The intentions of domestic companies’ overseas investments need to be more strictly interrogated to avoid foreign exchange arbitrage and malicious asset transfers, said financial critic Yang Guoying, writing in the Guangzhou-based
Southern Metropolis Daily.
Since 2015, Chinese investors have reportedly bought over 10 football clubs overseas, with investments totalling 40 billion yuan (US$5.8 billion). The country’s top foreign exchange regulator has already stated it suspects them of asset transfers.
Yang said in these cases there is a possibility of a "double agreement." In the purchase agreement, the target company is in a way made to agree to return to the buyer a certain amount of the purchasing funds as promised in the public agreement. This is how domestic investors get their hands on foreign currencies, Yang said.
If investors are offering a price that’s over 30 percent higher than the reference market price of other acquisition bids during the same term, Yang suggested, the authorities need to further interrogate the deal to minimize the space available for exchange arbitrage.
An even worse scenario, Yang said, is that some acquisitions are malicious asset transfers in disguise. While a company heavily indebted or even insolvent, it transfers its assets overseas through an associated company in the name of “foreign direct investment.” In this way, even if the company subsequently goes bankrupt, Yang said, these transferred assets wouldn’t be affected.
The authorities need to be particularly cautious about investments by unincorporated companies, Yang noted. He said such companies' relations with other companies should be investigated. If their holding companies have high debt ratios, they should immediately cancel their acquisitions and be subject to severe penalties if needed.
To assess the severity of such cases and carry out punishments accordingly, Yang said, the authorities will need to formulate clear standards in the first place.
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