While Renminbi depreciated significantly in 2016, China's outbound investments have soared to a record high as a result of its "going out" strategy and "one belt, one road" initiative. This has resulted in China's foreign exchange reserves dropping to a record low in recent years. To defend its currency and to curb capital outflow, the Chinese governmental authorities have stepped up their control over outbound investments and acquisitions, aiming at combating irrational or false outbound investments and reducing acquisition risks.
Some notable outbound investments that are subject to the tightened scrutiny include those:
- that are valued at US$10 billion or more;
- that are valued at US$1 billion or more, and the business of the target falls outside of the Chinese investor's core business;
- that are valued at US$1 billion or more in relation to overseas real property or development made by state-owned enterprises;
- which relate to certain industries or sectors such as real estate, hotels, cinemas, the entertainment industry and sports clubs;
- where the size of the Chinese investor is relatively smaller than the size of the target, or which has only been recently established with no assets or actual operations, or by limited partnerships;
- which relate to the privatisation of an overseas listed target that is controlled by the Chinese investor;
- which relate to the acquisition by the Chinese Investor of 10% or less of the shares in an overseas listed company; and
- that would result in a high leverage ratio and a low return on equity.
Besides tightening the examination and approval of outbound investments, remittance of funds offshore is also being closely monitored. Any outward transfer of US$50 million (or its equivalent in other currencies) or more related to an outbound investment or acquisition, or any outward transfer of US$5 million (or its equivalent in other currencies) or more under any capital account item, has to be reported to national level Beijing SAFE and such transfer can only be made after the Chinese authorities have re-examined the underlying transaction to verify its authenticity and compliance with relevant regulations. For outbound investments that have previously been approved but the related capital outflows have not yet occurred, they could still be subject to further review or re-assessment.
The above policies have, thus, halted (or even terminated) many large-cap Chinese outbound M&A deals in the market and their financings. They have also led:
- to prolonged delays (or sometimes rejections) in obtaining necessary NDRC and/or MOFCOM approvals for outbound investments, which are customary conditions precedent to utilisation of onshore or offshore financings; and
- to prolonged delays (or sometimes rejections) in obtaining:
- SAFE approval for money to be remitted out of China, which consequently affects the viability and the completion timetable of the acquisition (especially where no alternate offshore funds are available); and
- SAFE registration under ‘Nei bao wai dai’ of any guarantee and/or security provided by onshore entities or individuals for the offshore financing. The Chinese authorities will examine factors such as source of repayment offshore, risk of default under the offshore loan and likelihood of enforcement of the outbound guarantee or security which will result in remittance of funds offshore.
Meanwhile, the Chinese authorities have also issued new rules relaxing capital inflow and encouraging foreign direct investments into China. For example:
- the removal of the flow-back restriction under 'Nei bao wai dai' since 26 January 2017, such that offshore loan proceeds may now be repatriated back into China, thus facilitating the taking of outbound guarantees and security by offshore financiers; and
- the increase of foreign debt quotas for Chinese domestic companies pursuant to a PBOC circular issued on 11 January 2017.
The Chinese government continues to emphasize its support and promotion of the "going out" policy, and the recent market interventions are generally viewed as measures to screen authentic and compliant outbound investments and to ensure disciplined capital flows. Given the policy-driven nature of government regulations, it remains to be seen how long these measures will remain in place. Suffice to say, the market has felt the immediate impact of the measures and overseas sellers are increasingly vigilant in their due diligence of the ability of Chinese buyers to complete acquisitions.