Following the “going-out” policy promoted by the Chinese government for over a decade, China became a net capital export country in 2015, fuelled by 579 overseas acquisitions worth USD 54 billion. In 2016, the value of Chinese overseas acquisitions further increased to a record high of USD 107 billion. At the same time, slower economic growth at home and higher US interest rates have kept the renminbi under significant depreciation pressure. In 2016, the renminbi dropped by almost 7% against the US dollar, an eight-year low, even though the Chinese government spent large forex reserves to stabilise the renminbi rate. Fast capital outflows through outbound acquisitions further exacerbated the devaluation pressure. While promoting Chinese companies going out remains a long-term policy, the short-term pressure on the renminbi has prompted the Chinese government to implement an interim policy curbing capital outflow. We reported on these measures in February’s In context.
The capital control measures appear to be effective: net investment capital outflow of USD 29 billion in Q3 2016 was transformed into to a net investment capital inflow of USD 17 billion in Q4 2016. However, the measures appear to have come at a price, notably in suppressing genuine outbound acquisitions and increasing perceived deal certainty risks associated with Chinese buyers.
In this respect, a recent merger market report found that:
- the number of Chinese outbound deals worth USD 100 million or more fell by 27.3% in Q1 2017, compared to the previous year (from 44 deals to 32);
- there has been a significant drop in deal value in the same period (from USD 83.3 billion to 11.9 billion);
- at least five major deals have recently been scrapped due to the capital controls;
- of the 12 approved deals, approved onshore funding is believed to account for less than 10% of the deal value, indicating that Chinese companies have turned to different ways of financing as a result of the capital restrictions.
It is too early to tell when the capital control measures will be adjusted or removed. As is the case for many other policies in China, the Chinese government retains considerable flexibility and latitude in adjusting the rigour of its policy implementation. Between the short-term urgency of maintaining a stable renminbi and the long-term policy of promoting economic growth through overseas investments, the Chinese government has chosen to prioritise addressing the issue of currency stability.
However, in the long run, a non-transparent and tight control of renminbi value and capital flow could not only hurt the international community’s confidence in the Chinese economy, but also hinder the Chinese government’s currency efforts. This, in turn, could result in more serious economic issues. For this reason, we still believe that the capital control measures are temporary and that the Chinese government may currently be using a relief period to test and develop more systematic policy solutions. In the meantime, transactions with potential Chinese buyers remain subject to these policy uncertainties, which need to be taken into account by international businesses in their overall transaction planning.