Experts urge Chinese firms to tread cautiously

The latest phase of China's economic restructuring is prompting domestic enterprises to invest overseas or carry out foreign mergers and acquisitions, experts say.

Channels for foreign investment and financing are increasingly diverse and now extend to emerging markets.

As many domestic companies are looking overseas for growth, they must learn to handle a wide range of risks and challenges, Wang Qinmin, chairman of the All-China Federation of Industry and Commerce, told a recent industry forum.

China's non-financial overseas direct investment reached $88 billion in 2013 and was directed to 179 countries and regions.

According to Shen Liangjun, deputy director-general of the corporate project appraisal division of the China Development Bank, the risks are particularly high for overseas mining investments.

"Many countries want to maximize the economic and social benefits of their mineral resources, making it difficult for Chinese companies to invest in minerals and causing a 'lose-lose' outcome for both sides," Shen says.

Overseas resource projects may also be affected by investment policy changes, social turmoil, labor policy and other issues, Shen says.

"Chinese investors should fully consider the policies of a country where they plan to invest, including policies on taxation, finance, environmental protection, exports, mining and foreign exchange controls.

"They should also be aware of whether the country has a sound legal system and whether its laws are strictly enforced," said Shen.

Beyond thorough investigation and risk analysis, Chinese companies should pay attention to every detail concerning a project and make contingency plans.

"Some executives in charge of a foreign investment project are too confident. They don't pay enough attention to the details of a project," said Shen.

He gave the example of a Chinese company whose executives didn't fully understand the production management standards for explosives in an African country. The outcome was that the company's blasting materials couldn't be produced according to the original design.

In some countries, weak infrastructure facilities have meant unexpected costs for Chinese investors in mining projects. As a result, they didn't achieve the expected returns. Some projects fell behind schedule as well, he added.

"Chinese companies should strive for the rights giving them priority use of ancillary facilities, or even operating rights, to ensure normal production," Shen says.

He urged Chinese companies to join forces when investing overseas to reduce risks, achieve a stronger bargaining position and gain better access to financing.

Nearly 83 percent of the Chinese companies investing directly overseas are private enterprises. Their investments account for about half of all corporate foreign investment, says Wang, who is also vice-chairman of the 12th National Committee of the Chinese People's Political Consultative Conference.

"I hope private enterprises will develop internationalization strategies based on their own characteristics," he says.

"The companies should improve their legal awareness by studying relevant laws of the countries where they will invest. They should respect the local religions, culture and customs, uphold corporate social responsibility and build a harmonious relationship with local residents," he says.

Chinese enterprises have learned fast through rapid global expansion in recent years, but some of them still lack adequate knowledge of foreign markets. Many don't have experience in cross-border transactions and investment.

They also have a shortage of people with experience in managing transactions and carrying out integration after an investment, says Kenneth K.F. Lee, managing director of transaction advisory services at Ernst & Young (China) Advisory Ltd's branch in Beijing.

"Some foreign companies used Chinese enterprises as a chip to raise the bidding prices for investment projects. It was partly because Chinese companies were unwilling to spend a lot of time and energy making a careful assessment of the projects and the local market," Lee says.

He says Chinese investors to think twice before making a decision to invest abroad.

"Top executives of Chinese companies should ask themselves why they want their companies to go overseas, rather than expanding globally just for the sake of expanding," he said.

jiangxueqing@chinadaily.com.cn

(China Daily Africa Weekly 03/07/2014 page20)