China FX agency tightens capital outflow rules

Regulator hopes swift implementation of new measures will make firms think twice about sending cash overseas

China stepped up its monitoring of cross-border capital outflows on 26 January, with the immediate imposition of new market rules for corporates.

Introduced by regulator the State Administration of Foreign Exchange (SAFE), the rules require:

• domestic businesses to use proceeds from their exports to repay FX loans, rather than make FX purchases from their banks; and
• companies with outbound investment plans to clarify their financial backers for those purchases, and provide detailed information on how they plan to allocate their spending.

In addition, firms that are planning to remit profits of more than $50,000 from direct investments in China back to their own countries must provide banks with a range of materials connected to those decisions – such as tax documents, financial statements and board resolutions.

A statement from SAFE described the new rules as a “healthy development” that will “establish a sound macro-prudential management framework under the capital flow system”.

The rules, it added, will “strengthen the monitoring and early warning of cross-border capital flows, strictly fulfil the requirements of authenticity and compliance, maintain high pressures and a crackdown on FX violations to maintain the order of a healthy FX market”.

SAFE stressed: “Real and legitimate cross-border payments and remittances will not be affected.”

However, as the rules emerged, a a Wall Street Journal report indicated that a gradual ramping up of capital outflow controls in China has already made significant dents in corporate M&A plans.

According to the report, many of the record-breaking $225bn worth of overseas acquisitions that Chinese firms announced last year are now either dead, or in limbo.

For example, Anbang Insurance recently dropped its $14bn bid for Starwood Hotels & Resorts, and China National Chemical Corporation’s $57bn pursuit of Swiss agrochemical firm Syngenta has stalled.

Research from market intelligence firm Dealogic shows that while the number of deals that Chinese firms announced last year more than doubled those unveiled in 2015, the value of deals withdrawn was up sevenfold, hitting $38.4bn.

Also, the average number of days it took for a Chinese buyer to close an overseas deal in 2016 climbed steadily as the year went on – eventually reaching 140 days in November and December.

Fred Hu, chairman of private equity firm Primavera Capital – which was involved in the Anbang/Starwood deal – told the Journal: “It is unmistakeable that Chinese investors are far more cautious amid mounting uncertainties.”