china's overseas foreign direct investment risk: 2008-2009 › isn › 145949 ›...

South African Instit

ute of Inte

rnat

iona

l Affa

irs

African perspectives. Global insights.

China in Africa Project

O C C A S I O N A L P A P E R N O 7 3

China’s Overseas Foreign Direct Investment Risk: 2008–2009

J a n u a r y 2 0 1 1

W a n g D u a n y o n g

A b o u t S A I I A

The South African Institute of International Affairs (SAIIA) has a long and proud record

as South Africa’s premier research institute on international issues. It is an independent,

non-government think-tank whose key strategic objectives are to make effective input into

public policy, and to encourage wider and more informed debate on international affairs

with particular emphasis on African issues and concerns. It is both a centre for research

excellence and a home for stimulating public engagement. SAIIA’s occasional papers

present topical, incisive analyses, offering a variety of perspectives on key policy issues in

Africa and beyond. Core public policy research themes covered by SAIIA include good

governance and democracy; economic policymaking; international security and peace;

and new global challenges such as food security, global governance reform and the

environment. Please consult our website www.saiia.org.za for further information about

SAIIA’s work.

A b o u t t h e C h I N A I N A F R I C A P R o J e C t

SAIIA’s ‘China in Africa’ research project investigates the emerging relationship between

China and Africa; analyses China’s trade and foreign policy towards the continent; and

studies the implications of this strategic co-operation in the political, military, economic and

diplomatic fields.

The project seeks to develop an understanding of the motives, rationale and institutional

structures guiding China’s Africa policy, and to study China’s growing power and influence

so that they will help rather than hinder development in Africa. It further aims to assist African

policymakers to recognise the opportunities presented by the Chinese commitment to the

continent, and presents a platform for broad discussion about how to facilitate closer

co-operation. The key objective is to produce policy-relevant research that will allow Africa

to reap the benefits of interaction with China, so that a collective and integrated African

response to future challenges can be devised that provides for constructive engagement

with Chinese partners.

A ‘China–Africa Toolkit’ has been developed to serve African policymakers as an

information database, a source of capacity building and a guide to policy formulation

SAIIA gratefully acknowledges the generous support of the main funders of the

project: The United Kingdom Department for International Development and the Swedish

International Development Cooperation Agency.

Project leader and series editor: Dr Chris Alden, email: [email protected]

© SAIIA January 2011

All rights are reserved. No part of this publication may be reproduced or utilised in any form by any

means, electronic or mechanical, including photocopying and recording, or by any information or

storage and retrieval system, without permission in writing from the publisher. Opinions expressed are

the responsibility of the individual authors and not of SAIIA.

Please note that all currencies are in US$ unless otherwise indicated.

A b S t R A C t

Since the implementation of its ‘going-out’ strategy, China’s outward foreign direct

investment (FDI) has experienced a rapid development, which has already become an

important part of its overseas interests. This paper briefly analyses the current situation and

its main features, the losses suffered as well as the major risks that China’s outward FDI

faced during 2008 and 2009. The preliminary conclusions include: (1) China’s overseas

FDI has experienced rapid development, but is still low in absolute terms, while the

concentration trend of geographical and industrial distribution is obvious. This indicates

that the ‘going-out’ strategy has been faithfully implemented, but also contains high risks.

(2) The risks of China’s outward FDI emanate from four main aspects: breach of contract and

unexpected transactional costs; exchange loss; premium-value transactions; and failure

of integration. (3) Overseas FDI faces systemic risks. The internal causes from the Chinese

side include a high concentration of investment, excessive government intervention, low

international business management ability and a lack of overseas investment strategies.

(4) Based on a country risk analysis of China’s overseas FDI, the most important issues are the

legal, political, social and other institutional differences and conflicts. Through interpretation

of reports on Outward FDI and Co-operation Country (region) Guide (2009 Edition) issued

by the Ministry of Commerce, this paper argues that the primary risk of China’s overseas

direct investment is the incompatibility of institutions.

This research project is supported by a grant by the Shanghai Planning Office of

Philosophy and Social Science (Project No: 2009EGJ001) and the Shanghai International

Studies University (Project No: 2008115002).

A b o u t t h e A u t h o R

Dr Wang Duanyong is a research fellow and director of the Center for China’s Overseas

Interests at the School of International and Diplomatic Affairs, Shanghai International Studies

University, China. His research fields include China’s outward foreign direct investment and

the diplomatic protection to overseas Chinese. The author wishes to thank Mr Ji Xiaoyu

who translated the Chinese version of this paper to English, and Dr Chris Alden and Ms

Ana Alves, who modified the paper.

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S A I I A O C C A S I O N A L P A P E R N U M B E R 73

C H I N A I N A F R I C A P R O J E C T

A b b R e v I A t I o N S A N d A C R o N y m S

AUD Australiandollar

BCG BostonConsultancyGroup

BIT BilateralInvestmentTreaty

CAD Canadiandollars

DRC DemocraticRepublicofCongo

FDI foreigndirectinvestment

IMF InternationalMonetaryFund

KRW Koreanwon

M&A mergersandacquisitions

OECD OrganisationforEconomicCo-operationandDevelopment

RMB renminbi(Chinesecurrency)

RV recreationalvehicle

SAIC ShanghaiAutomotiveIndustryCorporation

SOE state-ownedenterprise

SUV sportutilityvehicle

WTI WestTexasIntermediate

C H I N A ’ S O v E R S E A S F O R E I G N D I R E C T I N v E S T M E N T R I S k : 2 0 0 8 – 2 0 0 9

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I N t R o d u C t I o N

Since2000,whenthe‘going-out’strategywasofficiallymadepublic,China’soutward

foreigndirectinvestment(FDI)hasexpanded,exceeding$10billionfiveyearslater

andmakingChinathelargestoutwardFDIinvestoramongdevelopingcountries.Inthe

wakeoftheinternationalfinancialcrisisof2008–2009,unlikemostcountries,Chinese

outwardFDIincreased.Thisphenomenonhasplayedanimportantroleinfacilitating

thetransferofChina’sproductioncapacitytoothercountries,deepeninginternational

reciprocalco-operationonnaturalresources,ensuringaneffectiveresponsetocrisisand

evenincreasingBeijing’srighttospeakaboutimprovingtheinternationaleconomicorder.

AsacrucialcomponentofChina’s‘going-out’strategy,FDIispartof‘agrandstrategy

relatedtotheoverallsituationandfutureofChina’sdevelopment’.1ForChina,thelong-

termstrategicsignificanceisthattherapiddevelopmentofoutwardFDIcancontribute

todeepeningdomesticreformandtheopening-upprocess,andleadtogreaterChinese

participationinfosteringamoreequitableformofeconomicglobalisation.OutwardFDI

makesitpossibleforChinatoattainandsafeguarditsdevelopmentinterests.Atthesame

time,asthepaceofChina’soverseasinvestmentcontinuestogrow,thisstrategycarries

certainrisks,whichwillhavesignificantimplicationsforChina’soverseasandnational

developmentinterests.

ThispaperreviewsandanalysestherisksofChina’sFDIfrom2008to2009.Itfirst

looksatthecurrentstatusandmainfeaturesofChina’sFDI,givingabriefanalysisofits

risks.Itthenexaminesthecauseoftheserisks,analysingtheroleofChina’spublicand

privatesectorinrelationtotheserisks.Finally,itprovidesaninterpretationofaseriesof

reportsinChina’s Outward FDI and Co-operation Country (region) Guide (2009 Edition).

C h A R A C t e R I S t I C S o F C h I N A ’ S o v e R S e A S F d I

Overseas FDI accounts for a small fraction of China’s outward FDI

AstrikingfeatureofthestatisticaldataforChina’soutwardFDIisthat‘outward’doesnot

meanoutsidetheborder,butratheroutsidethecustomsboundary,whichincludesall

regionsoutsidemainlandChina.2Thus,separatecustomsterritoriessuchasHongKong,

MacaoandTaiwan,whichfallunderthejurisdictionofChina’ssovereignty,areincluded

inChina’soutwardFDIstatistics.At thesametime, thecomplexityandrisksof the

economicandtradeexchangesamongMainlandChina,HongKong,MacaoandTaiwan

differgreatlyfromreal‘outward’investment,duetothepolitical,culturalandgeographical

proximityoftheseareas.AccordingtotheStatistical Bulletin of China’s Outward Foreign

Direct Investment, inrecentyearsHongKongandMacaorepresentedthelargestshareof

China’stotaloutwardnon-financialFDI,surgingto70.3%in2008,whiletheFDIstock

roseto63.8%atendof2008.Thisdoesnotaccuratelyreflecttherealeconomicrelations

betweenChinaandtheoutsideworld,orgiveatruepictureofthecloserelationship

betweenChina’soverseasandnationaldevelopmentinterests.3Therefore,tounderstand

therealpatternofChina’sinvestmentbeyondnationalboundaries,‘overseas’FDIwillbe

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usedasameasuretoreflectinvestmentinforeigncountriesandregionsoutsidethescope

ofChina’seffectivesovereigntyandjurisdiction.

Another defect is that China’s outward FDI statistics also include traditional

internationaltaxhavenssuchastheCaymanIslandsorBritishVirginIslands,where

inflowFDIdoesnotusuallymeanreal investment.According tohistoricaldata, the

CaymanIslandsandtheBritishVirginIslandsrepresented52.1%ofChina’soutwardFDI

in2005,and16.7%in2008.ThisaspectofChina’soutflowFDIisknownasthe‘virgin

phenomenon’.WhileitisdifficulttobesureofthefinaldestinationoftheinflowFDIto

thoseinternationaltaxheavens,mostoftheseinvestmentscamebacktoChina,enabling

domestic investors tobe treatedas foreigncompaniesandsoacquire super-national

treatmentconcessions.Inotherwords,the‘virginphenomenon’usuallyrepresentsa‘fake

FDI’phenomenon.4Therefore,forthepurposeofthispaper,China’sinvestmentinthe

CaymanandBritishVirginIslandsisexcludedfromthe‘overseasFDI’andcountryrisks

discussed.

