Challenges Faced by Chinese Enterprises Investing Overseas

Over the past 10-odd years,

the Chinese government has been vigorously promoting measures and policies regarding the “going out” strategy and foreign investment and has been implementing these in a more and more comprehensive and proactive manner. But despite the progress, China still faces great difficulties and challenges in developing overseas investment due to the late start of overseas investment, insufficient work as well as direct impact from complicated external environments.

At the 6th Chinese Enterprises Outbound Investment Conference, Kong Linglong, director-general of the National Development and Reform Commission’s Department of Foreign Capital and Overseas Investment, mentioned 5 main points in terms of the internal difficulties and challenges faced by China in promoting overseas investment. First, rules and regulations are still patchy and the legislation is far behind what is actually needed. Currently, there are no laws or regulations promulgated exclusively to regu- late overseas investment. As a result, both the authority and the efficiency of overseas investment management are seriously undermined. Second, the support for overseas investment is still scant. Supporting policies concerning taxation, finance and insurance, need to be improved. Internal and external coordination mechanism also needs to be strengthened. Third, compared with international competitors, Chinese enterprises seem smaller in scale and appear weaker. In particular, Chinese enterprises are short of talents specialized in the international management, lack international business experience and need to enhance their ability to prevent and tackle various risks. Fourth, Chinese enterprises do not have a definite long-term plan for overseas investment cooperation, which has led to disorderly competition and often cut-throat competition. Therefore, competition needs to be regulated. Fifth, the intermediary service system for overseas investment is still immature, especially domestic institutions such as investment banks and management consulting agents are not commensurate with the current demand of overseas investment in terms of finance, laws, experience and strength.

With regards to the direct impact from external environments, Wang Shengwen, deputy director-general of the Department of Outward Investment and Economic Cooperation of the Ministry of Commerce, summarized 4 risks faced by Chinese enterprises while “going out”. First, security risk. Wang pointed out that China’s outbound investment is relatively concentrated in high-risk markets. Investments in high risk countries account for one fifth of the total foreign investment of countries and regions that rank top 20 in terms of foreign investment stock. 18 countries out of the 89 countries and regions that have over US$ 1 billion worth of contracts on overseas project contracting have been listed among the 20 riskiest markets for global construction industry. Meanwhile, 18 countries out of the 89 countries and regions have been included in 26 countries considered high risk by China’s Ministry of Foreign Affairs. With respect to foreign labor service cooperation, one fifth of labor force in 24 countries and regions that receive more than 5,000 foreign workers live and work in high risk countries. According to initial statistics, over the past two years security incidents involved Chinese enterprises and staff totaled 198, causing 139 deaths and injuring 135 people. Second, political risk. Wang said that some countries, with the excuse of national security, frustrate the efforts of Chinese enterprises in making legitimate investment in their countries. In addition, influenced by overseas public opinion and unsubstantial reports, economic and trade issues are frequently politicized. Some local powers, under the pretext of protecting employment and national industry, point an accusing finger at Chinese enterprises and discriminate against them. Third, investment risk. According to Wang, while the debt crisis in the euro zone keeps smoldering, the Western economy is hard to rebound quickly in the foreseeable future and the effective demand is short, which makes it more difficult for Chinese enterprises to develop new markets, squeeze their profit growth and weigh on price increases including that of bulk commodities and might also curb global production and trade expansion and raise the cost for Chinese enterprises to invest abroad. Some developed and resource-rich countries have tightened control over foreign countries acquiring their resources and key technologies. By contrast, some developing nations need to enhance their policy stability. Fourth, integration risk. Due to the sharp differences in language, custom, value and religious belief, Wang warned Chinese enterprises against cultural shocks while trying to integrate into a foreign society. Moreover, it will cause a series of conflicts of interest when a large number of Chinese enterprises rush in, upset the local interest group structure and grab the market share from their hands.

