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China's capital controls apply brakes on 'go out' drive

Outbound investment plunges in the first half of the year

Beijing is more closely scrutinizing overseas investments by companies like Dalian Wanda Group.

BEIJING -- China's capital controls are taking a visible toll on its companies' investment activity abroad and discouraging foreign multinationals from pumping money into the world's second-largest economy.

China's outbound direct investment plunged 46% on the year to $48.1 billion in the six months through June, trailing foreign direct investment of $65.6 billion.

After it began opening up its economy in 1978, China achieved rapid growth by turning itself into a magnet for foreign capital, with the result that inbound investment long outpaced outflows. In the 2000s, after accumulating a deep capital base, Beijing urged Chinese companies to go forth and globalize. Nonfinancial outbound investment reached $170.1 billion in 2016, surpassing inbound investment for the first time.

That placed China among the ranks of net capital exporters, typically a sign of economic maturity. China's Ministry of Commerce marked the development as an important event indicating China's leap from a significant economy and trading nation to a powerhouse. Now, China has reverted back to a net importer of capital.

Step backward

Beijing's capital controls are the main reason. Foreign acquisitions, remittances, money exchanges and other outbound transactions of more than $5 million became subject to mandatory pre-screening by regulators starting last November. The threshold for such scrutiny had previously been more than $50 million. Regulators also said real estate, hotel, entertainment, film, sports club and other "irrational" overseas investments would be tightly monitored, making acquisitions in fields other than high-tech manufacturing difficult.

In June it was learned Chinese bank regulators had told lenders to more strictly examine overseas investments by Dalian Wanda Group, HNA Group and three other major conglomerates. These five groups accounted for about 60% of total Chinese overseas investment in the first half of this year, according to a study by the American Enterprise Institute and the Heritage Foundation.

Beijing appears intent on continuing to restrict overseas acquisitions. This month, the Finance Ministry introduced a policy of probing executive responsibility for failed foreign investments by state-owned enterprises, and called for regular checks of acquisitions' financial health.

While such capital controls have curbed capital flight and weakness in the yuan, a side effect has been falling inbound investment, which retreated in the first half. Steep declines were seen in inflows from the U.S., the U.K. and Germany -- nations home to high-tech groups.

"This year China's foreign investment has seen negative growth. This is something we need to monitor closely," Chinese Premier Li Keqiang said in June. "We must eliminate barriers to investment."

But if profits cannot flow back home, foreign corporations will continue to think twice about expanding investment in China.

At the World Economic Forum in Davos, Switzerland, in January, Chinese President Xi Jinping promoted an open China. But the reality is that flows of capital between China and other countries have weakened.

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