New Capital Controls by China Expected to Improve Economic Health


China's new rules on overseas acquisitions and mergers laid out three kinds of investment- encouraged, banned, and restricted. The August 18 guidelines will result in lasting effects on direct investments made abroad. Rules formulated by the National Development and Reform Commission and State Council categorize the overseas investments as per alignment with the state policy initiatives. The list of banned industries includes military, sex industries, and gambling. The list of restricted industries include hotels, real estate, entertainment and films, and sports. Any other industry non-compliant with the environmental standards is also pushed into the restricted category. The list of encouraged industries includes those which promote Belt and Road, leads to improvement in China's technological prowess, and those which expand fishing, mining, oil, and agriculture.

Better quality investments

The rationale behind these new regulations is to reduce any irrational outbound investment. The regulations also want to improve China's overseas investment quality. There are excellent reasons for this. The nation wants to fight the flight of capital that results from slowing economy along with downward pressures on the exchange rate. A slew of recent rules stipulates another control layer on the outbound capital. Due to this, the firms will have much less control over investment funding.

It must be said that overseas investment has contributed to a massive amount in the booming real estate sector. China's international buying prowess was the Anbang Insurance buyout of the Strategic Hotels and Resorts for a staggering six billion dollars. China Life Insurance paid two billion dollars for Starwood Capital Group. It is seen that the US commercial real estate market is under the thrall of Chinese buyers. The biggest group of investors in the US real estate are believed to be Chinese.

Dampening the enthusiasm for better

This is all now changed. The Ministry of Commerce has reported that the property sector witnessed a decline of 82 percent when it came to overseas direct investment during 2017's first half. There are abundant indications of it declining further as these new measures particularly limit real estate acquisitions by firms in foreign markets.

The newly made regulations will in all probability dampen acquisitions of foreign property, at least in the short term. However, CBRE Research expects that robust investments will be made by the SWFs and the focus will come back on the investment linked to Belt and Road initiative. The Chinese economy will be dampened, but it will be better due to such regulations.

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