China govt plans to crack down on overseas deals
HONG KONG: China plans to further tighten the screws on overseas acquisitions by Chinese companies and borrowing to fund those transactions, and has started closely scrutinizing the commercial aspects of the deals, three people familiar with the move said. The National Development and Reform Commission (NDRC), and the Ministry of Commerce (MOFCOM) are now reviewing deal agreements in minute detail, said the people, who work with various regulatory bodies and Chinese companies on their acquisition plans. The two bodies are asking companies looking to buy assets overseas to justify terms, including target valuations, deal premiums and financing arrangements, they said.
This was particularly the case with companies not seen by the Chinese government as “strategic,” they said. The tightened measures have been issued as informal guidance by Chinese regulators and have not been made official yet, said two of the people.
The tightening of regulatory oversight for outbound purchases comes as Beijing is cracking down on some large domestic conglomerates for their debt-fuelled acquisitions abroad of assets ranging from hotels to movie studios. The regulatory measures, if in place for an extended period, could deter some companies from making overseas acquisitions, and could also weigh on outbound deal volumes in China.
China’s outbound M&A volumes nearly halved in the first six months of this year to $64.2 billion following a crackdown on capital outflows, after Chinese companies spent a record $221 billion on assets overseas in 2016, according to Thomson Reuters data.
On top of tightened scrutiny of deal terms, the country’s foreign exchange and banking regulators are also looking to step up their monitoring of loans made by the overseas branches of Chinese banks, two of the people said. Those two regulators - the State Administration of Foreign Exchange (SAFE) and the China Banking Regulatory Commission (CBRC) - also plan to make it tougher for companies to borrow overseas by pledging some assets in China, the people said.
Borrowing funds from foreign banks and overseas branches of Chinese banks by pledging real estate and other assets in the mainland with local banks has been a common practice for some companies looking to fund foreign acquisitions. But some industry officials have questioned the quality of those pledged assets, and whether the lenders would be able to raise money against those in case borrowers defaulted on their repayment obligations.