AftereliminatingthestatisticsforHongKong,Macao,Taiwanandthetwotaxhavens,

China’soverseasFDIrepresentedabout20%ofoutwardFDIinrecentyears.Forinstance,

in2008,overseasFDIflowswere$13billion,whilethestockreached$35.74billion.

Table 1: Outward FDI versus overseas FDI, 2003–2008 ($ billions)

Category

Year

Outward FDI Overseas FDI

Total value

Proportion of Hong

Kong and Macao

Proportion of Cayman

Islands and British

Virgin Islands

Absolute value

Proportion of

outward FDI (%)

2003 flows 2.85 1.18 1.02 0.66 23.1

2004 flows 5.50 2.66 1.67 1.16 21.2

2005 flows 12.26 3.43 6.39 2.45 20.0

2006 flows 17.63 6.89 8.37 2.37 13.5

2007 flows 24.84 13.78 4.48 6.58 26.5

2008 flows 55.91 39.28 3.63 13.00 23.2

2008 stock 183.97 117.41 30.80 35.76 19.4

Source:AnnualStatistical Bulletins of China’s Outward Foreign Direct Investment.In2003–2007:

Non-financialoutwardFDIdata.In2008,theflowsandstockarealloutwardFDI

Overseas FDI is concentrated in certain regions

Underthe‘going-out’strategy,China’soutwardFDIisrapidlyexpandingaroundtheworld.

Inrecentyears,Chinahasinvestedinagrowingnumberofeconomies:from2003to2008,

newinvestmentsreached35countriesandregions.Atthesametime,Chineseinvestment


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isconcentratedincertaingeographicalareas,withthetoptencountries/regionsreceiving

over60%oftotalinvestmentinrecentyears,reachingapeakof81.1%in2008.Untilthe

endof2008,theinvestmentstockinthetoptencountries/regionsaccountedfor55.1%

ofthetotal.Inaddition,thenumberofthecountries/regionsincreasedsharply,fromfour

to21,representinginvestmentflowsofmorethan$100millionin2007.Asaproportion

ofoveralloverseasFDI,investmentflowssurgedfromlessthan40%in2004to80%,and

even90%,in2008.ThesechangesshownotonlythesizeofChina’overseasFDI,but

alsoimplyarapidincreaseinlarge-scaleprojects,whichinturnmeansmanyinvestment

projectsfocusedonspecificsectorsthatrequirehugefunding.

Table 2: Concentration of China’s overseas FDI

Total flows of China’s

overseas FDI

($ billion)

Invest-ment stock cover

countries or regions

Investment flows more than $100 million in the country/

region

Investment flows in the top ten countries/

regions

Number of

countries/ regions

Invest-ment

($ billion)

Proportion of overall overseas FDI (%)

Invest-ment

($ billion)

Proportion of overall overseas FDI (%)

2003 0.66 135 1 0.15 23.6 0.51 77.2

2004 1.16 145 3 0.39 33.5 0.75 64.6

2005 2.45 159 6 1.45 59.3 1.78 72.5

2006 2.37 168 4 0.90 37.9 1.42 59.9

2007 8.25 169 21 6.86 83.1 5.28 64.0

2008 13.00 170 18 11.68 89.9 10.55 81.1



In termsof flows and stock, theAsian regionhas enjoyed amajor shareofChina’s

overseasFDI,althoughChina’sinvestmentinAfricaisgrowingrapidly.In2008,flows

toAfricasurgedtofirstplace,infrontofAsia,mainlybecauseChina’sinvestmentsin

SouthAfricaweretentimesgreaterthanthepreviousyear.In2008,SouthAfricawas

China’stopFDIdestination,accountingfor87.6%ofinvestmentflowsinAfrica.Asthe

demandformineralresourcesrose,China’sdirectinvestmentinOceaniaalsoexperienced

rapidgrowth.Currently,AustraliaisthecountrythatreceivesthelargeststockofChina’s

overseasFDI.

TheprioritiesandtrendsofChina’soverseasFDIcanbeidentifiedbyexaminingthe

proportionoftotalinwardFDItohostcontinents.In2008,AfricaandOceaniaaccounted

for thebiggestproportionofChina’s investment.China’soverseasFDI inAfricaand

Oceaniaoccupied6.26%and3.93%oftheirinwardFDI,comparedtoonly1.01%inAsia

andlessthan1%inLatinAmerica.5China’sdirectinvestmentstockaccountedfor1.53%

and1.14%ofAfricaandOceania’sinwardFDIstocks.InAsia,thecontinentwhichowned

8



thehighestabsoluteamountofChina’sinvestmentstock,theproportionwasonly0.49%,6

whileinEurope,China’sinvestmentaccountedforonly0.07%ofthetotalinwardFDI

stocks.ThisdatathereforereflectsmoreclearlythegeographicaldistributionofChina’s

overseasFDIandalso(tosomeextent) theorientationofChina’s investment inthe

industryandtheeaseofaccessofrecipientmarkets.

Table 3: Regional distribution of overseas FDI ($ billions)

2003 flow

2004 flow

2005 flow

2006 flow

2007 flow

2008 flow

2008 stock

Asia 0.318 0.343 0.942 0.773 1.603 4.267 13.914

Africa 0.075 0.317 0.400 0.520 1.570 5.490 7.800

Europe 0.150 0.170 0.510 0.590 1.090 0.880 5.130

North America 0.058 0.126 0.320 0.260 1.130 0.360 3.660

Latin America 0.023 0.088 0.080 0.102 0.420 0.052 1.436

Oceania 0.034 0.120 0.200 0.130 0.770 1.950 3.820

Total amount 0.658 1.164 2.452 2.375 6.583 12.999 35.760



Table 4: China’s total inward FDI in all continents ($ billions)

Chinese investment

flows in the host

continents

Local absorption of the total investment

flows

China’s investment

flows accounted

(%)

China’s investment stocks in the host

continents

Local absorption of the total investment

stocks

Chinese investment

stocks accounted

(%)

Asia 4.27 421.89 1.01% 13.91 2,835.85 0.49%

Africa 5.49 87.65 6.26% 7.80 510.51 1.53%

Europe 0.88 632.70 0.14% 5.13 7,352.94 0.07%

North America

0.36 360.82 0.10% 3.66 2,691.16 0.14%

Latin America

0.05 144.38 0.04% 1.44 1,184.37 0.12%

Oceania 1.95 49.63 3.93% 3.82 334.45 1.14%

Total value

13.00 1,697.35 0.77% 35.76 14,909.29 0.24%

Source:ThelocalabsorptionofthetotalinvestmentdataisfromWorld Investment Report 2009,

UnitedNationsConferenceonTradeandDevelopment(UNCTAD).Authordidtheratio


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Target industries in the energy and mining sectors

Cross-bordermergersandacquisitions(M&A)areconcentratedintheenergyandmineral

industries,mainlybecauseofChina’slong-termeconomicdevelopmentstrategy.In2008

and2009,Chineseenterprisestookpartinatleast34cross-borderM&Aabove$100

million,representingatotalvalueofupto$57.13billion.7Ofthese,13M&Awereinthe

energyindustry,accountingfor$27.754billionor48.6%ofthetotal$100million,while

15M&Awereintheminingindustry,worth$26.234billionor45.9%oftotaltransactions.

UtilitiesandbusinessserviceseachhadoneM&Aworth$1.58billionand$858million

respectively,whilethethreemanufacturingM&Aamountedto$704million.8

The economy’s rapid growth in recent years has put strong pressure on China’s

domesticreservesofnaturalresources,suchasoil,non-ferrousmetalsandironore.China

needstoensureitsenergysupplysecurity,pricestabilityandanadequatesupplyofraw

materials throughco-ordinatedarrangementsaround theworld.Thesewillnotonly

beconducivetosustainedeconomicdevelopment,butalsoenableChinatoenterand

competeincommoditymarkets.China’sinevitablechoiceistoseektocontrolasmanyoil

andotherresourcesbyexpandingitsoverseasinvestments,whicharemainlyconducted

byChina’slargestate-ownedenterprises(SOEs)duetothecapital-intensivenatureofthe

resourcesector.9

t h e R I S k o F C h I N A ’ S o v e R S e A S F d I : S t A t u S q u o

Studieshaveshownthat,internationally,thesuccessrateoflarge-scaleenterprisesM&A

waslessthan50%,while67%ofChina’soverseasacquisitionsinthepast20yearsdidnot

succeed.10AccordingtostatisticsoftheMinistryofCommerceofthePeople’sRepublic

ofChinain2007,65%ofChineseenterprises’overseasinvestmentswereinthered.11

Anotherstudyestimatedthat,in2008,cross-borderM&AbyChineseenterpriseslost

morethanRMB12 200 billion,whichisequivalenttoabout$29.3billion.13Basedonrecent

casestudies,M&Aexperiencefourcategoriesofproblems:breachofcontractanddelay

totransactions;currencyexchangelosses;premium-valuetransactions;andintegration

failures.

Breach of contract and delay to transactions

Acommonproblemwasunexpecteddelaystotransactionsorbreachesofcontract,dueto

bothcommercialandnon-commercialfactors,whichincreasedtheinvestmentcostsand

risksofoverseasFDI.

Inrecentyears,thelargestcommercialbreachofcontractwaswhenRioTintotore

upthecapitalinjectionagreementwithAluminumCorporationofChina(Chinalco).

In2008,Chinalcoheld9.3%ofRioTintosharesandwasthelargestsingleshareholder.

On12February2009,ChinalcoandRioTintoannounced the signingofa strategic

co-operationagreement,whichincludedacashinjectionprovisionof$19.5billionby

Chinalco.Ifthistransactionhadbeencompleted,Chinalcowouldhaveowned18%ofRio

Tinto’stotalshares,19%ofRioTintoplc(UK)and14.9%ofRioTintoLimited(Australia).

On5June2008,RioTintoannouncedaunilateralbreachofcontract,ofwhatcouldhave

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beenChina’slargestcross-borderM&A.However,Chinalcoonlyreceived$195millionin

finalcompensation.AlthoughRioTinto’srejectionofChinalco’shugecapitalinjectionwas

notsurprising,whatwasamazingwasthatthefinalpenaltyfortheliquidateddamages

wasonly1%ofthetotalcontract.Afterwards,inordertoremainRioTinto’ssinglelargest

shareholder,Chinalcowasforcedtoacquiresharesontheopenmarketatacostofabout

$15billion.

