Gabriel Wong, head of China corporate finance for PwC China and Hong Kong, says funding demands for projects will continue to drive capital flows from China. Photo: Asia Times

New regulation and capital controls will act as a drag on China’s outbound mergers and acquisitions this year, according to a report from accounting and advisory firm PwC.

Given that outbound M&A involving Chinese companies reached US$220 billion last year — equivalent to more than 7% of China’s foreign currency reserves of about US$3 trillion — it is natural for Beijing to tighten policies related to capital outflows, Gabriel Wong, PwC’s head of China corporate finance, told reporters in Hong Kong on Wednesday.

Last month, China’s foreign exchange reserves fell below the psychological level of US$3 trillion for the first time since February 2011.

Capital control measures should only be a short-term factor, however, because of the strong demand for funding from infrastructure projects across the One Belt One Road countries, Wong said.

“Outbound investments that dovetail with strategic objectives will be encouraged,” he said.

A number of Belt and Road countries are lagging behind in the density of their rail networks, and some have incentives to integrate their large territories through rail with China, Wong said. Countries such as Russia, Kazakhstan and Mongolia that are located in Belt and Road corridors will see a ramp-up in projects, he said.

Investments in power utilities in a number of middle-income Belt and Road countries such as Indonesia, Myanmar, Sri Lanka and Iraq are expected to grow significantly this year, while aging populations, high fertility rates and insufficient hospital capacity will spur healthcare investments, he added.

The value of projects and deals across the Belt and Road region amounted to US$493 billion last year, down 14% from a record US$573 billion in 2015, according to the PwC report.

The decline was mainly due to a 49% drop in the value of deals to US$92.5 billion from US$180.2 billion a year earlier.

“We saw a 4.6% GDP growth across the Belt and Road region last year, compared with the emerging markets average of 3.6%,” said Simon Booker, a partner in the firm’s Hong Kong corporate finance division.

The value of invested projects across the Belt and Road region has been growing at a compound annual growth rate of 33% since 2013, he said. “This growth is evident in all the core infrastructure sectors studied.”