Banking Watchdog Calls for Closer Scrutiny on Overseas Investment

(Beijing) -- China’s top banking regulator issued guidelines Wednesday instructing the country’s financial institutions to tighten their risk control of funding for overseas investment amid a foreign buying spree by Chinese companies.

The China Banking Regulatory Commission (CBRC) called for commercial banks to strengthen the risk and compliance management of their offshore branches in funding Chinese businesses’ overseas activities.

The guidelines echo earlier regulations issued by the State-Owned Assets Supervision and Administration Commission (SASAC) to better oversee foreign investment by state-owned enterprises (SOEs). SASAC said it would establish a list of overseas projects that large SOEs should not invest in, a move to stem capital flight and stabilize the yuan.

Last year, China’s outbound mergers and acquisitions skyrocketed to a record high. Chinese companies’ overseas merger and acquisition deals expanded by 246% to $221 billion, more than the previous four years combined, according to a report by PricewaterhouseCoopers (PwC).

The buying spree has been bolstered by China’s “One Belt, One Road” initiative to foster trade and cooperation with dozens of countries in Asia and Europe, as well as government-backed investment funds and loans provided by commercial banks, said Catherine Cai, head of China investment banking for Citigroup.

In its report, PwC projected that China overseas mergers and acquisitions in 2017 may decline slightly, partly because of the tightening regulations on cross-border capital flows.

In a press conference Wednesday, a CBRC official said the guidelines called for lenders to improve credit risk management of cross-border business and strengthen due diligence while providing loans to support overseas mergers and acquisitions. Banks should review companies’ financial soundness as well as their acquisition targets’ future profitability, the CBRC said.

Bank of China’s general manager of corporate banking, Huang Danggui, recently told Caixin that after the outbound investment frenzy, many Chinese businesses may encounter long-term difficulties in business integration after acquisitions, as such risks may take several years to appear.

The CBRC guidelines also instruct banks to strengthen their supervision of anti-money laundering and anti-terrorist financing activities, and improve their oversight of overseas operations, after some of China’s top banks have come under foreign scrutiny for alleged non-compliance.

Last November, Agricultural Bank of China was fined $215 million by U.S. regulators for violating anti-money laundering laws. Separately, Bank of China and Industrial and Commercial Bank of China have been accused of breaking anti-money laundering laws in Europe.

Contact reporter Han Wei (weihan@caixin.com)