Chi­nese en­ter­prises are set to see record over­seas ex­pan­sion

China Daily (Canada) - - CHINA - By LI YANG in Shang­hai liyangi@chi­nadaily.com.cn

This year will be a mile­stone year for Chi­nese en­ter­prises’ over­seas ex­pan­sion with an un­prece­dented rise in over­seas in­vest­ment and merger, an­a­lysts pre­dict.

Chi­nese en­ter­prises made 92 over­seas pur­chases in the first quar­ter of this year, among which 63 dis­closed their prices with a to­tal trade price of $36.8 bil­lion, ac­cord­ing to re­search by Morn­ing Whis­tle, a Shang­hai-based fi­nan­cial con­sult­ing agent.

Al­though, Chi­nese eco­nomic growth slowed down last year, China’s for­eign-bound in­vest­ment ex­ceeded $100 bil­lion, up 21 per­cent yearon-year. Last year, Chi­nese en­ter­prise spent $51.4 bil­lion on merg­ers with for­eign en­ter­prises, a 50 per­cent in­crease from the pre­vi­ous year.

China is now the third­largest for­eign-bound in­vestor in the world. By the end of 2013, China’s ac­cu­mu­lated over­all in­vest­ment out of its borders has hit $630 bil­lion.

In the past few years, Chi­nese en­ter­prises’ over­seas pur­chases and merg­ers grad­u­ally changed to higher-end man­u­fac­tur­ing and hi-tech in­dus­tries from en­ergy and min­ing en­ter­prises.

Chi­nese man­u­fac­tur­ing ca­pac­ity ex­ceeds 50 per­cent of the global to­tal in many fields. But most of the brands, core tech­nolo­gies and re­search and de­vel­op­ment ca­pac­i­ties are still held by for­eign en­ter­prises.

Fierce price com­pe­ti­tion at home brings about se­ri­ous over­ca­pac­ity for some in­dus­tries, which used to be of vi­tal im­por­tance to the Chi­nese econ­omy and job mar­kets.

Pur­chas­ing for­eign en­ter­prises is the fastest way to by­pass the dead-end price com­pe­ti­tion and move higher in the value chain of Chi­nese en­ter­prises.

The other change is that more pri­vate en­ter­prises are pay­ing more at­ten­tion to over­seas than home.

Do­mes­tic pri­vate-eq­uity firms and cheaper over­seas fi­nanc­ing make pri­vate Chi­nese en­ter­prises com­pe­tent bid­ders in the global mar­ket. They are more flex­i­ble and more sen­si­tive to mar­ket changes than State-owned en­ter­prises.

En­ter­prises from Shang­hai are an ex­am­ple. Their over­seas in­vest­ment hit $2.1 bil­lion last year, ac­count­ing for 48.5 per­cent of the over­all in­vest­ment of Shang­hai firms.

Apart from the man­u­fac­tur­ing in­dus­tries, pri­vate Chi­nese real-es­tate de­vel­op­ers also show strong in­ter­est in buy­ing land and houses abroad, us­ing the huge prof­its they earned at home.

The ap­pre­ci­a­tion of ren­minbi and the com­par­a­tively lower price of over­seas as­sets are two im­por­tant fac­tors lur­ing Chi­nese real-es­tate firms to for­eign coun­tries, es­pe­cially the big cities of the de­vel­oped coun­tries.

Green­land Group, one of the largest Chi­nese real-es­tate de­vel­op­ers from Zhe­jiang prov­ince, said it in­vested more than $10 bil­lion this year in the for­eign mar­ket, or 40 per­cent of its over­all sales rev­enue last year, and its an­nual sales rev­enue from for­eign mar­ket will ex­ceed $3.3 bil­lion this year.

