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Forex controls forcing Chinese miners to tap overseas funding to close deals

Chinese mining companies are seeing a number of their outbound investment deals being delayed because of difficulty obtaining regulatory permission to purchase the foreign exchange needed to close deals, according to a Hong Kong-based mining lobby.

In response, companies are seeking to raise money outside of China to fund their overseas acquisitions, according to Tim Sun, chairman of the Hong Kong International Mining Association.

"Chinese outbound investments have been hit by more strict controls over foreign exchange purchases. Companies failing to secure approval from the State Administration of Foreign Exchange are becoming more common," Sun told S&P Global Market Intelligence.

In China, companies seeking approval for overseas acquisition deals must run a gauntlet involving government departments ranging from the National Development and Reform Commission, Ministry of Commerce, Ministry of Finance, State Administration of Foreign Exchange, or SAFE, and State-owned Assets Supervision and Administration Commission, according to Ernst & Young.

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Before late 2016, miners generally encountered little difficulty in seeking similar approvals, according to Sun.

"As far as I know, however, some mining deals were stalled at SAFE during their approval procedures in the last six months, as they need to seek foreign exchange certificates to purchase foreign exchange from banks to complete a deal," Sun said.

Alternatively, miners are trying to borrow money from overseas markets in other currencies to bypass the foreign exchange controls, according to Sun.

Earlier this month, Shandong Gold Mining Co. Ltd. signed separate deals with the offshore units of two Chinese state-owned banks for bank loans totaling US$1.26 billion to fund its acquisition of a 50% stake in the Veladero gold mine in Argentina from Barrick Gold Corp., after a private placement in the domestic market was canceled in May.

The Chinese gold producer said it was also accelerating a plan to list in Hong Kong to tap the international capital market.

Sun also said another Chinese miner from north China was seeking a backdoor listing in Hong Kong in order to gain access to the offshore capital market.

Separately, Liu Mingdong, chairman of Chinese iron ore producer Hainan Mining Co. Ltd., said during a May webcast that the company plans to tap "innovative financing channels" to aid its overseas acquisitions as the company moves to diversify from iron ore.

The miner, its controlling shareholder Fosun International Ltd., and Zhaojin Mining Industry Co. Ltd. are planning to acquire a 10% stake in Russian gold producer PJSC Polyus.

"Considering the tight controls at the moment, Chinese miners prefer to keep profits generated by their overseas units in offshore markets so that they would have more liquidity when investing abroad," Sun said.

The State Administration of Foreign Exchange could not be reached for comment.

CG Lai, BNP Paribas' head of global markets for Greater China, said in an interview with S&P that while it was true that Chinese companies are borrowing more from the overseas markets to support their offshore expansion, they are also increasingly tapping overseas liquidity for domestic use.

"There is a general sentiment in the market that if you are going to raise a lot of money for an overseas purchase, the [People's Bank of China] would be concerned whether the money you are raising is actually fitting into the strategic direction of the country," he said.

The Chinese central bank is also trying to control the growth of credit extended by domestic banks, leading companies to seek alternative funding to bring back to China, according to Lai.

"The [People's Bank of China] has been trying to control [yuan] credit extension, but they are open for banks to bring more U.S. dollar liquidity into China," he said, adding that the Chinese authorities will benefit from their conversion in the domestic market, as it increases the country's foreign currency reserves.

Lai did not consider the tightened controls over foreign currency purchases a change to the regulatory environment for Chinese outbound investments.

"China's capital control has always been a two-way thing. They have rules to control the money [going] in and out," he said. "Until two years ago, China was a one-way market and the mechanism had been [focused on] not letting too much money in."

"The Chinese regulators are now enforcing rules that have [always] been there but were never looked at," he added.

A macroeconomic analyst, who declined to be named, believed that the tighter control over foreign currency purchases will be sustained over an extended period, even though China's net capital outflows have eased this year after recording a surge in the second half of 2016.

"The capital control policies have effectively improved the capital outflow situation in China," the analyst said. "But the government still needs to prevent any further rise in capital outflows, as demand for purchasing foreign exchange is being sustained at both the personal and corporate levels."

However, Sun expected that Chinese miners would remain a major player in the global M&A market and the controls over foreign currency purchases would ease.

"Demand for acquiring overseas mining assets in China continues to grow strongly. Generally speaking, the Chinese government is encouraging companies to acquire more resource assets abroad," Sun said.