New tack on reforms: Chinese outbound investment faces tighter scrutiny

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China’s non-financial outbound direct investment dropped nearly 30 percent from the previous year in 2017. Several Chinese firms were selling off overseas assets due to the government's tightened scrutiny on outbound investment.

In 2014, China's outbound investment started to be prosperous, since the government eased its restrictions and simplified the application process by implementing a registration-based system to simplify the application process. In this way, the investment amount reached a record 170 billion US dollars in 2016. However, the regulators began tightening regulations last year to prevent excessive growth.

According to the Ministry of Commerce, outbound investments worth more than 300 million US dollars are now to come under tighter government supervision. The new focus points of regulatory supervision are investments in "sensitive countries and regions" or "sensitive industries".

VCG Photo

The new rules stipulate that record-filing and supervision will be required through the entire life of an investment project. One analyst says the tougher regulation is the result of poorly planned and highly leveraged investments in the past.

“2017 data showed that leverage remains quite high for companies’ overseas investment – 78 percent of the funding was from credit financing. And some of the overseas assets are not performing very well. So high leverage and tightening liquidity are having an effect on the ability of the companies to invest abroad,” said John Xu, the corporate partner of Linklaters LLP.

The Titan investors started pulling their money back from the property sector overseas. HNA Group and Dalian Wanda Group were cashing out by selling its assets in Sydney and London. So does this mean the attractiveness of overseas assets is diminishing?

“I think the companies selling overseas have two reasons. One is regulatory pressure – that they are not encouraged to invest in some restricted industries has made them sell those properties. But another important reason is that this helps them get more cash and deleverage. But from the overall trend, domestic firms remain enthusiastic about outbound investment,” Xu said.

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