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Cabinet Outlines Curbs on ‘Irrational’ Outbound Investment

By Denise Jia, Zhang Yu and Li Mingming

(Beijing) — China’s cabinet issued new regulations Friday on overseas deals by Chinese companies, imposing explicit restrictions on acquisitions in industries such as real estate and entertainment. At the same time, the new rules encourage investments in infrastructure projects under President Xi Jinping’s ambitious Belt and Road initiative.

The new guidelines specify categories of outbound investments that will be limited, banned or encouraged. The regulations formally endorse policies put in place over the past year that have already led to a dramatic drop in Chinese companies’ overseas real estate spending spree.

China has stepped up efforts since last year to curb domestic companies’ aggressive foreign spending, citing concerns over capital flight and mounting debt. The overseas splurge by Chinese companies ignited fears that soaring corporate debt could pose a systemic risk to the economy. Regulators have tightened scrutiny of foreign deals and ordered lenders to assess their exposure to offshore acquisitions.

In a separate statement, the National Development and Reform Commission (NDRC), China’s top economic planning body and one of the drafters of the guidelines, criticized “irrational” overseas investments in sectors ranging from entertainment and sports clubs to hotels.

“Some companies focused on property rather than the real economy, which, instead of boosting the domestic economy, caused capital outflows and shook financial security,” the NDRC said.

Under the new guidelines, foreign investments in real estate, hotels, film, entertainment and sports clubs will be subject to restrictions. The State Council said acquisitions in such restricted sectors was “not in accordance with macro-control policies.”

The cabinet’s guidelines also banned overseas investments in gambling, sex industries and core military technology. The cabinet said the authorities would establish a blacklist of enterprises that violate overseas investment rules and punish them.

At the same time, the council encouraged companies to invest in projects related to the Belt and Road project, Xi's grand plan to link China with the rest of Asia and Europe through multibillion-dollar infrastructure projects.

The new guidelines also encourage overseas investment and cooperation with foreign technology companies, high-tech manufacturers, and energy and agriculture sectors.

Some of China’s most aggressive overseas buyers, including the HNA Group, Anbang Insurance Group and Dalian Wanda Group, have already come under pressure to scale back their overseas ambitions.

Wanda, which has became the world's biggest cinema operator with its purchase of a majority stake in the U.S. chain AMC, admitted in April that stricter regulatory scrutiny had forced it to drop its planned $1 billion acquisition of Dick Clark Productions, the Hollywood production company behind the Golden Globe Awards.

Several of HNA Group’s overseas deals have also hit a hurdle. Chinese authorities reportedly asked Anbang to sell its offshore assets, though Anbang and the insurance regulator in early August disputed the report.

China’s non-financial outbound direct investment fell 45.8% in the first half of 2017, according to the Ministry of Commerce. In particular, investment in overseas property fell 82.1% in the first half, accounting for just 2% of total outbound investment during the period.

In a recent report, Morgan Stanley said it expected outbound property investments by mainland Chinese firms to plummet 84% in 2017 and to drop an additional 15% next year.

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