Chinese investment in UK is more accessible for Chinese investors after a new alteration was made to existing restrictions on outward investments from the country, providing a loophole to take advantage of.
China has long depended on foreign investment to develop essential sectors within its economy, the highly sustained economic growth rate, thriving middle class, and the expansion of diverse product demand underpins its appeal as a foreign direct investment destination.
Foreign investors, however, often temper their optimism regarding potential investment returns with uncertainty about China’s willingness to offer a level playing field towards Chinese competitors.
Earlier this year, the Chinese government restricted outwards investments from the country, hindering Chinese investment in UK.
China Cracks Down on Outbound Investment
After years of rapid growth, in 2017 China’s outbound investment plummeted as authorities established new rules on overseas investments. Characterising deals as ‘irrational’ and ‘non-genuine’, the Chinese government campaigned to regulate investments and stabilise the devaluation of the Renminbi (Chinese currency).
Overseas deals were suspected of being used to bypass capital controls and move money offshore, ultimately placing pressure on the yuan currency. The Chinese government released a crack-down on overseas mergers and acquisitions and taken diversified measures to increase scrutiny on outbound transactions and capital outflow.
A crackdown on capital outflow, has made it tighter for Chinese investors to deploy fresh capital abroad, causing uncertainty about their ability to do more overseas investment.
The National Development and Reform Commission (NDRC) listed three categories of overseas investment: those that are banned (sex and gambling industries, and core military technology); those that are restricted; and those that are to be encouraged. Placed in the ‘restricted’ category were film, entertainment, hotels, sports and property, implying any proposed deal will have to encounter new levels of investigation. Chinese companies are prohibited in making overseas investments that are not associated with China’s national development, macroeconomic, international cooperation and foreign policies. Property investment forms the large base of these restricted assets.
New Rules of Overseas Investment
In a newly released directive, the NDRC said that all foreign investment deals by Chinese firms, including those conducted by their overseas affiliates, must be reported through a new online, government run information system.
The new ruling closes the door on the defunct ‘irrational’ capital outflows, and now creates a route for Chinese investors to essentially reinvest cash in the UK as long as it is recycled from an existing property venture, or raised by non-Chinese banks.
Beijing is seeking to negotiate a balance between encouraging outbound investment to support its ‘Belt and Road Initiative’, an immensely ambitious infrastructure development plan designed to boost trade and stimulate economic growth across Asia and beyond.
One of China’s main intentions is to build a monumental amount of infrastructure keeping countries connecting around the globe. Proposed developments in the pipeline vary from a port in Pakistan, bridges in Bangladesh and railways to Russia. The ultimate goal is devising a vastly connected trading route that may ignite the start of a new era of globalisation – coining what China calls a ‘modern Silk Road’.
Chief Economist at Hong Kong listed Zhongyuan Bank, specifies the new rules are about creating a clear operating framework for businesses seeking overseas expansion, rather than ‘simply blocking some deals’. A fundamental part of the new rules structure was retargeting deals that were once deemed ‘irrational’, after outbound investment in 2016 reached its pinnacle at US$170 billion, causing a depreciation in the value of currency (the lowest levels since 2008) and huge capital outflows, hinting at instability.
Uncontrollable outbound investments were considered a ‘national security matter’ by President Xi Jinping, and close examination of the country’s top private sectors occurred. Wanda Group, China’s largest commercial property company, sought a buyer for its flagship property assets in London, valued at US$5 billion.
Statistics from the commerce ministry specify China’s outbound investment in the first 10 months of 2017 fell 40.9 per cent from the same period of 2016. In November alone, the total rose 34.9%, presenting a year-on-year increase of 2017. This was due to the recommencement of ‘normal’ deals after a blanket suspension.
State approval from China will no longer be a necessity for any overseas Chinese investment in UK, relating to infrastructure or development, even if the funds are currently in China and not yet distributed overseas – reinstating access for Chinese investors to enter the UK property market.
Lifting the Floodgates for Investors
If investors have already entrusted their money in UK real estate, they will now have an additional choice of trading and refinancing their current stock while reinvesting somewhere else, without receiving consent from the Chinese authorities. This stimulates greater diversification into the asset class covered by the new exemption, including logistics, infrastructure and business parks.
Research collated from Cushman and Wakefield highlight that Chinese investment into London has decreased exponentially with only £482m worth of commercial property transactions completed in the first quarter of 2018, compared to £7bn in 2017 ploughed into the capital from China and Hong Kong. Latest restrictions prohibiting outbound investment has had a detrimental effect and played a role in decelerating Chinese investment into London property.