Challenges as China's firms eye investments offshore
Chinese firms were expected to invest US$800 billion abroad over the next five years, but their investments were at an immature stage and faced serious challenges, speakers told the China Global Outbound Investment Summit in Beijing.
'We anticipate additional US$800 billion will be invested overseas by Chinese companies from 2012 to 2016,' Andre Loesekrug-Pietri, chairman of private equity fund A Capital, said. 'The growth of Chinese overseas investments will be 17 per cent per year, double its GDP growth.'
China's insatiable appetite for resources pushed its overseas direct investment up by 118 per cent to US$21.4 billion in the first quarter, according to A Capital. Resources accounted for 92 per cent of the first-quarter investment, South America being the biggest recipient with Chinese state oil major Sinopec's US$4.8 billion investment in 30 per cent of Petrogal Brasil. Foreign direct investment (FDI) in the mainland used to dwarf China's outbound investment, but in the first quarter, outbound investment was only 26 per cent lower than FDI, according to A Capital. Beijing's goal is for Chinese overseas investment to equal FDI in the mainland by 2015.
'Previously, foreign direct investment was crucial to the success of China. Crucial to the next 10 years is outreach to other countries,' said Michel Wormser, vice-president of the World Bank Group's Multilateral Investment Guarantee Agency (MIGA). MIGA insures international investments in risky emerging markets.
Mergermarket's Asia research manager Shunsuke Okano said that so far this year, China had made 39 mergers and acquisitions (M&A) overseas worth US$16.3 billion. 'That is not as high as last year's US$44.2 billion. At this pace, the total [for the whole of this year] won't match last year's,' Okano said.
Mergermarket's data differ from A Capital's because Mergermarket tracks only M&A, not other forms of investment.
China's overseas investment was smaller than the US, France and Germany, but was the fastest growing in the world, Loesekrug-Pietri said.
Last year, China invested US$68 billion overseas, but the US led with US$328.9 billion, followed by Germany with US$200 billion and France with US$147 billion, according to A Capital. But, China's overseas investment was the fastest growing at an annual rate of 54 per cent from 2000 to 2010, according to A Capital.
'A number of investment funds and companies in China are looking for acquisitions in emerging countries. They see emerging countries providing commodities to fund growth in China. A number of Chinese companies have been talking to us about Africa,' Wormser said. '[But] the risks of overseas investments are real ... Breach of contracts can destroy projects.'
'Ninety-nine per cent of Chinese companies are not ready to invest abroad ... I'm talking about culture and understanding of the world,' said Liu Shaohua, executive president of the Reignwood Group, a private Chinese conglomerate.
'We failed in our early attempts to acquire overseas companies. Sometimes, if you acquire a foreign company, you have a grand signing ceremony, then your nightmare begins.'
Hopes Jin Jian, China business development director at Deloitte, agreed. 'Chinese companies have lots of money to invest, but there are many difficulties overseas. The cultural differences are great. When Chinese companies go abroad, they realise their understanding of the laws in other countries is tiny,' Jin said.
One problem is Chinese companies and their foreign counterparts view contracts differently
Dirk Walker, partner at China-based law firm King & Wood Mallesons, said that 'often the Chinese investor will find the contract an ancillary aspect of the relationship, but the foreign side sees the contract as the entire relationship'.
'The Chinese party may misinterpret this as the foreign party not trusting him. The foreign party can misinterpret Chinese post-contract negotiations as reneging on the contract,' Walker said.
Annual growth in China's overseas investment between 2000 and 2010, according to A Capital