China’s new outbound investment policy: Is Israel an ‘irrational’ investment?

Last Friday the Chinese government released an official statement clarifying its policy regarding overseas investments made by its citizens.

Unlike western countries, the Chinese government views overseas investments made by Chinese entities as actions that affect the country’s economy and therefore, believes it is the government’s responsibility to regulate and direct the behavior of investors, even ones that are governmental owned. The government’s guidelines for the investors under the policy are based on national interests and on economic, homeland security and political considerations.

During 2016, over $186 billion was channeled out of China. 2016 year was a record year for outbound investments, some of which were perceived by the Chinese government as risky and irrational. As of the end of 2016, the government began to limit the outbound investment made by companies and individuals. As a result, China’s outbound investment fell by 44.3% during the first seven months of 2017 compared to 2016.

In the government statement issued last Friday, China set out the guiding principles for overseas investment, one of them being low risk. The government is working to direct the investors to reduce the levels of risk in their investments and focus on fields that are within their scope of expertise and management capability. In the government’s eyes, major Chinese buyers took systematic risk and acted in an irresponsible manner in their overseas investments. The government’s goal is now to create a more responsible diversification of investments, stabilize the currency and balance the risks to the banking sector.

The government is pushing the investors to make “real” investments, as it defines it, and the new policy defines three categories of outbound investment: banned fields, restricted fields and encouraged fields.

Under the new policy, the government prohibits any form of investment that could jeopardize China’s national interests or security. Among other things, investments in the gambling and sex industry were banned, as well as core technology and military technologies and investments prohibited by international treaties to which China is a party.

Under the category of restricted investments are included many areas such as real estate, hotels, cinema, entertainment and sports. Investments in these fields would be tightly controlled by the authorities and would require permits. As a matter of fact, in recent months the government has already worked to block costly transactions with high leverage; for instance, the government demanded that the insurance company Anbang, the owner of the Waldorf Astoria luxury hotel, sell its properties outside of China. The government also banned government banks from lending money to Dalian Wanda, which owns cinemas and Hollywood studios, thereby blocking funding for its overseas transactions.

Another aspect that is affected by investors’ behavior is China’s foreign relations with other countries. The government is opposed to investments that adversely affect China’s image in the world, like in polluting industries or in places of war zone. The policy states that overseas investments that are in conflict with the environmental protection, safety or energy requirements of the target countries will be restricted and will require approval. At the same time, cooperation that will take into account the mutual benefit of China and the target countries and will bring about a win-win result, will be encouraged. In addition, the government will proactively support investments in oil and gas, mining and development and exploration of energy resources.

Investments consistent with the One Belt One Road policy, the government’s trade expansion ambitious strategy, will continue to be encouraged, a good sign to Israel, which has a major role in the implementation of the strategy. In addition, the government will encourage high-tech investments, establishment of research and development centers and cooperation in agricultural fields. In these areas, Israel is considered a world leader in the eyes of the world and specifically, in the eyes of China. Chinese investments in these fields were encouraged by the government in the past, and they were part of most Chinese investors “dream list”.

So far, 2017 has been characterized by uncertainty regarding investment from China, and while the Chinese entities have been very open to cooperation resulting in bringing technology into China, the transfer of funds from China to Israel was covered by many question marks along the way. It now can be expected that the new policy will restore certainty, enable better flow of investments in these areas, and will lead to stability and strengthen Chinese investment in Israel.

Under the new policy, the Chinese government uses its ability to influence the private sector in order to harness its resources for the benefit of the country, to further consolidate China’s status as the world’s strongest power. Overseas business cooperation also serves China’s goals and is directed to areas in which the country needs to continue its growth and development. China sees Israel as an important source for the development of technologies that will serve it in achieving its goals, and the Israeli companies that will succeed in integrating in China’s plans will enjoy an enormous potential for growth and profit.