By Naveen Anandakumar
A recent change in foreign exchange policy in China, signed two weeks ago, has already made a strong impact in international investments from China, where a new categorisation for foreign investments has been set in Beijing to reduce leverage in financial markets and limit systemic risks ahead of a Communist Party Leadership transition later this year. These controls have come into place as the amount of money leaving China topped $816 billion last year.
The National Development and Reform Commission of China, the top economic planning body, spoke of ‘irrational’ overseas investment, where “some companies focused on property rather than the real economy, which, instead of boosting the domestic economy, triggered capital outflows and shook financial security”. The new categories are set as ‘Banned’, ‘Restricted’ and ‘Encouraged’, which can be described as the following:
- Banned: Core military technology, gambling, sex industry, investments contrary to national security
- Restricted: Property, hotels, film, entertainment, sports, obsolete equipment, investments that contravene environmental standards
- Encouraged: Investments that further Belt and Road framework, enhance China’s technical standards, research and development, oil and mining exploration, agriculture and fishing
Repercussions for the Sri Lankan real estate market are projected to be the following:
- Reduced real estate investment and development deal activity in the immediate future: This is due to Chinese investments representing the majority of real estate investments in Sri Lanka, both in development and apartment acquisition. This could result in a downturn in land and property prices, which would bring prices down from what is perceived as an overpricing bubble at present, if it is the case that the majority of investments and acquisitions have been coming from the China market
- Increased infrastructure investments, acquisition of Sri Lankan financial companies to find alternative financing and offshoring methods, and a focused and speedy Hambantota development: This is because Hambantota Port Development is a scheme directly backed by the Chinese Government, and is integral to the One Belt One Road Framework, therefore will be a focus for investments from core infrastructure to supporting social infrastructure, requiring investments from roads, industrial warehousing, logistics, residential, hospitals and other supporting development. This will be a new city that, along with connecting infrastructure to Colombo through the expressway extension and new airport, will become the major destination of Chinese foreign investment. The acquisition or establishment of new financial institutions would be seen as companies finding alternative methods to channel investments, leveraging a neutral platform for diversified investments, however this method may take longer to establish given the regulations and laws surrounding investing in financial institutions or establishing new financial companies in Sri Lanka
The result is a projected downturn in real estate development activity due to a fundamental reduction in liquidity, as there are few alternative investors from other countries capable of filling the gap. This presents challenges and opportunities, where those patient enough to wait could leverage reduced land and property prices in such a downturn to buy and invest at discount whilst building market share in the gap that could open up, whilst companies heavily dependent on debt for expansion may naturally slow down to limit expansion with reduced sales.
With a market still in need of growth however, particularly in the commercial, retail and industrial development, there is still enough space for expansion, and so we remain very optimistic for the health and growth of the sector in the future.
Specifics surrounding the new policy change are still being investigated, with provincial councils still trying to ascertain how to measure each category, which would then come down to the individual state and private companies who make the investments. The upcoming Communist Party meeting in October to clarify Beijing’s position is expected to set the direction for state and private companies and their investment activities abroad.
Already, several significant investments have been paused in Sri Lanka and regionally, with major players such as Dalian Wanda Group, Fosun International Ltd., and HNA Group already under pressure from the Government. China’s outbound investments have reduced by 44.3% in the first seven months from a year earlier as the government started aggressively monitoring capital outflows in 2016.
[The writer is CEO, P1F Ltd. LTD (UK Business | Real Estate Design, Development + Investment).]