“This is not a currency control issue. This is a control issue.”

The statement, made by a Hong Kong-based private real estate lawyer to PERE this week, in response to China’s latest regulatory diktat on outbound investments by domestic companies, is strong. But it is not entirely inaccurate.

Until now, the regulators’ stringent rules regarding the nature and scale of permissible Chinese overseas investments had one over-arching justification: to avoid a reckless depletion of its foreign reserves and maintain a stable yuan by scrutinizing currency conversion.

And the plan worked. According to data published by China’s state news agency Xinhua, total non-financial outbound direct investments by Chinese investors across all industries dropped 29 percent to $120 billion in 2017. In the real estate sector specifically, Real Capital Analytics has estimated there was a 55 percent drop in US transactions by Chinese investors in the first nine months of 2017.

Despite this result, there will be no regulatory let-up. Indeed, Chinese investors should brace themselves for a rude shock. The National Development and Reform Commission, China’s state planner, is set to expand its remit to include the offshore subsidiaries of mainland companies, bastions of capital previously untouched by Beijing. Under the NDRC Order 11, issued in December and effective on March 1, if a Chinese investor, whether an individual or a financial enterprise, uses its offshore subsidiary in Hong Kong or elsewhere to fund an acquisition, the parent company would need to get NDRC’s approval before closing the deal. For ‘sensitive projects’, the approval is a prerequisite, irrespective of the deal size. That definition includes a catch-all provision that incorporates sectors considered restricted per China’s laws and policies, which would essentially give its government “the flexibility to effectively control outbound investments in any overheated sector,” as Paul Hastings explained in a note released this week.

Since capital controls were issued in late 2016, Chinese investors have been trying a host of alternative funding routes to circumvent these curbs, as PERE discovered last year. A commonly used option was using offshore balance sheets to either fund the initial deposit for an investment (while the investors tried getting conversion approval for their capital in China) or pay the full acquisition price. For example, China Life Insurance’s $350 million acquisition of 48 single-tenant properties from US manager ElmTree in May was done by its offshore investment arm in Hong Kong.

Except publicly listed companies and insurance companies (which are still required to get approval from their regulatory body for overseas deals), privately held Chinese businesses operating offshore were not obligated to disclose their overseas dealings. Some deals could go unnoticed by the Chinese regulators, especially if they were done off-market.

This will change when the latest regulation is effective. As one lawyer pointed out, China is catching up fast with the US in how to track its citizens. The US government, for example, requires Americans abroad to disclose their bank accounts if they hold more than $10,000 in total.

While complete details of Order 11, and how it will be enforced, will only be revealed in March, there is little doubt that another regulatory hurdle will increase the uncertainty of transacting with a Chinese investor outside of China, regardless of the whereabouts of its money.