Avoiding “blind and irrational investments”

Chinese investments are welcomed with open arms but looked at with suspicion by many. For its part, China is limiting irrational investment, ensuring more information and transparency.

Who said China is conducting “blind and irrational investments” all over the world? Answer: China’s Commerce Minister Zhong Shan (one of the closest to Xi Jinping, further on). To further spice up the scenario, the statement was not made in a Western press interview but during a news briefing during the annual meeting of China’s Congress. 

While China boasts the most ambitious overseas investment programme – namely, the ‘One Belt, One Road’ Initiative – there is talk of the need to ease up on the investments that Beijing considers not only risky but non-strategic, such as cinemas and football clubs.  

The President of the People’s Bank of China, for instance, has said that some companies did not meet the requirements and policies for overseas investment, as they targeted sectors “that do not bring much benefit to China,” like sports and entertainment. “Investment projects like these are seen as a legal vacuum for money laundering and capital outflow,” Kent Deng, a professor of economics at the London School of Economics, told the BBC. 

Cinemas and football clubs are held up as examples of irrational investments and the criticism seems to fit like a glove at the Wanda Group (万达集团), a multinational conglomerate based in Beijing, and the world’s biggest private property developer, owner of the world’s largest cinema chain and of 20 per cent of the capital of Atletico Madrid (whose stadium bears its name). 

The Spanish capital has been a headache for founder Wang Jianlin and his management team: in 2014, he acquired an abandoned building in the centre of Madrid for €265 million (MOP2.482 billion). He wanted to demolish it and rebuild but received a thumbs-down from local authorities. Wanda ended up selling the building, losing €30 million (MOP281 million) in the process. 

“Investment projects like these [sports and entertainment] are seen as a legal vacuum for money laundering and capital outflow” – Kent Deng 

It is little wonder that Beijing announced less than a year ago a code of conduct for private Chinese companies investing overseas to avoid risky acquisitions that could pose a threat to China’s financial stability, in addition to new regulations aimed at further controlling the acquisition of foreign assets by Chinese investors. It extended the duty of information, too, to the subsidiaries of these companies, among other measures, obliging all foreign investments by Chinese groups or their overseas subsidiaries to declare their interests via online forms. 

The new rules limit, for example, investments in assets such as golf courses, movie studios and football clubs, with the objective of stopping the country’s investment outflow. 

The decision of the National Development and Reform Commission to extend supervision of investments to subsidiaries of Chinese groups abroad reaches the main private conglomerates, notably HNA Group, one of the most opaque financial groups but responsible for some €33 billion (MOP310 billion) invested outside China, and with recent signs of scarce liquidity. 

Authorities in many countries have long requested information on HNA’s shareholders, to the extent that US authorities have declared that they will not approve any more investments by the group until it can provide credible information. In addition, regulators in New Zealand and Switzerland have already blocked acquisitions because information on the shareholding structure of the group “is insufficient,” they complain. 

Not surprisingly, China’s Ministry of Commerce announced about a year ago that Chinese investment across borders had fallen due to increased restrictions (down 41.8 per cent in the first eight months compared to the same period last year). 

Open doors 

Xi Jinping promised that China will facilitate trade and investment and establish a new pattern of openness with the world via new global alliances and greater economic liberalisation. 

Ironically, the first examples seem to coincide with the commercial war between the US and China: for the first time, Beijing has waived the obligation of foreign investors to offer 50% of joint ventures to local partners. BMW and VW have been the first beneficiaries. BMW, in fact, will be the first foreign automaker to own “more than 50 per cent interest in its local joint venture,” the State Council’s website reports. 

Meanwhile, VW is in talks with China FAW Group on raising its interest in their joint FAW-Volkswagen Automotive venture. FAW-VW is currently a 60-40 partnership between FAW and VW. 

And the results – for those already restricted to German investors – are not limited to the automotive sector. 

Chemical giant BASF has inked an agreement with the government of Guangdong Province to build a wholly-owned petrochemical plant in Zhanjiang City, becoming the first foreign chemical company to operate a wholly-owned subsidiary in the People’s Republic of China.