China’s Overseas Acquisitions Likely to Slow Down Amid Capital Outflow Concerns

Overseas acquisitions by Chinese businesses abroad may slow down as Chinese authorities keep watchful eye on some companies making overseas investments amid concerns of excessive money flowing out of China's borders.

The New York Times reported that China's Commerce minister Zhong Shan criticized what he called "blind and irrational investment" by Chinese companies as he announced that they will increase supervision on these companies.

"Some enterprises have already paid the price," Zhong said in a news briefing at the National People's Congress on Saturday, March 11. "Some even have had a negative impact on our national image."

Zhou Xiaochuan, the country's top central banker, had also earlier questioned the aim of recent Chinese overseas deals.

"Some are not in line with our requirements and policies for overseas investment, such as in sports, entertainment and clubs," Zhou said. "This didn't bring much benefit to China and caused some complaints overseas."

The report said that the remarks made by these Chinese officials indicate that the government is putting a stop to overseas acquisitions of some companies which have the money but have no knowledge in deal-making.

Last year, Chinese companies made record acquisitions abroad which totaled $225 billion.

Collapsed deals

But on March 10, the agreement between Dick Clark Productions, producer of the Golden Globe Awards, and Chinese conglomerate Dalian Wanda collapsed.

For more than a year, Chinese families and companies moved money out of the country as they worry about China's slowing economy, a weakening yuan and other problems.

In the past two and a half years, China has already spent $1 trillion from its foreign currency exchange reserves to stem capital outflow and prop up the yuan. It also intensified its efforts to restrict the flow of money in recent months.

Data in February showed a slight increase in its foreign reserves, which indicated that the country's efforts are successful.

Regulatory curbs

In November, China required banks to obtain special approval before they can move money valued $5 million or move out of the country. Regulators also ask banks not to move money more than the amount that they take in.

The restrictions have affected not only the mergers and acquisitions but also the global companies who have to move their profits or dividends from companies based in China.

"On dividend payments, European Union companies experience more tedious paperwork, extended times of processing and the issue of breaking up the dividends over several months if it is a sizable amount," Jörg Wuttke, the president of the European Union Chamber of Commerce in China, said.

Zhou said on Friday, March 10, that the restrictions should not cover the dividends, the report said.

Dealmakers, however, believed that China's overseas acquisitions will continue this year, particularly those related to technical acquisition.

Zhong insisted that the country's long-term policy to encourage Chinese companies to compete globally has not changed but they are now pushing for more responsible investing than strengthening the country's financial system.

Chinese officials, however, do not acknowledge the restrictions they impose on large movements of money out of the country as they encourage foreign investors to invest in the country as well as purchase more bonds to offset the capital flight.

But not all Chinese deals have succeeded. One of the biggest deals, Anbang Insurance's deal to buy Starwood Hotels and Resorts for $14 billion did not push through.

In one of the biggest Chinese deals to come apart, Anbang Insurance, a politically connected company with a murky ownership structure, abruptly pulled out of a $14 billion deal to buy Starwood Hotels and Resorts. Anhui Xinke New Materials also pulled out of a $350 million deal to buy Voltage Pictures.

After the stock market crashed in 2015 and before China imposed rules on money transfers in February, more than $500 billion have been taken out of the country by Chinese companies. Many companies have a wealth of money overseas. A large part of the money had been invested in long-term projects, with $50 billion or more being taken out of the country each month, including earnings from previous overseas investments.

But many of the deals continue without obstacles because some companies use Chinese-owned dollar which is already overseas, according to Qiang Li, a lawyer at the law firm DLA Piper. He added that only those who transfer money out of China may face obstacles.