Kicking around Heavy Handed Policies against Chinese Outward FDI

It is widely known that not that long ago China adopted measures to limit capital outflows following several years of massive declines in its foreign currency reserves. One of these was new review processes for deals crossing certain thresholds, which were lower in situations where an overseas deal was unrelated to the investor’s “core” business. Regarding the latter, policymakers opined that numerous deals were “‘irrational and abnormal.’”

Examples of “questionable’ COFDI deals include investments by Chinese automotive companies in a film special effects company, poultry firms in software games, and a restaurant chain in cloud computing. Drawing much attention have been billions of dollars of COFDI in European soccer teams such as AC Milan, Inter Milan, and Southampton. In some cases, the aforementioned soccer transactions appear to be nothing more than ways to disguise capital flight. In others, however, there are many potentially legitimate business rationales behind the investments. For example, a deal may aid a company in diversifying into newer, higher growth areas such as entertainment and leisure. In addition, given the popularity of foreign soccer teams and players in China, Chinese acquirers may be thinking not only of marketing products associated with such teams and players, but also cross-branding opportunities. Suning, for instance, can advertise its products at Inter Milan football games while selling Inter Milan branded goods in its stores. Finally, deals may be a way to leverage government incentives. In short, the Chinese government should not prima facie reject transactions seemingly outside a company’s “core” business. First, in some cases, there may be a fit that is not apparent at first glance. Second, the core may leave much to be desired. Regardless, Chinese investors need to ensure they have the structures in place to make sure deals succeed so they do not suffer an own goal.