Capital outflow clampdown puts overseas businesses on edge over payment - analysts

The backlash against China’s outbound shopping spree has seen Western countries push back - but it could get even harder for mainland buyers, say analysts

PUBLISHED : Tuesday, 20 December, 2016, 3:34pm
UPDATED : Tuesday, 20 December, 2016, 9:57pm

Ever since Beijing’s latest moves to clamp down on capital outflows, Seattle-based lawyer Dan Harris has been deluged with phone calls from his United States clients.

“This [the scrutiny from Beijing] is as tough as I’ve ever seen it,” the Harris Bricken attorney and Chinese law blogger said. “This is a huge, huge deal.”

Harris is a lot less confident that even the biggest deal can go through following the news earlier this month that China would limit the amount of yuan companies could remit overseas, and impose a stricter checking process for overseas payments of more than US$5 million.

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Clients were likely to become more cautious when dealing with Chinese buyers, perhaps asking them to put down a larger, non-refundable deposit, he said.

“That’s going to kill a lot of deals.”

This month’s development - aimed at stemming the flow to protect the depreciating yuan - is just the latest challenge for Chinese companies, which were already seeing some apparent push back from Western countries this year.

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Chinese overseas investment hit record highs this year but the value and number of withdrawn deals also rose to the highest ever in China for the first nine months of this year, from 31 deals worth ­US$3.37 billion in the first nine months of 2015, to 45 deals worth US$35.89 billion in the same period this year, according to Dealogic figures.

Geoffrey Gertz, a post-doctoral fellow covering global economy and development at research and policy institute Brookings, told the South China Morning Post there had been an increasing trend of Western countries citing “security concerns” over a deal with Chinese companies,.

“Part of it is just an apprehension about China’s economic power, and how that economic power translates into political power,” he said.

Hong Kong-based Norton Rose Fullbright partner Emma de Ronde said Beijing’s latest move could increase the backlash.

“Chinese bidders, rightly or wrongly, are going to be under a higher level of scrutiny now, in terms of showing that they will be able to execute the transaction,” she said.

Part of it is just an apprehension about China’s economic power
Geoffrey Gertz, Brookings

Harris’ confidence that Chinese companies would be able to complete a deal has slipped to the extent that he now recommends his clients - many of whom do deals with China - opt for a smaller amount from companies with funds outside China rather than taking a larger amount from a mainland company.

“If one of them is offering you US$30 million and the other is offering you US$28 million, and one is going to send you the money from China, and the other can show you that they’ve got the money sitting in a bank account in Hong Kong or Cayman Islands, take the US$28 million,” he told the Post over the phone.

“I would say take $27 million if you’ve got a US buyer.”

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Any company that knows what is going on would rather take less money than “go through the hassle” of dealing with a Chinese company, Harris said.

“People are still moving forward, we’re doing deals a little differently,” he said, noting that many of his clients were underplaying the risk.

“The more word gets out, the more the risk could become. I would say they’re generally not taking it as seriously as we are because they don’t see it every day.”

Longer term, Harris thinks Beijing will ease up on its oversight but he doesn’t know when.

“It just keeps getting worse, but it could get better again in three months, it could get better again in three years.”

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Stenvall Skoeld & Company managing director Per Stenvall said Chinese buyers were already at a disadvantage compared to their Western counterparts, with US and European companies preferring to deal with each other, and only pursuing mainland buyers because they thought they could get a good price or for strategic reasons.

“There is already a lot of uncertainty. Chinese companies are already at a disadvantage,” Stenvall said from Shanghai.

“There’s a tendency for [Western] sellers to choose non-Chinese buyers. If the price is the same, they prefer to go with the local buyer or the non-Chinese buyer.”

But generally speaking, US and European sellers were getting more and more open to Chinese buyers compared with the past when sellers didn’t even reach out to Chinese buyers at all.

This was for a range of reasons, including cultural differences and concerns about Chinese buyers getting money out of the country, he said.

Long-term, Stenvall expected Western companies to become more and more willing to do business with Chinese companies.

“I think that trend will continue. People will become more open to working with Chinese buyers. That’s the long-term trend and I don’t think this policy is going to change that.”