International Rescue

Just outside one of the exits to London’s bustling Bond Street Underground station is an unfamiliar three-story boutique, within sight of iconic department stores such as Selfridges, Harrods and Harvey Nichols. This particular store stands out from its neighbors as it is the only property on this heavily-trafficked shopping street with Chinese characters above the doorway.

“You will find the three Chinese characters Bosideng on every tag, from a pair of socks for 15 pounds (US$24) to a leather jacket for 900 pounds (US$1435)” Wayne Zhu, CEO of Bosideng UK, proudly told our reporter.

“Our products are designed by our British designers and made in European factories, with only minimal materials from China,”he added.

Officially opened in October, Bosideng Bond Street is the first overseas flagship store launched by this Hong Kong-listed Chinese company based in Jiangsu Province and known in China for its mid-range padded winterwear. Zhu, along with some 30 colleagues who he claims speak 15 languages as well as English, are trying to promote this difficult-to-pronounce brand in the UK after its pivot to London. Their target market? Young professionals.

While the EU’s appetite for Chinese-made clothing has until now been insatiable, its member states’ appetite for Chinese-branded clothing has yet to develop. However, Chinese characters looming over London’s answer to Fifth Avenue is a sign that China is on the move. Although its outbound foreign direct investment only accounted for 2 percent of the world’s total by the end of 2011, new investment in 2011 originating in China made up 4.4 percent of global outbound FDI, putting China in 6th place. More international investment agencies have chosen China, rather than the US, as the“most promising source of FDI in the medium term [2012 2014],” according to the United Nations Conference on Trade and Development (UNCTAD)’s World Investment Report released in July 2012.

Chinese investors have also developed more diversified tastes, with private investors in particular drawn to developed markets, by necessity as much as desire. Under the mantra “go global,” Chinese companies are driven by incentives as diverse as their products and services, meaning it is becoming increasingly difficult to characterize the origins, nature and business models of China’s global businesses.

Bewildering Banquet

In his keynote speech at a Hong Kong business forum, Supachai Panitchpakdi, Secretary-General of UNCTAD, claimed that between 2001 and 2011, outbound investment from the Chinese mainland increased by some 25 percent annually, compared with the 9 percent world average and 6 percent for traditional major global investors from developed countries. At the same event, deputy director general of the WTO Harsha Vardhana Singh told reporters that even if China only manages to maintain one-third of that growth in the coming years, it will still play a crucial role in the global economy.

11 percent of China’s FDI had gone into developed markets by the end of 2011, compared to 7 percent by the end of 2009 and 9 percent by the end of 2010.The European Union is the main beneficiary of these Chinese dollars, receiving more than 56 percent of China’s investment in developed markets in 2011, and 44 percent of the total over the years. Although growth was down by 30 percent over the first three quarters of 2012, few investors are anticipating a prolonged slowdown.

In its report China Deals: A Fresh Perspective issued at the end of October, PricewaterhouseCoopers concluded that increasingly active Chinese investors in Europe have been narrowing the gap with their European counterparts.

A survey by Ernst & Young in August 2012 stated that Western Europe and North America are identified as the best sources of growth opportunities for the next few years by 32 percent and 22 percent of companies in the Chinese mainland respectively, showing a distinctive shift away from China’s traditional investment destinations in East and Southeast Asia.

The varieties of investment being lured to Europe and North America also deserve attention. Although billion-euro energy and financial projects have attracted nearly all the media attention, said the PwC report, a large percentage of M&A deals by Chinese mainland companies in Europe were deals valued at under 100 million euros, with most of them focused on industrial products.

In the US, Chinese investment has been concentrated in manufacturing, according to annual reports from the Chinese Ministry of Commerce. However, manufacturing is not even in the top five most significant destinations for China’s total outward FDI stock. So where is this money being spent?

Big Players

According to a survey published in April by the China Council for the Promotion of International Trade (CCPIT), three key factors motivate Chinese businesses to launch overseas operations. State-owned resource enterprises are interested in upstream resources, hi-tech companies in global competition and technology acquisition, and labor intensive companies (also China’s main exporters) like to be close to their customers and, in light of recent clashes with US and EU regulatory authorities, have the option to sidestep potential trade disputes. For example, trade investigations and punitive tariffs imposed by American and European regulators on China’s solar panels, for example, have dampened growth in the country’s nascent solar power industry. Some Chinese producers are already preparing to move their operations overseas to avoid these pressures.

Research published in February by Standard Chartered highlighted a 20 percent share in the South Africa Standard Bank by the Industrial and Commercial Bank of Chi- na in 2008 and a boom in manufacturing investment concentrated on China-funded special economic zones in sub-Saharan Africa, particularly in Ethiopia and Nigeria. In an article in the State-owned China Daily in June 2012, Bank of China chairman Xiao Gang stated that Chinese banks must “follow their customers overseas.” His bank expects to receive 30 percent of its profits from overseas operations in the next few years, compared with its current rate of 23 percent.

