China’s capital controls start biting

  • Nation
  • Sunday, 19 Mar 2017

Prospects look at a model of the development at the Country Gardens Forest City showroom in Johor Bahru, Malaysia February 21, 2017. Picture taken February 21, 2017. REUTERS/Edgar Su TPX IMAGES OF THE DAY

Projects with Chinese investments in Malaysia, however, are still going on smoothly. Many of these are government-to-government projects and will continue.

CHINA’s capital controls, invoked without much publicity since late last year to curb outflow of funds and to stabilise the yuan’s rate, are squeezing its investments abroad – including those in Malaysia.

This month, Malaysia suffered a rude shock when news broke that Johor’s mega Forest City project undertaken by China’s property giant Country Garden was hit by the controls.

So was China’s richest man Wang Jianlin, whose planned takeover of a Hollywood production house by Dalian Wanda Group was blown off as funds could not leave China.

In recent years, mainland Chinese corporations and cash-rich individuals have been the world’s largest buyers of real estate but this global property binge may subside soon.

Since late November, the world’s second largest economy has been scrutinising the deals and projects of its home grown companies abroad and fund repatriation by individuals, particularly towards mega property investments, doubtful mergers and acquisitions (M&A).

For companies, remittance of funds for overseas deals requires special approval from the central bank People’s Bank of China (PBOC) and other regulatory authorities.

Although the currency exchange quota for individuals is still US$50,000 (RM220,000) per person per year, there are additional restrictions to make it difficult for one to change yuan into foreign currencies.

There are many complaints from the ground now but Beijing’s actions appear justified, given that in the last three years, China has witnessed its foreign-exchange (forex) reserves dwindle to US$3tril (RM13tril) from US$3.8tril (RM16.8tril) in early 2014.

lee heng guie
are strategic, unlikley to be hit by capital controls. - Lee Heng Guie

The central government is also concerned with the loss in yuan or renminbi (RMB) value. In November, the RMB fell to its lowest level against the US dollar in nearly eight years.

To maintain the yuan’s stability, the PBOC had to use the country’s forex reserves to support its currency levels.

In addition, there are concerns that many outbound investments are not genuine business transactions but “creative covers” for moving capital out as the yuan keeps weakening amid a slower economic growth.

The outcome of some large foreign acquisitions, particularly those by state-owned enterprises (SOEs), is also worrying.

For example, CNOOC – a SOE –paid US$15bil (RM66bil) in 2013 for Canada’s large oil and gas firm Nexen but the investment has suffered with the plunge in crude oil prices.

There have been deals with doubtful synergies, such as the purchase of a video game developer by a mining company a year ago.

Last year, China witnessed 794 outbound investments worth a whopping US$226bil (RM1tril) –more than double that of 2015, according to Dealogic’s data. And if these funds are allowed to flow out, China’s forex reserves and yuan will fall further this year.

China’s officials recently made it clear that these measures target suspicious deals and imprudent outbound investments.

On March 11, China’s Commerce Minister Zhong Shan warned, at the sidelines of the “two sessions” meetings, that officials will intensify supervision of “a small number of companies involved in blind and irrational investments”.

Xiamen University Malaysia Campus held its opening ceremony for its pioneer group of students, marking the official opening of its first overseas campus. 22 February 2016.
Education Investment: Xiamen University Malaysia is an example of China’s early belt-road project.

Zhou Xiaochuan, the country’s top central banker, questioned the wisdom of some recent overseas deals that included investments in sports, entertainment and clubs. He said: “This didn’t bring much benefit to China.”

The impact of these measures came to light this month when several major property projects overseas, including one in Malaysia, were hit by the capital controls.

On March 10, property-cum-entertainment company Dalian Wanda Group – owned by Wang Jianlin with a net worth of US$500bil (RM2.2tril) – became the first high-profile casualty under current forex rules.

Owners of Dick Clark Productions, the Hollywood company that runs the Golden Globe awards and Miss America pageants, terminated a US$1bil (RM4.4bil) deal after “Wanda failed to honour contractual obligations”.

This is seen as a setback to Wang’s current Hollywood ambition.

“China’s capital controls that subject many overseas deals to reviews of strict control is expected to put a damper on extra-large M&As as well as real estate purchases and investments abroad,” says Lee Heng Guie, a senior Malaysian economist.

