(Beijing, China) Some compare China’s “One Belt One Road” (OBOR, in Chinese一带一路) to the United Sates’ post World War II Marshall Plan for Europe. I would say OBOR is more like a Marshall Plan on steroids. Why? Because of the epic scale. OBOR is not just another Chinese government initiative but a mass mobilization of every aspect of the Chinese economy. With the marching orders given and the investment funds flowing, the question for America, developing nations in Asia and professional service providers becomes: “How to benefit from this economic bonanza?”
The Chinese are clever. They will continue to layout specific guidelines, and develop a roadmap for the movement of an investment of Chinese businesses abroad. For savvy observers, this roadmap presents an opportunity for foreign businesses (even those from my birthplace, America’s “rust-belt”) to “get in on the action”.
Chinese outbound investment operates like water flowing through a valve. The valve is controlled by the government, which decides which money to let flow out to fund a specific investment. In this way the Chinese government controls the flow of Chinese money abroad, and is able to direct that money into preferred OBOR investments.
China’s currency the RMB (人民币) is not fully convertible, one needs government approval to convert funds into foreign currency and invest abroad. The transaction is not only a business decision for a Chinese private company, but the purchase must be approved by the State Administration of Foreign Exchange (国家外汇管理局), the administrative agency tasked with drafting and enforcing regulations governing all foreign exchange market activities.
The government’s control over this outbound investment is so complete that if a major China insurance company buys the Waldorf Astoria in New York for USD$ 1.4 Billion Dollars without approval, the government can come in and force the divestment of the asset. This actually happened. You see, while ownership of the Waldorf Astoria is a gaudy display of wealth, the investment itself was considered to have no benefit to China.
How, how can ordinary people “read the tea leaves” and better understand how they might capitalize on the OBOR outbound investment trends? It’s simple, just look at the draft and implementing regulations, as issued by Chinese government bodies such as SAFE and the People’s Bank of China (PBOC). These rules “telegraph” where Chinese money is going and when.
To be fair, for me as a Senior Fellow at the Chinese Academy of Social Sciences (CASS, in Chinese 中国社会科学院), and organization affiliated with the State Council (中华人民共和国国务院) which is synonymous with the Central People’s Government, I am lucky to be well positioned to have an inside glimpse at future trends.
So what is the news? China will introduce an official “Code of Conduct” (the Code) for outbound investment designed to provide better guidance on financial allocation and risks to Chinese companies investing abroad. This is good news. China watchers with the benefit of the Code will better understand the actions of Chinese businesses at all levels, whether mammoth Chinese State owned enterprises, or Chinese small or medium private enterprises. The Code will offer some clarity by the Chinese regulators after efforts the governmental regulators to curb what they consider “irrational” investment.
Chinese companies have great experience at doing business in China, but often are not familiar with business practices, political systems and security issues in the foreign countries targeted by OBOR. The detailed Code, which is yet to be released to the public, will guide enterprises’ outbound investment and help them better identify risks in foreign countries.
The Chinese regulators realize all Chinese investors are not the same, due to a lack of sufficient awareness of the local risks abroad, some investments made out of blind optimism have led to misunderstandings in the destination countries, and problems for the investing company. This is unavoidable at some level when an entire nation begins for the first time in history to make substantial investments abroad. The Chinese authorities understand that it is best to provide Chinese companies venturing into overseas investments a clearer set of guidelines and conduct in the form of the Code. This is similar to the phenomenon seen that airports in China which are replete with advertisements and public notices reminding Chinese nationals to behave well on their travels abroad.
The Code is part of China’s broader efforts to improve, clarify, and implement regulations on outbound investments, and publicize the same to the Chinese business community, as well as the global economic community. This has been a long time in coming. What is exemplary on the part of the Chinese authorities is that they actually solicit expert opinions from business professionals and lawyers in private practice (such as myself). The Chinese government will seek to enhance cooperation with foreign countries in building a legal framework and to help enterprises identify risks, thereby improving the quality of investment. Foreign experts have been invited by State Administration of Foreign Experts Affairs (SAFEA, in Chinese 国家外国专家局) and the administrative agency of the State Council (中华人民共和国国务院) to give advice on and to assist with the formulation of these types of initiatives.
I can say one thing for certain; the American government does not bother to do the same thing. The Chinese at least know enough to know they need foreign expertise to opine on these matters to keep things safe for the investors and the recipients of the investments.
With this Code in the pipeline, China will further streamline registration procedures and provide even more opportunities for investment projects that are not considered problematic for Chinese national security.
To promote investment abroad, the Chinese government has removed some administrative hurdles, like the necessity to obtain prior approval for enterprises investing more than $300 million. Such firms now only need to register the outbound investment with the National Development and Reform Commission (NDRC), according to these latest guidelines.
The Chinese defense industry sector and industries that the government considers as not a priority (identified as “irrational” by the authorities, such as that Waldorf Astoria deal, their term not mine) have been added to the “Sensitive” category, which means investment in those sectors will undergo more rigorous government scrutiny and will require the prior approval of the commission for such investment in foreign countries to proceed.
So-called “irrational investments” have been curbed after the government took measures to control buying sprees since late last year, according to data from the Ministry of Commerce.
It would seem that the government has no incentive to shut the valve for China enterprises investing abroad if the enterprises can show that the funds will be used properly in an investment abroad, and the transfer is not just a currency repatriation play or attempt by a Chinese national to get money outside of China and beyond control of the regulator.
Even the “average Joe” understands on some level that China’s overseas investments experienced high-speed growth in the past several years and have played a pivotal role in supporting the global economic recovery. Heck, a Chinese company making automotive windows opened in Ohio recently in what was an abandoned GM factory bringing some 800 jobs to Americans in the “rust belt”. This Chinese company is operated by a proud Chinese private businessman who likes “all things American”, and wanted access to selling his products to automakers locally; his workers each belong to the local United Auto Workers Union. Amazing stuff.
The overall trend is that the Chinese government will sustain the current path to further opening-up, with key focus on promoting the development of the OBOR. This is good news for China and the world economy. If you have questions or seek additional comments please private message me at
elehman@lehmanlaw.com
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by Edward Lehman 雷曼律师