Financial arrangements with a combination of SOEs and private enterprises, or a mix of 'real enterprises' and consortiums will enhance quality, further efficiency and reduce the risks of overseas investments, says Zhang Rui 张锐 Chinese Market Development Association director. Zhang argues that MoF's ‘Financial management measures for overseas investment of state-owned enterprises’, which has been active since 1 Aug 2017, does not translate into a change of policy direction to curb overseas investment, but an effort to upgrade their structure, quality and efficiency. Thus, investments that are congruent to the national strategic plan of de-capacity and structural upgrading will be supported, including investments along Belt and Road and investments in high-tech industries such as biomedicine and high-end manufacturing. Policy support will also be given to leading enterprises Going Global with robust market advantage and healthy financial structure.
Faced with soaring numbers of overseas investments, the 'Measures' warned enterprises going global on an 'irrational' basis, stresses Zhang. These were characterised by
- leveraged investments achieved through onshore guarantees for offshore loans, which include
- lending from domestic financial institutions
- private placement of additional shares
- issuing bonds
- trusts
- private equity funds
- internet financial products
- investments disregarding financial profit and loss prospects
- arbitrage through valuation adjustment between local and foreign currency capital
- large-scale cross-border investments which deviate from main industries and the national strategic plan
- money laundering and asset transferral in the name of overseas investment
These irrational overseas investments would inevitably increase the amount of outstanding foreign exchange funds. This will exacerbate capital outflow and negatively impact the balance and stability of the national foreign exchange reserve, says Zhang. He also adds that the biggest risk from these investments is the rise in corporate debt levels and the accumulation of non-performing bank debts.