China's outbound investments: back to normal - Rupert Hoogewerf

Rupert Hoogewerf

China's outbound investments are slightly picking up, and Rupert Hoogewerf, chief researcher of the Hurun China Rich List, sees levels reaching 'normal' levels after a stellar 2016 and dismal 2017, he tells the South China Morning Post.

The South China Morning Post:

Rupert Hoogewerf, chairman and chief researcher of the Hurun Report, said the data showed China’s investment outflows were returning to more normal levels.

“After a great leap forward in 2016, China’s outbound investment has calmed to a rational level in the past two years,” he said.

More in the South China Morning Post.

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Financial restrictions hurt China´s outbound investments - Victor Shih

Victor Shih

Fast declining foreign reserves have pushed China´s financial authorities into severely restricting the outflow of capital. Outbound investment, like the Vancouver real estate industry, might be under pressure, says financial analyst Victor Shih in the Vancouver Sun.

The Vancouver Sun:

The new edict demands a written pledge that yuan converted into U.S. dollars will not be used to buy property overseas. It also creates a government black list and harsher penalties for violators. 

The new rules came into effect on Jan. 1, causing uncertainty in global real estate markets from London to San Francisco and, of course, Vancouver. 

Some have been doing back-of-the-napkin calculations to guess at what a sharper chokehold on Chinese funds could mean for a market already reeling from the additional property tax for foreign buyers. 

Others wonder how this latest move might compare with past attempts to cool the outflow of Chinese money. 

“I think this round of (foreign-exchange) crackdown is much more strictly enforced and (will be) longer lasting,” said Victor Shih, associate professor at the University of California, San Diego, who is researching the impact of elite networks in China. “Prior to the end of last year, even low-level private bank clients for major Chinese and transnational banks can easily transfer money from mainland accounts to offshore (ones.)   

Chinese authorities have now stopped this, he said. 

“In addition, when exchanging any amount of money in China, one now needs to specify the beneficiaries of the exchanged foreign currency, whether it be an overseas university, a tour group or a hotel,” Shih said. 

China’s foreign-exchange reserve has been rapidly emptying since 2015, he added. 

“Because money supply in China today is over US$20 trillion, even if a fraction of the money of the money supply were to get out, it can quickly wipe out China’s reserves. Thus, (Beijing) has to impose increasingly draconian restrictions on capital flows.”

More in the Vancouver Sun.

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Outbound M&A will slow early 2017 - Shaun Rein

Shaun Rein

Increased government restrictions on the outflow of capital will severely impend the outbound M&A activities in the first quarter of 2017, after a record year in 2016, expects business analyst Shaun Rein, according to the South China Morning Post.

The South China Morning Post:

China overtook the US for outbound mergers and acquisition (M&A) volume for the first time, with US$219.3 billion of deals announced in 2016, according to data compiled by Dealogic. 

The record-high deal volume came as overseas takeover activity climbed for a seventh consecutive year, according to a full review of 2016 released by Dealogic on Tuesday.

It put China slightly ahead of the US on US$217.69 billion, down from $237.99 billion in 2015, although Dealogic said the figures are based on preliminary annual data. 

A total of 745 cross-border deals by China were announced in 2016, accounting for more than half of Asia Pacific’s outbound volume, which hit a record US$445.1 billion, according to the report. 

But some analysts believe it might mark a near-term plateau, as the Chinese authorities strengthen their scrutiny of outbound M&A activity and tighten checks on capital outflows in a bid to curb yuan depreciation and a draining of foreign reserves pool. 

Shaun Rein, managing director of China Market Research Group, said: “Outbound M&A activity will slow sharply over the first quarter of 2017, as the Chinese government is making it very difficult to get approval to convert currency, even for legitimate business transactions, because they are very concerned about capital outflow pressure.” 

In an attempt to counter the yuan’s steep devaluation, the Chinese central bank has introduced stricter rules on overseas payments and lending, and guided commercial banks to scrutinise reasons for large overseas payments.

More in the South China Morning Post.

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China´s emerging outbound financial investments - Sara Hsu

+Sara Hsu 

China´s financial outbound investment is tiny, compared to other capital streams. But financial analyst Sara Hsu expects a boost, following real estate and manufacturing, she writes in the Diplomat. Also here, fast growth is high on the political agenda.

Sara Hsu:

Outbound financial investment, while minimal today, is also on the table. The Asia Financial Risk Think Tank based in Hong Kong SAR, for example, is in the process of documenting ways in which China may consider outbound foreign financial investment. Strict capital controls continue to block outbound foreign financial investment, but the potential for the development of foreign financial investment is vast, and China’s institutional and retail investors alike can benefit from diversifying assets abroad. Allowing capital outflows for the purpose of financial investment is currently under discussion. Precedents for outbound financial investment from China are few, but include China’s sovereign wealth funds. The China Investment Corporation (CIC) has been most visible in this area, investing in a number of foreign assets. Controlled by the Ministry of Finance, CIC is registered as an independent non-bank state-owned enterprise, unlike other sovereign wealth funds. Although a recent audit revealed losses due to investment in firms such as Blackstone and Morgan Stanley, CIC has learned from its experience and continues to obtain returns abroad. An aggressive strategy implemented in the early years of its operation has been modified to a more moderate strategy based on investment in equities and other assets rather than high-yield assets purchased via absolute return vehicles such as hedge funds. 

The CIC case may increase the incentive to first open overseas financial investment to state-owned banks rather than non-bank state-owned enterprises, as state-owned banks may undergo emergency liquidity injections where necessary. State-owned banks are under the purview of the People’s Bank of China. In addition, the CIC case illustrates the danger in taking an aggressive financial position, particularly given low levels of experience in investing abroad. It also shines a light on the need to ensure adequate management and accounting procedures. 

Consideration of outbound financial investment comes at a time when China’s leadership is attempting to further marketize its financial sector, enhancing returns and other market signals. Overseas financial investment is a wide open field that has the potential to provide risk diversification and returns to institutional and retail investors, if managed properly. Like overseas direct investment, overseas financial investment may play an important role in providing China with much-needed resources (in the latter case, financial) to expand economic growth.

More in the Diplomat.

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