China’s FX Regulator Reviewing Overseas Deals Of Chinese Companies

China’s foreign exchange regulator, the State Administration of Foreign Exchange (SAFE) is reportedly looking into the practice followed by large dealmakers in China who are using their domestic assets to obtain overseas loans.

According to sources, SAFE has initiated a review into the guarantees offered by Dalian Wanda Group Co., Anbang Insurance Group Co., HNA Group Co, Fosun International Ltd., and AC Milan soccer team’s Chinese owner. The sources added that the review does not necessarily suggest anything irregular in the deals.

The review has its origins in an investigation that is being carried into Anbang’s chairman, Wu Xiaohui which focuses on examining the sources of funding used for Anbang’s foreign acquisitions and other suspected economic crimes. The China Banking Regulatory Commission had subsequently asked banks to provide more details regarding the overseas loans received by various companies.

The focus on deals by some of the largest companies in the country is a possible signal from the Chinese government that it was committed to its objective of cleaning up the financial system. Cross border flow of capital has come under heavy scrutiny in China with authorities implementing an array of restrictions with respect to transferring funds out of the country.

The tightened capital controls has slashed deal activity in 2017 by over 56 percent when compared to the same period last year based on a Bloomberg report. The consequent pressure has resulted in HNA dropping plans of buying out an in-flight entertainment provider and Wanda deciding to dispose of most of its theme-park and hotel related properties.

SAFE is specifically looking into a type of financing called overseas loan under domestic guarantee in which borrowers are able to use assets in China as collateral to get bank guarantees or letters of credit, which are then used to get loans from the overseas units of Chinese banks.

The regulator will also be looking for signs of any other improprieties like usage of falsified information or inflation of asset values. Most of the companies involved haven’t commented on the issue. Fosun said that the company’s investments abroad under the overseas loan under domestic guarantee scheme were very minor.

Since 2016, HNA has announced acquisitions worth over $30 billion which include stakes in hotel giant Hilton Worldwide Holdings Inc and Deutsche Bank AG. Wanda has invested over $10 billion since 2016 in major deals such as the buyout of Hollywood film producing company Legendary Entertainment. Yin Ming, vice president of investment firm Baptized Capital said that the regulators might be looking to rein in highly leverage deals.

---