As foreign investors pour money into China, the Chinese government is moving to open foreign investment to its nationals.
Wenzhou, a city of about 8 million people in the coastal province of Zhejiang bordering Shanghai, which had 32,595 RMB in per capita gross domestic product in 2009 (about 30 percent more than the national average), announced in January that its citizens and businesses will be allowed to invest up to $3 million U.S. in any single overseas investment and spend up to a total $200 million U.S. each year overseas. They will not, however, be allowed to invest in overseas financial companies.
The move was seen by many, including Bloomberg, as a government trial balloon to ease pressure on inflation and currency appreciation. The reason, despite efforts to cool the economy and dampen inflation using fiscal tools, like raising bank reserve requirements four times in the last few months, a combination of “hot money” flows and rising commodity prices have prevented the moves from working. Allowing direct outgoing investment is seen as another arrow.
In March, the other shoe dropped as the National Development and Reform Commission (NDRC), the country’s top economic planning body, indicated that resource-related overseas investments below $300 million will not need approval from the NDRC.
Kong Linglong, the head of the NDRC’s Department of Foreign Capital and Overseas Investment, said the commission will also exempt non resource-related overseas investments which are less than $100 million. In addition, the NDRC announced that it is working with the Ministry of Commerce to form a new law encouraging Chinese enterprises to invest overseas, Kong told the newspaper. Officials are currently working on drafting a proposal. Analysts speculate that the government may formulate a regulation to promote outbound investments before issuing the law.
What’s so bad about “Hot Money?”
Since 2001, a yearly average of nearly $25 billion has streamed into China in net “hot money” inflows. In 2010, according to a special report issued by the State Administration of Foreign Exchange (SAFE), (February this year) net speculative capital inflows into the country equaled $35.5 billion. While every country is looking to attract foreign direct investment (FDI), large infusions of so-called “hot money” tend to be viewed negatively as they often enter and exit nations swiftly and end up exaggerating economic trends. As the RMB rises and too much money is chasing unsustainable projects, they are seen as a negative destabilizing factor which is driving inflation and bad business decisions.
What does this mean for U.S. businesses?
It could signal a buying spree by Chinese companies and individuals as they seek to diversify their holdings and look for opportunities. Chinese businesses, while they have dominated the original equipment manufacturing (OEM) segments for a number of years, lack IP, brands, distribution and sales expertise. With many U.S. companies in or on the verge of bankruptcy and tight capital markets, the Chinese could become white knights for businesses which might otherwise disappear. There is definite interest, as the surging number of Chinese applying for investor visa status (EB5) attests.
So where is the hitch?
The problem is that, like foreigners who have invested in China, the Chinese are generally unaware and unprepared for the regulatory, legal and cultural systems they confront overseas. While I still hear sad stories from greenhorn foreigners who have invested in China, a new chorus of sad stories told by Chinese individuals and companies, who have invested overseas, is beginning to be just as loud. The short cuts and business practices which propelled their success in China end up being their Achilles heel abroad. There are law firms who are making a business out of suing Chinese companies, listed on foreign bourses, because most Chinese do not take the “full disclosure” requirements seriously. In many instances their business dealing and relationships include a myriad of issues which are not allowed here but which are often taken for granted in China.
Then there are the usual stories of scams and con artists who have bilked them. It seems every week I receive an inquiry about what could be done about some situation. The irony is that I have to tell them the same things I tell foreigners in China: do not leave your common sense on the runway, do your due diligence, there is no such thing as trust when you invest overseas just verification, never make assumptions, learn everything you need to know before you make a decision, the last people you should do business with are generally the first people you meet. Some of the worst scams are those perpetuated by consultants promoting EB5 visas and other investment opportunities. Just because Madoff is in jail does not mean the Ponzi scheme and the charlatan business has stopped. The Chinese are in many senses a conman’s dream.
So as you ponder your moves it may or may not bring you some comfort to know that your opposite number in China faces similar challenges. In any event the Chinese are coming. How it will work, we will have to wait and see.
