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Belt and Road Investors See Opportunity in China Capital Limits

  • China cross-border acquisitions down 47% in first half of 2017
  • Capital controls likely to remain for at least another year

Chinese constraints on capital outflows could benefit overseas investors looking to bankroll President Xi Jinping’s cornerstone ‘Belt and Road’ initiative, an Australian infrastructure fund manager said.

With China needing offshore support if its plan to revive the ancient Silk Road is to succeed, foreigners could fill a gap created by tight controls keeping Chinese capital at home, said Grant Dooley, Asia Pacific head of Hastings Funds Management Ltd.

“There appears to be an inherent contradiction in the Chinese government policy at the moment,” Dooley said in an interview in Melbourne. “It’s an opportunity.”

In May Xi pledged 540 billion yuan ($79.4 billion) in financing to build roads, railways, ports and pipelines across 65 countries in Asia and beyond -- the majority of which have less than investment grade credit ratings -- as part of his push to secure a central role for China in world trade and diplomacy. Credit Suisse Group AG estimates the plan could funnel investments worth as much as $502 billion.

Click here for a QuickTake on how China’s Silk Road pushes influence west

Hastings, a Melbourne-based infrastructure manager with A$12.8 billion ($9.8 billion) in funds under management, is a subsidiary of Westpac Banking Corp. with offices in London, Singapore, New York and Seoul. Hastings owns energy assets in Australia and the U.K, and has partnerships with several Chinese firms including Fosun International and China Merchants Group.

“The Chinese need someone like us,” Dooley said. “They want to invest but they have these headwinds, so there’s a real opportunity to bridge that.”

Political Sensitivities

The nation’s leaders last year made it harder for companies to shift profits offshore in a bid to stabilize its currency. Cross-border acquisitions by Chinese companies plunged to $96.3 billion in the first six months of this year, about 47 percent down from the $180.6 billion of announced outbound takeovers in the same period last year, according to data compiled by Bloomberg.

While Chinese companies are allowed to invest in projects linked to the Belt and Road initiative, some analysts say that many are using it as a way to get around the capital controls. There are also political sensitivities associated with Chinese investment in developed countries such as Australia.

“There are degrees of unease about the extent of Chinese investment in those economies,” said Andrew Parker, Sydney-based Asia practice leader at PwC, in a phone interview. “They wonder and worry about the costs being a little more than just the interest charge that they have to pay on the loan."

China may keep capital controls in place for at least another 12 months, despite expectations they will be relaxed after a national Communist Party congress scheduled later this year, Parker said. PwC has had deals as large as $1.5 billion fall through because Chinese firms were uncertain of getting the money out.

“They’ll be quite strategic and quite cautious in the outbound transactions that they’re allowing over the next 12-months,” Parker said in a phone interview. “It could be a longer period of time.”

‘Hairy Bits’

The delay may not necessarily be a problem for Western asset managers looking to tap lucrative Chinese capital. The capital controls in the long-run are "a good thing" once regulators find a consistent way of applying the rules, Parker said.

Hastings had funding from Chinese groups in its unsuccessful bids for National Grid Plc’s U.K. gas distribution assets and Australian electricity distributor Endeavour Energy.

Other potential investments by Chinese companies, including the privatization of another Australian power distributor, Ausgrid, were blocked on national interest grounds.

"Australia, the U.K., the U.S., Europe all want Chinese money, they just don’t want the hairy bits," Dooley said.

Nearer Home

The U.S. is also big opportunity if President Donald Trump can give clarity to his $1 trillion infrastructure plan and how that will involve the private sector, Hastings Chief Executive Officer Andrew Day said in an interview.

Closer to home, Hastings is considering a bid for the WestConnex road project in New South Wales, Day said. A sale process for WestConnex, which is expected to cost up to A$16.8 billion to build, may be announced early in 2018.

Hastings’s owner Westpac ran a process to sell the manager last year, and while any further plan to divest is a matter for the Sydney-based lender, Day said the bank thinks “there is a better long-term owner’’.

“As Hastings becomes more global in its alignment, the most likely owner is unlikely to be an Australian bank,’’ Day said. "We shop internationally on purpose because you never know when the best opportunity is going to come up.”

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