Moving Money Out of China: It’s Tricky

China’ s buying Hollywood, right? Not if the country’s capital regulators have anything to say.

When Dalian Wanda Group bought Legendary Entertainment for US$3.5 billion in January 2016, the fears of those who expected Chinese entities to snap up Hollywood piece by piece were triggered. Wanda had previously bought AMC Entertainment — the United States’ largest cinema chain — for $2.6 billion, and the company’s owner, Wang Jianlin, the country’s richest man, said he planned to spend billions more. Wang appeared to be following through on that plan when his company offered $1 billion for Dick Clark Productions — meaning that a Chinese company was going to be producing the Miss America pageant.

That deal, however, and potentially two other non-Wanda, high-profile investments, including a $1 billion investment in Paramount Pictures and a $100 million buy of Millennium Films currently all appear to be on the rocks. First, China’s currency, the renminbi (RMB) or the yuan, is not freely traded or fully convertible. China’s economic heft has made its money welcome in many parts of the world, but it still isn’t as easy to use or welcome as the British pound, the euro or the US dollar.

A Chinese company wishing to make an overseas acquisition must either a) get the Hollywood side of the deal to accept RMB, which they won’t; b) pay directly in US dollars that the company has earned elsewhere in its business, which even Wanda can’t do, because its billions were made in domestic Chinese real estate; or c) apply to China’s foreign currency regulators, ironically known as SAFE (State Administration of Foreign Exchange), to convert the necessary RMB into dollars. This is where the bottleneck now lies.

SAFE has demonstrated that it is more than happy to prevent showy, offshore deals, which almost always tends to describe the purchase of or investment in Hollywood properties. If Wanda, which is a major player in China’s domestic entertainment business, can’t satisfy regulators that buying Dick Clark Productions is a move that’s core to its business, then a cable and wire manufacturer buying the producer of The Expendables may have even more trouble.

In the first 11 months of 2016, more than $750 billion left China, with China’s wealthiest companies and citizens seeking to offset risk at home with investments overseas, or to swap domestic profits for a piece of the good life in Silicon Valley, Vancouver, and Sydney. It was a  time of looser control:  many companies and individuals squirreled money away overseas through both legal and illegal means, including carrying suitcases of RMB to Hong Kong, where it was deposited and then somewhat more easily converted to other currencies.  Strictly speaking, Chinese law limits individual citizens from sending more than $50,000 per year abroad, and they must now pledge not to use these funds to buy property or make other direct investments.

Legitimate businesses with legitimate international interests may still make overseas acquisitions, by applying to SAFE for permission. China’s Hollywood acquisitions received a lot of attention not just because of the Hollywood angle, but because despite China’s wealth, Chinese overseas M&A activity in all sectors has been surprisingly limited.

If a recent prevailing theory held that China’s government was supporting overseas show business acquisitions as a means to spread Chinese soft power, clearly hard power and the mighty dollar remain ascendant, at least right now.