China Unveils New Capital Controls

Back in March, when China’s various forms of soft capital controls had failed to stem China’s relentless capital outflows, we reported that “bizarro M&A” deals were rapidly becoming “China’s Most Innovative Capital Outflow Yet.” We pointed out several M&A deals that simply made no sense from the fiduciary perspective of a rational buyer, and had all the signs of a panicked attempt to park cash offshore in the form of mergers and acquisitions with zero regard for cost or return on investment. Among these were:

• Zoomlion, a loss-making Chinese machinery company that is partially state-owned: its total debt stands at 83 times its EBITDA.
• Fosun, a serial Chinese acquirer that spent $6.5bn on stakes in 18 overseas companies during a six-month period last year, had a a 55.7x total debt/EBITDA in June 2015. “Fosun has bought brand names such as Club Med and Cirque du Soleil as well as a host of other assets including the German private bank Hauck & Aufhaeser.”
• China Cosco Holdings acquisition of the Greek Piraeus Port Authority for €368.5m. Cosco has promised to invest €500m in the Greek port despite having total debt at 41.5x its EBITDA!
• Cofco Corporation, which recently reached an agreement with Noble Group under which its subsidiary, Cofco International, would acquire a stake in Noble Agri for $750m (in the process preventing the insolvency of the biggest Asian commodities trader), has total debt equivalent to 52 times its EBITDA!
• Bright Food, which bought the breakfast group Weetabix for $1.2bn last year, and has total debt at 24 times EBITDA!

This “bizarro” scramble to park cash offshore culminated with “China’s Most Innovative Capital Outflow Yet: Buying Legendary Italian Football Club AC Milan.”

After nearly a year of capital trickling out of China through the M&A back door, Beijing has finally come around to closing this most notorious loophole, one which incidentally has had a major role in boosting stock valuations to beyond bubble levels due to the constant possibility of a totally unpredictable “Chinese M&A premium” in which a Chinese conglomerate would swoop in and acquire some failing business at a 50-100% premium.