New guidelines on overseas investment are likely to have a mixed impact on Chinese investment companies, Fitch Ratings says.
The guidelines will increase concentration risk by narrowing the range of industries in which investment companies (ICs) can invest overseas. They will also increase costs due to the longer and more complex process for approving deals and could adversely affect profitability.
However, they may also result in a more measured approach to growth than ICs' recent rapid overseas expansion, says Fitch.
The guidelines issued by the State Council this month reflect the government's concerns over the pressure that overseas investment could put on the currency and the aggressive bidding on overseas assets by Chinese ICs and insurance companies.
Greater regulatory scrutiny
Fitch estimates that IC investments grew by a CAGR of 67% in the five years to end-2016. They are also intended to ensure foreign investments are in line with the Chinese government's strategic plans by encouraging ICs to invest in projects under the "One Belt, One Road" initiative.
ICs will face much greater regulatory scrutiny when investing in several overseas sectors, including real estate, hotels, entertainment and sports clubs, which investors had been expecting to benefit from demographic changes and economic rebalancing.
While ICs have invested in these sectors overseas, they generally have not done so in China, and the changes will therefore reduce diversification of ICs' investment portfolios in terms of sector, and weaken ICs' overall appetite for international investment.
Harder to raise foreign-currency funding overseas
Fitch also expects the guidelines to make it harder for ICs to raise foreign-currency funding overseas and to make it harder and more time-consuming to get approval for any international M&A deals.
ICs have been focusing on investments that are in line with the government's economic policies, but the greater focus on "One Belt, One Road" projects under the new guidelines could also hurt profitability, as the returns on policy-related projects may be less attractive than those in sectors that are now restricted.
The guidelines could also have some positive impacts on the sector. In particular, they may foster greater discipline among ICs against the aggressive bidding strategies of recent years, which could reduce risk.
The rapid growth and increasing operational complexity of Chinese ICs may not have been matched by investment in risk management and the solid performance of most ICs is yet to be tested through a full economic cycle. There is no indication that ICs will be forced to sell overseas investments, but if they were they could incur losses.
The latest publication gives ICs more certainty over what the government considers acceptable sectors for investment. The guidelines are also likely to favor those ICs that already have sizable operations or investments overseas or that have already secured overseas foreign-currency funding.