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Change to Chinese Capital Controls Could Bring New Investment

Wanda Group and Other Chinese Conglomerates May Still Seek to Sell Off Holdings
June 7, 2018
Rendering of Dalian Wanda Group's $1.2 billion One Beverly Hills luxury condo and hotel project in Beverly Hills, currently on the market for sale.

Just when Chinese investment in the U.S. seemed completely dead, it may be showing a renewed sign of life.

Chinese officials recently issued an amendment to the nation's capital controls that could open a window into some renewed spending by Chinese firms in the U.S. But the news is unlikely to change how some of the larger Chinese firms such as Dalian Wanda Group and HNA Group will proceed as they continue trying to sell off their U.S. holdings.

Earlier this year, China’s macroeconomic management agency the National Development and Reform Commission officials issued a series of rules that limited outbound investment on real estate and other categories that virtually halted Chinese investment in the United States.

Headlines that Chinese investment here was suddenly down as much as 75 percent after record amounts of spending in previous years were splashed across business sections nationwide. Putting an exclamation point on that, last month, China's Ministry of Commerce announced that it had approved no new overseas real estate investment through the first four months of this year.

But in an amendment to those rules issued last month, Chinese officials partially lifted one of the most onerous requirements in certain categories for mainland Chinese companies looking to spend off-shore: governmental approval.

The new guidelines list six categories of investment that no longer require governmental approval beforehand. Among the categories are investment in certain types of infrastructure and development, as well as borrowing money from overseas banks for deals less than $300 million.

As a result, Chinese investors can redeploy capital in the foreign countries such as the U.S., as long as the money is recycled from their existing property holdings or raised by non-Chinese banks, without seeking Beijing’s approval. It allows for some investment in logistics or business parks as well as owner-user buildings with fewer restrictions.

"Whether it’s temporary or permanent and what impact it will have are a bunch of unknowns," said Samantha Ahuja, partner at Morris, Manning and Martin LLP in Washington, DC. "I think if there has been some easing we will probably see an effect of that in the next 60 days."

In general, the new amendment primarily benefits mainland Chinese investors who have already bought properties and assets abroad, and now have the ability to reinvest proceeds from a sale or refinancing abroad without filing for government approval.

But it also opens a small door for first-time mainland Chinese investors who may be looking to purchase in foreign markets, or for existing investors looking to deploy funds out of China. It allows them to pursue acquisitions of less typical real estate – such as industrial technology park buildings – without filing for approval.

"You may see some Chinese banks buying buildings for their own occupation," said Alex Foshay, senior managing director of capital markets at Newmark Knight Frank in New York, who added it could be applicable to wider Chinese tenants of different industries.

The most notable deal concluded in the first quarter by Chinese buyer was just such a deal. Bank of China purchased the land underneath 7 Bryant Park in Manhattan for $200 million. The bank occupies the property on the land and owns the leasehold.

While it’s not a blockbuster change in the rules, Ed Mermelstein, a real estate attorney in New York with a specialty in foreign investment, said he had been hearing about "whisper directives" in China for the last few months that would allow for investments in things like educational or technology-related real estate. He thinks the recent amendment to the directive may be a sign of things to come.

"As the [Chinese] economy slowly rebounds, the government is loosening up some of their purse strings and allowing investment to go outbound," he said. "Previously, they were looking to repatriate as much of the funds as possible and looking to restructure the companies that overextended themselves in the last five to six years."

Large private companies such as Dalian Wanda Group, Fosun International, HNA Group or Anbang Insurance Group had been rampantly spending outside of China. HNA Group alone was responsible for almost one third of total Chinese investment in the US in 2015-2016, according to Rhodium Group, which tracks Chinese investment.

Chinese President Xi Jinping has called the companies’ outbound investment a "national security matter." Suggesting the firms have been overspending on properties to develop global portfolios by exploiting cheap debt from state banks, Chinese media called the firms' actions a "gray rhinoceros" that could wreak havoc on the economy there.

In conjunction with issuing the nationwide capital controls, Chinese officials have been forcing those companies to reshuffle their leadership and to sell off their assets worldwide.

Among them, Wanda Group has been selling its global properties from London to Australia. In the U.S., it has been attempting to sell its prime Beverly Hills $1.2 billion condo-hotel development site at 9900 Wilshire Blvd. and its stake in Chicago’s under-construction condo-hotel Vista Tower for months.

But even if the Chinese government is warming up to some renewed offshore investment, it is unlikely to change much for the firms who have already been forced to dial back their spending.

“Do I think it changes some of the massive fire-sales? Probably not,” said Morris, Manning and Martin's Ahuja. “It doesn’t look like the language is meant to prevent or soften or fix that problem."

Indeed, it remains unknown whether the Chinese firms will be allowed to reinvest any of it as their businesses come more in line with the government’s wishes.

In Wanda Group’s case, it has reduced its leverage through its aggressive sell-off of its international assets in the past few months. In fact, two of its entities’ bonds were upgraded to stable from negative this week by credit rating agency Moody’s after the firm repaid $1.7 billion in offshore bank loans and generated enough on-hand cash to maintain its mainland assets.

But Jason Zhang, Cushman & Wakefield’s senior director and head of China outbound investment for investment and advisory services in Greater China, said he’s not convinced anything will change much at all.

"The recycling of capital and lending from non-local banks (refinancing) in our opinion are treated with less scrutiny," he said. "We do not anticipate any further tightening of the government restriction however we have not seen material evidence of policy easing, as it is rather unusual for any official form of ‘easing’ within one year of the release" of the capital controls directive.

CoStar Group Senior National News Reporter Mark Heschmeyer contributed to this report.

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