China economy

China moves to close overseas investment deal ‘loophole’

Government proposes tightening regulations to stop use of Chinese bank guarantees to secure loans overseas as it bids to control outflow of cash

PUBLISHED : Tuesday, 07 November, 2017, 5:28pm
UPDATED : Tuesday, 07 November, 2017, 11:26pm

China is amending its overseas investment regulations to cover a widely used method of securing loans to buy assets abroad, as Beijing strengthens its oversight of outbound investment to curb the flow of cash out of the country.

The suggested changes to the regulations cover Chinese companies applying for a letter of guarantee from a bank operating in China, but using the note to secure an offshore loan for an overseas unit of the firms.

The practice has been popular among Chinese companies investing abroad, helping China’s total outbound investment to hit a record US$170 billion last year.

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The deals, however, were beyond Beijing’s scrutiny as the government has stepped up oversight of foreign investment amid fears of a flight of capital from China.

The National Development and Reform Commission, the powerful economic planning agency in charge of vetting of big overseas deals, is trying to close this loophole.

Newly drafted outbound investment regulations – published on the agency’s website to solicit public feedback – state that overseas investment by offshore business units “controlled” by Chinese companies should be reported to the government and be subject to Beijing’s scrutiny.

Under the draft rules, if a Hong Kong subsidiary of Chinese company invests in an overseas deal, the Chinese firm has a duty to tell the commission if the investment is deemed “sensitive” to the national interest or the figure involved is more than US$300 million.

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The changes are intended to “fix a shortcoming” in the regulations, the agency said in a statement.

“Some overseas investment deals are not covered by the current regulation system and there are certain risks,” the statement said. “The new rule will include overseas deals by offshore units of Chinese companies into the regulatory framework.”

The public has until December 3 to comment on the suggested changes.

Zhou Hao, chief emerging markets economist at Commerzbank in Singapore, said the economic planning agency may find it hard to check specific financing by overseas units of Chinese companies.

“It’s hard to define such entities especially when the money flow is outside China,” Zhou said.

While the commission is trying to boost oversight of overseas deals carried out through offshore units, the draft also sends a message that Beijing wants to cut red tape for overseas deals.

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Under the existing rules in effect since 2014, a Chinese company has to tell the commission beforehand about taking part in any overseas bidding or takeover deal valued at above US$300 million. The commission then decides whether to give the go ahead within seven days.

Under the new proposals, this “pre-screening” process is scrapped.

In another change, local Chinese companies have under the existing rules to report overseas investment plans to the provincial authorities and they report to the reform commission in Beijing for final approval. The new proposals suggest allowing firms to submit investment plans directly to the NDRC online for approval.

The agency said it will demand information about overseas investment deals from firms and conduct random checks, punishing those guilty of breaking the rules.

China’s government has strongly criticised “irrational investment” overseas in property, hotels, cinemas and sports clubs.

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After President Xi Jinping labelled outbound investments as an important part of “national security matters”, fundraising channels of some big deal makers, including Wanda, HNA Group and Anbang, have been scrutinised by the banking regulators since June.

Such irrationality has been “effectively curbed” after months of the clampdown, with the value of outbound investment dropping 41.9 per cent year-on-year to US$78 billion in the first nine months of this year, according to China’s commerce ministry.