By Michael Lelyveld
After a flood of outbound investment, China is cracking down on capital outflows as a weakening currency adds to concerns over capital flight.
On Nov. 28, officials of four government agencies confirmed plans to “tighten screening of overseas investment projects” following a 53.3-percent surge in foreign deals in the first 10 months of the year, the official English- language China Daily said.
The government briefing for state media came three days after The Wall Street Journal reported that China’s cabinet-level State Council planned to impose “strict control” with reviews of foreign investments and international acquisitions.
So far this year, non-financial outbound direct investment (ODI) of U.S. $145.9 billion (1 trillion yuan) has eclipsed China’s inbound foreign direct investment (FDI) by about U.S. $50 billion (344 billion yuan).
FDI has grown by a relatively slight 4.2 percent, the Ministry of Commerce (MOC) said.
In a statement, the four agencies stressed that the government was sticking with its “opening up” and “going out” strategies to facilitate outbound investment while “guarding against risks.”
The joint statement was issued by the National Development and Reform Commission (NDRC), the MOC, the People’s Bank of China (PBOC) and the State Administration of Foreign Exchange (SAFE).
Last week, the agencies repeated that there was “no change” in government policies, but added that they are “closely monitoring the tendency of ‘irrational’ overseas investment in some areas.”
The second joint statement named outbound investments in real estate, hotels, cinemas, entertainment and sports as “examples of this tendency,” the official Xinhua news agency said.
The assurances on overall policy appeared to be aimed at heading off speculation that China will back away from its ambitious “belt and road” investment programs to build infrastructure and trade routes through Asia, Africa and the Middle East to Europe.
In September, the MOC said that Chinese companies had signed nearly 4,000 engineering contracts in 61 countries along the routes with a combined value of U.S. $69.8 billion (480.3 billion yuan) in the first eight months of the year.
Capital flight under scrutiny
While these deals may not be a principal target, related investments that are driven partly by exchange rates and plans to take capital out of China are expected to come under scrutiny.
Last Thursday, an unidentified SAFE official also told Xinhua that four categories of investments would be subject to a crackdown on suspicion of capital flight.
Included are newly established firms investing abroad “without real business,” investment by a company exceeding its registered capital, investments unrelated to a company’s main business, and investment of capital from suspected illegal asset transfers or underground lending, the official said.
“Time to deleverage and slow overseas expansion,” said China Daily in one headline, noting that mergers and acquisitions (M&A) accounted for half of the country’s ODI in the first nine months. More than 20 percent of the M&A activity was in the United States, it said.
The crackdown comes as the yuan slumped to a succession of eight-year lows against the dollar in November and the PBOC’s foreign exchange reserves fell for the fifth month in a row.
The PBOC and SAFE are trying to slow a spiral of downward pressures on the yuan, as declining values push investors to take more money abroad. Capital exports are likely to drive the currency even lower, risking trade sanctions from the incoming administration of U.S. President-elect Donald Trump.
China’s government faces a delicate task in discouraging or disallowing outbound investment without undercutting confidence in its economy, its currency and its financial strength.
The pursuit of higher returns abroad was a “natural development,” said China Daily, but it argued that the rapid growth of ODI “doesn’t seem a rational thing to do.”
“Risky overseas investments could threaten financial stability,” it said.
The paper also hinted at consequences for questionable capital movements, noting that a SAFE official in September said the agency had found some companies and individuals had transferred assets “illegally” through overseas investments.
“We will take measures to curb their actions,” said Guo Song, director-general of SAFE’s capital account management department.
The balance of China’s ODI against FDI could soon become more lopsided if the planned U.S. $43-billion (296-billion yuan) buyout of Swiss seed maker Syngenta by China National Chemical Corp. (ChemChina) goes through.
According to The Wall Street Journal, the new reviews will focus most closely on deals valued at U.S. $10 billion (68.8 billion yuan) or more, property purchases of over U.S. $1 billion (6.8 billion yuan) by state-owned enterprises and similar investments by Chinese companies outside their core businesses.
So far this year, China’s announced ODI deals have totaled over U.S. $212 billion (1.4 trillion yuan), the paper reported.
Thomas Rawski, a China scholar and University of Pittsburgh professor of economics and history, said the government is likely to have difficulty in defining the investments that it will or will not allow.
In addition to the “belt and road” projects, China has pursued an elaborate initiative for developing countries known as “industrial capacity cooperation,” that offers to develop entire industries abroad with technology transfers, equipment and infrastructure.
The advantage for China is that it may help reduce its domestic production overcapacity in sensitive sectors like steel and power generation by shifting it overseas.
“I think it’s very difficult for them to crack down on these investment outflows because they represent a partial answer to the excess capacity problem,” Rawski said.
China has been particularly active in promoting investment for the entire supply chain of power plant development in Latin America and the “belt and road” countries.
One of the main incentives for the host countries in doing business with China is the availability of financing from Chinese banks.
“If they were to try to limit the financing by Chinese banks of these overseas projects, that would limit the attractiveness of the Chinese companies as business partners,” Rawski said.
The importance of industrial capacity cooperation and the “belt and road” investments to the Chinese leadership is likely to limit the government’s ability to restrict capital flows.
“It’s one of these areas where you get policy conflicts very quickly between different objectives,” Rawski said.
Last year, China’s investment in “belt and road” countries accounted for 13 percent of ODI, the MOC said in September.
Image of economic growth
China’s political image abroad may also be a key consideration.
The government has invested heavily in both financial and political capital to project an image of economic strength overseas at a time when it is struggling to slow a decline in economic growth.
The image-building was on full display in state media coverage of President Xi Jinping’s meetings with leaders of Latin American countries during his visit to Lima, Peru for the Asia-Pacific Economic Cooperation (APEC) summit meeting last month.
In the weeks following the summit, the domestic image of China as it tries to restrict capital outflows and the slide in the yuan may look different to partners overseas.
It is unclear whether the government delayed the announcement of its capital controls to leave a clear field for Xi’s mission, which might have been clouded by bad economic news from home.
Subsequent reporting by The New York Times suggests that the ODI limits are part of a larger plan to keep capital at home.
In a directive on Nov. 28, SAFE ordered China’s banks to check with the agency before transferring U.S. $5 million (34.4 million yuan) or more out of the country, The Times said.
State media have repeatedly portrayed China’s economy as recovering, although official gross domestic product growth rates have remained rock-solidly consistent at 6.7 percent for all three quarters so far this year.
“Major economic indicators in the first 10 months, including fixed asset investment and industrial production, suggested the economy is stabilizing,” Xinhua said on Nov. 25, although it was never reported to be not stabilized.
“This is just standard business,” said Rawski. “The fluctuations that happen—you don’t see them in the statistics, but you do see them in the discussions.”
The depreciation of the yuan last month and the effort to stem capital outflows are signs that the government at least has misgivings.
While there may not be clear solutions, officials have sounded a hopeful note about the trends in capital flows.
“I believe capital that has flown from China will return in the future,” said PBOC deputy governor Yi Gang in an interview with Xinhua.