It was less than 20 years ago that China announced its “going out” strategy, opening the door for Chinese enterprises to venture abroad with their investments and operations. Up to that point, China’s post-1978 “opening up” to the rest of the world had largely been defined by 20 years of being a recipient of foreign direct investment into China. In truth, it has really only been during the last 10 years that Chinese enterprises (increasingly private as well as state-owned) have increased their investments overseas, in markets such as Australia. During this time, China’s domestic political economy has played a significant role in shaping China’s domestic and foreign investment strategies.
Since 1995, the Chinese government has published guidance catalogues every few years specifying which investment industries are “prohibited”, “restricted” or “encouraged” for foreign investment into China. Last week, China’s State Council (its cabinet) released guidelines specifying which industries would be prohibited, restricted and encouraged for investment abroad by Chinese enterprises. These guidelines formalise policies that have been put in place over the past year and provide a new regulatory framework for China’s “going out” strategy.
The new guidelines prohibit foreign investment by Chinese enterprises in casinos and gambling related investments, core military technologies and the sex industry, among others areas. Chinese enterprises which ignore the guidelines will be blacklisted and punished.
Under the new guidelines, investments in overseas property (commercial, residential developments, hotels and theme parks), cinemas and entertainment, sporting clubs, and equity investment funds will be restricted. Such investments will come under increased scrutiny from Chinese government authorities responsible for approving overseas investments. It will also become more difficult for such investments to receive finance from Chinese banks and for Chinese investors to convert Chinese currency into foreign exchange to fund such investments.
Chinese investors will face restrictions in the setup of overseas private equity funds or other investment platforms without specific projects and limited investments that do not meet local technological, environmental or safety standards.
In recent years, a substantial portion of Chinese investment into Australia has been in the property sector, often through equity investment funds. The new guidelines are likely to, at least temporarily, dampen demand out of China and enhance settlement risk in certain cases where funding remains subject to China-level approvals.
Overseas investments by Chinese enterprises in infrastructure (especially which is linked to the “One Belt, One Road” strategy), new technologies and tech companies, high-tech manufacturers, energy (mining and oil and gas), agriculture, fishing, trade and culture-related industries will be encouraged under the new guidelines. This is largely in line with China’s current five-year plan for 2016-2020.
Through implementing the new guidelines, the Chinese government is seeking to avoid what Chinese regulators have called “irrational” overseas investments that are “not in accordance with macro-control policies” and which “could negatively impact China’s financial stability”.
The new guidelines will certainly have an impact on investments by Chinese enterprises in places like Australia. It has been reported that in the first seven months of 2017, China’s non-financial outbound direct investment dropped around 45% year on year. Futher, according to reports, China inked a total of 163 outbound deals worth US$43 billion during the first half of 2017, down 65% in terms of total deal value compared to the same period last year, as the nation’s tightened capital control measures dampened Chinese overseas investment.
Nonetheless, China’s “going out” strategy is still young and there is still enormous scope for increased investment by Chinese enterprises in Australia, especially in the industries which are aligned with China’s macro-economic strategies.