China Frees up Rules for Overseas Investments

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M&A Activity, Macroeconomics

First China tried using state enterprises to forge green field mining projects in countries like the DRC. Recently, the state apparatus has re-invested directly in the physical metals markets by importing tens of thousands of tons of copper and other metals to put in store for times of need.

Now SAFE, the State Administration of Foreign Exchange, has announced changes to the regulations governing outflows of foreign exchange.  Effective from August 1, all companies, state and private will be able to fund their overseas subsidiaries according to an article in China Daily. The announcement makes much of how operations overseas have been hampered due to trouble raising funds abroad in the current financial crisis. But the telling statement is one sentence in the 350 word article that quietly states the new rules will also simplify approval procedures for outbound investment. This is the main intention of the change in the rules. It is not to support cash flow or plant expansion projects it is to free up Chinese industry to buy into foreign companies, sometimes in minority stakes, sometimes to buy outright.

In the past, only state enterprises have had the freedom to move quickly in overseas acquisitions and even they have needed state approval. From August 1, any company registered and having gained prior approval from SAFE can invest up to 30% of the parent equity base. Mining and processing companies could be early targets as private firms join state enterprises to buy historically low priced foreign assets, and in the process soak up some of China’s massive foreign exchange holdings in a productive manner. The government estimates some $30bn of additional investment will result from the changes and are no doubt hoping the outflows will balance net foreign currency inflows generated by exports and hence keep pressure off the currency.

China is sensitive to foreign markets security concerns and is likely to buy minority stakes for the time being. For a culture used to thinking in terms of decades rather than years China will play the long game and build overseas stakes strategically and gradually. As we had predicted in previous articles, it makes more sense for China to buy firms than buy physical commodities. This is just the first step in the process of freeing up China’s growing private sector to secure supply sources on behalf of the wider economy.

–Stuart Burns

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