Beijing Says Goodbye to Crazy

New rules will inject a measure of sanity into the country's M&A rush.
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Goodbye crazy deals, hello discipline.

U.S. delistings of Chinese companies, big-ticket acquisitions of office buildings in New York -- all those transactions that were leveraged to the hilt are in trouble. Sick of capital fleeing the weakening yuan, Beijing is putting its foot down, planning sweeping curbs on its companies' overseas purchases.

Although the new rules, which will last until September 2017, won't kill China's appetite for large international assets, they will inject a measure of sanity into the country's M&A rush. Buyers nowadays are a lot more sophisticated than they were, but headlines about hefty premiums haven't gone away.

Authorities are barring or restricting several types of deals: Overseas investments of $10 billion or more; take-private transactions involving offshore-traded Chinese firms looking to exploit valuation differences; and state-owned enterprises wishing to spend $1 billion or more on international real estate. Companies that borrow heavily, have a history of poor returns, or pay a lot of money for assets outside their core competency will also find themselves under the microscope.

The $10 billion ceiling snares two deals already this year -- China National Chemical Corp.'s $43 billion play for Swiss pesticide maker Syngenta AG and HNA Group Co.'s $10 billion purchase of CIT Group Inc.'s aircraft-leasing business. It could be argued that acquisitions like ChemChina's give Beijing access to coveted genetically modified food, and so, barring protectionism, will continue to get done because they're in the nation's strategic interests.

HNA's bid for CIT, however, is another matter. The acquisitive owner of regional carrier Hainan Airlines Co. hasn't been exactly disciplined in making purchases and has been borrowing heavily at cheap rates to do so. HNA paid 1.2 times book value to buy CIT, a hefty price in an industry where most aircraft lessors trade at a discount. Like Syngenta, the deal has yet to close.

Shopping Spree

Of the top 10 China deals this year, two are worth at least $10 billion

Source: Bloomberg

Transactions such as the buyout of search-engine operator Qihoo 360 Technology Co., funded by mainland wealth looking for a better return, could also dry up. Already facing a valuation cap on reverse mergers back home, Chinese companies looking to relist in Shanghai or Shenzhen will have their work cut out finding finance. And there are loads of them in that boat: Of the top 10 take-private transactions of U.S. publicly traded corporations this year, none has actually completed.

Take Me Home

The volume of Chinese take-private transactions has come down, but remains elevated

Source: Bloomberg

The curbs will also dent global real estate. Chinese investors, especially insurers, have been large buyers of overseas property, accounting for more than half of the surge in Asian investment in offshore real estate during the first six months of 2016, data from CBRE Group Inc. show. Beijing's new rules could crimp the ambitions of state-owned China Life Insurance Co., while Anbang Insurance Group Co.'s foray into property in Japan might raise questions over whether that's a core business.

As with almost anything in China, there will be loopholes to be sure. Some deals will be funded via offshore vehicles and may escape scrutiny -- HNA, for instance, is buying CIT through Dublin-based Avolon Holdings Ltd.

But those really out-there transactions, funded by a crazy number of zeros? You can say goodbye to them, at least for now.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

    To contact the author of this story:
    Nisha Gopalan in Hong Kong at

    To contact the editor responsible for this story:
    Katrina Nicholas at

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