In 2013, Chinese President Xi Jinping announced something called the Belt and Road Initiative, which was to be a trillion-dollar framework to guide Chinese foreign investment, infrastructure development, trade, and other international forays. What this initiative actually consists of still remains vague, what its benchmarks are have never been stated. It is often difficult to discern which projects are a part of the initiative and which aren’t, but this hasn’t stopped China’s private sector from jumping onto the “China International” bandwagon and embarking on global investment sprees of their own.
Over the past two years, some of China’s large private companies have taken to the international arena like kids set free in a theme park — buying this, acquiring that, and dropping boatloads of exchanged RMB on foreign soil in the process. Last year, nearly half of China’s $226.5 billion worth of outbound foreign investments were transacted by private companies. Companies like Wanda have dumped tens of billions of dollars to acquire foreign companies like AMC Entertainment Holdings, Odeon & UCI Cinemas, Legendary Entertainment, while the Anbang Insurance Group was spending billions on things like the Waldorf Astoria New York hotel.
Beijing responded to this with ever-stricter capital controls, which sought to dam up the torrent of RMB that was pouring out of the country by limiting the amount of money that could be exchanged into foreign currency as well as scrutinizing big foreign transactions. To a large extent, these measures appeared to be working, as they immediately chopped down many high-profile international takeovers by private Chinese firms and apparently stopped others from even getting started. As reported by Yue Wang for Forbes:
“In the first quarter, 27 outbound deals worth a total of $16 billion were either cancelled or rejected, according to Dealogic. Over the same period, China announced 121 outbound deals worth $25 billion, a pace far slower than last year when the country witnessed 794 foreign investments worth a whopping $226 billion.”
But these measures apparently weren’t enough.
Last month, a President-Xi-Jinping-approved crackdown on the international acquisitions of private Chinese companies went into effect, with banking regulators being sicked upon a handful big firms who had been stuffing their international portfolios in recent years. The main targets were four companies who were responsible for a full 18% ($55 billion) of China’s foreign investments over the past two years: HNA Group, Anbang Insurance Group, Fosun International, and Wanda — with the later being outright prohibited from taking out new loans from state-owned banks.
The move to cut back on private firms acting in overseas markets has been posited by Beijing as a pragmatic reaction to the debt that they had accrued via “irrational investments,” but there appear to be other, less obvious reasons for the crackdown.
“State-owned assets, whether in China or abroad, are still state assets. But when private entrepreneurs take their money out, it’s gone. It’s no longer something that China can benefit from or the Chinese government can get a handle on,” a lawyer named Mr. Tao recently told the Wall Street Journal.
Outbound investment is nothing new for China, and the central government has actually initiated large-scale policies to promote just that. In 1999, for example, just before China became a member of the WTO, Beijing started the Go Out Policy, which was essentially a framework to encourage Chinese outbound investment and foreign acquisitions, partially as a way to eat up excessive foreign reserves which were applying too much upward pressure on the yuan. This policy could be thought of as a crude precursor to the Belt and Road Initiative. So Beijing is all for foreign investment, just not the kind that it doesn’t control — i.e. state-owned enterprises as opposed to private companies.
As it turns out, this new crackdown appears to already have been effective, with Wanda Chairman Wang Jianlin publicly claiming that his company will return home to focusing its investment activities in China’s domestic market, while also engaging in a mass selloff of assets to repay some of its loans.
All told, it is becoming clear that China’s Belt and Road will not go the same way that NAFTA initially did for the USA or of Japan’s big outward bound spending spree in the 1980s. It is looking as if China will not see a situation where droves of private domestic companies up anchor and go offshore, leaving industrial wastelands and an economic vacuum in their wake, essentially doing to them what companies like Kodak, GM, and GE did to the USA during the first leg of the globalization race.
While many Chinese companies will be offshored in the years to come and China will land many high-profile foreign acquisitions, it will be done very strategically and with the tether to the motherland still firmly attached. It is now clear that the vanguard of the Belt and Road will not be the ‘gray rhinos’ — the tycoons who lead dynamic and innovative private companies like Wanda, HNA Group, and Anbang — but shadowy state-owned firms with ambiguous acronyms that start with the letter C: COSCO, CREC, CRCC, CNGC, CMG . . .
By Wade Shepard