TheunforeseenrisksfacingChineseenterprises’overseasFDIaremainlyintheenergy,

mineralandotherstrategicresourcessectors,andcomefromincreasedprotectionism.

OneexamplewasinFebruary2009,whenPetroChinaCompanyLimitedbidCAD14 499

million($460million)toacquireasmallCanadianoilcompany,VerenexEnergy,Inc.,

whosemainbusinesswasinLibya.AccordingtoLibyangovernmentregulations,any

change in control of the foreign assets requires theLibyanNationalOilCompany’s

writtenconsent.Initially,inMay2009,theLibyanNationalOilCompanyexpressedan

interestintheoffer,butdidnotapprovethedealorexercisetherightofpreemption

untilannouncing,inJune,thatVerenex’sacquisitionoftheexploitationconcessionin

Libyawasillegal.On22June,VerenexdenouncedtheLibyanNationalOilCompanyina

publicnotice,notingthattherealmotiveofitsreluctancetoapprovethetransactionwas

to‘cutoffprice[tobuyontheirown],ortoraisetheapprovedfee’.Followingmonths

ofcontinuedefforts,PetroChinaandVerenexdecidedtoterminatetheacquisitionon7

SeptemberbecauseLibyawasblockingthedeal.15VerenexwaseventuallysoldtoaLibyan

sovereignwealthfundforonly$340 million,30%lowerthanthePetroChinaoffer.16

InadditiontodirectinvolvementbystakeholdersinChineseoverseasFDItransactions,

thirdpartieshavealsointerferedforinternationalpoliticalreasons.Forexample,on22

April2008,thegovernmentoftheDemocraticRepublicofCongo(DRC)signedapackage

ofco-operationagreementswithChinesecompanies,includingtheChinaRailwayGroup

Limitedand theSinohydroCorporation.17Theagreementscentredon investment in

copperandcobaltoreprojectsandinfrastructureconstructionprojectsintheDRC,based

onthe‘projectforresources’mode(asitischaracterisedbytheWorldBank),worth$9.25

billion.Chineseenterprisescommittedtobuildhundredsofclinics,hospitalsandschools,

twohydroelectricdams,3 300kilometresofhighwaysand3 000kilometresofrailways

intheDRC,inreturnforobtainingrightstodevelopcopperandcobaltmines.18Atthat

juncture,theDRCwasfindingitverydifficulttoobtainlargeamountsofcapitalthrough

otherchannelsand,althoughthefinancingagreementswere‘win–win’andconformed

tocommercialprinciples,someinternationalforceswereuneasy.Atthetime,Kinshasa

andforeigndonorswerediscussinghowtorelievethecountry’shugeforeigndebt,and

negotiationswereatadelicatestage.19The‘ParisClub’creditorsandtheInternational

MonetaryFund(IMF)wereopposedtosomeprovisionsoftheagreements.20TheIMF

stated:‘Justco-operationagreementsofChinaandtheDRCshouldbeconsistentwiththe

requirementsofdebtsustainability’,21andrequestedthattheagreementsbeamended.22

Underpressure,aslargedebtreliefwasbeinglinkedtoChinesecommercialloans,the

agreementsweredrasticallyrevised:the$3billioninfrastructureprojectsinthesecond

phaseand$3billionofgovernmentguaranteesforminingprojectswereremoved,reducing

theoverallsizeoftheagreementsto$6billion.23Onthesurface,theIMFintervention

wasmotivatedbyconcernsthattheagreementscouldaggravatethedebtburdenofthe

DRC.However,themediaintheDRCbelievedthatthetruereasonfortheIMF’sfierce

oppositionwastoobstructtheexpansionofChinese‘resourcesforinfrastructure’or‘loans


11


forenergy’intootherfieldsinAfrica.Thisexpansionwasbelievedtoposeathreattothe

oldcolonialmodeofacquiringresourcesbyEuropeandtheUS.24

Exchange loss

OverseasFDInecessarily involves foreigncurrencyassets,which inevitably leads to

exchangeriskscausedbytheuncertaintyofexchangerates.Traditionally,China’soverseas

investmententerprisessellproductsdenominated indollars,andhaveproductcosts

denominatedinthehostcountries’currencies,whiletheircreditathomereliesmainlyon

renminbiloansfromChinesestate-ownedbanks.Inrecentyears,withtheappreciationof

therenminbiandthedepreciationtrendofforeigncurrencies,especiallythedollar,25the

overseasFDIofChineseenterpriseshavefacedmoreandmoreseriousexchangerisks.

Since2008,traditionalhedginginstrumentshavehaddifficultydealingeffectivelywiththe

tumultuousfinancialsystem,furtheringtheprospectsofuncertaintyduetosystemicrisk.

Moreover,Chineseoverseasenterpriseshavesufferedenormouslossesduetoexchange

ratemovements.

Infirsthalfof2008,exchangelossesofoverseasFDIcamemainlyfromtheappreciation

oftherenminbiandthecontinueddepreciationofthedollar.Ofthe745Chineselisted

companiesthatincurredexchangegainsandlossesinthefirsthalfof2008,488companies

sufferednetexchangelossesofupto65%,atotallossofmorethanRMB5.2billion–

PetroChinarankednumberonewithmorethanRMB1billioninexchangelosses.26The

secondhalfof2008sawadramaticfallinthevalueofthepoundsterling,theeuroandthe

Australiandollar(AUD),oneafteranother.Inthethirdquarter,inlessthantwomonths,

thepoundsterlingdepreciatedbyabout25%andtheeurobyabout21%againsttheRMB.

InSeptemberandOctober,theReserveBankofAustraliacutinterestratestwiceandthe

Australiandollardeclinedbynearly40%againstthedollar,whichresultedinanumberof

ChinesecompaniesinAustraliasufferinghugeexchangelosses.Accordingtoinformation

publiclyavailable,atleast12largeChineseSOEssufferedexchangelossesrelatedtothe

depreciationoftheAustraliandollar.27AtypicalexampleoftheeffectoftheAustralian

dollar’sdepreciationwasChinalco,whichsufferedtotalexchangelossesofRMB2.351

billioninthefirstthreequartersof2008.28ThemostdramaticwasthefateofChinalco’s

investment in the Aurukun bauxite project in Australia, for which Chinalco paid

AUD2.92billioninMarch2007,whentheexchangeratewasaboutAUD1for$0.68.

However,overayearlaterinJuly2008,theratereached$0.9848,a40%appreciation,

whichmeantthatChinalcoalsohadtopaymorethan40%foritsmainforeigncurrency

assetsthatwereindollars.Furthermore,aftertheAustraliandollar’ssharpdeclineinJuly

2008,equipmentorderedpreviouslyinAustraliandollarsfacedtheriskofsubstantial

depreciation.AsChinacurrently lackshedgingtools,especiallyfinancialderivatives,

somecompanieshavechosentousethecorrespondingcountry’sderivativesashedging

instrumentstoavoidforeignexchangelosses.Inaperiodofextremecurrencyfluctuations,

thisstrategycanleadtomoreseriouslosses.Suchwasthecasein2008forCITICPacific,

whichexperiencedhugelossespursuingthisrisk-offsetstrategy.Seekingtoreducethe

currencyriskassociatedwithacquiringan ironoreproject inwesternAustralia, the

companyleveragedforeignexchangecontracts,whichledtolossesofmorethanHKD29

14.6billionastheAustraliandollarplummeted.30

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Losses from premium-value transactions

Between2002and2009,Chinamorethandoubleditsnumberofenterprisesestablished

overseas,anaverageannualincreaseof10.8%.31Duringthesameperiod,thestockof

China’soutwardFDIincreasedby5.4times,anaverageannualgrowthrateof30.3%.The

investmentgrowthrategreatlyexceededthegrowthrateofthenumberofcompanies,32

whichinferredanexpansionofthescaleofinvestmentprojectsandgreaterconcentration.

However, thegapbetween the twonumberswasmuchhigher than similarChinese

domesticdata,33whichsuggeststhatotherfactorswereinplay.

Inrecentyears,formanyhigh-valueoverseasFDItransactionsbyChineseenterprises,

theactualpurchasepricewasnotonlymuchhigherthanthedomesticprice,butalso

higherthansimilardealsbetweenotherforeignfirms.Evenafterthefinancialcrisisin

2008,whentheoverallglobaleconomywentintorecessionandmanyforeignenterprises

suffered financial difficulties, several overseas ‘bargain-hunting’ M&A by Chinese

enterpriseswereunsuccessful.Thepopularimageofmakingacquisitionsatalowprice

didnotcometrueasexpected.Onthecontrary,theoutbreakandcontinuationofthe

financialcrisisledtomanyChineseenterprises’overseasFDIprojectssufferingahuge

discountduetofinanciallosses.

