Jan 19, 2017 05:57 PM

China to Issue Negative List for State Firms’ Outbound Investment

(Beijing) — China’s state-owned asset regulator has said it would make a “negative list” of overseas projects that large state-owned enterprises (SOEs) must not invest in, as authorities take steps to stem capital flight and stabilize the yuan.

The list will also clarify which projects that SOEs plan to put money into will need approval from the State-Owned Assets Supervision and Administration Commission (SASAC). The firms can “make their own decisions” on deals that are not included in the list, according to new rules posted on the regulator’s website Wednesday.

Meanwhile, SOEs should design a “stricter and more specific” negative catalog of their own based on the official one, according to the rules, which replaced temporary directives published in 2012.

The SASAC described the mechanism as “an innovation” in supervision, while the China Business News said Wednesday that it was the first time a negative-list system had been introduced in the area.

Items on its list will be kept “relatively stable,” with adjustments to be made “in a timely manner,” the SASAC said.

The SASAC did not elaborate on what sectors the restrictions may involve. Rather, it listed criteria, saying that SOEs should focus on their core business areas; aim at improving innovative capabilities and international competitiveness while striking a deal; pursue “reasonable returns”; and invest in a way that is “compatible with their capital strength, financing ability, industrial experience, management levels and risk control skills.”

In December, four government agencies, including the State Administration of Foreign Exchange (SAFE), warned of “irrational outbound investment trends” in some sectors, including property, hotels, cinemas, entertainment and sports clubs.

Analysts said the effect of the SASAC rules will depend on how broad a reach the negative list will have.

Before the dos and don’ts become clear in a published list, the regulations “may dampen the central government-controlled SOEs’ enthusiasm to invest abroad” due to worries over uncertainties, said Tao Jingzhou, managing partner of U.S. law firm Dechert LLP.

“Constant changes” previously in the government’s policies on what foreign assets SOEs are allowed to buy had been “depressing” because they increased transaction risks, he added.

“The fewer the number of items is on the negative list, the better,” Tao said.

Massive overseas investments by Chinese SOEs, such as ChemChina’s 7.1 billion euros (now $7.6 billion) takeover of Italian tire maker Pirelli in 2015, have made international headlines in recent years as Beijing encouraged companies to “go out” to acquire technology and the energy and resources to power the country’s growth. But critics said some of the deals did not go through proper due diligence and were money-losing.

The government has tightened scrutiny on the buying spree lately, partly to help fight an uphill battle to stem capital outflows fueled by pessimism about China’s growth outlook and the weakening yuan.

In the December statement, the four departments “advised” Chinese investors to “make decisions prudently.” The Economic Observer reported then that overseas investment worth over $10 billion and SOEs’ foreign property acquisitions valued more than $1 billion might come under “draconian reviews” by the authorities.

Other capital-control measures introduced since late last year include stricter requirements on currency conversions by individuals, and inspection of bitcoin bourses to prevent investors from using them to move cash aboard.

The Chinese currency depreciated about 6.5% against the dollar last year. The central People’s Bank of China has been slashing its holdings of U.S. Treasury bonds in a bid to slow the slide.

The cut in November, the sixth straight month of reduction, was $66.5 billion, the biggest in nearly five years, according to latest U.S. data.

In 2016, Chinese companies’ total outbound direct investment in nonfinancial sectors soared more than 40% from the previous year to $170.1 billion, the fastest pace since 2008, according to the Ministry of Commerce. But with stepped-up controls on capital flows, foreign investment will slow, according to a recent forecast by the Chinese Academy of Social Sciences, a government think tank.

Yet China isn’t slamming the door on foreign investment. In his keynote address to the World Economic Forum in Davos, Switzerland, on Tuesday, President Xi Jinping said he expects China’s outbound investments to total $750 billion over the next five years, while inviting in $600 billion of foreign investments during that period.

China currently has 106 central-government SOEs under the direct supervision of SASAC, including the country’s top oil producer, China National Petroleum Corp., mobile network operator China Mobile, and transport giant China COSCO Shipping Group.

On Dec. 29, Liu Jiayi, the auditor general of the National Audit Office, said the state auditor will tighten reviews of overseas state assets and SOEs’ overseas investment.

Contact reporter Han Wei (

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