Europe, US hit by China outflow squeeze

EUROPEAN dealmakers who sell companies and real estate to Chinese investors are increasingly asking them to pay deposits upfront, after China clamped down on capital outflows, according to bankers and lawyers.

Wary that Chinese buyers will pull out of a deal because they can’t send funds overseas, European sellers are asking for non-refundable deposits, often about 10 percent, before the deal can go ahead, industry insiders say.

Such deposits are common in the US, where the federal government’s Committee on Foreign Investment reviews acquisitions by foreign entities for their national security implications, leading to more deals falling through. Increasingly, European sellers are following suit.

China’s government began restricting foreign deals last year, culminating in rules in August of this year to curb “irrational” investment overseas. It wanted to keep outflows of funds from destabilising its currency.

Since then, overseas deals have waned. Acquisitions of European companies by buyers from Hong Kong and China have fallen nearly 40 percent this year, according to Thomson Reuters data.

The decline has been even greater in the US.

According to corporate filings, CC Land put down £40 million (R713m) before agreeing to buy the Cheesegrater skyscraper in London for £1.15bn.

Zhengzhou Coal Mining Machinery, which produces auto components and coal-mining machinery, paid a 54.5m euro deposit when it agreed to agree to buy Robert Bosch’s starters and generators business for 10 times as much.

China’s ZTE paid a $10m deposit before its acquisition of a 48 percent shareholding in Turkey’s Netas Telekomunikasyon for $101m.

“Everybody I know is demanding this for Chinese bidders because there’s uncertainty about them being able to extract funds from China,” said Tom Whelan, global head of private equity at law firm Hogan Lovells.

In Europe, interested parties are rarely asked for deposits in mergers and acquisitions. Sellers worry that such demands would deter interest and be seen as discriminatory.

Deal makers expect the volume and size of Chinese overseas mergers and acquisitions to pick up soon as a strengthening economy makes capital controls less necessary.

Bankers are looking to China’s 19th Party Congress, which opened yesterday, to clarify government policy on outbound investment. They expect restrictions on overseas M&A to ease.

However, the uncertainty of China’s regulatory regime means deposit requests are unlikely to disappear any time soon, according to bankers.