China: Beijing Tries to Rationalize Spending With New Investment Guidance

3 MINS READAug 18, 2017 | 18:31 GMT

China has taken another step in its efforts to increase investment oversight and stem the flow of capital out of the country. On Aug. 18, China's State Council issued a notice offering specific guidance for overseas investment. The memo specified that risky or spurious investments, such as in real estate, hotels, entertainment and sport clubs, will be restricted and must receive regulatory approval. But it also stipulated that investment and infrastructure projects promoting the Belt and Road Initiative would receive state backing, and that the state would continue to encourage investment in the advanced manufacturing, agricultural and service sectors.

Over the past several months, China's central government has been pushing to optimize overall outbound investment, and this latest guidance codifies some informal investment bans that were already in the works. So far these efforts have led to a 45 percent drop in overall investment in the first half of the year, from $88.8 billion in 2016 to $48 billion in 2017. Property, sports and entertainment investments — which the state sees as having the highest risks of overseas capital loss and money laundering — reportedly plummeted by 80 percent.

These various investment limits are part of a broader push for more oversight. Since last year, Beijing has been tightening control over capital and closely scrutinizing large overseas mergers and acquisitions to try to reduce its excessive debt and outflowing capital. Meanwhile, in recent months it initiated a high-profile clampdown on the country's largest, most aggressive and most politically entrenched financial conglomerates, including Anbang Insurance Group, Dalian Wanda Group and HNA Group. Recently, all of these groups have either scaled back or sold off their foreign assets, or they have pledged to shift their focus to domestic investment. And after a seven-month decline, China's foreign reserve bounced back slightly in February 2017.

Despite progress, Beijing is still seeing Chinese companies in Belt and Road countries continue to increase investments and mergers. According to some estimates, Chinese acquisitions in the 68 nations officially associated with the initiative totaled $33 billion as of Aug. 14, already surpassing 2016's total of $31 billion. And Beijing's headway is further limited by its continued valuing of overseas investment in the tech, manufacturing, and service sectors, which it sees as critical components in its ambitious domestic transformation to an economy led by high value-added industries, services and consumption.

Just as when China rapidly expanded its oversea investment five to six years ago, Beijing's push to rationalize its massive cash flow now could have ramifications elsewhere. In areas where Chinese asset investments have fueled a frenzy in local property markets, the decreasing momentum could leave some partners in a vulnerable position. On the other hand, China's appetite for large mergers and acquisitions in the tech and manufacturing sectors shows no sign of abating, and friction with developed economies such Germany and the United States will likely increase.  

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