As to the challenges and risks faced by Chinese enterprises in investing in or merging or acquiring overseas companies, Kong Linglong, director-general of the National Development and Reform Commission’s Department of Foreign Capital and Overseas Investment, said that along with challenges come opportunities and China will continue the basic state policy of opening-up. He added that China will, while fully respecting the independent decision-making power of Chinese enterprises, continue to support enterprises with proper conditions to invest overseas steadily and surely from the following 5 aspects.

First, strengthen the macro-guidance of the government. The government should double its efforts in directly coordinating major policies, issues and projects, researching and promoting the positive interaction between diversified means of overseas investment and integrating “bringing in” and “going out”. The government should actively implement and give priority to major plans at hand, emphasize key projects, further clarify policy guidelines, optimize investment environment, strive to make significant breakthroughs during the Twelfth Five Plan period, constantly improve the overseas security warning mechanism and the security incident response mechanism and resolve all kinds of security issues properly and timely.

Second, accelerate the related legal work. According to the demand of a changing overseas investment environment, the government should make more efforts to study and establish rules and regulations to promote outbound investment and formulate interim regulations concerning overseas investment so as to provide a legal guarantee for regulating and promoting overseas investment while reforming and improving the management system. In February of last year, the National Development and Reform Commission of China decided to entitle provincial development and reform commissions with the power to approve resource development projects that involve more than US$300 million from the Chinese side and non-resource development projects that involve less than US$100 million from the Chinese side. Enterprises directly under the central government began to implement records management system. This is the biggest decentralization move taken by the government since the adoption of reform and opening-up policy. Therefore, the independent decision-making power of enterprises has been enhanced and the government approval procedure has been simplified. We will continue to seek varied ways to streamline the approval procedure.

Third, improve the support system for overseas investment. The government should improve financial and taxation supporting policy for overseas investment, put in place a fund that detect risks for overseas investment, encourage financial institutions with proper conditions to explore various channels such as bank loans, export credit and project financing to give credit support to enterprises investing overseas or overseas investment projects that are encouraged by the government, encourage domestic banks with proper conditions to set up branches or outlets overseas, provide a convenient and sound financial service to enterprises investing abroad, explore new application channels and ways for the foreign reserve, effectively support foreign investment and give full play to the domestic insurance agencies by expanding their underwriting capacity and developing new insurance products with the view to boosting risk resistance capacity of enterprises.

Fourth, properly guide the orientation of foreign investment and provide comprehensive services. In recent years, in order to help enterprises to better understand foreign market and investment projects, the competent departments compiled the System of Reporting Country Investment and Operation Obstacles and released the Foreign Market Access Report as well as Foreign Investment and Cooperation Country(region) Guide. We will cooperate with the competent departments to revise the relevant policies and guidelines that have been released by the National Development and Reform Commission, strengthen the foreign investment guidance, establish a foreign city information service platform by gathering information about domestic and international institutions and enterprises, improve the system of statistics about overseas investment, stress research and analysis about overseas investment developments and trends, speed up customs clearance construction and promote the port customs clearance efficiency, facilitate the import and export of products and equipment related to foreign investment and adopt specific measures to facilitate the exit and entry of people from enterprises investing abroad.

Last, intensify cooperation with key nations and regions. At present, China has entered into over 130 border protection agreements accumulatively and over 90 treaties that prevent double taxation and signed over 80 countries’ business associations that are affiliated to the national chamber of commerce, creating enabling conditions for enterprises to invest overseas. Furthermore, the National Development and Reform Commission has set up a series of bilateral investment promotion and cooperation mechanisms with the national departments and commissions of the People’s Republic of Mongolia, Russia, South Africa, Sweden, Brazil, Venezuela, Australia and Canada, increased communications with relevant government departments, carried forward the implementation of key projects, resolved collaboration problems through coordination and achieved great results. We will continue to establish and improve intergovernmental investment and cooperation mechanisms, intensify bilateral consultation, expand the field for cooperation, oppose any form of investment protectionism and discriminating investment restrictive measures, consolidate and develop long-term and stable investment and cooperation relationships.