More and more Chinese enterprises are looking for investment opportunities outside the domestic market
The 10th China International Fair for Trade and Investment, which is scheduled to open on September 8 in Xiamen, is in the world media spotlight.
According to organizers, 55 delegations from 38 countries and regions will hold exhibitions at the fair, the largest of its kind in China. Another 285 delegations, from 74 countries and regions, are expected to participate in investment negotiations.
Today, when foreign investment is pouring into China’s booming market, the matchmaking symposiums held during the Xiamen fair are aimed to inspire more Chinese enterprises to seek overseas business opportunities.
Not content merely to attract foreign investment, China is now emerging as an overseas investor. A survey conducted by the UN Conference on Trade and Development shows that, starting from 2004, China ranks fifth in terms of overseas investment volume, following the United States, Germany, Britain and France. In the last two years, China’s direct investment abroad has soared. Statistics from the Ministry of Commerce show that, in 2003, Chinese enterprises invested $2.9 billion abroad. That figure surged to $6.44 billion in the first half of 2006.
However, China is still at an early stage as an investor. Ministry of Commerce data show that global direct investment topped $897 billion in 2005, while China only made up 0.8 percent of the world total at $6.92 billion.
Initial steps
China’s official figures for direct investment abroad had totaled $58.1 billion since 1949, the founding of the People’s Republic, until the end of this June, however, less than the annual amount of such developed countries as the United States and Britain.
“China’s overseas investment is minor compared to what it receives, let alone the money flows from its Western counterparts,” said Zhao Chuang, Deputy Director of the Department of Foreign Economic Cooperation of the Ministry of Commerce.
Zhao explained that there is an international standard for the ratio of a country’s absorbed foreign investment to its investment in other countries. It is likely to be around 1:1.2 to 1:1.4 for developed countries, meaning that for each $100 million a nation draws in, it invests $120 million to $140 million in other countries. For developing countries, the ratio regularly averages between 1:0.2 and 1:0.43, meaning that for each $100 million in incoming investment, between $20 million and $43 million is invested abroad. But for Chinese enterprises the ratio is highly unbalanced, with $60.5 billion flowing into the country and $6.92 billion sent abroad in 2005.
Currently, more than 10,000 Chinese enterprises are expanding their businesses outside of the country. However, most of these affiliates are firmly controlled by their parent companies, and bogged down in rigid personnel management and isolated business operations. Being heavily dependent on the headquarters, the overseas business in most cases does not have a sound sales and information network.
In addition, enterprises in monopoly industries such as energy resources and telecommunications account for the lion’s share of China’s overseas investment so far.
Integrated global market
The “going global” strategy is definitely intended to meet the requirements of an integrated world economy.
In 2005 alone, the number of Chinese enterprises investing in foreign countries with approval from the Ministry of Commerce reached 1,067.
In spite of their immature market experience, Chinese enterprises appear to be positive about the trend. This is particularly evident at the Xiamen fair. In 2003, the matchmaking symposiums were first launched. The number of participants continued to increase, from 107 in 2003 to 156 in 2004 and 179 last year. The destinations for the investments had been increasing correspondingly, from 73 in 2003 and 85 in 2004, to 97 in 2005.
According to Zhao of the Ministry of Commerce, Chinese enterprises have gained easier access to the outside market in recent years.
First, the improvement in China’s international status and reputation has produced a favorable investment climate for Chinese businesses. Second, domestic enterprises are showing great interest in the international market. Most export-oriented industries, including textiles, chemicals, energy and construction, have competitive edge with advanced technologies and are well adapted to the countries in which they invest. Third, as China merges into the world market, corporate governance is improved. In addition to technological know-how and low labor costs, the competitiveness of Chinese enterprises has increased. Moreover, emerging Chinese entrepreneurs are pragmatic in their business choices, which gains them more business opportunities.
“The Chinese Government encourages powerful domestic companies to invest abroad,” said Zhao. “With foreign experts and chambers of commerce invited, the Xiamen fair is a platform to facilitate more Chinese businesses to invest abroad by providing them with investment information to reduce the costs of promotion.”
Tao Jian, Vice President of the China Institutes of Contemporary International Relations, agrees with Zhao on that point. The world economy is going through the process of industrial transfers, which predict a global reshuffling of production elements leading to a huge market potential. Chinese enterprises are also driven by this wave, he said.
Profits behind the scene
“It is natural for more enterprises to look overseas. Facilitated by government support in financing, insurance, foreign exchange supplies, customs procedures and quarantine, it will be a lot easier,” said Wu Xilin, Director General of the Department of International Economic Cooperation of the Ministry of Commerce.
Actually, China’s overseas investment began as early as 1949. During the three decades from 1949 to 1979, major industrial businesses set up wholly owned subsidiaries in world financial hubs such as Paris, London, Hamburg, Tokyo, New York, Hong Kong and Singapore, to develop bilateral trade, although the investments were small.
The reform and opening-up policies implemented since 1979 represent a turning point.
After 15 years of rapid development, the overseas investment structure was adjusted between 1993 and 1998. State departments tightened their approval procedures and surveillance. The overseas affiliates and branch offices were reregistered to slow the process.
In 1999, government controls on direct investment abroad were scrapped, giving a strong boost to Chinese enterprises interested in overseas expansion. At present, China has almost 10,000 enterprises engaged in overseas investment. The money flows to major economies in Asia such as Hong Kong, South Korea, Thailand, Cambodia, Japan, Mongolia, Viet Nam, Yemen and Indonesia. Other major destinations include the Cayman Islands, British Virgin Islands and Venezuela in Latin America and Sudan, Algeria, Nigeria, South Africa and Zambia in Africa. The United States, Canada, Russia, Germany, Britain, Kazakhstan, Australia and New Zealand are also winning over Chinese investors.
At present, investments from China concentrate on manufacturing, mining, information technology, computer and software, commercial services, wholesale and retail business, communications and transportation, agriculture, forestry, fishery and architecture.
The process has also helped a host of indigenous brands win global reputation, such as Haier household electric appliances, Huawei and ZTE telecommunications equipment and Lenovo computers.
Meanwhile, some have learned their lessons from hasty investment. The TCL Group is such a case, where the expected profits from its joint venture with the French TV maker Thomson have not materialized.
“Chinese overseas investment is impeded by two major obstacles,” said Tao with the China Institutes of Contemporary International Relations. “The first is the scarcity of internationalized brainpower, people who are familiar with business rules, cultural backgrounds and legal documents. Without those professionals, the lawful rights of Chinese investors cannot be well protected in practice. The second problem is the challenges of the internal management system. Though Chinese businesses have advantages in production, they suffer largely from a lack of market resources, brand image, sales networks and R&D capacity.”
Out of the impulse for short-term profits, some enterprises invest overseas before they are well prepared. Tao suggests that comparative advantages in terms of technology, management, capital and markets would be of great help, and other factors such as political stability, legal environment, taxation policy and traditional customs should also be considered and assessed before capital looks abroad.