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Chinese firms' growing ODI offers opportunities

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While the past decade was the period that saw a huge inflow of foreign investment into China, the coming 10 years are certain to herald a wave of outbound direct investment by Chinese companies.

Although some people have expressed doubts over the intentions behind Chinese companies' overseas investment, a number of examples show that these projects create win-win benefits.

Huang Bao'an, administrative vice-president of Qingdao Kingking Group, the world's second-largest candle maker, has been traveling around the world since early this year, from Africa to Europe, to see whether there are business opportunities amid the spreading European debt crisis.

"We plan to invest $100 million to develop gold and copper mines across the world in the next three years", with Africa being a priority, he told China Daily.

Due to the debt woes, "many European companies, which own energy projects in Africa, are finding it hard to survive and are considering halting or withdrawing their investments. This has given Chinese enterprises huge opportunities to invest abroad and develop natural resources", he said.

As part of the expansion, Kingking, based in the coastal city of Qingdao in Shandong province, is considering buying a gold mine in Mozambique, covering more than 100 square kilometers.

While the European debt crisis worsens and the global economy remains sluggish, developed economies are committed to economic stimulus, while developing economies are boosting their spending on infrastructure construction.

"This offers Chinese companies new opportunities for overseas investment," said Wang Shengwen, deputy director-general of the Department of Outward Investment and Economic Cooperation at the Ministry of Commerce.

Chen Runyun, commercial counselor at the department, agreed.

"China's ODI is still in the initial stages, but the growth trend is clear. ODI is on a fast-growth track which will probably continue for some decades," Chen said.

Due to the global financial crisis, foreign direct investment worldwide has been weak since 2008, but China's outbound investment has grown.

In 2010, China overtook Japan and the United Kingdom to become the fifth-largest global investor. China was the largest investor among developing economies in 2010 and 2011.

The nation's ODI grew 1.8 percent year-on-year to $60 billion last year.

And the trend is set to get even stronger.

A recent statement from the ministry said that ODI is expected to register an annual growth rate of 17 percent from 2011 to 2015, reaching $150 billion in 2015.

Kingking's expansion plan comes after a series of purchases in the United States since the outbreak of the global financial crisis.

In January 2009, the company bought 9 sq km of oilfields from the US State of Oklahoma, the first time a Chinese company bought oilfields in the United States. Later, the company purchased six oilfields covering 290 sq km in the US states of Texas and Louisiana.

"Our success in the US could be attributed to the global financial crisis, which caused problems for energy companies and also forced the US government to loosen investment restrictions on M&A deals," Huang said.

During the past few years, the Chinese government has stepped up its efforts to encourage Chinese companies to expand overseas.

In 2011, in his annual Government Work Report, Premier Wen Jiabao, for the first time, prioritized boosting the nation's ODI over absorbing FDI.

Expansion: More companies opt for M&As

In his 2012 Government Work Report, Wen also emphasized the point, saying that China will encourage enterprises to buy, invest and merge in key sectors overseas, including energy, raw materials, agriculture and manufacturing, the first time that specific sectors were included in such a report.

Considering many factors, including the Chinese government's positive attitude and the large volume of foreign exchange reserves, "the high growth trend (of Chinese ODI) is irreversible", said Jessie Tang, a partner at Jones Day's Beijing office.

Jones Day is the world's eighth-largest law firm in terms of revenue that specializes in mergers and acquisitions.

"There are many driving forces behind the surge," she said.

"Chinese enterprises either want commodities, markets, technology or brands, or simply expand their business overseas and create jobs to fend off growing trade protectionism."

M&As represent a growing trend in Chinese ODI, which had previously been dominated by investment in greenfield sites, including new factories or new infrastructure.

Last year, 37 percent of Chinese ODI by value was realized through M&As, in the mining, manufacturing, transportation and retail sectors.

"The energy and mining sectors will be the major focus of M&A activity," said Li Tong, executive director of the China Enterprise Forum.

Win-win benefits

Gerald Lyons, Standard Chartered Bank's chief economist, said that "we are going from made-in-China to bought-by-China".

In addition to China Investment Corporation, China's sovereign wealth fund, the State Administration of Foreign Exchange has also been active overseas through its investment arm, Safe Capital, which owns at least $300 billion in overseas assets.

And the State-owned Assets Supervision and Administration Commission has been given around $10 billion to support Chinese outbound investment.

But the motivation of Chinese companies and investment institutions has been frequently misunderstood and challenged by some foreign governments and institutions, who claim that Chinese companies are grabbing assets around the world.

"Many people are willing to claim that Chinese companies are investing for some political purpose or with evil intentions, but they are wrong," said Chen.

"They always have their own business considerations. They do it either to expand their market and obtain know-how or to obtain resources China needs. And what is more important is that many Chinese investment deals are warmly welcomed by foreign countries amid the debt crisis."

Huang agreed. "Our projects abroad create numerous jobs, injecting capital and vigor into local economies," he said.

Kingking's operations in Vietnam are a good example of this.

Early in 2006, the company was granted approval to establish a wholly owned subsidiary and factory in Vietnam to make high-end candles, with an initial investment of $2.8 million.

In 2009, Kingking invested a further $15.8 million to expand the plant's capacity.

"Our factory in Vietnam employs more than 1,000 local people. It exported candles worth $26 million and generated tax revenue of around 8 million yuan ($1.26 million) in 2011," Huang said. "It's not a small contribution."

Kingking is not alone. Especially due to the financial crisis and debt problems in Europe, many companies in developed economies are on the brink of bankruptcy and struggling for capital. As a result, Chinese investments are a boon to them and inject dynamism into the local economy.

