“Ion Pacific’s Co-CEO Itamar Har-Even was recently asked by the FT for his views on the Chinese Capital Controls”

China’s capital controls dent inbound investment

By Don Weinland from the Financial Times

China’s restraints on capital outflows have started to discourage inbound investment into the country, the opposite of the intended effect of the measures. Last year, Beijing began cracking down on outbound investments and stopping companies from remitting capital offshore in an attempt to preserve its rapidly deteriorating foreign reserves, which
dipped below $3tn in January for the first time in five years.

At the same time, China sought to promote inbound investments in order to attract more foreign exchange.

However, some global investors and advisers say they fear investments could get trapped in China if regulators decide to further tighten controls over company remittances, potentially stopping investors from getting returns on their investments. “The capital controls have had a chilling effect,” said Mario Giannini, chief executive of $330bn alternative investment manager Hamilton Lane. “People recognise that this is only temporary but [the capital controls] show what the regulator is capable of.”

Regulators put into place the capital controls in late November, homing in on the more than $220bn wave of outbound investments Chinese companies made last year.

The measures have killed several M&A transactions but have also had wide-ranging effects on other areas of cross-border remittance. Regulators have tightened checks on its citizens exchanging renminbi into foreign currencies, curbed gold imports and stopped banks from moving capital overseas. Even imports into China have been hurt.

Private equity investors have taken note of the challenges global companies have faced in remitting dividends overseas. The EU Chamber of Commerce said in December that
European companies had at times been blocked from moving cash offshore.

“There are a lot of businesses conducive to global investment right now but the capital controls have really hurt sentiment,” said Itamar Har-Even, co-chief executive at Hong Kong-based investment bank and fund adviser Ion Pacific. “We’ve spent an inordinate amount of time trying to figure out how to get cash out of China.”

The cooling of investor sentiment comes at an inopportune moment for investments in China as economic prospects brighten in 2017 and other investing conditions improve.

China posted 6.9 percent growth in gross domestic product for the first quarter of the year, coming in above analysts’ consensus expectations. Concerns over debt levels and non-performing loans have also eased in recent months.

China has brought in $2.8bn in overseas private equity-backed buyout deals in the year-to-date, outpacing investment during the same time last year but coming in far below 2014 and 2015, according to data from Preqin.

Many private equity investments into China are structured through offshore holding companies, reducing the risk of getting cash trapped onshore, said Philip Li, a partner at Freshfields Brockhaus Deringer in Hong Kong.

However, many investors are still targeting exits in China given the high valuations at which many companies are sold.

“The risk has always been there,” Mr Li said. “You can see that some investors are still willing to take those risks that are not uncommon in emerging markets. And even in the mature markets these days, investors have to deal with all sorts of uncertainties.”

This article was also published as an opinion editorial in the Financial Times as “China’s capital controls dent inbound investment”