China to clamp down on outbound capital flight

The party may soon be coming to an end.

The trophy asset shopping spree transacted by the likes of Anbang Insurance, Sunshine Insurance and Dalian Wanda could soon be a remnant of the past as Beijing is set to issue tighter controls on outbound investment. According to the South China Morning Post, Shanghai’s municipal foreign exchange authority has "told bank managers in the city that all overseas payments under the capital account of more than US$5 million would have to be submitted to Beijing for special clearance ­before proceeding."

While this doesn't assure that a deal will be vetoed, the process will be much more time consuming and scrutinized.

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Here's the kicker: A separate document, reportedly seen by SCMP, from a central bank meeting on cross-border capital controls showed that from now until September of next year, Beijing would ban deals involving investment of more than US$10 billion; mergers and acquisitions valued at more than US$1 billion outside a Chinese investor’s core business; and foreign real estate deals by state-owned enterprises involving more than US$1 billion.

This is all coming at a time of frothy New York real estate prices and a glut of high-end condos hitting the market.
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“Some look at investments such as Anbang’s spate of hotel acquisitions in 2015 and 2016 and question the pricing and cyclical timing. However, for some investors, the associated globalization and portfolio diversification benefits can outweigh the reduced return potential caused by a high purchase price,” said the Asia Society and Rosen Consulting Group in a recent report.

While the Financial Times writes that the new restrictions are being drafted to "curb capital outflows that are putting downward pressure on the renminbi and draining foreign exchange reserves," the SCMP points out that The State Administration of Foreign Exchange said on its microblog that it supported legitimate and compliant overseas direct investment and would work with relevant ­departments to ensure the ­authenticity of overseas direct ­investment, and crack down on false investment activities.

"SAFE always supports capable and qualified enterprises to make authentic and legal overseas direct investments. ODI should bear authentic and legal trading foundations, and be registered with the authorities by rules. SAFE will cooperate with other departments in charge of overseas investment to carry out scrutiny over the authenticities and legality of the investment object, crack down false practice of overseas investment, and help promote the health and orderly development of ODI," SAFE said.

As CNBC points out, alluding to an internal document from the People's Bank of China, from January to October in 2016, a total of two trillion yuan ($290 billion) in capital has left China to overseas markets, with no signs of deceleration.

Further, Chinese companies have spent $212.7 billion on overseas mergers and acquisitions in 2016, almost doubling 2015's record-high total of $111.5 billion, according to the Chinese Commerce Ministry. This includes Anbang's $6.5-billion acquisition of Strategic Hotels & Resorts.

But according to FT, China is on course to "record its first net foreign direct investment deficit this year." Inbound FDI had reportedly exceeded outbound flows every quarter from 1998 until the middle of last year.

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