China has published its 13th Five Year Plan, in which the government laid out its policy blueprint for 2016-20. The key economic targets focused on improving investor confidence and further opening up the country.
High on the agenda was improving the efficiency of investments and enterprises – especially state-owned companies – a welcome priority for the private equity industry, which has often found the Chinese market tricky to navigate.
Beijing is also adopting a more investment-friendly tone through significant financial reforms, including encouraging Chinese enterprises to expand abroad by simplifying overseas M&A rules and reducing State Council approvals.
1- CRACKDOWN ON INTERNET FINANCE COMPANIES
In April 2016, China’s banking regulator launched a campaign to regulate its internet finance sector. The industry, which includes online payments, P2P lending and equity crowdfunding, involved nearly 200 billion yuan ($29 billion; €27 billion) in the first half of 2016 and has secured investments from Beijing-based private equity firms Hony Capital and Citic Capital. More than 1,500 P2P platforms or about 40 percent of the total P2P companies have either shut down or defaulted on repayments, further boosting industry consolidation.
2- SIMPLIFIED RULES FOR OUTBOUND DEALS
To spur Chinese companies to go global, the country’s outbound investment regulator, the National Development Reform Commission, announced in May it would simplify overseas M&A rules. Chinese companies with deals of $2 billion or more and investments in sensitive sectors such as media and telecom will no longer need State Council approval or proof of financing. Regional bureaus will also have less say on overseas deals and allow Chinese companies to bid against each other.
3- SCRUTINY ON US-LISTED CHINESE COMPANIES
The China Securities Regulatory Commission tightened rules in June on US-listed companies which seek to raise funds from China’s stock market using backdoor listings, amid concerns of a huge valuation gap between domestic and overseas stocks. Only seven of the 40 US-traded Chinese firms that proposed privatisation in the past 12 months to April have completed the process, according to Bloomberg data.
4- LAUNCH OF $53BN SOE RESTRUCTURING FUND
In its push for a transition from state to private ownership, China set up a 350 billion yuan ($53 billion; €47 billion) private equity fund to restructure state-owned enterprises in the steel, coal and iron industries in September. Around a third of the capital, or 131 billion yuan, has been raised from SOEs including Sinopec and China Mobile, with the rest to be funded by foreign and private investors.
5- APPROVAL OF DEBT-TO-EQUITY SWAPS
The country holds nearly $700 billion in corporate debt – 280 percent of gross domestic product last year. In October, the government move to address the problem by approving debt-to-equity swap reforms. Stricken SOEs and businesses have unleased investment opportunities for private equity players, including KKR, which teamed up with China Orient Asset Management earlier this year to target credit and distressed assets in the country.