CHINA CURBS HOLLYWOOD DEALS, BUT GREENLIGHTS TECH INVESTMENTS
China announced formal measures to curb outbound investment as the government seeks to establish firmer control over corporations whose international shopping spree has rattled China’s currency and foreign-exchange reserves.
Chinese officials have been cracking down on what they call “irrational” overseas investment since the end of 2016, tightening controls on capital leaving China and scrutinizing some of the country’s most aggressive deal makers, but the measures Friday marked the first time the cabinet has published such controls in the form of official guidance.
Government statistics indicate the crackdown has already sent China’s foreign direct investment down over 40% this year. The latest move shows that it is trying to clamp down in a more systematic way, according to analysts who track Chinese investment.
“We now know that China will not any time soon return to liberal outbound [foreign direct investment] policies,” said Thilo Hanemann, an economist at New Yorkbased Rhodium Group.
The new rules could have an outsize impact on investment in the U.S., which was the largest recipient of China’s foreign direct investment flows last year, taking in $46 billion, or triple the previous year, Rhodium said.
And the new restrictions could impair China’s strategy of trying to win political points with local U.S. officials, such as governors and mayors, eager for foreign investment that can create jobs. At the same time, the rules are unlikely to dampen U.S. officials’ concerns about threats to national security, as they don’t restrict Chinese investment in sensitive sectors like technology.
Already the Committee on Foreign Investment in the U.S., known as CFIUS, has toughened its scrutiny of Chinese investment, throwing into question billions of dollars in high-profile Chinese bids to buy U.S. companies in recent months. The multiagency panel led by the U.S. Treasury can approve deals or recommend the president block them based on national security concerns.
China will restrict overseas investment in sectors such as property, hotels, cinema, entertainment and sports teams, the State Council said in guidelines released on the main government website.
By contrast, Beijing wants companies to continue buying overseas technology and supporting initiatives such as President Xi Jinping’s “One Belt, One Road” project, a massive global infrastructure investment plan to establish China as the dominant world-trading power.
China’s enthusiasm for Hollywood deals has been cooling for nearly a year as capital controls took hold. Talks broke down between Metro-GoldwynMayer Studios and several Chinese companies in late 2016. And deals that would have placed Dick Clark Productions Inc. and Voltage Pictures LLC, the production company behind “The Hurt Locker,” under Chinese control fell apart this year.
More recently, Chinese state scrutiny of Dalian Wanda Group Co. has raised questions in executive suites across Hollywood: The real-estate conglomerate has been the most visible Chinese player to enter the U.S. entertainment industry.
Wanda owns Legendary Entertainment LLC, the production company behind “Kong: Skull Island,” and AMC Entertainment Holdings Inc., the world’s largest movie-theater chain. AMC has said its finances aren’t affected by Wanda’s turmoil. A Legendary spokeswoman said the government investigation hasn’t affected the company’s balance sheet. “Wanda has never failed to satisfy any of its funding obligations owed to Legendary,” she said.
Chinese capital has also played a significant role in the global hotel industry in recent years, with Chinese investors pouring nearly $8.5 billion into U.S. hotels last year, according to Real Capital Analytics Inc., up from $2.6 billion in 2015. Amid the capital-outflow clampdown this year, China’s investment in U.S. hotels has been less than $500 million, Real Capital added.
Chinese insurance companies were among the most prominent deal makers last year. Anbang Insurance Group in 2014 purchased New York’s Waldorf Astoria hotel for $1.95 billion and last year acquired a portfolio of hotels from Blackstone Group LP for $5.5 billion.
China will also restrict the establishment of equity-investment funds and any investment platforms that aren’t linked to a specific project, according to new measures jointly drafted by the country’s top economic planner, Commerce Ministry, central bank and Foreign Ministry.
U.S. officials and a bipartisan group of lawmakers have grown increasingly wary of Chinese companies’ U.S. deals, alleging they pose disproportionate risks to U.S. national security because China is a chief economic and military rival.
Ultimately, China’s new rules won’t resolve those concerns since they don’t restrict investment in critical technologies such as computer chips, said Derek Scissors, a China scholar at the American Enterprise Institute in Washington, D.C.
Mr. Scissors said U.S. policy makers’ reaction to the new rules is likely to be along these lines: “Fine, play around with your investment rules if you like. You’re still going to be trying to buy the things we don’t want to sell.”
At the local level, it will be a different story, said Nancy McLernon, president of Organization for International Investment, in Washington, D.C., which promotes foreign investment in the U.S. She pointed to Rhodium data published in April indicating that Chinese companies employ more than 140,000 workers in the U.S., a more than ninefold increase over 2009. “With these new restrictions laid out, governors may need to rethink their strategies to increase investment in the U.S.,” she said.
Beijing’s crackdown on foreign investment comes as big private businesses and others have been amassing capital and influence that challenge the Chinese government’s firm hold on the economy.
After a 2015 stock-market crash, Chinese investors looked abroad for better returns, pressuring China’s tightly controlled currency. Beijing burned through nearly a trillion dollars in foreign-exchange reserves trying to steady the yuan, ultimately prompting government regulators to move to control the money leaving the country and to scrutinize proposed offshore investments.
The crackdown is starting to bear fruit, with China’s outbound direct investment outside the financial sector declining 44.3% over the first seven months of this year compared with a year earlier, with investment in property down 81% and entertainment down 79%, the commerce ministry said Tuesday.
China’s foreign-exchange reserves rose for the sixth straight month in July, and the yuan rose 4% against the dollar so far this year, following a drop of 7% last year.