Dr. Gang Yi, Vice President of the People’s Bank of China, first analyzed the current situation and trend of Chinese enterprises going abroad then drew conclusions from international experience and typical Chinese cases. Based on his analysis and conclusion, Dr. Yi illustrated the support provided by Chinese macroeconomic policy and foreign exchange policy for Chinese enterprises to go abroad, proposed the principles that enterprises should follow when entering overseas market, and emphasized the importance of keeping an even mind during the process of going abroad.
Since the reform and opening-up of China, the history of Chinese enterprises going abroad can be basically summarized into three stages. Between 1984 and 2000, China was in a stage of importing foreign enterprises. The scale of Overseas Direct Investment (ODI) was relatively small, and the accumulated investment of Chinese enterprises in foreign markets was less than $30 billion. Since 2001, China entered the second stage prior to the financial crisis by making going abroad as a national strategy. During this stage, China entered the WTO so that the ODI of China increased dramatically. As the global economic crisis in 2008 had caused a general decline in the evaluation of foreign assets, Chinese enterprises saw the best opportunity to enter global markets. Since 2008, the third stage of Chinese enterprises going abroad was characterized by a significant increase in ODI. The scale of ODI in 2008 exceeded the combined scale of ODI between 1980 and 2005. However, despite of the scale that China had recently established, Chinese enterprises, as late comers, had already fallen behind enterprises of the developed countries such as the US, UK, and Germany, in terms of capital flow and capital stock.
Although China has fallen behind many of the long-established developed countries, according to the theories of John Dunning (1981), a British economist, there still exist a large potential for Chinese ODI to increase. Dunning had divided the growth of overseas direct investment into four stages. A country with high per capita GDP usually has relatively large ODI. China, with its current per capita GDP of $5414 (netting the impact of inflation), is at the Dunning’s third stage. During this stage, China has seen a significant increase in its ODI and will have a great potential for growth. In the meanwhile, the current economic and financial situation has provided a relatively favorable environment for Chinese enterprises to go abroad. This favorable situation is possible because the valuation level in global developed market economy has been relatively low. Although ODI does not directly go into the foreign stock markets, the ODI for merge, reconstruction, or new projects are all connected to the valuation level.
As industrial upgrade and structural transformation continues, Chinese enterprises will focus on attaining advanced technologies and brands, entering foreign markets, and integrating industry chain. The process of going abroad will transform from the demand of singe resource to multiple targets. Although the return on domestic investment is relatively high in China, it is still necessary for Chinese enterprises to go abroad when analyzing from the perspectives of comparative advantage, spread of risk, hedge risk, integration of industry chain, and etc. For example, China has comparative advantage and large competitive advantage in construction of infrastructure.
In terms of the regions that Chinese enterprises have yet entered when going abroad, the first most popular destination is usually Hong Kong. Most of the transactions in overseas acquisition of Chinese enterprises take place in Asia (along with Australia). According to the distribution of transaction amount in foreign acquisition by Chinese enterprises in 2010, 59% of the total transaction amount takes place in Asia, 25% takes place in North America, 10% takes place in Europe, and 6% of the total transaction takes place in Africa and South America. The future Chinese overseas acquisition will continue to increase in various regions of the world. Chinese enterprises will compete against enterprises that own advanced technologies and large brands in European and American markets.
In China, the main force of overseas investment has been state owned enterprise. By the end of 2010, 66% of the non-financial stock of FDI has come from state owned enterprises. In terms of overseas acquisition, 1/3 of the acquisitions and 80% of the total transaction amount come from state owned enterprises. In the future, the growth of private business in China will increase substantially, and their performance in competitiveness and growth rate will be outstanding.
Japan, the United States, and Germany are countries with long-established overseas business. Their experience is meaningful to the development of Chinese overseas investment. Since World War II, the development of Japanese economy can largely divided into three sections. From 1950s to 1970s, Japan was in a stage of economic recovery; the nominal GDP of Japan increased rapidly, and its average growth rate was about 15.8%. At that time, Japanese enterprises had not gone abroad. Between 1970s and early 1990s, Japan’s per capita GDP went over $3,000, entering the rank of medium-income developed country with a nominal GDP growth rate of 7.7%. In the meanwhile, the domestic economic growth rate of Japan had gradually slowed down. After the Plaza Accord, yen experienced large scale of appreciation, and Japan’s ODI increased substantially. Therefore, since 1985, Japan had been in an active position to help its enterprises going abroad. Starting from 1990s, the Japanese economy entered a long-lasting depression, while its nominal GDP growth rate averaged around 0.1%. So far, Japanese enterprises are still relatively strong and successful in global markets. They have learned lessons from their failure and experience from their success. For example, the Mitsubishi Group of Japan purchased the Rockefeller Center but was soon forced to sell it back to the original owner with only half the price. Another example would be the success of Mitsui Property in integrating its industry chain and executing the strategy of going abroad with minority investment.
