New Chinese capital changes hit Aussie deals

China’s central bank will continue its clampdown on foreign lending with foreign real estate cited as a prime target. But while some impact is inevitable, in the long run Chinese companies will continue to see Australia as a favorite destination for their capital, according to one local dealmaker.

Chinese companies investing abroad - and Australian companies looking to secure Chinese investors - need to be on top of changes in the foreign exchange rules as tightening of capital controls could impact their deal structures and timing, according to MinterEllison partner, Bi Chen.

Recent measures taken by the Chinese authorities - that come as the renminbi faces depreciation pressure - will affect deal flow from China.

“In particular, funds sourced within mainland China for outbound transactions will be subject to additional scrutiny and discretionary approval of the State Administration of Foreign Exchange," she said.

Chen added that a key consequence of the changes would be that deals are expected to take longer to complete or that they could even be suspended due to likely delays in fund flow.

Outbound investments

Even though Chinese regulators had restated their commitment to Beijing’s “Going Global” strategy, Chen is expecting deals by Chinese companies to slow this year as these forex measures, their application by the relevant regulators and their practical implications are further understood by the market.

Yet, MinterEllison’s Sydney-based partner, Chris Carr, does not see concerns about capital flight as a sign that China would necessarily turn off the tap for outbound investments. But he does argue that it is significant that China is tightening its FX regulations. 

“As the sophistication of the Chinese regulatory regime increases, we expect what happens in practice to evolve and remains a critical limb in any China outbound transaction," he said.

In his view, investments made for legitimate purposes and investments that fit within the general scope of the businesses making them will continue to flow. "And that applies to real estate just as it does to any other sectors."

For sellers, he argued, there might be a certain hesitancy and there will almost certainly see a drop in the raw number of parties looking to buy. 

"For now some deals have been aborted or subjected to additional structural scrutiny by parties. That will slow the deal flow down," Carr said. "However, if a Chinese buyer is operating within their business scope and the investment is logical in that context, we expect limited interruption, albeit with some delays."

Big-ticket acquisitions

Carr is making a call that big-ticket acquisitions will continue, particularly where there are other funding measures available to the parties. As a result, we are still seeing interest in Australian real estate from Chinese buyers. 

"There will no doubt be a lot of analysis done on the dollar figures around this, but that might not reflect the full picture," he added. "We can see already, for example, that the total deal outflow has dropped for January year on year by value. 

By historical levels, outbound investment remains high, so China has certainly not turned off the tap. 

Carr remains convinced that Chinese companies will continue to seek, secure and pay for investments that are within their core businesses and in sectors which China itself stands to benefit - of which there are still many. 

"One month or even six months of numbers doesn’t always tell you a long-term trend in China," he said. "So while we are seeing some impact, in the long run we still expect Chinese companies will continue to see Australia as a destination for their capital." 

In practice, however, official reports hold that some Chinese banks have suspended the remittance of foreign currencies and bank transfers of over US$5 million since November 2016.

Asian Markets,
China, Minter Ellison
Elizabeth Fry,
Article Posted:
February 09, 2017

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