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China's capital controls cast shadow on record deal for Hong Kong skyscraper

A Chinese investor's sudden exit from a consortium's high-profile acquisition of Hong Kong skyscraper The Center underscores the difficulties Chinese companies are having deploying capital into offshore investments amid the central government's tightening control over capital outflows, according to industry insiders.

Leader of the pack with a 55% stake, Beijing-based China Energy Reserve and Chemicals Group Co. Ltd. has pulled out of the group that in November 2017 agreed to pay a record HK$40.2 billion to Hong Kong mogul Li Ka-shing's CK Asset Holdings Ltd. for the building.

A group of Hong Kong investors — including Shimao Property Holdings Ltd. chairman Hui Wing Mau and Kingston Financial Group Ltd. CEO Chu Yuet Wah — will take up China Energy Reserve's stake, Reuters reported Feb. 27.

While the reason for its departure remains unclear, and officials at China Energy Reserve were not available for comment, in an interview with Apple Daily on Feb. 28, Lo Man-Tuen, one of the buyers in the consortium, said China Energy Reserve has faced obstacles in dispatching money overseas even though it has abundant cash on hand.

"[The capital transfer process] requires government approval," Lo was cited as saying, with the green light required from authorities such as the State-owned Assets Supervision and Administration Commission, or SASAC, and the National Development and Reform Commission, or NDRC, among others.

The Chinese government has been tightening its grip on capital flight for what it defines as "irrational" outbound investments in sectors such as real estate since late 2016, as it sought to relieve pressure on China's foreign currency reserves.

Although the market widely believes these controls are temporary, industry insiders say there are no signs authorities will relax these regulations anytime soon, and China Energy Reserve's setback in buying The Center is just the latest example.

"The government is keeping a strict eye on overseas investment," Joseph Tsang, managing director and head of capital markets at JLL Hong Kong, told S&P Global Market Intelligence.

In a Feb. 12 statement, NDRC reiterated its restrictions on overseas property investments, placing real estate, hotels, cinemas, entertainment, sports clubs and other selected markets on its 2018 list of "sensitive sectors" for outbound investments subject to additional regulations, effective from March 1.

In the meantime, the China Insurance Regulatory Commission, or CIRC, announced Feb. 23 that it was taking control of insurance company Anbang Group Holdings Co. Ltd., one of China's top overseas investors in the past few years, which purchased New York's Waldorf Astoria hotel in 2014. CIRC's seizure of the company for up to two years is demonstrative of its no-nonsense stance on aggressive overseas shoppers.

Paul Guan, a partner at law firm Paul Hastings, which focuses on cross-border real estate transactions, said the government's capital control over the property sector is at the tightest level and will be maintained through 2018. "Unless the target projects are related to [Xi Jinping's] Belt and Road initiative, it will be extremely hard to get approval."

Guan added that the government would not allow a company to make what they view as speculative overseas investments, or investments not related to the company's core businesses.

The Chinese government will not wish to see any overpriced acquisitions that attract wide attention at this point, said a Hong Kong-based real estate fund manager, whose mid-sized fund was approached by China Energy Reserve in its fundraising efforts for The Center buy.

He added that they decided not to extend a loan after deeming the purchase too expensive and the yield unappealing.

Little-known China Energy Reserve is a unit of state oil behemoth China National Petroleum Corp., and The Center was its first deal in Hong Kong. The company said in November 2017 that it made The Center deal in response to the Chinese government's call to go global.

Nevertheless, industry players believe Chinese companies' demand for overseas properties remains strong due to their asset diversification needs, and it appears unlikely that an exodus of Chinese capital from Hong Kong will take place. Frank Ma, director of PRC office services at Colliers International, added that office rental income in Hong Kong is still attractive to Chinese buyers.

But not all sources are this optimistic.

The fund manager expects there will be a property price correction in Hong Kong in 2018 amid the pull-back of Chinese investors. "Hong Kong's property prices are at their peak and have largely been pushed up by Chinese investors over the past few years."