In November 2008, COSCO Pacific, China's State-owned container operator, agreed to invest 620 million euros ($740 million) to upgrade an existing terminal at Piraeus port in Greece, and build a new facility to handle larger ships capable of carrying 10,000 TEUs (20-foot equivalent units), in a bid to boost trade with emerging markets around the Black Sea rim.

Due to limited handling facilities and poor labor relations, Piraeus Port Authority, the state-controlled operator, had struggled to attract international container companies.

But Wei Jiafu, chairman of COSCO Group, said "we are in Greece for the long term".

COSCO will operate both terminals under a 35-year concession agreement with the Greek government, tripling its annual capacity to more than 3 million TEUs and creating up to 1,000 jobs.

In the months after the deal was signed, there were many strikes initiated by the port's trade union, and the local workers expressed their misgivings about COSCO's investment, Wei said.

The COSCO chairman said he went to the port many times to tell the workers that the company's investment was in their interests. He said the pledge he made to them to create more jobs and employ a high proportion of local workers brought an end to the strikes.

While the company has around 200 employees in Greece, only seven managers are Chinese.

Tang from Jones Day said "a lot of cases speak well about the positive impact that Chinese companies exert on local economies".

As the nation's ODI surges and spreads to more regions worldwide, establishing a sound reputation in foreign countries and having good communication with local people have become pressing tasks for Chinese companies. The Chinese government has also recognized the importance of this.

In May, cultural guidelines were released by six ministries and bureaus, including the Ministry of Commerce. The guidelines cover how Chinese companies doing business overseas should deal with differences in languages, customs, values and religious beliefs, and emphasized the importance of job creation and corporate social responsibility.

"Chinese outbound companies need to strengthen their soft power" to get assimilated into foreign markets and make themselves acceptable to local people, said Zhang Guoqing, deputy director of the ministry's department of policy research.

Investing in Europe

Asia, Europe and Africa are the top three destinations for China's ODI. But since the European debt crisis broke out, Europe has led the growth and will probably continue to do so.

In 2011, China's investment in the European Union jumped by 94 percent year-on-year to $4.28 billion. In Africa it increased 59 percent year-on-year, compared with the 1.8-percent growth in the nation's total ODI during the same period.

Recent research by the consultancy Rhodium Group and China International Capital Corporation showed that China's investment in Europe increased by as much as 200 percent last year to $10 billion.

China's investment scale is still quite small, but the nation is set to accelerate its overseas investment, and debt-stricken Europe will be a most attractive market for Chinese companies, the report said.

By the end of 2020, China's investment in the region will range between $250 and $500 billion, it predicted.

A recent example is Chinese construction equipment maker Sany Heavy Industry Co Ltd's announcement that it will pay 324 million euros ($426 million) for a 90-percent stake in Putzmeister, Germany's largest concrete pump maker.

"In the past, we had few Chinese clients, but the figure is growing, despite the high fees," said Tang from law firm Jones Day

"Africa, Latin America and Australia are their focus," she said. "But Europe also interests them greatly."

Since the second half of last year, Chinese officials have repeatedly said the European debt crisis provides huge opportunities for Chinese companies aspiring to invest overseas.

Premier Wen Jiabao said during his meeting with German Chancellor Angela Merkel early this year that China has neither the intention nor capability to "gobble up" the region.

During the past few months, many top Chinese leaders, including Wen and Vice-Premier Li Keqiang, paid official visits to a number of European nations, highlighting the importance that the Chinese government attaches to the debt-stricken continent.

During his 10-day official visit, Li witnessed the signing of a series of investment deals between China and European nations including Russia, Hungary and Belgium.

And in Belgium, China Investment Corporation, the nation's sovereign wealth fund, launched a mutual fund, the China-Belgium Mirror Fund, with a local investment company to help Chinese companies boost their investment in Belgium and throughout the European Union.

"Belgium will become a very important platform for Chinese companies to expand in all 27 member countries of the EU," said Li.

Hurdles ahead

China's overseas investment, by the end of 2010, mainly went to the manufacturing, retail, wholesale, commercial services and mining industries.

But Chinese enterprises are diversifying their overseas investment into industries such as culture.

In May, Dalian Wanda Group, China's largest entertainment group, agreed to buy AMC Entertainment Holdings Inc for $2.6 billion including debt, in a bid to expand into the US. The deal marks the largest-ever buyout of a US company by a Chinese firm, and also made Wanda the second-largest cinema operator in North America.

Although many foreign countries welcome Chinese investment, especially since the outbreak of the global financial crisis, there are still various restrictions.

Huawei Technologies Co Ltd, China's leading telecom infrastructure provider, early this year missed out on building a national broadband network in Australia after the Australian government said it had a responsibility to protect the "integrity" and information security of a "strategic and significant government investment".

Justin Knapp, director of China Outbound Practice with Ogilvy Public Relations in Beijing, said "there are two important lessons" for Chinese companies facing restrictions in the US.

"First, Chinese companies should avoid politically sensitive acquisitions in the US and consider pursuing minority stakes of solicited assets in a non-aggressive public manner. Second, Chinese companies must leverage non-government, third-party associations as much as possible to influence the US government and local communities in which they seek to invest," said Knapp.

Chen from the Ministry of Commerce agreed. "Chinese enterprises own capital, capacity and technology, but what is weak is their cultural responsibility and corporate social responsibility.

"China's ODI growth cannot be sustained if this problem is not solved."

Chen said many Chinese companies that own overseas business have set good examples.

Fujian-based Licheng Garment Co, which has a factory in Bangladesh, employs about 8,000 local workers. Every year, the company invests 5 percent of its profits in charity projects, including donations to schools and temples, said Chen.

Michel Wormser, vice-president and chief operating officer of the Multilateral Investment Guarantee Agency of the World Bank Group, said it is very important to create benefits for local people and local communities.