The Chinese authorities have strengthened the overseas investment policy. State-owned enterprises (SOEs) and private companies are further required to retreat from investing in unproductive industries such as real estate and entertainment, while Beijing bans investments that might go against the national interest. At the same time, companies and state-owned banks are urged to prioritise investments and lending to OBOR-related (One Belt, One Road) projects respectively. On this occasion, the Party legalised its role in influencing investment decisions within SOEs and JVs (i.e. including foreign companies) which will make them less market-based.    

Impact on country risk

Beijing’s latest decisions have several aims. One is to reaffirm the Party’s power in a transition period and given calls for economic liberalisation. Another one is to confirm that overseas investments in ‘irrational’ sectors should be abandoned as they are seen as disguised capital flight and weigh on the RMB and foreign exchange reserves. It allows a more coherent foreign investment policy which prioritises acquisitions in high-tech industries and OBOR-related projects, a dominant political goal for President Xi Jinping. Formalising the Party’s political influence in major business decisions is a way to reach such a goal and to assert the Party’s economic role after the EU refused to recognise China as a market economy last year. Hence, it is likely to further deteriorate the business environment and affect China-based foreign groups’ overseas investments given the high political emphasis on OBOR. From a recent statement made by the National Development and Reform Commission (NDRC), one can conclude that foreign groups (together with SOEs and main private Chinese companies) might be under political pressure to invest in OBOR-related projects. While investment amounts are fast-growing, companies would potentially face many underlying risks, be it at regulatory (e.g. Central Asia), political (e.g. Vietnam) or security (e.g. Pakistan) level, and more generally related to project profitability.

Analyst: Raphaël Cecchi, r.cecchi@credendo.com