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Tough capital controls stalling China's offshore M&A spree

Big investors shifting focus to domestic opportunities

Fosun Group Chairman Guo Guangchang, far right, speaking in Hong Kong on Wednesday.

SHANGHAI/HONG KONG -- Chinese companies' big offshore mergers and acquisitions even raised eyebrows in the West not long ago, but the tide of Chinese money washing over distant shores is turning into a trickle, as Beijing steps in to stem capital flight.

After shooting up 31-fold between 2004 and 2016, Chinese direct investment overseas likely will shrink this year for the first time in 15 years, with capital controls instituted by Beijing the culprit.

Conditions have become so draconian that Guo Guangchang, chairman of Chinese investment giant Fosun Group, is apparently shifting his focus inward. The biggest opportunities are to be had in China, he said Wednesday.

The billionaire known as China's Warren Buffet had been busy inking a spate of headline-grabbing overseas acquisitions, buying the Canadian circus troupe Cirque du Soleil and the Hoshino Resort Tomamu ski resort in the northern Japanese island of Hokkaido.

Sudden shift

Guo told The Nikkei as late as last June that his group aims to invest actively in Japan and Southeast Asian countries. Now that attention has suddenly veered to the mainland.

That about-face parallels the change in Chinese government policy. It used to be that the central leadership, waving the "go out" banner, urged Chinese corporations to invest in offshore operations and purchase foreign companies. That policy has had a huge impact on the Japanese industrial sector, such as when Chinese appliance giant Haier Group bought out Sanyo Electric in 2012.

Chinese cross-border direct investment amounted to no more than $5.4 billion in 2004, but the figure reached $170 billion in 2016. That spending has grown for each of the past 14 years, according to Chinese media.

As the Chinese economy began slowing in recent years, individuals and businesses stepped up efforts to move funds overseas. This put strong downward pressure on the Chinese currency. The country's equity and currency markets experienced a steep correction in early 2016. Toward the end of the year, the yuan fell to its lowest level against the greenback since May 2008.

Thanks to market interventions by the People's Bank of China, the yuan has since recovered somewhat. The currency has been hovering at around 6.9 against the dollar lately.

Also at the end of the year, Beijing tightened capital controls, including instituting a pre-approval process that targets overseas mergers and acquisitions valued at $5 million or more.

Tight reins on business

Corporations are unable to conceal their bewilderment. Dalian Wanda Group last year agreed to purchase U.S. TV production company Dick Clark Productions for $1 billion, but the Chinese commercial and real estate conglomerate has been unable to wire funds overseas.

Finalization of the deal "could take an additional year at least," said a source close to Wanda.

Along with other production companies, the Chinese group also went on a buying spree of movie theaters in the West to the point of owning the most movie screens worldwide. Wanda's chairman also said he wants to control one of Hollywood's six major studios. If the Dick Clark deal falls through, that ambition would suffer a major setback.  

"Even if we have our cash back after selling the properties, there is nowhere to invest," complains Pan Shiyi, chairman of Beijing property developer Soho China. On March 23, Soho decided to cancel plans to offload a high-rise office building in Shanghai. The group had intended to use the proceeds in property investments abroad, but it appears the stiffer capital controls have made that impossible.

The government has not put the kibosh on all overseas mergers and acquisitions. Currently, the curbs cover five areas-- real estate for investment purposes, soccer and other sports teams, entertainment businesses, movie companies, and hotels. Deals that are likely to help modernize Chinese industry, such as those involving advanced technology, are seemingly still being approved.

But "the line is unclear, and there are moves toward freezing investments in unrelated areas," said a Chinese lawyer well-versed in foreign acquisitions. Some small corporate acquisitions and property investments have ended up in court over a failure to fulfill contractual obligations.

Prolonged oversight of offshore acquisitions may slow growth at Chinese enterprises. At the same time if surplus funds start chasing domestic investment opportunities it could trigger another property and asset bubble.

China's leadership, however, is unlikely to ease capital controls to stop the yuan's slide. Top officials are focused on preventing economic chaos in the lead-up to the all-important Chinese Communist Party National Congress this fall, where a new leadership team will be selected.

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