China issues rules to curb state firms' overseas investment risks

BEIJING (Reuters) - China’s finance ministry has issued guidelines on overseas investment of state-owned enterprises (SOEs), amid a campaign to tighten controls on outbound investment and financial risks.

FILE PHOTO - A Chinese flag is seen in front of the Friendship bridge over the Yalu River connecting the North Korean town of Sinuiju and Dandong in China's Liaoning Province on April 1, 2017. REUTERS/Damir Sagolj/File Photo

China’s giant SOEs making products from trains to chemicals have been leading the country’s “go out” drive with growing overseas investments, but they have encountered low returns on investment and weak profitability, the ministry said.

The guidelines will help “strengthen financial management of overseas investment of state-owned enterprises, prevent financial risks and improve investment efficiency,” the ministry said in a statement on Wednesday.

China is increasingly scrutinizing overseas spending by both private and state-owned firms, amid growing concerns about rising debt levels and potential systemic financial risk.

The guidelines, which come into effect from August, covered the areas of investment decisions, financial management, cost control, dividend distribution and foreign exchange business.

“Greater outbound investment by SOEs is going to take place and many of them lack the ability to properly manage risks,” Xu Baoli, director of the research center at China’s state-owned assets regulator told the official China Daily newspaper.

“The lack of accountability of senior executives for poor or failed investment is one of the reasons that lead to radical decision-making and loss-making deals.”

China’s SOE’s are spearheading investment in infrastructure projects overseas along the ancient Silk Road land and sea trade routes, part of Beijing’s signature ‘Belt and Road’ initiative.

In January, China issued regulatory rules on outbound investments by centrally controlled state firms, in a bid to tighten controls on money moving out of the country and stabilize a faltering yuan.

Beijing’s crackdown on showy overseas deals has drawn in corporate giants including property developer Dalian Wanda, HNA Group, Anbang Insurance [ANBANG.UL], Fosun and Zhejiang Luosen, which was behind the purchase of A.C. Milan football club.

Reporting by Kevin Yao; Additional reporting by Adam Jourdan; Editing by Jacqueline Wong and Richard Pullin