Caixin
Dec 07, 2016 06:20 PM
FINANCE

China Tightens Restrictions on Outbound Investment

Illustration by Xu Yuanyuan
Illustration by Xu Yuanyuan

(Beijing) — China is stepping up restrictions on outbound investment in its latest effort to stem capital outflows as the yuan's value tumbles to multiyear lows.

Companies are being advised to "make decisions prudently" regarding investments in four categories that will come under closer government scrutiny in a bid to control risk, according to an announcement at a news conference attended by officials from the four central government organs that share oversight of outbound investments.

The officials from the National Development and Reform Commission (NDRC), the Ministry of Commerce, the People's Bank of China and the State Administration of Foreign Exchange did not say what measures will be taken to screen those investments or how they will be evaluated.

In this latest move, investments in four categories will now face particular regulatory attention — outbound investments made by limited partnership entities, large investments unrelated to a firm's core business, those involving companies that set up investment vehicles in a rush, and big subsidiaries controlled by much-thinner-capitalized parent firms.

Targeting investments with these characteristics will deliver a "precise and to-the-point impact" in the field of outbound investments, said an analyst specializing in the field.

Some of the characteristics serve as red flags for a company's real intention behind an investment, the analyst said.

When a mainland company controls a much-bigger subsidiary that is incorporated overseas, for example, chances are that it is not using its own capital to fund the investment, he said. Also, a company setting up a new entity in another place in a rush could be taking advantage of different regions' currency conversion quotas and exploiting weak implementation of policies in some areas.

"Unlike previous policies, we saw the central bank, the State Administration, the Ministry of Commerce and the National Development and Reform Commission moving together this time," he said. "This coordination alone speaks to the policymakers' determination."

The announcement comes on the heels of reported tightening of controls by the Commerce Ministry and the NDRC, China's top economic planner, over those investments that result in large capital outflows.

China has been fighting an uphill battle to control the depreciation of its currency, which, despite the central bank's intervention, has tumbled to an eight-year low of about 7 yuan to the U.S. dollar. As the yuan's value falls, companies are tempted to buy more dollar assets, resulting in stronger demand for foreign exchange and reinforcing the yuan's depreciation.

In late November, Beijing responded to previous media reports about its curbing outbound investments to stem capital flows by saying it was cracking down only on "fake" investments, or those made with the sole intention to increase dollar holdings.

Contact reporter Wang Yuqian (yuqianwang@caixin.com)

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