The United States has the largest international business and occupies the leading position in global capital stock and capital flow. At the same time, US enterprises tend to take their development strategy very seriously, disregard short-term interest during exploitation of international markets, and strictly demand protection of intellectual property. The overseas investment of Germany mainly focuses on manufacturing industry and developed countries. The overseas investment of German enterprises share the following features: most of their investment is consisted of equity capital; ratio of corporate leverage is relatively low; investment projects have high percent stock holding; over 70% of investment is funded by sole proprietorship; large enterprises and projects have absolute advantages. In the US, Germany, and Japan, there are banks, financial organizations, and government to provide the enterprises with financial support.
Among the classic cases in China, Lenovo, Geely, and Zoomlion are relatively successful cases, while Ping An of China, CRCC, Saic Group, and CITIC Pacific have experienced failure. Most the cases of failure are resulted from overly optimistic predictions about the future earnings, lack of comprehensive understanding of local juristic and environmental regulation, lack of knowledge about the demand of local people, and underestimation of risk. There are numerous risks that an enterprise will be facing when going abroad. These risks include macroeconomic risk, government risk, industrial risk, microeconomic risk, operating risk, transaction exposure, subsequent risk, and etc. When the international business of Chinese enterprises is involved in resource trading, we need to consider our cost and benefit as well as regulations of international markets and local governments and try to avoid sensitive political topics.
Currently, China has adopted policies to provide enterprises that are going abroad with support. This support includes providing convenience for enterprises in exchange control of ODI, eliminating exchange limit of ODI, implementing registration management, offering the same conditions of exchange with FDI, and equalizing offers toward state owned enterprises and private enterprises. Most importantly, the Chinese foreign exchange surrender and purchase system (FESPS) has been abolished. This transition can be roughly divided into several stages: before 1994, China performed overall management of economic plans, tightly controlling foreign exchange purchases and sales; after 1994, China established FESPS; since December 1, 1996, China allowed exchange in current account; in 2001, China gradually loosened its control on foreign exchange; in 2007, FESPS was officially removed; in 2008, China revised its statute for foreign exchange regulations, ending FESPS from legal standpoint; since 2009, Chinese government carried out a thorough review of current administrative rules and regulations, abolishing over 400 regulations. Since 2005, the rapid increase in foreign reserve has indicated that Chinese people and enterprises are selling their dollars voluntarily when they have anticipated the raise of exchange rate of RMB. When logistic companies go abroad, China can use multilateral development platforms and investment from multilateral development organizations to reduce sensitivity of certain issues.
During the conference, Gang Yi concluded the principles that enterprises going abroad should follow. Firstly, enterprises that are going abroad should keep moving toward marketization, observe market rules, and make money with their capital. Secondly, enterprises should clarify ownerships of property right and responsibilities, establish effective incentive mechanism, perfect institutional structure, and prevent from moral risk. Thirdly, enterprises should be able to undertake reasonable financial expenses and ensure sufficient cash flow to cover their cost. Reasonable cost can be used to identify high-quality projects, ensuring sustainable foreign investment economy and improving the efficiency of utilization and distribution of funds. Enterprises should keep sufficient cash flow to ensure liquidity safety. Fourthly, enterprises need to ensure the security of their account assets and fair return, and establish reasonable exit mechanism. Fifthly, enterprises should strive to solve the issues including social responsibility,
environmental protection, public welfare, corporate image, employee training, and local employment. Lastly, enterprises should be especially cautious about security of foreign investment. They should carefully evaluate geopolitics, coup, terrorist attack, pirates, abduction, and other risks.
Overall, we are facing a huge opportunity. However, enterprises need to keep an even mind when evaluating the risks that will come along with this opportunity before going abroad. By keeping an even mind, enterprises should be calm and steady when making business decisions. They should consider all the potential risks and enter the global markets step by step according to the market rules. If the Chinese government will be able to adopt appropriate policies, we will have a relatively long period of strategic opportunity. Therefore, we should not rush it, we should not pursue short-term interest, and we should calmly go abroad.
（Written by Jun'an Zhou, Translated by Ricky Binhai Hu)