Onesourceofpremiumlosswasthedramaticfluctuationofpricesintheinternational

market:in2008and2009,thepricesofoil,oresandothercommoditiesininternational

marketswerevolatile.In2008,theaveragepriceofUSWestTexasIntermediate(WTI)

andNorthSeaBrentcrudeoil(Brent)wasrespectively$100.06and$97.26perbarrel,up

38.66%and34.37%comparedtothesameperiodinthepreviousyear.On11July2008,

theWTIpricereachedarecordhighof$147.27perbarrel.However,fromthebeginning

ofAugust,asthefinancialcrisisandglobaleconomicrecessionspread,thedemandfor

oildeclinedandinternationaloilpricesbegantofallsharply.On19December2008,

WTIpricesfellto$33.87perbarrel,thelowestlevelinnearlyfiveyears,afallofmore

than70%comparedtoJuly’srecordhighs.34Moreover,in2009,theinternationaloilprice

trendroseto$80perbarrelbytheendoftheyear.However,theannualaveragepriceof

WTIandBrentfellrespectively38.2%and36.5%comparedtothepreviousyear.35As

theoilpricesfell,manyChineseenterprises,whichwereinvolvedincross-borderM&A

whentheinternationaloilpriceswerehigh,sufferedlosses.Forexample,ChinaOilfield

ServicesLimitedacquiredAwilcoOffshoreASAofNorwayforRMB17.1billion(about

$2.5billion)whentheinternationalpriceofoilreachedarecordpeakinJuly2008,after

whichtheinternationaloilpriceslumped.Oneyearlater,thecompanyannouncedthat

theacquisitionhadresultedinavaluelossofRMB820million.36Itisnotsurprising

that,initsacquisitionofRioTintoshares,Chinalcosufferedapaperlossofmorethan

$8 billion (equivalent to about RMB 54.4 billion) during one year, as in 2008, the

internationalpriceofprimaryaluminumdroppedfrom$3,260to$1,471perton(the

LondonMetalExchangealuminumspotprice).37

Anothertypeofpremiumloss isobviouswhenanalysingsomeoftheactualdeals

negotiated.Forexample,inMay2008,Chinalcoenteredintoajointventureagreement

withforeignenterprisestobuildamillion-tonelectrolyticaluminumplantinSaudiArabia

anda1860megawattscaptivepowerplant,investingatotalof$4.5billion.Chinalco

wouldhold40%sharesinthealuminumfactory(becomingthelargestshareholder)and

20%sharesinthepowerplant(makingitthethird-largestshareholder).38Atthattimein


13


China,investmentsinelectrolyticaluminumproductionwasRMB40–70millionperten

thousandtonsandinpower,RMB4–6millionpermegawatt.Basedonthis,investingin

similarprojectsinChinawouldhaverequireduptoRMB18.1billion(onlyabout$2.65

billion).39

Integration failure

ThegreatestchallengeofM&Acomesfromthepost-acquisitionintegration,asmaking

adeal(whethersuccessfulornot)isonlythebeginning.Thepost-mergercompanyhas

tochangethemanagementstructureandtheinternalandexternalenvironmentofthe

company.Indeed,thebestmeasurementofasuccessfultakeoveristheabilityofthe‘new’

companytocontinuestableoperationsunderthenewframework.

Incross-borderacquisitions,integrationinvolvesnotonlyproductlines,saleschannels

andbusinessstrategies,butalsocorporateculture,whichisarguablymoreimportant.A

surveybyDeloittefoundthat60%ofM&Adonotachievethedesiredbusinessvalue.Of

these,two-thirdsfailtointegrateculturesafterthemerger.IntheM&Abusiness,amajor

challengeisbridgingtheculturegapandblendingbothcorporateculturesintoanew

corporateculture.40ManyofChina’soverseasM&Athatwereconsideredas‘successful’

ultimatelyfailedbecauseofineffectiveintegration,whichledtomorelosses.

InOctober2004,theShanghaiAutomotiveIndustryCorporation(SAIC)contributed

KRW41 90billion($500million,oraboutRMB4.1billionatthetime)tobuy48.92%ofthe

SouthKoreanSsangyongMotorCompany(Ssangyong),becomingitslargestshareholder.

This first acquisitionbyaChineseenterpriseof a foreignvehiclemanufacturerwas

consideredalandmarkeventfortheChineseautoindustrytocompeteinternationally.

Although SAIC injected huge funds, the already troubled Ssangyong’s operational

difficultieswerenotreversed,andthe2008saleswere30%lowerthanexpected.Bytheend

of2008,Ssangyongsufferedaseriousliquiditycrisis,whichledtoitsfinancialsituation

deterioratingfurther,affectingSAIC’sfinancials,whichdeclinedsharply.SAICthenwent

ontoaccruelong-termequityinvestmentstooffsetthedepreciationofaboutRMB 3.076

billionforSsangyong.42Thefinancialdifficultiescausedafurthercrisisofconfidenceon

bothsides.SAIC’sproposedreorganisationplanincludedhighjobcuts,whichwereill-

receivedbytheSsangyongunion.ThebreakdownoftheSsangyonglabournegotiations,

attheendof2008,wasfollowedbyabankruptcycrisis.On9January2009,Ssangyong

attemptedtorestorecontroloverthemanagementofthefirm,whichsubsequentlyled

toSAIClosingcontrolofthecompany.On22May2009,theSsangyongunionbegana

strike,whichlasted76daysandresultedinfurtherdeterioration;SAICmadeaRMB1.182

billionprovisionforimpairmentoflong-termequityinvestment,43whichmeantthatthe

SAICassetinvestmentlossescausedbySsangyongweremorethanitsinitialinvestment.

At theendof2009theSouthKoreancourtapprovedthereorganisationplan,which

dilutedSAIC’sshareinSsangyongfrom51.33%to11.2%.Thus,theSAICinvestmentin

Ssangyongappearstohavebeenacompletewasteofhumanandmaterialresources.

The failure of SAIC’s integration of Ssangyong demonstrates some fundamental

mistakes made before and after M&A. Firstly, there was the lack of an adequate

pre-mergerinvestigation.SAICthoughtthatSsangyong,asKorea’slargestmanufacturerof

sportsutilityandrecreationalvehicles(SUV/RV),haddevelopedtheoriginaldieselpower

technologythroughitslongstandingco-operationagreementwiththeGermancompany,

14



Mercedes-Benz,andthereforeexpectedSsangyongtohaveagoodlevelofproduction

management,technicalequipmentandresearchanddevelopment.However,afterthe

merger,Ssangyong’sviability turnedout tobe largelydependentonMercedes-Benz’s

technicalsupport,especiallyfordiesel-poweredtechnologiesandaccessories.

Secondly,asthemanagementcapacityofthecombinedenterpriseswasinadequate,

themarketsituationdidnotimprove.Ssangyong’straditionalmarketswereinKoreaand

itsmainmodelswerethehighfuel-consumptionSUVs.Withtherisinginternationaloil

pricesinrecentyears,thecompetitivenessofthecompany’sproductsdeclined,whilenew

modelsweredelayed.NotonlydidSsangyong’sproductlinesremainfundamentallythe

same,butalsonewinternationalmarketswerelimited.SAIChelpedSsangyongtoexport

itscarstoChinaandtoestablishtheappropriatesaleschannels.However,Ssangyong’s

brandcommunications,imageandcustomersatisfactiondidnotperformedwellinChina,

andthecompanyfailedtoachievethedesiredmarketshare.Ssangyongsalesdidnot

improveaftertheacquisition,withtheexceptionof2007,annualearningsfrom2004to

2008showedadeficit.

Mostimportantly,thekeyreasonforthefailureofM&Aistheinabilityofbothsides

toachievesuccessfulculturalintegration.AtSsangyong,themostseriousshortcoming

wastherelationshipbetweenmanagementandtheunions.Duringthefiveyearsafter

theacquisition,thetradeuniondidnotsupportanyofthecompany’smajordecisions.

Themainconflictsweretodowithtechnologytransfercontractsandlayoffprogrammes

to reduce production costs, which have yet to be implemented because of strong

resistancefromtradeunions.Underthebannerof ‘topreventtechnologyleakage,to

fulfillinvestmentcommitments,tocrushrestructuringplanandforfullemployment’,

Ssangyong’slabourunionaccusedSAICofnotbeingsincereaboutlong-terminvestment

inKoreaandlaunchedanumberofdemonstrationsandstrikes.Thetwosides’sharp

oppositioncausedasignificantlossofbusiness.Thelaststrawwasthecollapseofthetalks

betweenemployersandemployees,whichledtobankruptcyandreorganisation.

AfteracquiringSsangyong,SAICreplacedtheheadofthecompanywithasuccessor

(whowasalsoKorean).Concernedwithpersonnelchangesandlayoffs,theSsangyong

labourunionthreatenedtostrike.Eightmonthslater,anotherpersonnelchangesawthe

arrivalofanewdirectorwhoproposedstructuraladjustmentprogrammesthatwouldlead

to550jobcuts.TheSsangyonglabourunion’s‘diestrike’lasted20days,causedabout

16 000motorvehiclestobecut,andalossofaboutKRW 370billion(RMB3billion).

Despiteaslightimprovementin2007,withtheinternationalfinancialcrisisfrom2008,the

Ssangyongbusinesswasonceagainindeeptrouble,requiringacapitalinjectionfromSAIC

inordertodevelopanewvehiclemodel.Inreturnfora$200millioncapitalinjection,

SAICaskedSsangyongtocarryoutastructuraladjustment,whichincludedlayingoff

2000productionlineworkers.Labourunionsresistedtheplanand,whennegotiations

betweenemployersandemployeesbrokedown,Ssangyongwentintobankruptcyand

reorganisationtosavethecompany.Duringthelabournegotiations,beforeandafterthe

bankruptcyproceedings,thelabourunionaccusedSAICof‘steal[ing]KoreaAutomotive

Technology,contradict[ing]theoriginalinvestmentagreements’.Labourunionmembers

evenbesiegedtheChineseEmbassyinSouthKorea,askingChinesebusinessgroupsto

leave,andseizedChinesemanagementpersonnel.


15


I N t e R N A l F A C t o R S A F F e C t I N g o v e R S e A S F d I R I S k

TheTenthFive-YearPlanningOutlinein2000firstproposedthe‘goingout’strategyand

madecleartheneedto‘regulateforeigninvestmentthroughsupervision’.Thisshowsthat,

fromtheoutset,the‘goingout’strategywasconsciousofoverseasFDIrisks.Fiveyears

later,theEleventhFive-YearPlanningOutlinewasevenmoreemphaticabouttheneed‘to

strengthenco-ordinationofoverseasinvestment,risksmanagementandsupervisionof

state-ownedassetsabroad’.In2009,thegovernmentworkreportadoptedbytheSecond

Sessionof theEleventhNationalPeople’sCongress emphasised ‘strengthening risks

controlandsupervisionofenterprisesinvestmentabroad’.Thegovernmentworkreport

approvedbytheNationalPeople’sCongressin2010againsuggestedthattheenterprises

implementing ‘going out’ needed to avoid risks. At present, losses in overseas FDI,

especiallycross-borderM&A,havefarexceededthenormalleveloflossesinthedomestic

market.Accordingly,inadditiontonormalbusinessrisksandspecificcompanyrisks,the

moreseriousproblemsfacingoverseasFDIofChineseenterprisescomefromthesystemic

externalrisks.Thesecross-borderinvestmentsystemicriskscomefrombothdomestic

factorsofhostcountriesordifferencesbetweencountries(oftencalledcountryrisks),and

thebehaviourofChineseenterprisescausedbytheirowninvestmentobjectives,means

andprocesses.

