Legal Article in Eurobiz - December 2010 Co-author: Chen Aihua

1. Column • ouTBounD InVESTmEnT
Growth spurt
China's outbound investment is both rising and maturing
By Chen Aihua and Laure Deron
I n the last two years, the development
of Chinese outbound direct invest-
ment (ODI) has stepped up signifi-
cantly. This is partly because policy-mak-
ers swiftly adapted the legal framework,
ODI among 7,000 Chinese enterprises
in 2007. As such, China is now the fifth-
largest global investor, up from its 12th-
place ranking two years ago.
Some of the ODI comes from private-
allowing the country's massive €1.8 tril- owned enterprises which invest abroad
lion of foreign reserves to be utilised at a with business-driven agendas – such
time when many economies are under a as developing new markets or seeking
capital crunch. lower production costs. Many expect, for
China delegated the authority to ap- example, that recent workers' demands
prove outbound investments to the Min- will eventually lead to an increase in
Chen Aihua is an istry of Commerce's (MOFCOM) provin- wages and production costs in China.
associate at Gide loyrette cial agencies, and refined guidelines for According to a Nottingham Universi-
nouel in Beijing. Her administrative procedures in 2009. Reg- ty study, private firms that lack access to
specialties include mergers ulatory conditions were widened, allow- state-backed credit channels are invest-
and acquisitions, foreign
ing foreign currency to be released for ing overseas to take advantage of funds
direct investment and
overseas investment and financial tools in international capital markets. Green-
corporate law.
– such as the credit-support mechanism, field investments, with their ensuing de-
or the reimbursement of incurred fees in velopment of sales channels abroad, are
certain strategic industries – to be more preferred methods of investment.
readily available. At the same time, Chinese companies
Although fewer regulations were im- are increasingly willing to embark on
posed in 2010, several government agen- global mergers and acquisitions (M&A).
cies reaffirmed their willingness to help This is a result of their growing experi-
Chinese companies invest abroad. The ence and a move away from some of the
State Administration of Taxation, for rigid management methods that led to
example, announced some measures to high-profile failures. Chinese electron-
adjust tax policies, standardise tax pro- ics manufacturer TCL, for example, lost
cedures and strengthen tax treaties. In €150 million as a result of its acquisition
October 2010, the State Administration of Thomson Electronics.
Laure Deron is an
of Foreign Exchange also launched pilot Companies in China now pay great-
associate at Gide loyrette
nouel in Beijing. She is
policies in selected provinces that al- er attention to post-deal management.
a member of the Paris lowed export earnings to be deposited in There is greater emphasis on integrat-
Bar and her practice overseas bank accounts, instead of being ing the target company by keeping the
mainly focuses on foreign repatriated to China. local team and using professional advi-
investment, international sors throughout the process. As one CEO
restructuring, and mergers Making changes said to us before signing the agreements
and acquisitions. The result of these changes have been for an important acquisition: "We don't
impressive: MOFCOM figures show want a situation where we purchased a
that China's ODI totalled €41.6 billion reputable restaurant but could not retain
in 2009, while 12,000 Chinese enter- any of the good cooks."
prises invested in 177 nations and re- The increase in M&A transactions is
gions worldwide. This is a substantial mostly a result of a massive flow of state-
increase from the €19.5 billion of total driven ODI. The above policies have par-
26 December 2010 | EuroBiz

2. ticularly benefited state-owned enter- ernment on Rare Earth Elements
prises, which form the vast majority (REE) initiated at the end of 2009
of China-based multinationals and created fears that China will manage
overseas investors. Their main moti- its strategic assets in an increasingly
vation for going global is usually to protectionist manner. The shortage
acquire strategic assets like valuable in REE could further weaken produc-
technology, knowledge and access to tion companies abroad, resulting in
natural resources. a greater number of available targets
for Chinese ODI willing to trade a
Target regions guaranteed source of supply for a
Asian countries are the preferred des- Chinese stake.
tinations for ODI. However, accord- China's business community, which
ing to a recent KPMG report, large prioritises economics and not politics,
companies with annual revenues of reliable regulatory environment. is aware of European concerns over
more than €110 million are also look- The noticeable rise of China as the sudden increased inflow of Chi-
ing to Europe for future investments. a key world investor has been met nese capital. The country's outbound
In the EU, the China Council for the with mixed feelings. For example, investors are therefore anxious to be
Promotion of International Trade some argue that the recent signing seen as willing to learn from past mis-
found that Chinese investors mainly of a protocol to stimulate Chinese takes, demonstrated by management
target Germany, France and the Unit- investments in Greece is an attempt improvements and a willingness to
ed Kingdom. That said, they realise by China to use its financial might to adapt to local environments. Mean-
that more recent member states also garner EU support for the country's while, China's business leaders aim
provide opportunities by granting global political ambitions. for sustainable development – all
easier access to a unified market with At the same time, the tightening the while hoping to alleviate worries
a single currency and a highly-valued of export rules by the Chinese gov- about their global ambitions. ■
EuroBiz | December 2010 27