Will China’s revised capital controls impact UK M&A?

Over the weekend, a new policy emerged from China’s State Administration of Foreign Exchange (SAFE) that was intended to slow down the country’s capital outflows which have exceed $150bn so far this year. Specifically, it:

  1. Lowered the threshold at which permission must be received to transfer money out of the country from $50m to $5m.
  2. Clamp down on ‘fake’ overseas investments that acted purely as capital flight.

As with many new policies in China and in fact the rest of the world, turning policy into implementation takes time. Those that process and implement the policy usually find out of the change at the same time as the rest of us and so it takes time for change to be adopted. In this instance, we imagine that managers in the banks and government offices are reviewing every foreign transaction request even it falls below the new threshold just to make sure nothing slips through. This naturally slows the whole infrastructure down.

Who will be impacted and for how long?

At this stage, we expect most foreign transactions to be impacted as they get caught up in the new policy. This includes dividend payments, invoice settlement and M&A deals. This logjam could continue through until after Chinese New Year (28th January) but after that, payments for standard trade flows will ease and it will be the major M&A deals that will face continued scrutiny.

What about SME investment and M&A?

We do not believe that relatively small investments (up to $50m) made into technologically advanced technology companies will be impacted by this new policy. SAFE is likely to be interested in significant investments made by State Owned Enterprise and private companies where the underlying transaction value and asset class does not align with China’s 13th Five Year Plan and “Made in China 2025” policy. These policies are all intended to help China develop an advanced manufacturing capability through acquisition of technology and IP. Acquisition of hotels in the Caribbean are likely to fall outside of this objective.

Similarly, the more complex the transaction’s legal structure the greater the chance of it being caught in the new crack-down from this source. Use of off-shore tax environments such as the Cayman Islands could raise the interest of SAFE and cause further delays.

Most transactions introduced by the China Investors Club are in Medtech, Biotech and Edutech companies and under $20m. These industries are core to China’s transformation of its manufacturing base and remain actively encouraged by the State. As such over the medium term we see little impact of this policy and could even justify a re-focus into these niche sectors as other investment options become harder to complete. That said, if you are hoping to close an investment before Christmas that relies on fund transfer from China then expect some delays unless you have a particularly influential sponsor.