Investment over-concentrated in a few industries

China’soverseasFDIhasfocusedonafewindustriessuchasenergyandmining,where

thelargestM&Atransactionshavebeenconcentratedinafewhostcountries.Thefocus

oninvestinginlargefinancialtransactionshas,insomecases,producedtensionsand

concernswithinhostcountries,whichprobablyexacerbatedthepotentialeconomicand

politicalrisks.Asaresult,China’soverseasinvestmentsfacegreaterrisksthanitsshareof

worldinvestmentwarrants.Forexample,whenChinalcoacquired$14billionofRioTinto

sharesinearly2008,theAustraliangovernmenthadbeenencouragingthemanagement

tolookforforeigninvestment.However,in2009,Australia’sForeignInvestmentReview

BoardsaidthatforeigninvestmentinAustralianminingcompanieswouldbelimitedto

15%oftheshares,andnewinvestmentinminingprojectsshouldbelessthan50%.These

provisionsaregenerallyaimedatChina’soverseasFDI.Suchproblemscannotsimplybe

attributedtotheeconomicnationalismofhostcountriesorprotectionism.Infact,Chinais

inrealdangerofbecomingoverdependentonimportedresources,whichwillweakenany

obligationtoupgradetheChineseindustrialstructureandenforcetheexisting‘backward’

modeofeconomicgrowthandtheirrationaleconomicstructurethatstillprevailsinsome

industries.Therefore,toreduceoverseasFDIrisks,themosteffectivemeasureswould

be tochangeChina’seconomicgrowthpattern, improve industrystructure, increase

economicefficiencyandeffectivelyco-ordinateinternationalanddomesticmarketsand

resources.Foralongtime,China’soverseasFDIwillcontinuetobemostlyinenergyand

rawmaterials,44whichmeansthattheconcernsandpossiblefrictionsofhostcountries

willnotberapidlyeliminated.

16



Excessive government involvement and intervention

China’soverseasFDIreliestoagreatextentonlargeSOEsforcross-borderM&A.Although

theadvantagesoflargeSOEsareevident,thisapproachisnotwithoutitsproblems.Inno

matterwhatindustry,businessstrategyneedstoreflectthenatureofcapitalexpansion,

bothwithinandoutsideitsborders.However,Chinesecross-borderM&Aareoftensaid

tobemotivatedbytheinterestsoftheChinesegovernment,althoughthemajorityofthe

Chinesepeopleconsiderthisbelieftobetheproductofanti-Chineseprejudice.However,

inviewofthegeneralrulesoftheglobalmarket,anobjectiveattitudetosuchopinions

isnecessary.TheopaquerelationsbetweengovernmentandSOEswillinevitablymake

expansionoverseasmoreexpensiveandeven,attimes,actasafatalobstacle.Inearly2008,

theAustraliangovernmentissuedaforeigninvestmentreview,basedonsixprinciples,

thatwouldexamine‘whethertheoperationoftheinvestorisindependentoftherelevant

foreigngovernment’anditscorporategovernanceandfinancingarrangements.Inessence,

foreigninvestment(includingM&A)shouldbeacommercialactivity,enterprisesshould

bethemainforce,andgovernmentshouldonlyprovideexternalinstitutionstoprotect

business.Atpresent,theChinesegovernmenthasdonemuchtopromoteoutwardFDIby

buildingmechanismstoguaranteeitseffectiveness.Asofmid-2009,Chinahadestablished

bilateraleconomicandtradeagreementswithover100countriesandregionsalloverthe

worldandsignedatleast127BilateralInvestmentTreaties(BITs),45makingChinanumber

twointheworldforBITs.46Nevertheless,forthe‘goingout’strategytobetrulyeffective

andmoreefficient,thegovernmentwillhavetoletmarketforcesplayamoreimportant

roleinthefuture,sothatSOEscanfollowcommercialprinciplesindependentlywhen

makinginvestmentdecisions.Anditisparticularlyimportanttocreatefairercompetition

mechanisms,whichwouldallowprivateenterprisesthataredrivenbyeconomicself-

interesttoparticipate,alongwithinstitutions,andinthelongrunpromotehealthyand

sustainabledevelopmentofChina’seconomy.

‘ g o I N g o u t ’ e N t e R P R I S e S l A C k m A N A g e m e N t C A P A C I t y F o R I N t e R N A t I o N A l b u S I N e S S

FormanyChineseenterprises, theirunderstandingofM&Aintegrationseems tobe

stuckinamodethatemphasisespurchasinghardassets–equipmentandplants–and

acquiringtechnology.Thecurrentfinancialcrisishasexacerbatedthisapproach,with

ChineseSOEssearchingfor‘bargains’.ManyChineseentrepreneursthinkthatmoneycan

buyeverything,whereasthecross-borderM&Amiscarriagesofthelasttwoyearsshow

thatcapitalisnotthemostimportantconsiderationpriortoanacquisition.Furthermore,

aftertheacquisition,Chineseenterprisesfinditdifficulttoaddvalueotherthanfinancial.

These two issues show that China’s overseas FDI capacity is seriously flawed. For

enterprises,theultimatepurposeofcross-borderM&Ashouldbetooptimiseresources

andindustrial,technologicalandmarketstructures,notjusttoachieveeconomiesofscale.

Chineseenterprisescurrentlyimplementingthe‘goingout’strategysufferfromasevere

shortageofinternationalmanagementcapacity,whichisreflectedintheproblemsrelated

tointegratingorganisationalcultureandhumancapital.Asubstantialgapexistsbetween

Chineseenterprisesandinternationalcompetitors,whoarebetterabletohandlethe


17


problemsofintegrationinM&A.ThisunderscoresthefactthatChineseenterprisesneed

toexertmoreeffortandtakerisksinordertoachievetheaimsofthe‘goingout’strategy.

C h I N e S e e N t e R P R I S e S l A C k A N o v e R S e A S F d I S t R A t e g y

From2005to2008,therenminbi–dollarexchangerateincreasedbymorethan20%,

whichcouldbeseenasasignificantadvantageforChineseenterprises‘goingout’.In2008,

theinternationalfinancialcrisisledtodecliningeconomicgrowthinmanycountries

andalackofdemand,depressinginternationalpricesofstapleproductsandresultingin

aseriousshortageofcapitalmobility.Incontrast,thecrisisencouragedmanyChinese

enterprises,especiallylargeSOEswithrelativelyadequatecashin-hand,to‘bargain-hunt’.

However,overall,Chineseenterprisesinvestingoverseasseemtolackaclearandlong-

termstrategy,especiallyinacquisitionandintegration.

An investmentopportunityandpotentialbenefitswillnotautomaticallyproduce

genuineprofits.Comprehensiveandclearstrategicplanningisakeyfactortorealising

thisfundamentalaim.Chineseenterpriseshavestrategicplanningflawsintheiruseof

overseasFDI: first, theyusuallyonlyconsiderpriceandaccessibility,not investment

objectivesthatareconsistentwiththeiroveralldevelopmentgoals;second,theydonot

havealong-termbusinessplanoraclearpictureoftheacquisition’sfuturedirection;

third,theirduediligenceisinadequatefortheinvestmentobjectives,resultinginafailure

todiscovertherisks;fourth,theydonothaveafullyconsideredintegrationplanbefore

thetransaction.47

Oneofthereasonsforthislackofstrategicplanningisthattheenterprisesdonothavea

clearknowledgeoftheirownbusiness.ThepurposeofoverseasFDIistooptimiseresource

allocation,introduceadvancedtechnology,achieveeconomiesofscaleandpromotethe

rapidexpansionofproductionandcapital.Corporateinvestorsmustcorrectlyassesstheir

competitiveandstrategicpositionandintegratehumanresources,whichissomethingthat

manyChineseenterprisesseemill-preparedfor.AsVice-PremierWangQishanpointedout,

inrelationtotheChineseentrepreneurs’impulseforoverseasacquisitionafterthe2008

financialcrisis,overseasM&Aisnotjustaboutthemoney.Hewarnedoftheneedtoanswer

thesequestionsfirst:‘Canyoubuyout?Canyoumanageit?Doyouhaveconfidenceabout

yourownmanagementability?Haveyouanalysedtheculturaldifferencesbetweenthetwo

sidesyet?Haveyoueverstudiedthelocallabourunionrelations?’48

The lack of strategic planning is closely related to the external institutional

environment in which enterprises operate. Currently, enterprises that invest or are

planningtoinvestoverseasaresubjecttoChineseoverseasinvestmentpolicy.TheChinese

government’slegalprotectionofoutwardFDIischaracterisedbythelackofaunified,

stableandauthoritativelegislationandoverlappingorconflictingpoliciesfromdifferent

managementsectors,whichsubstantiallyreducestheefficiencyofChineseoverseasFDI.

Inparticular,theChinesegovernmenthasfewpoliciesinplacethatencourageandsupport

entrepreneursoverseas.TheChinesegovernmentcannottakefulladvantageofmobilising

therequisiteresourcesunderitsauspicestoaddressthemarketfailuresofinformation,

andisnotinvolvedinthedevelopmentofinternationalrulesforcross-borderinvestment

either.49 More fundamentally, the government’s industrial policies in the relevant

enterprisescannotprovidethecorrectincentives.TheultimatepurposeofoverseasFDIis

18



toco-ordinatedomesticandinternationalmarketsandresources,whichmeansinessence

importingresourcesforuseinChinaratherthansimplyexportinggoods,services,or

softpower.50OverseasFDIcanplayanimportantroleinpromotingenterprisereform,

improvinggovernanceandbuildingmultinationalcorporations.However,inrecentyears,

the‘goingout’strategyemphasisedsecuringresources,focusingoninvestmentinenergy

andmineralresources,anapproachthatdoesnottakeintoaccountissuessuchasbrandor

saleschanneldevelopmentandinnovation.Asaresult,enterprisesinevitablyseeoverseas

FDIasinvolvingquicksuccessesandshortsightedbehaviour,notstrategicthinkingand

investmentplanning.

