China’s overseas direct investment (ODI) plunged in the first half of this year as government measures to reduce foreign investments began to bite.
Non-financial ODI fell 45.8 percent to US$48.19 billion, the first decline since 2015, according to the Ministry of Commerce.
“Growing uncertainties in global business, increased prudence by companies making investment decisions overseas and tightened compliance reviews by regulators are the reason for the drop,” said Gao Feng, a ministry spokesman.
This brings to an end an astonishing spending spree. In 2016, Chinese firms spent US$183 billion in ODI, ranking second in the world for the first time. They acquired trophy assets like Club Med, Cirque du Soleil, the Waldorf Astoria hotel in New York and several of Europe’s top football teams, including AC Milan, Inter Milan, Aston Villa and West Bromwich Albion.
The HNA Group acquired nearly 10 percent of Deutsche Bank. On July 21, to celebrate its rise to 170th place in the Fortune 500 list from No. 464 in 2015, HNA hosted a banquet at Hampton Court Palace outside London; it invited former British premier David Cameron and ex-French president Nicholas Sarkozy.
These firms, both state and private, were acting in line with Beijing’s earlier call for Chinese enterprises to “Go Abroad”. At the time the authorities thought the country’s foreign exchange reserves were more than adequate and there was too much capital at home.
These acquisitions help to create global companies and make Chinese brands famous around the world.
But the policy began to change in the second half of last year. Policy makers feared that Chinese firms would follow in the footsteps of their Japanese counterparts after the sudden rise of the yen after the Plaza Accord of 1985.
They went on a spending spree in the United States and Europe, paying well above market value for “brand” companies and properties, like a man who had suddenly become rich from winning the lottery.
Since 2014, for example, Chinese firms have spent US$2.27 billion on foreign sports clubs, even though most had lost money. One reason is that President Xi Jinping, a keen soccer fan, wants to make China a world power in the sport.
In June 2016, electronics retailer Suning Commerce Group paid 270 million euros (US$318.57 million) for nearly 70 percent of Inter Milan, one of Italy’s most famous soccer teams. During the previous five years, the club had accumulated losses of 275.9 million euros.
Many of these acquisitions were financed by loans from China’s state banks – so the assets are overshore but the debts are in the mainland. From the fourth quarter, the government had to approve ODI deals exceeding US$50 million.
State media asked if the buyers had done due diligence before their purchases. Did they understand sectors that had nothing to do with their core business? Or was it a way to move money offshore?
“There was an outstanding problem of irrational outbound investment by a few companies last year,” Vice Minister of Commerce Qian Keming said last week. “We worked with other regulators to determine if the deals were genuine. The irrational investment has now been effectively curbed.”
The National Development and Reform Commission said that Chinese banks would not finance overseas purchases of sports clubs, hotel, entertainment and real estate. Firms can make such acquisitions using their own cash.
But, said Gao Feng, the Ministry of Commerce spokesman, China would continue to support investments in infrastructure and manufacturing related to the Belt and Road initiative and those that improve industrial capacity.
These stringent measures have dealt a severe blow to the foreign reputation of companies like HNA, Wanda, Anbang Insurance and Fosun International, which have led the overseas spending spree. The measures have made foreign banks and potential vendors less willing to deal with them and have hit their share prices at home.
Adam Tan, chief executive of HNA, told the Financial Times in an interview last week that his firm was still expanding abroad. “We may do things more cautiously. Anything related to One Belt, One Road and the Chinese government is in full support. So a lot of things can happen.”
In Europe, regulators are taking a second look at its purchase of nearly 10 percent of Deutsche Bank. “We did everything legally,” said Tan. “We are happy to be reviewed by them if they want.”
Fosun is another big investor, having spent about US$38 billion on more than 130 mergers and acquisitions in China and overseas since 2010.
Its chairman, Guo Guangchang, has been rushing to praise the government’s measures. He said on Saturday that they were essential and timely, so that foreigners would not treat Chinese investments as “silly money”.
These are nervous days for Tan, Guo and those who lead China’s biggest private firms. President Xi Jinping is a traditional Marxist who wants state companies to dominate the economy. How much space is he willing to give “the tail of capitalism”?
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