Now is the time to seize investment opportunities from China: direct investments by Chinese companies overseas have seen a dramatic surge in recent years, following a long period of development of its domestic economy and the accumulation of foreign currency reserves over many years foreign markets represent a real opportunity. According to the Heritage Foundation, a US think tank, in the past five years, nearly half of Chinese non-financial investment overseas was made in the engineering and construction sectors. The UK, in particular, draws considerable Chinese investment interest, for example, the planned High Speed 2 rail link from London to Birmingham. Many other potential projects are currently under discussion include updating Britain’s energy infrastructure, broadband investment and road schemes. At the moment, under an initiative backed by the Chinese government, two Chinese energy groups are poised to investment in Britain’s nuclear programme and are involved in talks to buy the Horizon consortium from its German owners.
Can you take the initiative to attract Chinese investments that are “going global”? This article looks at the key issues you should consider when seeking out investment relationships with Chinese companies in order to secure that investment and reduce the risk of things going wrong further down the line.
Five steps to securing Chinese investment
- Showcase your local connections
Your understanding of the local market and your extended local network are exactly what Chinese companies eagerly need when starting their operations in new markets offshore. They will want people on the ground who are already familiar with the market to minimise the risk of failure.
- Demonstrate your R & D ability
Chinese companies are looking to boost their technological skills through overseas expansion. This is an area in which Chinese companies are particularly keen to benefit from an investment relationship. Their needs are your opportunities. For instance, they may wish to jointly host an R & D centre with you. This can be a spring board for subsequent cooperation and investments.
- Local HR and support services
Many Chinese firms operating overseas may not be familiar with how certain functions operate in a foreign country. For instance, there are a number of HR issues relating to employee health care, pension, and other benefits that are unique to the UK. In these areas, Chinese firms cannot simply bring Chinese practices to their overseas operations. Your experience in dealing with those management and service issues and your acquaintance with well-qualified local professionals in business will be highly valued by your Chinese partners.
- Brand management
One of the key aims of Chinese firms investing offshore is to seek to globalise their brand. However, the lack of IP and brand related legal and commercial knowledge may well put their IP rights and brand at risks in overseas markets. Your risk management strategies in respect of brand marketing and protection will doubtlessly impress your Chinese partners and attract their interest.
- Local regulations
We are often asked by our clients about how they should manage and minimize the risks associated with investing or contracting overseas. Indeed, Chinese firms that invest abroad are not only entering a local market, but are also stepping into a whole new world of risks. Few Chinese companies have first hand experience of operating in highly regulated western economies, and may not be familiar with the kind of risks they face in the new markets. For example, many Chinese companies lack full comprehension of compliance requirements in managing risks associated with labour, environmental, or product liability.
Several Chinese companies have been investigated and fined by local authorities for tax issues as a result of being unfamiliar with the local tax system. The UK Bribery Act 2010 has a notably wide geographical coverage meaning that once Chinese firms starting to do business in the UK, their activities worldwide in terms of bribery and anti-corruption matters may fall into the scope of this act. The value of assisting your Chinese partners in addressing those fatal issues cannot be underestimated.
Avoiding the risks
There are a variety of legal risks inherent in the Chinese overseas investments in relation to which you and your Chinese JV partners should be aware. Specific risks to guard against include:
- Be wary that Chinese investors are required under Chinese law to obtain governmental approvals for outbound investments. In the absence of such approvals, a contract or investment agreement in relation to overseas investments may be ineffective and hence unenforceable in China. If the approvals are necessary under Chinese law, consider whether it would be best for them to be conditions precedent to the contract.
- When contracting with a Chinese entity, draft the contract in both Chinese and English but ensure that the two versions conform, and clearly identify the prevailing version in case of any discrepancy.
- Clarity is key so avoid using vague terms. Precise language will help to avoid disputes and may also bring the counterparty to heel in respect of the exact scope of its contractual obligations.
- Any agreement, however basic, should always contain a binding governing law and jurisdiction clause and expressly provide for the method of dispute resolution (i.e. litigation in local courts or international arbitration). This will avoid any surprises or difficulties surrounding the resolution of any disputes that subsequently arise.
- The possibility that a contract might end up being examined by a foreign court, e.g. the Chinese court, should be always kept in mind. Accordingly, when drafting, consider the differing approaches to contractual interpretation taken in different jurisdictions. Avoid using English drafting styles and legal concepts such as “best endeavours” as these are not generally recognised under Chinese law.
- Bear in mind that a judgment or arbitral award involving a Chinese party may need to be enforced in China, as many Chinese companies have little meaningful assets outside China.
- As with any multi-jurisdictional commercial exercise, employing a project management approach from the outset will help to avoid difficulties emerging as the case develops. It will also ensure that costs, time and information are managed efficiently.