F d I I N C o u N t R y R I S k A S S e S S m e N t

Althoughinrecentyearsmorestudieshaveappearedontheenvironmentsandrisksof

China’soverseasFDI,fewcomprehensivestudiesfocusspecificallyonthecountryrisks

ofChina’soverseasFDIaroundtheworld.In2009,theOutward FDI and Co-operation

Country (region) Guide(hereinafterreferredtoasthereport)wasjointlypublishedbythe

ChineseAcademyofInternationalTradeandEconomicCo-operation,theInvestment

PromotionAgencyofMinistryofCommerce(People’sRepublicofChina)andChinese

embassies business sectors. The report gives a complete and objective description

oftheinvestmentenvironmentsinhostcountriesand/orregions,notingwhichtypes

ofinvestmentrisksexist.Thereportappearstoreflectthelocaldata,usesconsistent

standardswhencomparingcountriesandregions,andcanberegardedastheauthorityon

countryrisksofoverseasFDI.

Thereportincludesatotalof160countriesandregionsintheworld,distributedover

sixcontinents(Asia:36;Africa:47;Europe:46;NorthAmerica:2(USandCanada);Latin

America:21;Oceania:8).

Atext-basedinterpretationofquantitativeanalysiswasusedtoanalysethereport.The

mainexternalrisksfacedbyChineseoverseasFDIweredividedintosevencategories:

1 politicalrisk,includingpoliticalstabilityandadministrativeefficiency;

2 sovereignrisk,includingnationaltreatmentandmarketopenness;

3 securityrisk,thethreatofterrorism,epidemicsandotherphysicalthreats;

4 legalrisks,theintegrityofthelegalsystems,Chineseenterprises’familiaritywithlegal

systemsandlitigationcostsinhostcountries(regions);

5 culturalrisk,mainlyculturalintegrationandtheextentoffriendlinesstowardsChina’s

overseasFDI;

6 risksoflabourunionsandstakeholders,theinfluenceofmainlabourunionforcesand

otherexternalstakeholders,employmentconvenienceandlabourcosts;and

7 environmentalrisk,theresponsibilityofenvironmentalprotectionrequiredbythehost

country.

Theoverall risk indexofan individualcountryorregionwasachievedbyaveraging

theseventypesofrisk.Thequalitativeandquantitativeanalysesofriskswerebasedon

thecontentanalysismethod.First,thenatureofriskwasidentified,accordingtothe

textlanguage.Then,thestrengthofthesevarioustypesofriskswasmanuallyevaluated


19


usinga5-pointLikert-scale,whosegradesdependedonwordsfrequencyextractionand

languagecharacterisation.

The geographical distribution of the overall risk index

AfterestimatingtheriskindexofChina’soverseasFDIinallcontinents(seeTable5),a

crossanalysiswasconductedbycombiningthedataofnon-financialoverseasFDIstocks

andflowsin2008.ABCGmatrix51wasgeneratedbycombiningtheriskindexwiththe

geographicaldistributionofChina’soverseasFDI.BeingsimilartoaSWOTanalysis,the

matrixwasanalysedusingsimilarmethods.52

Table 5: The risk index of China’s overseas FDI in six continents

Asia Africa Europe US & Canada Latin America Oceania

Risk index 3.49 3.61 3.78 3.65 3.37 3.67

BasedonthegeographicaldistributionofthetotaloverseasFDIstockstotheendof

2008,China’snon-financialoverseasFDIisathighriskinfourofthesixcontinents.

TheshareofFDIstocksinAsiaisthehighestofthesixcontinents(seeFigure2).The

extentofinvestmentislowerinEurope,LatinAmericaandOceaniarespectively,butthe

risksarerankedcomparativelyhigher,makingthemmoredifficultareasforinvestment.

Moreover,specialattentionshouldbegiventoAustralia,asthecountryhasabsorbed

mostofChina’soverseasFDIforyears.TheUSandCanadasharealowerdistribution

ratioandtheleastrisk,whichmakesthempotentialdestinations(long-term)forChina’s

overseasFDI.Atpresent,China’sinvestmentinAfricarepresentsahigherproportionof

China’soverseasFDIandseemstocarryfewerrisks,makingthecontinentauniqueand

high-qualityinvestmentarea.

Figure 1: Distribution of China’s overseas industrial M&A transactions, 2008–2009

business service$0.86 billion (1.50%)

utilities$1.58 billion (2.77%)

mining industry$26.23 billion (45.92%)

manufacturing$0.70 billion (1.23%)

energy industry$27.75 billion (48.58%)

Source:Calculatedbytheauthorfromexistingstatistics

20



Figure 2: China’s overseas FDI per continent

100%

80%

60%

40%

20%

48.4

8.8

5.23.5

22.8

11.4

29.5

10.8

10.3

14.6

6.0

27.2

38.4

13.1

3.3

8.2

20.8

16.3

32.5

10.9

4.3

5.5

24.8

21.9

24.3

17.2

4.0

11.7

16.6

23.9

32.8

2.80.4

15.0

6.8

42.2

38.9

10.2

4.0

10.7

14.3

21.8

0%2003 flow

2004 flow

2005 flow

2006 flow

2007 flow

2008 flow

2008 stock

oceania

latin America

North America

europe

Africa

Asia



AsFigure2shows,Africaoccupied the largest shareof investment flows in2008,a

signofitsprominentpositionasaninvestmentlocation.Oceania(actuallyAustralia)is

obviouslyalsoavaluableinvestmentdestination,whileattentionshouldbepaidtothe

fullpotentialoftheUSandCanada,whoseregionaladvantagesareweakening.Although

higherinvestmentriskhasalwaysbeenafactorinEuropeandLatinAmerica,theirshare

decreasedin2008.

The overall coverage of seven types of risks

Theseventypesofriskhavedifferentexposureinthe162countriesandregions,and

soacrossanalysiswascarriedoutthatcombinedthecoverageandthedegreeofrisk.

Accordingtothereport,thehighestcoveragerelatedtolabourunionsandstakeholders

risk(85.6%)andpoliticalrisk(85%)in137and136countriesandregionsrespectively,

followedby legal risk (76.9%)andenvironmental risk (76.3%).Cultural riskhada

coveragerateof71.3%,whilesecurityriskandsovereignriskcarriedthelowestrisk,at

46.9%.


21


Table 6: The coverage rate and risk index of seven types of risks

Political risk

Sovereign risk

Security risk

Legal risk

Cultural risk

Labour union risk

Environmental risk

Coverage rate of risk (%)

85.00 46.90 46.90 76.90 71.30 85.60 76.30

Risk index 3.45 3.71 3.37 3.70 3.11 3.87 3.94

Basedon thematrix thatcombined the indexofsevenrisk typeswithriskcoverage

rates,themostcommonandsevererisksforChina’soverseasFDIare:labourunionsand

stakeholders,legalriskandenvironmentalrisk.Althoughpoliticalriskandculturalrisk

arecommon,theproblemisnotserious.Securityriskalwayshasalargeinfluence,butthe

probabilityandseverityoftheproblemsarenotobvious.Finally,theeffectofsovereign

riskwillbemoreseriousbut thisriskonlyappears incertaincountriesandisnota

universalphenomenon.

The distribution of various types of risk in different countries/regions

An investment risk analysis was created for different levels of economic and social

developmentofcountriesandregions,using theWorldBank’s incomeclassification.

AccordingtotheWorldBank,the160countriesandregionsinthereportaredividedinto

fivecategories:highincome(OECD53),highincome(non-OECD),upper-middleincome,

lower-middleincomeandlowincome.Theoverallindexvaluesofseventypesofrisks

werecalculatedinthefivecategoriesofcountriesandregions(economies),whichwere

sortedinascendingorderforeverytypeofrisk.

1 Political riskIngeneral,high-incomeeconomieswouldbeexpectedtohavethelowestpoliticalrisk,as

theireconomicandpoliticalsystemsaremoremature,theirsocietiesmorestable,andthe

administrativeefficiencyoftheirgovernmentsmoresatisfactory.Assuch,thelowerthe

economy’sincomeis,thehigheritsexpectedrisks.However,accordingtothestatistical

results,thehighestpoliticalriskwasnotcarriedbylower-incomeeconomies,butby

lower-middleincomeeconomiesandupper-middleincomeeconomies,whicharemainly

fromSouth-EastAsia,SouthAsia,WestAsia,LatinAmerica,WestAfrica,SouthernAfrica

andtransitioneconomies,wherepoliticalstabilityandcorruptionaremajorissues.

2 Sovereign riskTheleast-developed,low-incomeeconomieshavealowerlevelofsovereignrisk,which

isinsomerespectscounter-intuitive.Apossibleexplanationforthisresultisthatsuch

economiesaremainlyfromsub-SaharanAfricaandSouthAsia,whereleadersareless

likelytobereplacedandfavourableconditionsareofferedtoattractforeigninvestment.

So,low-incomeeconomieshavealowerprobabilityofriskssuchasnationalisation.

22



3 Security riskTheseverityofrisks(suchaspublicorder,terrorism,epidemicdiseasesandothercauses

ofpersonalsecurityrisks)isininverseproportiontothepercapitalincomelevel.This

reflectstherelationshipbetweenthelevelofeconomicandsocialdevelopmentandthe

investmentenvironment.Thestrengthofsuchariskisthesameforinvestmentfromany

country,includingChina.

4 Legal riskInterestingly,althoughbothgroupsbelong tohigh-incomeeconomies, the legal risk

facedbyChina’soverseasFDIwasnotthesameinOECDandnon-OECDcountries.As

mostofthenon-OECDhigh-incomeeconomieshavesmallereconomicaggregates,they

cannotattractorretainrealdirectinvestment.Insteadtheymaysimplydevelopoffshore

financialbusiness,becominginternationaltaxhavens.TheOECDeconomiesareadvanced

countrieswithbasicallysound legal systems.Manyof theseOECDcountrieshavea

commonlawsystemthatdiffersfromChina’slegalsystem,whichmeansthatChinese

companiesoftenhavetopayhigherlegaladaptationandlitigationcosts.