Forest city, R&F hurt

On the same day (March 10), Malaysia was shaken by foreign news reports that Country Garden Holdings has shut down all its showrooms in China that promoted its huge Forest City project in Johor Baru, due to the crackdown on capital outflow.

Planned as a futuristic smart city project, Forest City is to be built on four man-made islands opposite Singapore.

The RM100bil mixed project, expected to be developed in 20 years, will enjoy total gross development value (GDV) of RM400bil.

As 80%-90% of Forest City buyers are from China, the company says it will modify its marketing strategy to target other nationals.

About the same time, the plight of other corporate victims was highlighted at China’s “two sessions”, where top politicians and legislators held annual meetings in Beijing.

Angry businessmen aired their grouses at the conferences on March 11 to top decision makers, as well as to reporters.

“It’s almost impossible to use the yuan to invest in overseas projects,” Citic Capital Holdings’ chairman Zhang Yichen told reporters.

“To say that capital controls don’t have any impact – it’s a lie.”

Zhang Li, co-chairman of Guangzhou R&F Properties, told South China Morning Post there has been no news on the company’s application of US$1bil quota for investments in an agriculture-cum-property project in Cambodia and a mine in Angola.

R&F is no stranger to Malaysia. This Hong Kong-listed Chinese group spent RM4.5bil in December 2013 to acquire six sites in Johor Baru from the Sultan of Johor, with a plan to build commercial and resi­dential properties.

Its on-going R&F Princess Cove project in Tanjung Puteri Waterfront, Johor Baru, is a 63ha commercial-residential mixed development with a GDV of RM24.5bil. The other major Chinese property group that has entered the Iskandar property market is Shanghai-based state-owned Greenland Group, a Global Fortune 500 company.

Three years ago, the company announced it was planning to invest RMB20bil (RM12bil) to deve­lop a resort hotel and residential projects at Danga Bay, Johor Baru.

Economist Dr Hoo Ke Ping told Property Guru portal that China’s crackdown on capital flight could lead to a surge in abandoned residential projects in Malaysia catering for cash-rich Chinese buyers.

Most of these projects, with units priced above RM1mil, are found in Kuala Lumpur, Johor and Penang. And these properties are way beyond the affordability of most Malaysians.

He opined that Country Garden, and similar mega projects, would find it difficult to fill the void left by the Chinese.

“People from the Middle East are unlikely to fill the void due to the current low oil prices, while Europeans and Australians have not shown any interest to come to Malaysia in a big way all this while,” Hoo reasoned.

Wang Jianlin, Chairman of the Wanda Group, speaks during a joint media event with China Union Pay in Beijing, China March 2, 2017. REUTERS/Thomas Peter
Wang: China’s richest man, is one of the first victims of capital controls.

Government concerned

China’s move to control capital flight might have a negative impact on investments within the mainland, and its economy.

And Malaysia is watching with concern.

Last Sunday, Second Finance Minister Datuk Seri Johari Abdul Ghani said Malaysia “is affected” because the trend of investors leaving China will impact on the mainland’s economy and thereby on trade with Malaysia.

China, which continued to attract the most foreign investments among emerging countries last year, has been Malaysia’s largest trading partner for eight consecutive years.

“Malaysia will be indirectly affected because our total trade with China is 16% of Malaysia’s total trade of RM1.5tril,” Johari told reporters at a Sunday event.

Malaysia-China bilateral trade, which includes indirect trade via Singapore and Hong Kong, totalled about US$100bil (RM440bil) last year, according to Chinese estimate.

If China’s forex rules dissuade re-investments by existing foreign firms and turn away potential investors in a major way, its economy will be hurt.

“If China’s domestic economy is affected, to a certain extent we will be affected too,” the Minister added.

Economist Lee, executive director of Socio-Economic Research Centre, says the capital controls could also affect new Chinese investments heading overseas – including Malaysia, a favoured destination by Chinese investors now.

“Chinese companies will not be as enthusiastic as they used to be about pouring money into overseas projects that are not related to their core business,” Lee tells Sunday Star.

Hoo, in his column in Nanyang Siang Pau on March 16, warns of the impact on tourism. He says there might be fewer Chinese tourists coming to Malaysia.

Noting that many tourists who previously visited Johor Baru were partially sponsored by Country Garden as an incentive to look at the Forest City properties, he says these tourists could “suddenly disappear”.

“Global tourism will be affected because credit cards held by Chinese nationals are also subject to capital controls… Our hotels and restaurants will be hit,” writes Hoo.

