After recording double-digit rates of growth over the past few years, Chinese outbound mergers and acquisitions have been grabbing headlines around the world. However this remarkable trend faces a twofold challenge. First, US, German and Australian regulators, among others, are paying increased attention to Chinese investments. At the same time, the Chinese government has started to scrutinise outbound investment projects more closely, and has even reinstalled the approval process that was abolished in April 2014.
The new regulatory restrictions in China are being imposed partly to manage the high risks that Chinese investors are taking. For state-owned companies, the mere fact that they are investing in foreign countries can help their leaders secure promotion within the Chinese government apparatus. For private entrepreneurs, outbound M&A can be a way to diversify an investment portfolio or to transfer wealth abroad.
The other main reason for the new restrictions in China is to prevent further depreciation of the renminbi. With capital outflows increasing, the Chinese government has begun to tighten foreign currency controls on outbound investments to stabilise the exchange rate, although the authorities have taken a soft approach towards implementing this restriction, to minimise the shock for Chinese citizens.