Zhang Yu­liang, pres­i­dent of Green­land, said in a fo­rum held by the 21st Century Busi­ness Herald in Shang­hai: “If an en­ter­prise can­not al­lo­cate re­sources and par­tic­i­pate in global com­pe­ti­tion in the world, it can­not be a first-class en­ter­prise. Now is a rare strate­gic pe­riod of op­por­tu­ni­ties for Chi­nese en­ter­prises to en­ter the for­eign mar­ket, be­cause the per­for­mance-price ra­tio of many for­eign as­sets is more com­pet­i­tive than the do­mes­tic mar­ket.”

Chi­nese en­ter­prises fo­cus more on buy­ing high tech­nolo­gies that can ben­e­fit them­selves in the long run, than only ac­quir­ing stock own­er­ships.

This round of over­seas merger and in­vest­ment did not come by ac­ci­dent. China had only four en­ter­prises in the world’s top 500 com­pa­nies in1994, and now has 95. The trans­for­ma­tion of eco­nomic struc­ture and the up­grad­ing of in­dus­tries in China force the en­ter­prises to ac­quire more ad­vanced tech­nol­ogy, bet­ter man­age­ment, mar­ket­ing sys­tems and brands as soon as pos­si­ble.

China’s fast eco­nomic growth has in­creased Chi­nese en­ter­prises’ pur­chas­ing ca­pac­i­ties. Mean­while, the re­ces­sion and debt cri­sis in de­vel­oped coun­tries have cre­ated con­sid­er­able dif­fi­cul­ties for some small- and medium-sized com­pa­nies.

The Chi­nese govern­ment ac­tively en­cour­ages do­mes­tic en­ter­prises to ex­pand glob­ally.

Af­ter the Chi­nese lead­ers made the com­pre­hen­sive plan of deep­en­ing re­forms last Novem­ber, the govern­ment has con­tin­u­ously sim­pli­fied its for­eign ex­change ad­min­is­tra­tion and project ap­proval pro­ce­dures for over­seas in­vest­ments and merg­ers.

That the govern­ment en­cour­ages pri­vate cap­i­tal to in­vest in some SOEs to pro­mote the de­vel­op­ment of mixed own­er­ship en­ter­prises com­bines the strengths of pri­vate firms and SOEs in in­ter­na­tional mar­ket.

Apart from the United States and Europe, South Amer­ica and South­east Asia has also be­come in­creas­ingly pop­u­lar among Chi­nese buy­ers and in­vestors, be­cause of strong de­mands and Chi­nese brands’ in­flu­ence in those ar­eas.

De­spite this, the Chi­nese en­ter­prises must be aware of the po­ten­tial risks in buy­ing for­eign as­sets.

Lu Jun, an en­ter­prise fi­nanc­ing and merg­ers part­ner with the Price water­house Coop­ers (China), be­lieves Chi­nese en­ter­prises should first have the abil­i­ties to re­vi­tal­ize for­eign com­pa­nies be­fore buy­ing them.

“The pur­pose is not buy­ing a com­pany, but us­ing its tech­nol­ogy, mar­ket­ing sys­tems and brands,” Lu said. “Chi­nese buy­ers should look for the fittest tar­get firms, but not the most fa­mous ones.”

Farhad Jali­nous, a vet­eran lawyer with the law firm Kaye Sc­holer LLP, thinks that the most fun­da­men­tal as­pect to a suc­cess­ful Chi­nese in­vest­ment in the US mar­ket is care­ful plan­ning.

“It is clear that there has gen­er­ally been height­ened sen­si­tiv­ity with Chi­nese trans­ac­tions, but it is also quite ev­i­dent that the US mar­ket is not closed off to Chi­nese in­vest­ment,” Jali­nous said.

He said Chi­nese en­ter­prises should care­fully study rel­e­vant laws and reg­u­la­tions and de­velop a strat­egy to min­i­mize the risk of trans­ac­tion fail­ure due to US na­tional se­cu­rity con­sid­er­a­tions.

In 2012, ac­cord­ing to data, China over­took the UK for the first time with the largest num­ber of trans­ac­tions.

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