Keeping China’s international investments in the national interest

The first great wave of Chinese investment in overseas real estate has peaked and it will be some time before restrictions on outbound investment are significantly relaxed.

Nonetheless, as China continues to grow both its economy and its role in world affairs, the long-term projection is that outbound investment will continue. However, the travails of big-ticket real estate investors such as Anbang – taken over by the government, its former chairman in prison and its assets up for sale mean Beijing is in no position to loosen its stance.

In June, Bloomberg reported that the People’s Bank of China and other state bodies have stepped in to support conglomerate HNA Group, one of the biggest Chinese buyers of foreign real estate. It is understood creditors will be forced to give HNA more leeway while it sorts out its $93bn debt pile. More real estate assets are expected to be sold as Beijing is insisting HNA focus on its core travel business.

James Macdonald, head of research at Savills China, points out that Chinese outbound investment effectively peaked in 2016. Last year’s figures were slightly higher, but only due to the acquisition of European logistics develop Logicor by China Investment Corporation for RMB87 bn. “Excluding the Logicor deal outbound investment by China would have fallen by 27.5% to roughly RMB193bn,” he says.

“Some of the policies to cool outbound investment may have been a little heavy handed and a knee jerk reaction to the pace of outbound investment and the aggressive behaviour of certain investors, however policies and guidelines are likely to soften and become more nuanced in the future as investors and regulators become more experienced.

“China still wants to invest overseas and become a global economic power however Beijing is reassessing the priorities and methodology to achieve these goals.”

While there have always been controls on investment in overseas markets by Chinese individuals and institutions, policies were tightened in 2016 at the time when the Renminbi was weakening against the US dollar and foreign exchange reserves were being depleted to support the currency. Further guidelines and clarifications were issued in August and November 2017.

In March this year, a new circular amended the rules to further favour Belt & Road-linked investments and further restrict investments in hotels and sports clubs. This circular also widened the regulatory reach to include investments by subsidiaries and overseas companies ultimately controlled by Chinese citizens.

Macdonald says: “The regulations are designed to ensure that outbound business expansion should not damage the national interest. They should also curb irrational investment as well as high leverage deals and offshore financial derivatives. They will also reduce risks related to investment in trophy assets. At the same time the policies should continue to support authentic and compliant overseas investment from capable and qualified Chinese enterprises.”

While Anbang and HNA have hit the headlines, Chinese outbound investment has not fallen off a cliff. Real Capital Analytics data for the first quarter of this year show total outflows of $9.4bn from China to Hong Kong, Japan, Australia and Singapore combined.

Macdonald says: “The current priority seems to be investment in neighbouring countries and especially those with strong economic or political ties to China, especially those along the Belt and Road.”