5 Cultural riskMost of the low-income economies, mainly in sub-Saharan Africa and South Asia,

maintainfriendlydiplomaticrelationsandtraditionalfriendshipwithChinaandhavea

higherdegreeofacceptanceofChineseoverseasFDI.

6 Labour unions and other stakeholder risksGenerallythelabourunionmovementandlabourcostsarehighlycorrelatedtotheextent

oflocaleconomicdevelopmentandincomelevels.Asmentionedearlier,non-OECDhigh-

incomeeconomieshavelowereconomicaggregatesandsmallrealinvestmentprojects,

butprovideregistrationservices,whichmakeslabourunioninterventionandlabourcosts

meaningless.

7 Environmental riskIn general, there is a trade-off between environmental protection and economic

developmentinmanycountriesorregions.Localenvironmentalprotectionrequirements

are therefore in line with development and income levels. Lower-middle income

economiesaremainlyfromlessadvancedindustrialisedcountriesinAsiaandAfrica,

where the industrialmodel is labourandresource-intensive.Therefore, therequired

environmentalresponsibilitiesarerelativelylenient.

ThemainrisksofChineseoverseasFDIwereanalysedingreaterdepthbysubmittingthe

seventypesofrisktoafactoranalysis.Thenumberoffactorswasdecidedaccordingto

whethertheirrespectiveeigenvaluewasgreaterthanone.Threefactorswereextracted

whose cumulative variance contribution ratewas76.798%.Themaximumvariance

orthogonalrotationdeterminedthatfactor1consistedofpolitical,legalandculturalrisks;

factor2comprisedunion,securityandsovereignrisks;whilefactor3wasenvironmental

protectionrisk.Thethreefactorswerenamed:systemrisk,interestgroupsandmajeure

risk,andenvironmentalliabilityrisk.Therefore,generallyspeaking,themainbarriersto

ChineseoverseasFDIarecausedbyincompatiblelegal,politicalandsocialsystems.This


23


meansthatalotofpainstakingworkremainsifChinaistoimproveitsunderstanding

andintegrationintotheinternationalformalandinformalsystems.Moreover,China’s

‘goingout’strategymustbeaprocessofintegratingintotheinternationalsystem,and

adequateattentionmustbepaidtotheinterestgroups,socialandpoliticalmovements

andthesupplychaininhostcountries.ChineseoverseasFDIshouldalsobecommitted

tofollowingtheinternationaltrendofresponsibleenvironmentalprotection,inorderto

avoidsocialandpoliticalriskarisingfromecologicalproblems.

Table 7: Index of seven types of risks in five categories of economies

Political risk

Sovereign risk

Security risk

Legal risk

Cultural risk

Labour union risk

Environmental risk

High income: OECD

2.46 3.58 2.12 3.91 3.59 4.04 4.64

High income: non-OECD

3.20 3.50 3.00 3.29 3.46 3.41 3.93

Upper– middle income

3.71 4.06 3.45 3.61 2.89 4.06 4.15

Lower– middle income

3.84 3.70 3.50 3.92 3.18 4.03 3.48

Low income

3.56 3.56 3.70 3.69 2.62 3.56 3.61

Figure 3: Geographic distribution and risk index of China’s overseas FDI stocks in 2008

Prop

ortio

n of

dis

trib

utio

n

Risk index

Asia

europe

oceania

Africa

latin America

uS & Canada

45%

40%

35%

30%

25%

20%

15%

10%

5%

0%3.3 3.4 3.5 3.6 3.7 3.8 3.9

I

Iv

II

III

24



Figure 4: Geographic distribution and risk index of China’s overseas FDI flows in 2008

Prop

ortio

n of

dis

trib

utio

n

Risk index

Asia

europe

oceania

Africa

latin AmericauS & Canada

45%

40%

35%

30%

25%

20%

15%

10%

5%

0%3.3 3.4 3.5 3.6 3.7 3.8 3.9

I

Iv

II

III

Figure 5: The coverage rate-risk index matrix

Cov

erag

e ra

tio

Risk index

Cultural risk

Political risk

legal riskenvironmental risk

labour union risk

Sovereign riskSecurity risk

90%

80%

70%

60%

50%

40%3 3.2 3.4 3.6 3.8 4

I

Iv

II

III

C o N C l u S I o N

AfteranalysingthecurrentsituationandmainfeaturesofChina’soutwardFDIin2008–

2009, the lossessufferedandthemajorrisks faced, thepreliminaryconclusionsare:

(1)China’soverseasFDIhasexperiencedarapiddevelopmentbutisstilllowinabsolute

terms, while the concentration trend of geographical and industrial distribution is

obvious.Thisindicatesthatthe‘going-out’strategyhasbeenfaithfullyimplemented,but

alsocontainshighrisks.(2)TherisksofChina’soverseasFDIemanatefromfourmain

aspects:breachofcontractandunexpectedtransactionalcosts;exchangeloss;premium

transactions;andfailureofintegration.(3)OverseasFDIfacessystemicrisks.Theinternal

causes from theChinese side includeahighconcentrationof investment; excessive

governmentintervention;lowinternationalbusinessmanagementability;andalackof


25


overseasinvestmentstrategies.(4)BasedonacountryriskanalysisofChina’soverseas

FDI, themost important issuesare the legal,political, socialandother institutional

differencesandconflicts.ThisindicatesthatChina,hostcountriesandtheinternational

community need to continue to strengthen co-operation and mutual institutional

transformation.And,asimportantly,asanemergingworldpower,Chinashouldtakeon

moreinternationalresponsibility.

e N d N o t e S

1 JiangZeming’saddressatthemeetingofthePoliticalBureauoftheCentralCommitteeon20

January2000.‘JiangZemingAnalects’,2,Beijing:PeoplePublishingHouse,2006,pp.569.

2 Accordingto China Statistical Yearbook 2008,outwardFDIisdefinedasaneconomicactivity

wherebyChina’sdomesticinvestorsestablishorpurchaseenterprisesabroadoroutsideof

customsterritorybycash,intangibleortangibleassetsetc.withaviewtogettingtherightof

controltooperateormanagetheenterprise.

3 ChenWeishuarguedthatChina’soverseasinterestsexistoutsidetheeffectivejurisdiction

ofChinesesovereignty.Thenarrowconceptisthesecurityoflife,propertyandactivitiesfor

overseasChineseorganisationsandcitizens.Thebroadconceptincludesallkindsofeffective

agreementsandcontractsrelatedtotheinterestsofChinesegovernment,corporationsand

citizens,andthedignity,reputationandimagefairlyaccessedbyofficialandcivilsociety.

SeeWeishuC,‘GeneralvisionofChina’soverseasinterests’,International Review,2,2009.

SuChanghearguedthatChina’soverseasinterestsaredefinedasatypeofnationalinterests

whichentitledininternationalinstitutionsanddistributedinextra-territorialareaswithin

theestablishedgloballinkagesofdomesticmulti-actors.SeeChangheS,‘OnChina’soverseas

interests’,World Economics and Politics,8,2009.

4 NominalGDPofCaymanIslandsisKYD2.03billion(about$2.5billion).CaymanIslands

Governmentwebsite,http://www.gov.ky/portal/page?_pageid=1142,1481068&_dad=portal&_

schema=PORTAL).The2006StatisticalBulletinofChina’sOutwardForeignDirectInvestment

demonstratesthatChina’sdirectinvestmentflowtoCaymanIslandsis$7.83billion.TheGDP

ofBritishVirginIslandswasabout$1.1billionin2007.DatacalculatedaccordingtotheBritish

MinistryofForeignAffairs,http://www.fco.gov.uk/en/travel-and-living-abroad/travel-advice-

by-country/country-profile/north-central-america/british-virgin-islands?profile=economy.

The2007StatisticalBulletinofChina’sOutwardForeignDirectInvestmentdemonstratesthat

China’sdirectinvestmentflowtoBritishVirginIslandsis$1.88billion.Bycontrastingthese

figures,itisobviouslyverydifficulttobelievethattheseinvestmentsaretrulysettledlocally.

5 NotethatexcludingtheCaymanIslandsandBritishVirginIslandsinvestment.

6 NotethatexcludingHongKong,MacaoandTaiwaninvestment.

7 Thispaperconsolidated thecompletionofnon-financial sectorM&Acases thatChinese

enterprises announced between 1 January 2008 and 31 December 2009. The top 20

transactionsare listedat theendof thepaper.Unless thesource is indicated, theauthor

calculatedthecross-borderM&AtransactionsfrompubliclyavailablereportsinChinaand

overseas,corporateannualreportsandothernoticesororders.Duetothewidevariety,the

sourcescannotallbelisted.

8 Someindependentresearchinstituteshaveindicatedthatformanyyears,cross-borderM&A

of Chinese enterprises focused on energy, mining and utilities. Deloitte’s study showed

26



that from2003tothethirdquarterof2009,acquisitionsbyChineseenterprises inthese

sectorsaccountedfor29%oftheircross-borderM&Aactivities,and66%ofthetotalvalue

oftransactions.Inthefirstthreequartersof2009,dealsacquisitionscompletedbyChinese

enterprisesintheseindustriesaccountedforabout41%oftheircross-borderM&Adeals,

andupto93%ofthedealsvalue.SeeDeloitteChina,China’s rise: New areas of cross-border

mergers and acquisitions, November 2009, http://www.deloitte.com/assets/Dcom-China/

Local%20Assets/Documents/Services/Global%20Chinese%20Services%20Group/cn(zh-cn)_

gcsg_EmCnNewFront_011209.pdf.ThomsonReuters’studyconfirmedthatin2009China’s

cross-borderM&Afocusedontheenergyandrawmaterialssectors, ‘Fourthquarter2009

financial advisors: Mergers & acquisitions review’, http://online.thomsonreuters.com/

DealsIntelligence/Content/Files/4Q09%20MA%20Financial%20Advisory%20Review.pdf.

9 HongmeiH,‘M&A:Systemicstrategyismoreimportant’,fromthewebsiteoftheChinese

AcademyofInternationalTradeandEconomicCo-operation.

