China’s biggest overseas acquirers to face tightened deal scrutiny by Beijing

China will launch a campaign to more closely scrutinise overseas mergers and acquisitions (M&A) carried out by Chinese companies, with an emphasis on deals worth more than US$300 million, according to an official document jointly issued by seven ministry-level authorities late Thursday.

The document, published on the official website of the Ministry of Commerce (MOC), was titled “Interim measures regulating overseas investment by Chinese firms”.

The release said the measures would help regulate and monitor rising overseas investment by Chinese companies, and also help facilitate a smooth roll-out of the “Belt and Road Initiative”.

Beijing eased restrictions on outbound investment in 2014, introducing a registration-based system to simplify and quicken the processing of smaller M&A deals deemed non-sensitive.

Deal value reached an all-time high of US$225.4 billion in 2016, more than double the previous record of US$102 billion announced in 2015, according to data provider Dealogic.

But the overseas buying binge by Chinese companies, including headline grabbing acquisitions of Hollywood studios, luxury property and sports franchises, triggered concerns on capital outflows and yuan depreciation, prompting authorities to make a policy U-turn in late 2016.

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The MOC’s new directive clarifies that registration-based approval for overseas investment will be given only to applications “providing information of the ultimate investment targets”, while investment to offshore shell companies will need to undergo thorough checks.

Post-registration checks should be enhanced, the document said, adding that spot checks will be launched by the MOC and other authorities to ensure timely and accurate disclosure.

The MOC will coordinate the regulatory work involving state authorities in charge of banking, state assets, securities, insurers, and foreign exchange.

Under the new directive, outbound investment worth more than US$3 million will be “key supervision targets”, in addition to investment in “sensitive regions and sensitive industries”. Investments that result in major losses, or those that involve accidents or trigger social unrest will also be targets for closer scrutiny, the document said.

Xu Hongcai, an economist with the China Center for International Economic Exchanges, said mainland authorities are seeking to find the right balance when it come to controlling fund flows to overseas investment.

“The last thing Beijing wants is big volatility,” he said. “Neither a huge outflow of capital, nor a fast appreciation of yuan is desirable, so the authority should always adjust policies to fine-tune outflow.”

The MOC statement said the interim measures are intended to prepare for the launch of formal Overseas Investment Regulations, as the ministry is working on a blacklist that clarifies investment restrictions.

China has become the world’s second largest source of foreign direct investment (FDI) since 2016, following the US, amid mega deals by both state-owned firms such as ChemChina, and private companies like Wanda and Anbang.

The outstanding FDI from China ranks 6th worldwide, while 70 per cent of the investment stays profitable or at the break-even point, according to the MOC statement.

China’s FDI fell by a third in 2017, reflecting the first drop since 2006, as tighter scrutiny and restrictions were installed by authorities in late 2016.

Last year, investment flows from China to the US totalled US$30 billion, down 35 per cent from the previous year, owing to tighter regulatory scrutiny from both Beijing and Washington.