The Chinese government has embarked on a nationwide crackdown against sham overseas direct investments, China's State Administration of Foreign Exchange (SAFE) said on Tuesday, following rumors that the regulators set $5 million cap on all capital flowing out of the country. "SAFE always supports capable and qualified enterprises to make authentic and legal overseas direct investments. ODI should bear authentic and legal trading foundations, and be registered with the authorities by rules. SAFE will cooperate with other departments in charge of overseas investment to carry out scrutiny over the authenticities and legality of the investment object, crack down false practice of overseas investment, and help promote the health and orderly development of ODI," SAFE announced Tuesday via its official account on Weibo. The move follows rumors that the People's Bank of China and SAFE held meetings in the past week to mull over tighter and more effective measures to curb the fast and giant capital flight that is causing authorities headaches.

Workers producing clothes in a factory in Huaibei, China. STR | AFP | Getty Images

According to an internal document from PBOC, from January to October in 2016, a total of two trillion yuan ($290 billion) in capital has left China to overseas markets, with no signs of it decreasing. At the meetings, the regulators said they had noticed recent instances of individuals and enterprises using Free Trade accounts owned by companies in the Shanghai FTZ to transfer assets overseas. According to a meeting summary seen by CNBC, partnership companies, companies with capital scale smaller than their domestic subsidiary, and companies which are newly established but which have already applied to engage in overseas ODI, will now need to provide details on the background of their stakeholders or partners, their sources of funds, and the authenticity of the overseas project they wish to invest in. Failure to do so will see their request to engage in ODI refused. PBOC or SAFE will set up meetings with every company planning investments of at least $5 million into overseas projects and whose foreign exchange registration with the authorities will be completed after November 28. Those companies that have already qualified to invest in overseas projects and completed the foreign exchange registration process, but which did not settle payment before November 28, will also be required to attend compulsory talks set up by PBOC and SAFE. The regulators further ruled that from 9am on November 28, all banks must report to central government on every single foreign exchange transaction of at least $5 million. SAFE will supervise and halt any on-going ODI projects in which Chinese investors still need to transfer more than $50 million out of the country. Only once they have vetted the authenticity and legality of the company's ODI plans will the green light be given.



Emmanuel Wong | Getty Images

The new policies are very likely to cast a big shadow over many ongoing ODI projects, including a few very high-profile investments that were announced very recently, said a source at JPMorgan who wished to remain anonymous because of the sensitivity of the situation. China's ODI has massively increased this year. Chinese companies have spent $212.7 billion on overseas mergers and acquisitions so far this year, almost doubling the 2015's record high total of $111.5 billion, according to the Chinese Commerce Ministry. This includes Anbang's $6.5 billion acquisition of Strategic Hotels & Resorts.. Facing the tightening regulation, a senior manager at Anbang who asked to remain anonymous said they were still studying the new policies and the short-term impact on the company is unclear. However, He Weiwen, vice president of think tank Center for China and Globalization (CCG) doubted that Beijing is targeting big names like Anbang or Wanda. "It is very common for a government of a sovereign country to carry out its responsibility of carrying out foreign exchange control when it's necessary. In fact, many countries have done so before. I believe that these new measures are meant to crack down on those speculators or those who simply want to transfer assets, instead of targeting at the normal overseas investment of Chinese enterprises. Therefore there is no need to over react," he said. Bain Consulting also regarded the new rules as "harmless" to those Chinese companies whose overseas investments are legitimate and consistent with their main business. Since May, apart from Shanghai, many provinces and municipalities in China, including Beijing, have more or less tightened direct foreign investment, suspending overseas investment of partnership enterprises and onshore foreign exchange purchasing. Market analysts believe that Beijing is proactively taking measures in order to minimize the impact of possible US interest rate hike. "I think it's totally understandable for PBOC and SAFE to put these new rules in place," said Huang Shan, a Chinese currency expert and M&A investor, "It's almost certain that Fed will announce the interest hike in December. Trump's inauguration will against boost the US dollars in the international market. However, on the other hand the uncertainty of European politics and unpleasant Brexit negotiations will further push up the dollars. China needs to take precautious measures to protect itself from the foreseeable heavy blows on its currency system." Huang also implied that feasibility was not an issue at all. "The government regulates that each Chinese resident can exchange up to 50,000 US dollars a year, if SAFE is capable of monitoring and control 1.3 billion people, I don't think it will be a big deal for it to keep an eye on those company and the activities of their bank accounts," he said It will be a very easy job for the central government."

