To find out about the latest trends in FDI from China we got in contact with our friend Geraldine, a Senior Foreign Legal Consultant at the Hong Kong office of Minter Ellison Lawyers. An experienced China cross-border investment advisor, she has kindly given us lots of valuable feedback to our questions:
Q: What are the latest trends re: outward investment from China?
A: Large resource-hungry Chinese State-Owned Enterprises (SOEs) have been the most well-known stereotype of the Chinese outbound investor over the last decade. There is no denying that, to feed China’s massive energy requirements, Chinese SOEs have made significant acquisitions of oil, natural gas and coal mines. Beneficiary regions and countries have included the Middle East and Africa as well as Canada and Australia.
However, this is by no means the complete story and it is becoming less so with each passing day. For example:
- Chinese companies are still piling into resource investments but are focusing on reducing transport costs and processing closer to the source of extraction, so that now Chinese companies are investing in refineries, smelters and so on, abroad. There are hundreds of Chinese aluminium and copper smelters on the African continent, and many of these are owned by private Chinese enterprises
- China has a growing appetite for renewable energy plays, from wind farms to solar energy plants to biomass, and is the world’s largest investor in renewable energy. Chinese renewable energy companies benefit from government subsidies and cheap credit and have built up their competitiveness through years of government export assistance, so that they are now in a fantastic position to acquire targets across Europe and North America
- Moving away from energy and resources, we have seen growing Chinese investment in food-related areas, not just in farmland and agricultural plantations abroad (such as in Africa, Australia and New Zealand), but in fertiliser minerals such as potash. This is a consequence of rising food costs and shortage of available agricultural land in China
- Other sectors that have seen increased investment by Chinese companies include banking and telecommunications (particularly in developing markets), and automobiles and heavy machinery
The pattern of investment has shifted from the predominance of large SOEs such as CNOOC and Sinochem to other investors, including less well-known private companies such as manufacturing companies seeking to acquire foreign brands and distribution networks. Chinese sovereign wealth and pension funds such as China Investment Corp (CIC), the State Administration for Foreign Exchange (SAFE) and the National Social Security Fund are also deploying huge amounts of funds under their management towards new markets. Finally, there are a growing number of high net worth investors who are looking for ways to generate investment returns, and they sometimes have personal preferences and tastes that drive their investment choices.
In my experience, Chinese investors are not particularly averse to either M&A or greenfield investments, although JVs are less common, as they are for any segment of investors unless mandated by legal or regulatory requirements, because of their inherent difficulties.
Overall, although energy and resource investments still count among the largest investments by Chinese enterprises, Chinese outbound investment is developing to a stage where it is no longer possible to say that one sector or type of investor or investment predominates.
Q: For investment promotion agencies (IPAs) targeting China, what marketing messages should they be communicating?
A: Chinese enterprises have grown increasingly sophisticated in the conduct of their investments and larger ones routinely engage professional advisors and perform detailed due diligence. They are adept at dealing in the commercial and regulatory environments of overseas markets.
However, if I can generalise, I would say that they are still relatively risk averse. Many SOEs have complicated and abstruse reporting lines and, to the outsider, appear to be extremely political. In such an environment, any hint of uncertainty, whether regulatory, commercial or litigious in nature, can be fatally damaging to a deal, because of potential fallout to any individual who makes a risky call. And with private enterprises, again generalising, their instinct is to go for an easy target or “low-hanging fruit”, otherwise there is no sufficiently strong incentive to expand outside of the “safety” of Chinese markets.
So, to the extent that Chinese investors perceive heightened risk factors, they will take note of this.
One area where they could be particularly sensitive is the risk of descrimination because of their status as Chinese nationals (for example, being subject to increased regulatory scrutiny). Therefore, one clear message that could be made to Chinese investors is that the investment landscape is not discriminatory towards Chinese investors, and could go so far as to single them out as welcomed.
Having said that, I think both the reality and perception of regulatory bias against Chinese investment is fading. Chinese investors are being actively courted by governments and businesses all over the world. Speaking from personal experience, I think the fear of bias has shifted somewhat. The Chinese are still wary of how welcome they will actually be, but this is more from a management, workforce and community perspective. The Chinese investor prefers to deal with Chinese labour and in many African countries, the Chinese have spent large amounts transferring their people abroad. Of course, this is not always feasible and in places like North America and Europe, it would take away from the very jobs that the community is trying to create or retain. So, in these markets, the Chinese investor will ultimately have to deal with a local workforce in a local community. The message to be projected here needs to be subtle, but it should assure the Chinese investor that its management will be welcomed and will find a comfortable (if not familiar) environment, that the workforce will be adaptable to working for Chinese owners, and that the community will be positively disposed to the new players in town.
A final message that I would suggest is a statement that the IPAs recognise and are prepared for the fact that Chinese enterprises seeking to invest abroad are themselves subject to approvals from Chinese authorities, which can be time-consuming and a bit of a headache for the investors themselves.
Q: How do you see outward FDI from China trending over the next 2-3 years?
A: Over the next 2-3 years, as China faces increasing food and land shortages, food related investment will increase. So will the renewable energy sectors, aided by government policies that are favourable to these sectors. Chinese enterprises may also be more motivated to acquire brands, IP rights and technology across a range of sectors, from nanotechnology to telecommunications to biotechnology and pharmaceuticals.
Engaging in outbound investment for a Chinese investor will increasingly “normalise” and I expect that regulations will be eased, making it quicker to obtain approvals.
Chinese private equity players have enjoyed an advantage over foreign private equity firms in China due to investment and foreign currency rules that have hamstrung foreigners, and like Chinese renewable energy companies, they have been growing more and more competitive, accumulating reputation and know-how, and of course access to funds. They will be the next significant class of Chinese investor abroad.