China's government has intensified its crackdown on overseas investment despite claims that concerns about foreign exchange reserves have eased.
Last December, government agencies and the People's Bank of China (PBOC) stepped in to stop a wave of outbound direct investment (ODI) that raised fears of capital flight, falling reserves and pressure on the yuan.
The move coincided with a drop in reserves below U.S. $3 trillion for the first time since 2011, as PBOC holdings slipped to U.S. $2.998 trillion in January.
While insisting that the $3-trillion barrier was only psychological, regulators took aggressive measures to rein in ODI, including warnings against "irrational" investment in foreign real estate, hotels, cinemas, entertainment and sports clubs.
Such deals would be "closely monitored," the agencies said. In August, the cabinet-level State Council announced that investments in the targeted fields would be "limited," while those in some sectors including gambling were banned.
The council said it would classify outbound investments in three categories, those to be encouraged, restricted or prohibited.
Since then, forex reserves have stabilized.
Last week, the PBOC reported that reserves in November rose for the 10th month in a row to U.S. $3.1193 trillion with a gain of some U.S. $10 billion from October.
Yet, the authorities have been relentless in discouraging ODI deals this year.
Last month, the Ministry of Commerce (MOC) reported a 40.9-percent plunge in non-financial ODI to U.S. $86.3 billion through October, only slightly less than the 41.9-percent drop through September from a year ago.
"Irrational outbound investment was effectively contained," a ministry statement said.
Overseas investments focused on leasing and commercial services, manufacturing, wholesale and retail, and information technology, the official Xinhua news agency reported.
"No new projects were reported in property, sports or entertainment," it said.
The drop-off stands in sharp contrast to the 44.1-percent boom in non-financial ODI in 2016 to U.S. $170.1 billion, according to MOC figures, as high-rolling Chinese groups snapped up foreign real estate, sports clubs, entertainment companies and hotels.
Last year's surge took place despite warnings against "irrational" investments that date back to government guidelines issued in 2014, the official English-language China Daily said.
Top economic tasks
Although official reports have voiced confidence in stability and reserve levels this year, the authorities appear to be clamping down even harder with an extraterritorial reach to guard against financial risks.
At a meeting chaired by President Xi Jinping last week, the Communist Party's Politburo made risk prevention one of the three top economic tasks for next year, along with poverty reduction and pollution control, state media said.
Last month, the National Development and Reform Commission (NDRC), China's top planning agency, issued a draft rule "including stipulations on the investment activities of firms established overseas by domestic companies," Xinhua said.
On Nov. 28, Xinhua reported that the NDRC and other agencies would "strengthen supervision of businesses involved in cross-border economic activities."
"Taking outbound investment as an example, discreditable behavior includes breaking approval rules, falsifying information, and cheating on capital transfers," the agencies said.
"Dishonest businesses will face restrictive measures on loan guarantees, insurance rates, bidding and procurement," Xinhua said, quoting the government guidelines.
On Dec. 1, China Daily reported that the government would soon issue a "code of conduct" to provide "better guidance on risks to companies investing overseas."
The tightening of controls raises questions about the government's confidence in economic stability and reserve levels. If stability has been achieved, what are the investment curbs for?
"My guess is that it has to do with their concerns about capital flight," said University of Pittsburgh economics professor Thomas Rawski.
Forex reserves inching up
China's forex reserves have inched up by U.S. $121 billion, or 4 percent, since January but they remain nearly 22 percent below their high of U.S. $3.99 trillion in June 2014.
The figures suggest that the PBOC may have lost more than U.S. $800 billion in defending the yuan's value under pressure from outflows.
Last week, China Daily also quoted renewed warnings from economists about the need to "strengthen scrutiny of cross-border capital flows," citing the attraction of U.S. assets and the dollar due to pending tax law changes and interest rate hikes.
"One immediate impact on China could be rising pressure of capital outflows and the potential depreciation of the yuan," said Xu Hongcai, an economist at the China Center for International Economic Exchanges.
Rawski cited reports that large numbers of high-income citizens are considering leaving the country and sending their children for study abroad. The migration may spur strategies to shift capital overseas.
"It's certainly my impression that there are a lot of people in China that are hungry to move assets offshore," Rawski said.
The government may also be concerned that Chinese investors have been paying too much for foreign assets in the rush to export capital, said Rawski.
On Nov. 29, a top regulator warned that "systemic risk may possibly rise in the foreign exchange market" due to irrational trading and opening of the financial sector, China Daily reported.
Lu Lei, deputy director of the State Administration of Foreign Exchange (SAFE), cited the withdrawal of asset purchasing and quantitative easing programs in "some developed economies," echoing the concern about flows to the United States.
China's regulators have tried to steer capital toward domestic financing and projects in "One Belt, One Road"(OBOR) countries that support the government's trade and infrastructure agenda.
In the first 10 months of the year, 53 OBOR countries drew U.S. $11.2 billion (74 billion yuan) of investment, or 13 percent of China's total ODI, according to MOC data, suggesting limited success.
"They continue to be enthusiastic about outbound investment that gives the buyers access to attractive technology portfolios," Rawski said. "But clearly, they are worried about excesses in other sectors, and they may be worried about an overall drain on their reserves."
While China is not unique in exerting extraterritorial control over investments, it has grown more assertive in its attempts to channel private investment into supporting government and party goals.
"The current idea seems to be that the party is in charge of everything, that all kinds of companies should have party branches and that boards of directors should consult with party branches before they make important decisions," Rawski said.
Pushing a PPP model
Whether party control leads to more rational decisions or competitive ventures for investors remains to be seen.
The government has been pushing its model for public-private partnerships (PPP) for revitalizing its marginal state-owned enterprises (SOEs), while pledging to phase out "zombie" companies by withdrawing bank loans.
The success of such models may depend on a combination of government support, restrictions on ODI and alternative investment opportunities.
On Nov. 30, the NDRC urged local authorities to provide better services and more subsidies for private investors to participate in government projects.
"China is pushing the PPP model to reduce government debt burdens and improve efficiency, but has only seen a tepid response from private businesses, partly due to low returns and difficult risk control," Xinhua said.
Not all investors appear to be observing the government's rules on ODI deals, raising questions about how rigidly they may be enforced.
Last month, for example, Beijing ByteDance Technology Co., parent of news aggregator Jinri Toutiao, acquired Musical.ly, a video-based Chinese social network popular in the United States and Europe, for about U.S. $800 million (5.2 billion yuan), Bloomberg News and The New York Times reported.
While the companies are both Chinese, the deal has been seen as an investment outside China in the restricted categories of media and entertainment.
"The acquisition represents the biggest investment abroad thus far for a startup valued at (U.S.) $20 billion that's already spawned one of the world's largest news services," Bloomberg said.