China tightens rules on state groups’ foreign investments
Fears over risk and capital outflows spark stricter oversight of transactions
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Beijing's Belt and Road Forum in May. Analysts fear the $900bn infrastructure initiative has incentivised groups to approve risky projects © Bloomberg
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AUGUST 2, 2017 by: Emily Feng in Beijing
China’s financial regulators have further tightened oversight of foreign investments by the country’s struggling state-owned enterprises, in a bid both to stem capital outflows and rein in risk.
Starting this week, China’s finance ministry will require state groups at both national and provincial level to defend the financial viability of overseas investments and assess their political risks before proceeding, while also mandating stricter auditing mechanisms.
The regulations also require all state groups to better document foreign currency transactions to assuage concerns that overseas infrastructure investment could mask capital outflows.
China’s leaders have encouraged the country’s SOEs to “go out” and fund overseas telecommunications, railroad and construction projects as part of $900bn in planned investments for the country’s signature Belt and Road infrastructure initiative.
However, that has exposed the groups to greater credit and political risk as they sink resources into central Asia, Southeast Asia and Africa. Analysts also worry that the Belt and Road frenzy has incentivised groups to approve financially risky projects.
“It’s clear Chinese regulators decided that this sort of free-for-all shopping spree that has been happening over the past few years is not acceptable, and they want to reassert the government gatekeeper role in to the outbound flow of investments,” said Yanmei Xie, an analyst at Beijing-based consultancy Gavekal Dragonomics.
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Weighed down by debt and overcapacity, China’s unwieldy SOEs have struggled to catch up with private groups in terms of profitability. In response, authorities have merged underperforming SOEs with stronger ones and warned them to cut back on non-strategic investments.
“Some investments do not meet our industrial policy requirements for outward investment?.?.?.?they are not of great benefit to China and have led to complaints abroad,” Zhou Xiaochuan, central bank governor, said in March. “Therefore we think a certain degree of policy guidance is necessary and effective.”
Regulators have long sought a greater role in directing SOE investments. In January, the State-owned Assets Supervision and Administration Commission set out a “negative list” that outlined sectors off-limits to SOE investment. This week’s regulations subject overseas investments to greater scrutiny.
However, that kind of heavy-handed enforcement may not cure SOEs of their financial woes, analysts say.
“SOEs have not been very capable of investing in commercially profitable projects but it’s doubtful that bureaucrats will be better equipped to make those decisions ether,” said Ms Xie.
One of several requirements in Sasac’s January regulations mandates that SOEs attract third-party investors when investing abroad as part of a push to integrate public and private capital and form “public private partnerships”.
However, China’s finance ministry declared this week that it had found several of these partnerships for domestic infrastructure investment to be “disguised borrowing” by local governments
