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China announces new financial incentive policy which further encourages & supports private enterprises to invest and to develop business abroad
Chinese Private Enterprises (CPEs), including project investors, property developers, contractors & suppliers are getting almost "free" foreign investment loan from Chinese banks.
Will they flood the world market?

China is releasing the power of their huge foreign reserve for foreign investment.  Within a short duration of 2 weeks, China has announced two significant financial stimulus policies to encourage Chinese Private Enterprises (CPEs) to invest and to develop business abroad.  China's Ministry of Finance announced yesterday 20.7.2012 that the interest for foreign investment loan taken out by CPEs will be subsidized by up to 3% interest rate pa.  If a foreign investment loan in foreign currency is originally of 3% pa interest rate, after subsidy, the interest rate will be 0%.  This shows how hard China is pushing for China's CPEs to go abroad.   It is reported that loan interest subsidy program existed previously to encourage CPEs to invest overseas but, together with other supporting policies announced recently, this subsidy program is much more significant and powerful.

China's National Development & Reform Commission, together with 12 other ministries including Foreign Affairs, Industrial Intelligence & Information, Ministry of Commerce, and the Central Bank of China, announced a significant policy
earlier this month on Wed 4.7.2012 - "Implementation guidelines regarding promoting and guiding private enterprises to actively develop investment outside China".  The guidelines are about forming supporting policies to encourage private enterprises to invest overseas, streamlining and framing management of private enterprises' foreign investment, and delivering support services to private enterprises for their foreign investment plans.

China's State Administration of Foreign Exchange (SAFE) announced a significant policy earlier this month which facilitates financing of Chinese private enterprises' foreign investment.  Effective from 1.7.2012, CPEs will be able to take out foreign investment loans, in foreign currency, from local Chinese banks by using CPEs' Mainland China based assets and personal guarantees as security.

Industries to be benefited
The Interest Subsidy Program will benefit CPEs' foreign investment in the following 4 main areas: foreign investment including JV, M&A, etc. (broad definition); foreign JV in agriculture, forestry, fishery, mineral & resources; contracting (building, construction, & other types of projects); design & consulting.  For the last two areas, it refers to services provided by CPEs to projects outside China.  Loans taken out to invest in the above disciplines in foreign locations with operation or project duration of at least one year will be eligible for interest subsidy.

Other form of subsidy
China will also subsidize the preliminary expenses of CPEs' foreign investment, ie. expenditure incurred in market research, due diligence, foreign legal, technical & business consulting fees, project initiation, etc; resources deployment & repatriation costs; shipping & travel insurances; personnel's compensation insurances; emergency event handling costs; personnel training cost; and foreign investment insurance.

Reasons & Implication for business
China's big push for CPEs to "go abroad" is possibly based on the following factors in the current international & domestic economic environment:

1. Many CPEs in China are cash rich (and most are also asset rich).  If they are limited to only investing and expanding within China, it will result in ugly negative competition among CPEs due to shrinking overall export volume (attributed to weak US & European economies), high inventory level (thus eroded profit margin or operating loss, at worst bankruptcy) and escalation in fixed asset price (eg. property & housing prices)
& asset bubble.  China needs to provide new channels of investment for CPEs to release the pressure of high liquidity and surplus production capacity within China.
2. The price of many businesses or assets for sale or for merger/JV around the world is depressed due to weak US & European economies.  This is favourable for CPEs entering foreign investment market.
3. The domestic economy of China is decelerating.  The growth outlook for China's export markets is not encouraging.  It is better for CPEs to invest overseas than to expand within China if they have surplus capacity.
4. China has a huge foreign reserve, mainly in US$ bond.   With depreciation of US$, Euro and more & more direct currency swaps between China and its major trading partners, US$ may lose its dominant position in future global trade and its value may be further downward pressured. It is logical for China to realize part of its foreign reserve's buying power before it deteriorates further.
5. China becomes one of the most favorite spot for foreign investment funds due to its consistent high growth during the past decade.  The situation is particularly apparent since the GFC as investment environment around the world has deteriorated.  The high inflow of FDI and high trade surplus for China has exerted tremendous upward pressure for RMB.  China needs to release this pressure by directing and channelling capital flow in reverse direction to foreign countries.  This helps to stabilize the value of RMB while China implements the
program of gradual internationalization of RMB.
6. By encouraging CPEs to invest in foreign countries, it achieves the same effect of helping China's export markets to get back on their feet, which in turn helps to improve, or turn around, the downward trend of China's shrinking export volume.
7. Many of China's past foreign investment by Chinese State Enterprises (CSEs) do not perform well.  Some even incur huge losses, particularly during GFC period.  China
possibly attributes the situation to not high enough risk management and liability issue, due to insufficient link between failure of foreign investment and loss of personal fortune.  The situation would be different with CPEs' foreign investment, where success or failure of foreign investment has a direct link to gain or loss of personal fortune - much higher degree of care will be exercised when selecting and conducting foreign investment by CPEs.

The announcement of the new financial stimulus measures for CPEs to "go abroad" implies that "money is not a problem".  For foreign local businesses who wish to attract CPEs' investment, the issue becomes "how to convince CPEs that a certain business venture or project is worthwhile for investment" and "how to make CPEs feel comfortable about a particular investment by educating them the foreign local business rules, legal framework, risks in the venture or project, risk management options, and exit paths".  In this case, the assistance of a good consultant
who understands both the local business practice and the Chinese business practice will be very valuable.  Presenting your business venture or project in Chinese with proper and correct terminologies is a must and is vital for attracting serious CPEs' attention.

Please also refer our other postings titled "China encourages private enterprises to invest and to develop business abroad" and "China facilitates financing of private enterprises' foreign investment" for related information.

AAPAC Group can help
If you need assistance in terms of setting your business up to prepare for B2CB (Business to Chinese Business) marketing, arranging CPE investment, or presenting your business or project to gain exposure to CPEs, our company can help, particularly if your business is in property development, project management, planning, architecture, design, engineering, construction, building material & system, properties & real estate.

Since our posting titled
"China encourages private enterprises to invest and to develop business abroad" and "China facilitates financing of private enterprises' foreign investment", we have received numerous enquiries about assistance in setting up B2CB marketing, arranging CPE investment, or presenting business venture or project to gain exposure to CPEs.  We decide to provide service in the form of listing proposed business ventures and development projects in Chinese on our Chinese webpages of our website; and advising our contact network in Greater China region & relevant CPEs in China of the opportunities.  We will handle the translation, marketing, contact, and initial response & qualification of enquiries.  Our website is registered with mainland Chinese search engines and information on our website is searchable in Chinese.  If interested to know further details of this service, please contact us by email to mail@aapacgroup.com

Fabian Chan
Source: HKEJ, China Ministry of Finance - 21.7.2012

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China further encourages private enterprises to invest and to develop business abroad

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