To allay fears, Chinese Premier Li Keqiang told a press conference on March 15 that genuine business deals, personal travels and education should not be affected by the controls.

Governor of the Peoples Bank of China Zhou Xiaochuan answers a question at a press conference during the Fifth Session of the 12th National Peoples Congress (NPC) in Beijing on March 10, 2017. / AFP PHOTO / WANG Zhao
Zhou Xiaochuan: ‘Overseas investments in sports, entertainment and clubs didn’t bring much benefit to China.’

Fate of deals worth RM144bil

What could happen to the RM144bil worth of Chinese deals signed in Beijing last November during the official visit of Prime Minister Datuk Seri Najib Tun Razak to China?

The RM55bil loan promised by Beijing to finance the construction of East Coast Rail Line (ECRL) is unlikely to be stalled as it is a government-to-government deal, which also involves Kuala Lumpur granting the RM55bil construction job to a SOE of China.

In fact, construction for this project that aims to spur economic growth along the East coast will begin by the end of this year, according to the Chinese Embassy in Malaysia.

A recent research report by CIMB says that state-owned Malaysia Rail Link has launched a three-month public display of ECRL.

The other major projects among the RM144bil deals are US$7.4bil (RM32.6bil) Malacca Gateway project, RM2.5bil Trans-Sabah Gas Pipeline and RM4bil Wuxi Suntech Power Co Ltd manufacturing project in the Malaysia-China Kuantan Industrial Park (MCKIP).

China’s Ambassador to Malaysia Dr Huang Huikang last week declared that investments in MCKIP, a government-to-government project, will not become victims as they are genuine business activities.

He told Malaysian reporters that projects with Chinese investments in Malaysia are still “going on smoothly”.

Similar expectations could be held for Bandar Malaysia, a strategic project that will see a total GDV of RM150bil when it is completed in 10 to15 years.

With involvement from China’s SOEs, this massive integrated property project will become the main terminal for the planned Kuala Lumpur-Singapore High Speed Rail that China is now bidding hard for.

“Bandar Malaysia was secured prior to the new control measures and evaluated on a commercial basis, and the concerned parties should be allowed to proceed with their long-term plans,” Lee argues.

However, Malaysia’s planned RM200bil Carey Island port-industrial city project may have to ignore China for a while. In January, Chi­na’s SOEs had expressed interest.

This 20-year project will comprise the development of an integrated port and related infrastructure, industrial parks, free trade zones, commercial and residential buildings.

Tan Sri Kong Cho Ha, chairman of Port Klang Authority (PKA) and Malacca Port Authority, tells Sunday Star: “There is no concern at the moment. We will take all factors into consideration when identifying investors.”

Belt-road projects

But if Carey city-port is categorised under China’s belt and road projects, it may get endorsement from Beijing.

The belt and road initiative, seen as a long-term strategic move of China, was propounded in 2013 by the Middle Kingdom’s most powerful leader President Xi Jinping.

Lee opines: “Forex restrictions will have a limited impact on the One Belt One Road initiative as these projects are largely infrastructure-oriented and are critical to China’s geo-economic strategy.”

This strategy aims to create an economic land belt on the original Silk Road through Central Asia, West Asia, the Middle East and Europe, as well as a maritime road that links China’s ports with Asean and African coasts.

It also aims to redirect China’s domestic overcapacity and capital for regional infrastructure development to improve trade and diplomatic relations, while creating opportunities for Chinese corporations to build roads, railway lines, ports and industries in Asia, Africa and the Middle East.

Not to ignore is: the financing of these projects will speed up the globalisation of the yuan which is happening speedily now.

Together, the belt and road covers 65 countries populated by 4.4 billion people.

So far, the Chinese government has spent US$50bil (RM220bil) on overseas projects linked to this initiative.

For Malaysia, projects that fall under belt and road programmes include the RM1.3bil Xiamen University Malaysia, RM4bil Kuantan port expansion and RM3bil Kedah Integrated Fishery Terminal (KIFT) project.

The ECRL and RM70bil KL-Singapore high speed rail will be the new belt-road projects.

In mid-May, China will be hosting a summit of belt-road nations. It is expected to announce some “pleasant surprises” for some nations.

Najib, one of the first few leaders to support this initiative, has accepted Xi’s invite to attend the summit.

Note: The US dollar to yuan was last traded at 6.9.

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