January 16th, 2012 | Caixin CIC Vice Chairman： Obstacles to Overseas Investment
China has been involved with making acquisitions abroad for only a short time, but despite several challenges, there are huge opportunities that should be seized
Vice chairman and general manager, China Investment Corporation
Chinese overseas investment has grown from zero before reform and opening-up in the late 1970s into a behemoth today. It is projected that the total will reach US$500 billion during the 12th Five-Year Plan, which covers 2011 through 2015. Chinese companies are an emerging force on the stage of international investments. Due to the immensity of the country’s foreign exchange reserve and its fervent expansion of overseas investments, Chinese investors have had the world’s attention since the financial crisis of 2008. While the movement has gone quite well so far, we still faced many challenges, some external and some internal.
Every nation has laws and organizations to supervise foreign investments. There were two levels of challenges in the supervision realm that Chinese overseas investments faced. The first was that the laws and regulations of some countries are particularly complicated. In those countries, it is easy to wander down the path of illegality if one stops paying attention for even a moment. The second was that some countries put up obstacles to Chinese investments via the legal or supervisory systems because of ideological or political concerns. Another major challenge for China’s new overseas investment drive is a lack of experience.
First and foremost, we lack an understanding of investment products. Many investment products abroad are either completely nonexistent at home or have just emerged, whether they are swaps, hedging or stock index futures. These products or vehicles have grown complex in developed markets. One must be especially competent in handling the technical aspects, for even the slightest misunderstanding could easily result in losses.
We are probably most familiar with direct investments. However, in many countries and in many industries we have no precedent to follow. Our lack of experience exacts greater demands on us in risk management.
The next challenge is a lack of experience in project design, investment structures and negotiations. How can we identify good opportunities, develop projects or find suitable partners? How can we design an effective structure to manage investments, taxes and repatriation of investment income? How can we extract better terms and conditions from negotiations? These questions demand that we respond to the challenges carefully and study diligently. We must also make the utmost use of highly experienced talent – lawyers, accountants and other intermediaries.
Then comes a lack of understanding of foreign cultures and societies. Many investment activities cause cultural or societal friction in target countries. Some countries have developed complex feelings toward China as it has rapidly grown. Many people in those countries (not only supervisory organizations) look at China through culturally or ideologically colored glasses.
The world still hasn’t entirely adjusted to the reality of China’s rise, nor is our rise welcomed everywhere. We must be prepared to encounter some setbacks while we are investing abroad. In addition, the societies and governments of some investment target countries are especially complex. So we must research diligently and find top-notch consultants before investing. It is of the utmost importance that we maintain the stability and safety of investments, and that we avoid passively becoming entangled in local political, economic or social conflicts.
While Chinese investors are making great contributions to the growth and stability of the global economy, we must avoid certain immature attitudes. While it is true that Chinese corporations are becoming a force to be reckoned with in international investment markets, some of our investors put on arrogant attitudes – as though they believed that everybody ought to be seeking them. This attitude is not good for China’s image. It will also negatively affect the investors’ ability to attract opportunities, and in the long term it will harm development potential.
One big difference between Chinese overseas investment and that of developed Western nations is that we lack talent. The West has been involved in overseas investment for several hundred years, so their talent pool is vast. But Chinese efforts have only just begun. One could say that our first generation of investors has just emerged from the clay.
Our greatest challenge is to establish a mechanism to attract talents, retain them and allow talents to rise to their full potential. It’s not enough just to hire them; we must also be able to train them and build a reserve of talented individuals.
These are only a few of challenges facing China as a newbie in international investment. These are all just developmental problems, and we should have faith that we can resolve them. And despite these challenges, many new opportunities are appearing on the international market. For example, some high-quality assets have been devalued due to current market turmoil. Also, some sellers’ urgent need for cash means we can negotiate stellar provisions and agreements that would be difficult to obtain under normal circumstances. As long as we analyze issues scientifically and approach them carefully, we can seize all opportunities and fulfill our fiduciary duty.
By Gao Xiqing