10 DevelopmentResearchCenteroftheStateCouncil,‘AnanalysistothestrategyonM&Aof

Chineselargeoilenterprises’,DRCnetMonthlyAnalysisofPetroleumandChemicalIndustry

Report,14August2009.

11 YouZ,‘Thereasonsof“goingout”failure,threestrategiesexpertsgiven’,21st Century Business

Herald,9August2007.

12 RMB:renminbi(Chinesecurrency).

13 ChuanJ,‘Hurriedwithdrawoverseasacquisitions:China’s200billionRMBtuitiontestwaves’,

China Securities Journal,18December2008.

14 CAD:Canadiandollar.

15 ‘CNPCacquiredVerenexdealfellthrough’,Caijing,September9,2009.http://www.caijing.

com.cn/2009-09-09/110244077.html.

16 ‘Verenex shareholders approve sale to Libyan government arm’, Wall Street Journal,

14December2009,http://online.wsj.com/article/SB100014240527487042014045745900808

69123634.html.

17 NoticeofChinaRailwayGroupLimited’sforeigninvestment,ChinaRailwayGroup,23April

2008,http://www.crec.cn/c_admin/images/200842474626.pdf.

18 ‘Congo(DRC)announceddetailsofthe$9.25billiontransactionwithChina’,FT Chinese,

12May2008,http://www.ftchinese.com/story/001019267.

19 Until2007,theDRC’sbalanceofforeigndebthadreached$13.4billion,belongingtothe

HeavilyIndebtedPoorCountries.InternationalMonetaryFund(IMF),‘DemocraticRepublic

oftheCongo:StatisticalAppendix’,IMF Country Report,10/11January2010.Seehttp://www.

imf.org/external/pubs/ft/scr/2010/cr1011.pdf.Inrecentyears,theDRCgovernmenthasbeen

negotiatingwiththecreditorsandtheIMFabout$11billionofdebtreliefissues.

20 ‘China’s largest investment in Africa delay’, FT Chinese, 10 February 2009, http://www.

ftchinese.com/story/001024589.

21 IMF,statementbyIMFstaffmissiontotheDemocraticRepublicoftheCongo.PressRelease,

08/346,23December2008.Seehttp://www.imf.org/external/np/sec/pr/2008/pr08346.htm.

22 WallisW,‘ChinesedealthreatensIMFaidforCongolese’,Financial Times,15May2009.See

http://www.ftchinese.com/story/001026447/en.

23 IMF, ‘DemocraticRepublicof theCongo:Request for the rapid-access componentof the

exogenousshocksfacilityandreportonthe2008staffmonitoredprogram’, IMF Country Report,

09/317,17November2009.Seehttp://www.imf.org/external/pubs/ft/scr/2009/cr09317.pdf.


27


24 ‘IMFputpressureonChinaandtheDRCshrinksagreement’,STNN,20August2009.See

http://www.stnn.cc/chinafin/200908/t20090820_1088718.html.

25 InJanuary2008,theexchangerateofRMBagainstthedollarincreasedby7.5%overthesame

periodofpreviousyear.InJanuary2009,theexchangeratehadincreasedby6.0%year-on-

year.(DatacalculatedaccordingtothePeople’sBankofChina’swebsitestatistics.)

26 ‘ChinaCOSCO:Exchangerateriskscontinuetoexpand’,EEO,25December2008.Seehttp://

www.eeo.com.cn/hwtz/2008/12/25/125040.shtml.

27 DongL,‘Openthe“doorofAustraliandollar”looksatcorporateexchangerisk’,Securities

Daily,21November2008.

28 ChinaRailwayGroupLimited,Report of the third quarter of 2008,http://www.crec.cn/c_admin/

images/2008103192833.pdf.

29 HKD:HongKongdollar.

30 ‘CITICPacificLimitedResultsAnnouncement(2008)’,CITICPacific,http://www.citicpacific.

com/upload/gb/20090325-1c.pdf.

31 Untiltheendof2002,Chinasetup6 960enterprisesoutside(includingHongKongand

Macao regions). See Ministry of Commerce website, ‘2002 concise statistics of foreign

economicco-operation’.Untiltheendof2009,Chinahasestablishedabout14 283enterprises

acrosstheborders.ThecalculationisbasedonStatisticalBulletinofChina’sOutwardForeign

DirectInvestment2008andthedataonoutwardFDIpublishedonthewebsiteoftheMinistry

ofCommercein2009.

32 Beingunabletofindthenumberofcompaniesthatsettingupinoverseascountries(excluding

HongKongandMacaoregions),theoutwardFDIdatawasusedtoreplacetheoverseasFDIto

analyse,astheirdevelopmenttrendsaresimilar.

33 From2002to2007,thenumberofdomestic-scaleindustrialenterprisesincreased0.85times,

totalassetsincreased1.41times,andaverageannualgrowthrateswere13.2%and19.3%.

BasedonChina Statistical Yearbook 2003 andChina Statistical Yearbook 2008, publishedbythe

NationalBureauofStatistics.

34 AnnualReportofPetroChinaCompanyLimitedin2008,PetroChinawebsite.

35 Chen Y, Hui H & T Chunrong, ‘2009 International oil price review and 2010 forecast’,

Petroleum & Petrochemical Today,1,2010.

36 ‘ReportofChinaOilfieldServicesLimitedinthethirdquarterof2009’,COSLwebsite,http://

www.cosl.com.cn/Chinese/uploadSoft/200910281751252097.pdf.

37 AnnualResultsAnnouncementofAluminumCorporationofChinaLimitedin2008,Chinalco

website,http://www.chalco.com.cn/zl/html/61/2009/20090330093156145492057/2009033009

3302457679349.pdf.

38 Mid-term Results Announcement of Aluminum Corporation of China Limited in 2008,

Chinalcowebsite.

39 XinhongL,‘TheaftermathofChinalco’sM&A’,Weekly On Stocks,2December2008.

40 Deloitte, ‘Deloittesurveyshowsthat60%ofmergersandacquisitionsdonotachievethe

desiredbusinessvalue’,Deloitte’snetworkinChina,http://www.deloitte.com/view/zh_CN/

cn/7039/press-release/68f30b7412a94210VgnVCM100000ba42f00aRCRD.htm.

41 KRW:Koreanwon.

42 SAICMotorCorporationLimited,2008 Annual Report,SAICwebsite,http://www.saicmotor.

com/chinese/images/tzzgx/ggb/dqbg/2008ngg/2009/4/29/2390.pdf.

43 SAICMotorCorporationLimited,2008 Mid-term Annual Report,SAICwebsite,http://www.

saicmotor.com/chinese/images/tzzgx/ggb/dqbg/2009ngg/2009/8/28/2605.pdf.

28



44 ThenewsonthewebsiteofNationalDevelopmentandReformCommission,5January2010,

ZhangXiaoqiang,deputydirectoroftheNationalDevelopmentandReformCommission,

addressedthemeetingonutilisingforeigncapitalandoverseasinvestmentthat‘goingout’

strategyshouldcontinuetoinvestinthemainenergyresources,increaseabilitiestoexplore

overseasresources,marketsandadvancedtechnologysoastoprovideprotectionfordomestic

economicdevelopment.Seehttp://zhangxiaoqiang.ndrc.gov.cn/zyjh/t20100105_323369.htm.

45 ‘China has already signed 127 bilateral investment protection agreement with over 100

countriesandregionsintheworld’,People’s Daily,overseasedition,20May2009.

46 UNCTAD,RecentDevelopmentsinInternationalInvestmentAgreements,2008–June2009,IIA

Monitor, 3,2009.Seehttp://www.unctad.org/en/docs/webdiaeia20098_en.pdf.

47 ‘PWC experts: There is misunderstanding overseas investment of Chinese enterprises’,

International Finance,9,2009.

48 ‘Chineseenterprisesinoverseasmergersandacquisitionsshouldbecareful’,Securities Journal,

21March2009.

49 Zhang Guangrong, ‘The evolution of the basic policy of China’s “foreign investment”’,

International Economic Cooperation,9,2009.

50 Deloitte,‘LookatChina’soverseasinvestmentactivities’,MeasuredValue,thefifthJanuary-

February2010.

51 Boston Consulting Group matrix is a chart created by Bruce Henderson for the Boston

ConsultingGroupin1968.Ithelpscorporationstoanalysetheirbusinessunitsorproduct

lines,andallocateresources.

52 Quadrantsofthematrixwerebasedonmid-valueofverticalandhorizontalranges.Theexact

degreeofriskindexispoor,assubjectivitywasusedtosortthereferences,andsothefigures

arenotmathematicallycorrect.

53 OrganisationforEconomicCo-operationandDevelopment.


29


A P P e N d I x

20 largest cross-border M&A by Chinese enterprises (non-financial sectors), 2008–2009

Rank

Dat

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pu

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South African Institute of International Affairs

Jan Smuts House, East Campus, University of the Witwatersrand

PO Box 31596, Braamfontein 2017, Johannesburg, South Africa

Tel +27 (0)11 339-2021 • Fax +27 (0)11 339-2154

www.saiia.org.za • [email protected]

S A I I A ’ S F u N d I N g P R o F I l e

SAIIA raises funds from governments, charitable foundations, companies and individual

donors. Our work is currently being co-funded by AusAid, the Bradlow Foundation, the

United Kingdom Department for International Development, the European Commission,

the British High Commission of South Africa, the Finnish Ministry for Foreign Affairs, the

International Institute for Sustainable Development, INWENT, the Konrad Adenauer

Foundation, the Royal Norwegian Ministry of Foreign Affairs, the Royal Danish Ministry of

Foreign Affairs, the Royal Netherlands Ministry of Foreign Affairs, the Swedish International

Development Cooperation Agency, the Canadian International Development Agency,

the Organisation for Economic Co-operation and Development, the United Nations

Conference on Trade and Development, the United Nations Economic Commission for

Africa, the African Development Bank, the Open Society Foundation for South Africa, and

the Africa Governance, Monitoring and Advocacy Project.

SAIIA’s corporate membership is drawn from the South African private sector and

international businesses with an interest in Africa. In addition, SAIIA has a substantial number

of international diplomatic and mainly South African institutional members.

African perspectives. Global insights.South Africa

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