Beijing cracks the whip on outbound investment

Mainland's super rich and insurance giants hunt for real estate targets after Beijing makes it easier to move funds abroad

PUBLISHED : Wednesday, 10 December, 2014, 6:08am
UPDATED : Wednesday, 10 December, 2014, 6:08am

In this Year of the Horse we have seen a host of state-facilitated measures introduced to help mainland companies find new markets and enhance the nation's economic strength.

In ancient times, people used to call an able person a qianli ma, a horse that runs 1,000 li (500km) a day.

This year, Beijing certainly has been running with its policies to facilitate outbound investments from a wide range of sources: state-owned enterprises, sovereign wealth funds, insurance companies, private firms and wealthy individuals.

SOEs and private companies no longer have to deal with the lengthy and often challenging government approval process.

In April, Beijing increased the threshold for investments dependent on State Council approval to US$2 billion. In October, the central government simplified the outbound investment process allowing companies to transact with much greater certainty, on a level playing field with their international counterparts.

In the real estate sector, certain types of outbound investment are now encouraged, such as the acquisition of mature commercial properties, construction, infrastructure and hospitality projects in particular countries and regions.

Historically, only sovereign wealth funds such as the China Investment Corp and investment vehicles affiliated with the State Administration of Foreign Exchange led outbound real estate investment. However, insurance firms are now positioning themselves to be major overseas real estate players, having been given government clearance in October 2012.

In February, insurance firms were allowed to invest up to 30 per cent of their asset value in the sector. Statistics show 20 per cent of the available insurance proceeds in the first half of the year was invested in products outside typical investments, such as bonds, bank deposits, stocks and securities.

Real estate, especially in mature and developed markets like Britain, will continue to be a popular investment choice.

This appetite has been demonstrated recently by big insurance players such as China Life Insurance, which this year acquired Clifford Chance's headquarters in London in a £780 million (HK$9.48 billion) deal. Taikang Life Insurance and Gaw Capital Partners recently placed Milton Gate, in the City of London, under offer for about £200 million. We can expect this trend to continue.

Previously, moving capital out of the mainland to fund outbound investments was one of the greatest challenges for its high-net-worth individuals. Underground banking methods were widely practised as a result. Fortunately, they can now move their capital transparently, through legal methods.

On November 16, Shanghai's Communist Party chief announced that qualified high-net-worth individuals could invest overseas directly through the Shanghai free-trade zone.

Detailed rules will be out in a few months, but it is a momentous development. We expect the Shanghai zone will be used by wealthy individuals as a major investment vehicle. They can also now use the Shanghai-Hong Kong Stock Connect scheme to move their capital by investing in the Hong Kong stock market.

These two channels will allow wealthy individuals to play a much bigger role in pushing forward the mainland's outbound investment in a significant way.

In the real estate sector, private enterprises and wealthy individuals accounted for 62.6 per cent of outbound deals from 2008 to June. According to a Barclays survey in September, close to half of mainland high-net-worth individuals are considering relocating to more developed countries within the next five years.

Britain has emerged as one of the world's most attractive places of residence for foreigners. London was the first choice for most ultra-rich last year and we expect this trend to continue in the next five to 10 years. Performance pressure from the mainland market and the need to secure funds for future generations means high-net-worth individuals' outbound real estate investment will only grow, and on a much larger scale.

"The world is your oyster" is an idiom from The Merry Wives of Windsor, a comedy written more than 400 years ago by William Shakespeare in England, a country then so foreign to the Chinese people.

The same country is now no longer such a world away to many mainland investors with the qianli ma spirit.

Victoria Gardner is a partner and Lu Junwei an associate of law firm Berwin Leighton Paisner (HK)