Chinese Overseas Investment Guidelines Could Hamper International Deals

New Chinese guidelines on overseas investment are likely to concentrate risks and increase costs and the complexity of regulations for investment companies in the country.

Risks will grow because the new rules, issued by the State Council this month, will narrow the range of industries in which investment companies can invest overseas, according to a new report from Fitch Ratings. The longer and more complex process for approving deals could negatively impact profitability as well, though they could serve to moderate investment companies’ recent rapid overseas expansion.

The guidelines reflect the government’s worries about the pressure that overseas investment could put on the currency and the aggressive bidding on overseas assets by Chinese investment companies and insurance companies, Fitch analysts said. The guidelines are also designed to align overseas investment with the priorities of the “One Belt, One Road” initiative.

“ICs [investment companies] will face much greater regulatory scrutiny when investing in several overseas sectors, including real estate, hotels, entertainment and sports clubs, which investors had been expecting to benefit from demographic changes and economic rebalancing,” the report stated. “While ICs have invested in these sectors overseas, they generally have not done so in China, and the changes will therefore reduce diversification of ICs' investment portfolios in terms of sector, and weaken ICs' overall appetite for international investment.”

Analysts also believe the guidelines will make it more difficult for investment companies to raise foreign-currency funding overseas, as well as make it more time-consuming to get approval for any international mergers and acquisitions.

– Nicholas Stern, managing editor

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