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No sex, no gambling: China tightens rules on foreign investment

  • New rules from Beijing prohibit investments in core military technology and anything that endangers national security
  • They also prohibit investments in the gambling and sex industries
  • Deals in outbound deals in property, hotels, entertainment, sports clubs and film studios will also be restricted
  • Still, some kinds of investment are encouraged

China now has a list of what it considers the “right” kind of outbound investment as the government continues its crackdown on foreign spending.

The new rules prohibit investments in core military technology and anything that endangers national security, along with the gambling and sex industries, according to a government statement released Friday. Outbound deals in property, hotels, entertainment, sports clubs and film studios will be restricted, though the government didn’t specify how those would be curbed.

A customer holds a 100 Yuan note at a market in Beijing.

Jason Lee | Reuters
A customer holds a 100 Yuan note at a market in Beijing.

What is encouraged, however, are investments that fall along the lines of China’s “One Belt, One Road” framework. That giant foreign policy plan seeks to invest billions abroad and shore up influence by strengthening China’s infrastructure and trade links with the rest of the world.

Beijing is also supporting investments in energy resources exploration, agriculture, along with ones that advance China’s technical abilities and research and development.

“There are profound changes taking place within China and internationally, that offer Chinese companies a good opportunity to invest overseas, but there are also many risks and challenges,” the State Council said.

After Beijing relaxed rules on foreign investment a few years ago, Chinese companies went on a massive overseas shopping spree, spending a record $200 billion last year, according to Dealogic. But government worries grew as money flew out of the country and downward pressure on the yuan increased, especially as acquisitions started to span areas deemed more frivolous, from luxury resorts to soccer clubs.

The government stepped up restrictions on capital outflows in response, and the latest rules codify what has long been known: Beijing wants to shepherd investments into sectors that align with national economic and strategic goals.

“This probably is not really a new regulation, as such overseas investment like property, hotel and gambling have never been openly encouraged by the Chinese government,” wrote Credit Suisse analyst Vincent Chan in a note. “This new regulation is more like a re-statement of policies that have already been implemented for some time, and not likely to create a major shock to the economy.”

The impact of the recent crackdown on outflows has been dramatic — outbound deals from China dropped 40 percent to $74 billion in the first half this year, based on Dealogic data.

Beyond the currency considerations, Beijing is clearly worried about the financial risk involved with these deals, experts said. The government has ordered banks to be more judicious about lending to China’s more acquisitive companies. Regulators, meanwhile, are reviewing the purchases made and may even ask companies to sell off assets.

“I suspect that some of these companies have got themselves a little bit too far, they’ve overreached themselves,” said Richard Harris, CEO of Port Shelter Investment Management. “I think Beijing is worried … that some of these companies may go under as we’ve seen with other countries, with some of their champions in investing heavily.”

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