China Overseas Investment Curb Exposes Splits in Government

Wang Jianlin displayed considerable composure and self-confidence when facing questions about the recent sale of his theme park and hotel assets to smaller rivals Sunac China Holdings and Guangzhou R&F Properties. But Wang, the founder of China's largest real estate developer Dalian Wanda Group and formerly China's richest man, may actually have something to fear.

"Wanda will respond to the state’s call and has decided to keep its main investment within China, said Wang, who recently slipped to third in the Bloomberg Billionaires Index, alluding to the latest Beijing warnings about China's biggest-ever foreign acquisition frenzy.

Late last year, China's Ministry of Commerce and the Banking Regulatory Commission began scrutinizing overseas investments in real estate, hotels, film studios, entertainment and sports clubs amid a government crackdown on capital outflow, money laundering and an aggressive campaign to check financial risks ahead of the 19th party congress. The crackdown has overwhelmed several corporations including Wanda, HNA Group, Anbang Insurance, Fosun International and Zhejiang Luosen, which was behind the purchase of A.C. Milan football club.

In mid-June, the regulatory commission began requiring banks to check credit exposure to the five companies and prepare risk analyses. Meanwhile, outbound M&A volumes nearly halved in the first six months of 2017, after record spending of US$221 billion on assets overseas ranging from movie studios to football clubs in 2016.

What's more, Chinese transactions targeting US and European assets have faced delays and even withdrawals as concerns mount over Beijing's acquisition of critical technology. Since March, China's overseas purchases have been speeding up somewhat and foreign exchange reserves rose for the fifth month in a row in June, indicating easing capital flight pressure. Yet, Beijing is still far from lowering its guard.

The timing is particularly sensitive. In a few days, the communist leadership will gather at the northeast seaside resort of Beidaihe for its annual policy summit just a couple of months ahead the crucial Party Congress which will determine the power geometry for the next five years and more. Many of the party organs and government are focused on making sure the Congress goes off without a hitch and that there isn‘t any kind of economic or political schism in the months leading up to it. Speculation about an alleged links between Beijing's iron fist on Chinese shopping abroad and the much-awaited political event is soaring.

Analysts say Beijing is reining in private companies to speed up state-owned enterprises’ "going global process" despite the repeated promise of a more market-driven China. Behind this trend is a struggle between the supporters of a conservative state capitalism and those who hope in a more open market-oriented economy.

Just a few days ago, the State Council ordered all firms controlled by the central government to complete a massive restructuring to become limited liability and joint stock companies by the end of 2017.

This theory, despite its speciousness, is allegedly supported by the direct engagemant of Xi Jinping in the current "witch-hunt" as well as by the latest economic data: the private sector’s share of overseas spending – after shooting up from barely above zero about a decade ago to nearly half of China’s overseas investments in 2016 – slipped back to 36.9 percent in the first half of 2017. At the same time, profits at China's state-owned firms were up 45.8 percent at RMB805.5 billion in January-June, compared with a 53.3 percent rise in the first five months.

In other words, in 2017 it was mostly traditional sectors, including export manufacturing, real estate, and old-fashioned infrastructure investment, that kept China's economic growth on track.

Supporting rumors of an internal split, Reuters examined the president's performance at the recent National Financial Work Conference in an article with an eloquent title ("Xi pours cold water on China's 'creativity' rally"), in which the main focus was put on the growing discrepancy between Premier Li Keqiang’s idealistic inclination for an innovation-led economy and Xi's preference for pragmatism and stability.

Rumors hinting at a rivalry between the Party's number one and two are not new. In a recent guide to the 19th Party Congress, Trivium China described Li as the weakest premier since Hua Guofeng (1976-1980), Mao Zedong's designated successor.

"Over the past five years, much of the premier’s traditional portfolio has been taken over by newly created leading small groups headed by Xi Jinping. What’s more, Li doesn’t seem to be on board with much of Xi’s conservative agenda," Trivium China reported. Many analysts say Xi would actually prefer to see the loyal anti-corruption czar Wang Qishan (deeply involved in the restructuring of China’s state-owned banking sector in the first decade of this century) take over as Prime Minister.

Nothing can be said for sure, but as Nicholas Hope, former director of the Stanford Center for International Development (SCID), told Asia Sentinel, the nebulous situation should be read and interpreted in the light of two main themes: measures to manage capital inflow and outflow; and ambivalence concerning the role of Chinese SOEs.

From late 2006 through June 2014, Chinese foreign exchange reserves quadrupled to about US$4 trillion. One of the reasons for that was sustained capital inflow (along with undesirably high current account surpluses), which contributed to exchange rate appreciation and created management problems for the monetary authorities.

In turn, that encouraged more liberal approaches to capital outflow, including for private citizens who spent large sums on tourism, shopping abroad, education for their children and even acquisition of foreign assets, especially housing. At the same time, the government encouraged large firms to invest abroad and there was a tremendous upsurge in outward direct investment which doubled to around US$170 billion during 2013-16.

After the government widened the trading band for the renminbi in August 2015 (probably as part of its successful campaign to persuade the International Monetary Fund to include the renminbi in the SDR basket), the currency drifted downwards to the surprise and consternation of some American observers. To date, the government has spent about US$1 trillion of its reserves to arrest the decline and ensure that the rate moves in an orderly way that minimizes trade disruption.

The liberal approach to capital flows has been reversed with controls being enforced more stringently and greater efforts being made to ensure that funds leaving the country are not simple capital flight, with firms and households seeking to diversify their asset holdings and/or guard against further depreciation.

"China being China, the government has also intervened to prevent investments that it might view as 'frivolous' or 'prestige' projects (sports teams, entertainment industry, hotels and resorts), especially where it perceives these investments, whether made by private or state-owned companies, as contributing to an undesirable build up in indebtedness of the investing entities to Chinese banks (themselves government owned)", said Nicholas Hope. "My view is that often the government is not an especially reliable judge of whether or not these investments promise good returns".

On the more intricate question of SOEs, the former director of the Stanford Center’s China research program raises an even more sensitive point. While it is impossible to prove the ongoing political fight, Hope said, there is considerable evidence substantiating a certain form of disharmony inside the party.

"My observation over the past several years, vindicated by the public disagreements in several conferences of participants who represent different arms of government, is that there is indeed,” said Hope, “unresolved tension between those who believe that innovation and economic dynamism would be served best by privatizing the SOEs or, at least, exposing them to more competition, and those who still see the SOEs as the pillars of the economy and the main sources of R&D that will drive further growth or, at least, as the way in which the party will retain control of the commanding heights of the economy. Within the two competing positions there are many nuances, with the self-interest of many powerful factions influencing current opinion and vying for the deciding voice in the ultimate outcome".

But this may not be enough to support the thesis of a radical U-turn on the so-called "supply side reform." "I don’t see this issue as a deliberate attempt to restrict the rise of private firms, and I believe the government is taking measure to encourage smaller firms to thrive", Hope said. "But big private outfits in China (Alibaba, Wanda, TenCent, Baidu, Didi) are at best quasi-private as the party ensures that it retains a big voice in how those firms operate and some of them have been equally affected by restrictions on their acquisitions abroad as the SOEs."

After all, in China, the line that separates the public from the private sphere is extremely thin. We only need to look at the top of Alibaba, HNA, Wanda and Anbang to find well-connected magnates, with guanxi that stretches from the former paramount leader Deng Xiaoping to the Politburo and nothing less than members of President Xi Jinping’s family.

Alessandra Colarizi is an Italian Sinologist, translator and freelance journalist. She is a regular contributor to Asia Sentinel.