Economic
News relating to
Property and Construction Market -
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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