body, convened on 24 July to assess the economic development in the first half of 2017 and set the tone for economic work for the rest of the year. According to a statement following the meeting chaired by President Xi Jinping, China will implement a "proactive" fiscal policy and "prudent" monetary policy in the second half of the year.
The meeting has identified six key priorities for the second half of 2017, namely further promoting the supply-side structural reforms by effectively dealing with the “zombie enterprises” issues; stabilising foreign and private investment by increasing their confidence in the market and improving market access; creating more employment opportunities to improve people’s livelihood; ensuring there is no “systemic” financial risks while improving the efficiency of the financial sector; stabilising the real estate market by maintaining the continuity of relevant policies; and “actively and steadily resolving built-up government debt risks, effectively regulating local government debt financing, and resolutely curbing the increase in hidden debt”.
Among these arrangements, the key task is the government’s increasing concern about China’s financial and debt risks. Years of economic expansion fueled by easing of the monetary policy has caused excessive leverage. The financial sector needs to play a stronger role in nurturing the development of the real economy and financial regulation needs to be strengthened in the face of rising moral hazard. To address these problems, China is about to create a “super regulator” in addressing financial woes. The People’s Bank of China will play a bigger role in enhancing coordination and improving weak links in financial oversight. In 2017 alone, CBRC has planned to complete 46 legislative programs, covering risk management on bankruptcy, liquidity of commercial banks as well as cross products services.