Guideline tightens control of outbound direct investments

The Chinese government released a guideline on Friday to further tighten the grip on or ban outbound direct investments in sectors including real estate, hotels, entertainment, sports and casinos to avoid investment risks or potential crime.

The policy came as the government increased scrutiny of overseas investment and reined in speculative deals by Chinese companies in some industries and sectors, such as equity investment funds, the key military and national defense sector and highly polluting industries, as well as businesses in war-torn or politically unstable areas.

China will continue to tighten review of the authenticity of overseas investment and its compliance with regulations, hoping to guide more investment into the real economy and to reduce investment in sectors in which Chinese companies are not proficient at managing, said Commerce Ministry spokesman Gao Feng.

"The government will continue to encourage legal overseas investments, especially in projects tied to the Belt and Road Initiative, and will help with the development of home industries," said Gao.

Friday's guideline stressed that ODI in high-tech industries, high-end manufacturing, agricultural cooperation and capacity-sharing projects that can help China export its standards, quality machinery and industrial equipment will be further encouraged by the government to optimize China's outbound investment portfolio.

The stricter scrutiny of overseas investment comes as China's top leadership has pledged to prevent financial risks, especially against the backdrop of the decline of the country's foreign exchange reserves and the rise of capital outflow.

Nonfinancial ODI by Chinese companies dropped by 44.3 percent year-on-year in the first seven months to $57.2 billion.

Outbound investment in the real estate, culture, sports and entertainment sectors saw substantial declines during the period, according to the Ministry of Commerce.

Meanwhile, outbound investment to countries involved in the Belt and Road Initiative stood at $7.65 billion, accounting for 13.4 percent of total ODI, up by 5.7 percentage points from the same period last year.

Zhang Yansheng, chief economist at the Beijing-based China Center for International Economic Exchanges, said it is necessary for the government to properly manage and regulate cross-border investment to avoid massive fluctuations of cross-border capital flow.

"As a big country, it is important for China to maintain a stable financial market and to contain risks," he said.

Government branches such as the State-owned Assets Supervision and Administration Commission of the State Council and the Ministry of Finance have issued administrative documents to lead companies to invest in overseas business in an adequate manner.

Ma Yu, a senior researcher at the Chinese Academy of International Trade and Economic Cooperation in Beijing, said China's outbound investment activities will pick up for the remainder of the year, and projects that are in line with the country's overall economic policies will continue to be supported by the government.

"As the winds of trade protectionism blow hard, many developed markets, including the United States, Germany, Italy and France, have either set or prepared to set restrictions on Chinese investment," said Ma.