The idea that now is the time for Chinese private companies to buy cheap, high-quality overseas assets has led to a series of megadeals such as the acquisition of Germany’s Parchim Airport by Henan-based LinkGlobal Logistics, and Swedish automaker and Ford subsidiary Volvo by Zhejiang’s Geely.

China Investment Corporation (CIC), China’s State-owned sovereign wealth fund, has shown more interest than ever in tangible assets, as proved by its recent investment in London’s Heathrow Airport and utilities giant Thames Water, rebounding after losses from its previous portfolio investment in Black Stone, a US private equity firm, as well as Freddie Mac and Fannie Mae.

In the financial sector, the Shanghai-based Fosun Group, an investment company, set up a private equity fund with US-based global investment giants Carlyle and Prudential Financial in 2010 and 2011 with an eye to tapping business opportunities in and beyond China.

Limited resources have always been, and will remain, the main weakness of China’s State monopolies. Since 2004 Australia has been one of the top five destinations for Chinese investment, mostly mining concerns. Africa’s abundant natural resources and investment-hungry governments have also become popular with Chinese investors. Largely as a result of this unquenchable thirst for resources, China’s State-owned enterprises (SOEs) with their vast, State-backed asset pools, have so far dominated China’s overseas FDI expansion.

By the end of 2011, Hong Kong, the Cayman Islands and the British Virgin Islands had pooled a staggering 74 percent of total Chinese investment. Normally, international investors incorporate in these territories for the sake of tax evasion, loose supervision and ease of access to other foreign markets. Some Chinese companies, particularly resourceheavy SOEs, use these subsidiaries for a different purpose to give the appearance of independence from the Chinese state, and thus facilitate international acquisitions that might otherwise be blocked by potentially hostile governments. For example, in 2010, Sinochem, a State-owned oil company, bought a 40 percent stake in Brazil’s Peregrino field, operated by Norwegian giant Statoil through a Hong Kong subsidiary.

Chinese internet companies such as Alibaba and Sina get access to international capital markets by listing their Cayman-incorporated subsidies in Hong Kong or New York, at a stroke turning them into global corporations, and, at the same time, their domestic operations in China into “foreign-funded companies.”

Private Eyes

While China’s State monopolies may be looking to secure much-needed resources as well as feather their nests with lucrative overseas deals, they remain in pole position at home due to their favored status with the central government. Private enterprises, on the other hand, are increasingly forced offshore simply to maintain growth. In China, rising costs, increasing competition and difficulties in accessing domestic market resources are beginning to drag private businesses down.

In March 2011, some 900 well-established Chinese private companies joined the Aigo Entrepreneurs Alliance, an organization designed to facilitate the process of going global for Chinese companies. “After years of devel- opment, many top Chinese private companies are eager to have their brands not just purchased, but respected internationally,”Feng Jun, initiator of the alliance and chairman of Aigo Digital Technology Co., told NewsChina.

The increasing interest in developed markets also reflects Chinese companies’ at- tempts to move up the value chain, says the PwC report. Moreover, relocating outside of China gives some companies the opportunity to reinvent themselves this was the principle reason for Bosideng’s move to London. The company’s executives sought to lift their terminally middling Chinese clothing brand into a chic alternative for the fashion- conscious European.

“You must bear in mind that customers hold on to their money in a crisis. Without taking your global strategy seriously, you can hardly carry on, much less be a success,” Zhu told our reporter. Zhu claims that Bosideng spent five years preparing for the establishment of its UK presence before finally opening its London flagship store.

Having an “international presence” also allows Chinese companies to promote their brands at home some companies go “global” simply to boost domestic sales Chinese consumers overwhelmingly prefer international labels to domestic ones.

Others pay lip service to globalization for even more cynical reasons. Migrating to other countries, particularly Canada, Australia and the US, is increasingly popular among Chinese entrepreneurs. The easiest way is to meet the investment thresholds in those countries.

The Wealth Report released in July by Rupert Hoogewerf, the man behind China’s rich list, and GroupM, a media investment management company, shows that more than 60 percent of Chinese citizens with US$1.7 million in fixed and investable assets had already migrated or were considering doing so in 2011. While their business operations remain in China, these CEOs move their families abroad for the same reasons as any other Chinese emigrant the desire for a better life, and better opportunities for themselves and their families.

From the scramble for resources by Statebacked leviathans looking to carve an even greater slice of the pie to the mass flight of successful entrepreneurs tempted by the American (or European) dream, analysis of China’s outward-bound FDI statistics lays bare the stark contradictions that continue to lurk at the heart of the country’s bullish growth. Indeed, when the numbers are dissected, they tell the complicated ongoing saga of China’s economic miracle warts and all.