Why China's outbound capital spigot is being squeezed

Chinese companies have been on a buying spree
Chinese cross-border purchases dropped 67 percent in Q1.

Chinese investors came in with a bang and are going out with a whimper. That's according to Bloomberg, which writes that Chinese cross-border purchases "plunged 67 percent during the first four months of this year," reportedly the largest drop for a comparable period since the global financial crisis in 2009. 

In total, China outbound capital acquired some $246 billion in assets last year, but tighter controls levied by Beijing have made cross-border investment more difficult for investors chasing yield and the relative investment safe haven that countries like the U.S. offer. 

“China’s outbound M&A activity will likely remain slow for the rest of this year,” Bee-chun Boo, a Beijing-based partner at the mergers and acquisitions practice of law firm Baker & McKenzie, told Bloomberg.

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"Last year’s 137-percent surge in Chinese takeovers vaulted the country to No. 2 behind the U.S. on the ranking of global acquirers," Bloomberg writes. 

Beijing committed to putting a stranglehold on capital outflows as the yuan fell further against the dollar, making it tougher for individuals and companies to move money out of China.

Last fall, Shanghai’s municipal foreign exchange authority had reportedly 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. A separate document, reportedly seen by the South China Morning Post, from a central bank meeting on cross-border capital controls showed that through this 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.

“Capital controls have clearly had a dampening effect on China’s outbound M&A activity,” Joseph Gallagher, head of mergers and acquisitions for the Asia-Pacific region at Credit Suisse Group AG, said in an interview with Bloomberg. "Chinese companies, especially those that are domestically-listed, will likely have a much harder time to do deals as they typically do not have offshore financing vehicles or access to offshore funding."

The controls still haven't stopped deal-making. Today it was reported that HNA Group, which has been on a wild shopping spree, having acquired many hospitality-related interests, including Carlson Hotels and a 25-percent stake in Hilton, closed on the $2.2-billion acquisition of 254 Park Avenue in New York. The deal is highly leveraged with HNA reportedly financing the deal with a $1.75-billion loan from a consortium of banks led by JPMorgan Chase. 

Bloomberg further writes that, according to law firm Clifford Chance, "to get around capital controls," some investors have resorted to getting financing from the overseas branches of Chinese lenders "by pledging their onshore assets as collateral."

The obstacles Chinese investors now face could result in deal volume ending the year as much as 50 percent below 2016's level. 

 

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