China has been pushing the Belt and Road Initiative (BRI) hard over the past six months with a rolling programme of exhibitions, conferences, forums and workshops. These have taken place in countries all along the route from China to the UK and built on the theme of out-bound investment by China in partnership with others.
At the same time China's SAFE (State Administration of Foreign Exchange) has been clamping down on Chinese citizens and companies from moving capital outside of China. The next wave of pressure will be felt on 1st July 2017 when Chinese banks will have to report transactions of as little as $1,000. However this causes some confusion to the international community when China Investment Corporation (CIC), China's state owned investment platform, buys Logicor from Blackstone for €12.25bn. So what exactly is China's stance on releasing capital for overseas acquisitions and how can UK firms benefit?
Large vs Small
Headline grabbing investments like for Logicor and the £1.12bn acquisition of the Cheesegrater are very much in the firing line for SAFE controls. While the former has State backing, the latter is seen as going against the sentiment of what President Xi is trying to achieve both in terms of scale and industry focus. However, smaller transactions under £100m are still getting albeit unofficial State support as they align to the BRI.
Industrial IP vs asset diversification
China's BRI very much supports outbound investment in advanced engineering, education and technology so long as it can be shown to help China progress to up the value chain. A lot of the small to mid-cap firms that the China Investors Club work with are in these areas and can receive a warm welcome from sanctioned investment and partnership opportunities.
Random asset diversification is less supported by SAFE with stories of mining companies buying foreign digital gaming companies or luxury yacht builders. This makes sense given historic failures of such policies that damage the reputation of Chinese investment market and also drain China's foreign exchange reserves.
Repatriation of cashflow and dividends
We have been working on setting up new investments in China for UK firms and one of the key concerns is how to repatriate cash flow and dividends to the UK. Working with UK friendly accounting firms in China we find that so long as the latest documentation is submitted to SAFE then there is no issue bringing funds back to the UK. Problems occurred at the beginning of 2017 when new legislation was introduced regarding movement of funds overseas and the local tax offices and banks needed time to understand how it was to be applied. This subsequently settled down with normal payment cycles of 1-2 months being reestablished. We may see a similar stalling in payment in July and August once the new rules come in but medium term should not see any problems.
How long will SAFE apply these rules
One thing that we know is that Chinese government policy can change very quickly when needed. Following the tightening of regulations in January 2017 we then saw loosening of the policy in April 2017 when it appeared too restrictive. We now see a readjustment in July as SAFE finesse their policies. We do not anticipate any loosening of the policy again until after the National Congress in November 2017 however by the time China celebrates New Year in 2018 the National GDP and Foreign Exchange Reserve figures are reported we feel some further loosening could occur.
Next steps
Of course, application of government policies depends on who you know so expect to see State Owned Enterprises continue to make headline acquisitions while listed companies have to wait their turn. Smaller companies making strategic investments will also be given a greater degree of latitude to buy assets overseas and it is this area we are focusing our attention. If you are seeking new Chinese partners or investors in biotech, medtech, education or advanced manufacturing then get in touch...we will be able to help find new contacts for you.
