MAN OF VISION: John Gruetzner, Vice Chairman of Intercedent Ltd., has been in China for 25 years and is the right person to speak on the topic of China’s overseas investment

SHI GANG

Canada was considered the most open economy in terms of investment environment by Chinese enterprises, according to a survey conducted by the Asia Pacific Foundation of Canada and China Council for the Promotion of International Trade in 2006.

By now, most Chinese investments in Canada were in the resources and mining sectors. According to the survey, most of the Chinese enterprises reviewed have an interest in Canada because of an easy access to the United States and other major markets, the high-quality living environment, and a rich and reliable supply of energy and resources.

But factors such as a relatively small domestic market, and high corporate taxation and capital cost-as well as low return on investment, were regarded as disadvantages that will discourage Chinese enterprises from investing in Canada.

A roundtable themed on "Opportunities and Challenges for Chinese Companies Investing in the Resources Sector in Canada," to promote effective communications between both sides was held in Beijing on March 28. The Canada-China Business Council (CCBC) and Beijing Review jointly sponsored the seminar. Participants include a researcher with the Ministry of Commerce (MOFCOM), professors from the University of International Business and Economics (UIBE), lawyers, and representatives from consulting companies and investment banks.

The challenges discussed included: conducting a thorough and comprehensive market research, designing practical strategies tailored to Canadian markets, selecting managers who can be effective in Canada both culturally and operationally, getting familiar with differences in the culture, political and legal systems of the two countries, and building a good image in media and promoting strong public relations.

Of all these challenges, John Gruetzner, Vice Chairman of Intercedent Ltd., believes to find the right consulting services or the right local partner to get the right information might be a "lesson in less" for many Chinese enterprises to carve a story of success elsewhere.

Mutual benefits

Zhou Mi, a researcher with the Chinese Academy of International Trade and Economic Cooperation (CAITEC), offered a glimpse of the general situation of China's overseas investments while making the opening speech. CAITEC is the only research organ under the MOFCOM in China focusing on overseas investments by Chinese enterprises.

"The role of government is to help enterprises in planning their overseas strategies and get them better informed," said Zhou.

He summarized a number of features of China's overseas investments at this primary stage and thought the "going abroad" strategy was a result of global industrial transfer trend.

China's investments overseas comprise a small proportion of the aggregate foreign direct investment worldwide, though China has seen high growth in the past few years, said Zhou. About 40 percent of these investments went to the mining industry in 2006. Many of these investments were unsuccessful because the companies were not experienced in operating business in a different context and lacked a good knowledge of risks.

Sensitive as they are, Zhou contended, resources and energy are commodities, and should not be treated as a political item. Chinese-Canadian cooperation in the resources sector will allow both sides to achieve mutual benefits.

Effective communication

Lan Qingxin, a PhD in economics from the UIBE, analyzed the motives of Chinese enterprises investing abroad and the industries they prefer.

"Some companies in labor-intensive industries transferred their factories overseas to keep their comparative competitiveness as the supply has exceeded the demand in China," said Lan. "That's the most common motivation for Chinese investment overseas."

BRAINSTORMING: Researchers, officials and representatives from consulting companies are discussing Chinese investments in Canada

SHI GANG

Lan also pointed out Chinese enterprises usually look for countries of similar cultural background to invest in. That explains why a majority of Chinese enterprises prefer Southeast Asian countries to European or American countries, said Lan.

Julie Zou, Manager of the Tax and Business Advisory Services of the Beijing branch of Deloitte Touche Tohmatsu CPA Ltd., found inefficient communication had prevented some Chinese enterprises from seeking for an oversea IPO because they failed to make their stories of success understandable and acceptable to foreigners.

Zou wondered if there are any measures to ease their worries in looking for professional help from consulting agencies.

Chinese enterprises are still on their way toward learning to trust and make good use of their advisors. Also, working closely with these experts, Chinese companies can absorb a great deal of information about the Canadian market, said Zou.

Angelo Zia, Co-Director of the CNPC-Alberta Petroleum Center, a service organization jointly set up by China National Petroleum Corp. and Government of Alberta, Canada, said Chinese enterprises are facing increasing pressures from getting listed domestically, not financing on any overseas market, because of China's huge forex reserves. Besides, stock exchanges in the United States, Canada and UK don't recognize the H-shares, which are incorporated in China and traded on the Hong Kong stock exchange.

Robert Y. Kwauk, Chief Representative of the Beijing office of Blake, Cassels & Graydon LLP, one of Canada's leading law firms, said Canada has a Foreign Investment Review Act that stipulates acquisitions worth more than 290 million Canadian dollars ($245 million) have to go through the government's review process.

The only consideration for the Canadian Government in approving foreign direct investments is whether they harm "national interests," while in the United States it is "national security," and any project involving national security, infrastructure, defense industry and resources goes into that category.

If the investor is a state-owned enterprise from China, a hearing will be held on if they will run the company in conformity to the market economy practice, said Kwauk.

Kwauk also pointed out the difference between the media in China and that in Canada. The media in China is self-restrained and follows the mainstream voice, but in Canada, the media always stands by the side against the mainstream, said Kwauk. Chinese enterprises that want to invest in Canada will get some idea about what they are worried about, their needs and even their conditions, from local reports.

In this sense, it is helpful for the Chinese side to work out acceptable terms to smooth the deal, said Kwauk.

Slow the pace

Feng Pengcheng, Director of UIBE's research center on multinational corporations, compared Chinese enterprises joining in the craze for overseas investments to lemmings that jump willy-nilly into the sea and drown.

"It's not a good sign that major offshore investments were conducted by state-owned enterprises, especially when the financial sector was moving quickly to invite strategic investors from outside China for a public listing in 2007."

Feng didn't think acquisition is a good choice. He was increasingly worried as many of the deals, usually in companies operated at loss or nearly bankrupt, had proven unsuccessful and have already threatened the financial security of China.

CCBC Vice Chairman Gruetzner warned that Chinese companies might repeat the mistakes Japanese companies made in their resource strategies decades ago.

"When the Japanese went into the United States, the beginning was hot," said Gruetzner. "They had a very good exchange rate and they were internationally successful, but they lost huge amounts of money."

Feng thought highly of the 12-percent stake the Aluminum Corp. of China secured with the help of Alcoa in Rio Tinto, Australian's second largest mining company.

"Chinese enterprises should participate in the process of globalization and exercise themselves in mainstream markets before they make a bold move of merger and acquisition," said Feng.

Gruetzner contended it's much safer from the risk management point of view to have a strategic stake in a company instead of buying it out if your target is the supply of products, technologies or operation experience in the target market.

"When you've got a 5-10 percent stake of the company, you get a board seat and an understanding of the rest of the company," said Gruetzner.