23 October 2018
Chinese authorities are reported to have told banks to stop providing funding for six of Wanda Group's overseas acquisitions. Photo: Reuters
Chinese authorities are reported to have told banks to stop providing funding for six of Wanda Group's overseas acquisitions. Photo: Reuters

Why China’s private firms may go slow on overseas deals

China has been encouraging companies to “go out” as part of efforts to boost the nation’s economic influence abroad. This has led to a flurry of deals and investments overseas by state-owned as well as private enterprises.

But now the government is getting concerned about the activities of some of the firms amid fears that the companies may have overstretched themselves and taken on too much debt, posing a risk to the banking system.

Amid these worries, authorities are reported to have put several private conglomerates, including names such as Dalian Wanda and HNA Group, under the scanner, taking a closer look at their outbound M&A activities.

Officials of the National Development and Reform Commission warned that the country should remain vigilant against irrational outbound investment.

So what exactly is going on? Do Chinese authorities still want companies to go out or not?

Well, the answer depends on whether the private firms are aligned with the government’s priorities and subtle rules.

China is not a exactly a free economy, and the development of various industries has to go in line with government planning.

State-owned firms naturally have to follow government policy, but what about private enterprises?

Well, the truth is that though the private firms have more freedom, even they have to operate within the lines drawn by the government, be it at home or abroad.

While Beijing has been encouraging Chinese firms to venture overseas, the primary objective is not profitability. Rather, the goal is to improve the nation’s influence and secure vital resources such as energy supplies.

That is why, state-owned firms, which used to lead the expansion overseas, mainly invested in energy, ports, railway and other strategic sectors, and are now putting money in countries along the Belt and Road routes.

As for private firms, they have been actively looking for overseas investment opportunities in the recent past amid slowing growth at home.

At the beginning, there was little intervention from the government.

But more recently, things have gotten more stringent. Entertainment and real-estate conglomerate Wanda, for instance, is said to be facing curbs as it tries to buy cinema chains in Northern Europe and the US.

In other cases, state broadcaster CCTV has raised questions about Suning’s 270 million euro purchase of Italy’s Inter Milan soccer club last year.

Yan Pengcheng, spokesperson of NDRC, has said that authorities will keep a close eye on overseas investments in businesses such as real-estate, hotels, entertainment and sports clubs, in order to guard against outbound investment risk.

In my opinion, such types of private investments will not be encouraged because they do not rhyme with the government’s strategic focus in terms of the sectors and countries that Beijing prefers.

Officials are also worried that if the private firms experience substantial losses in their overseas investments, Chinese banks will get into trouble given their loan exposure to the enterprises.

Besides, authorities have other reasons for not wanting too much overseas investment at this juncture.

Excessive capital outflow will add to depreciation pressure on the Chinese currency, which has already taken a knock due to slower economic growth.

This article appeared in the Hong Kong Economic Journal on July 21

Translation by Julie Zhu with additional reporting

[Chinese version 中文版]

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HKEJ columnist

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