China is vast, rich, motivated and a nation of entrepreneurs. China is an intoxicating proposition. Now the world’s second largest economy, China’s GDP growth in 2017 was 6.9% and with Q1 2018 GDP growth at 6.8%*, China continues to expand at a rate enviable to the western world’s advanced economies.

The prospect of doing business in China is becoming increasingly important for any business or individual wishing to expand their international client base or develop their international strategy. But China is culturally complex, and conducting successful business is an artform.

I am a massive advocate of China having lived in Beijing between 1995-2004, then spending the last 13 years investing significant sums into 6 Chinese industrial, mining and real estate projects. I would like to share what I believe are the three most crucial questions one should ask before investing in or conducting deals with Chinese counterparts.

1. Who is the decision maker?

Without the of knowledge the Chinese language, experience and a thorough understanding of China’s strict state regulation, foreign investors and operators often rely on a ‘fixer’, an introducer, or a broker since access to the decision maker is often difficult. This person, or organisation is likely to be the introduction of an associate, or a professional advisor such as a lawyer, or an accountant. Your ‘fixer’ must be able to display an excellent track record and this will be your first challenge.

When introduced to a relationship or an opportunity, again it is crucial to conduct in advance, a detailed diligence ensuring there is clarity surrounding the decision maker. If the decision maker is a State-Owned Enterprise (SOE) expect the Chairman, or a committee; and in the case of a private or listed company, the Chairman or one of their senior lieutenants.

2. What does the other party want to achieve?

Once you are confident you are meeting the right people, you need to understand what the decision maker is really after. Be sure not to make pre-judgments and paint an understanding of what it is you believe they want. There are more nuances in the Chinese language and business conduct than the average person can fathom, so it is vital that you make sure that your interests are genuinely aligned and understood.

3. Can they deliver on their promise… or not?

In today’s business environment this will certainly include the availability of funding domestically or internationally, regulatory permissions and the decision maker’s real support and buy-in.

Follow these steps and, with the correct advice, you should be in safe hands.

As with any other country Salamanca Group has transacted in, we believe securing the right partner is 90% of the way to success. If not, no expensive lawyer, relationship or contract is likely to make it successful.

Early investors into China are seeing great results and now the opportunities are broadening for both inbound and outbound investments, the timing to get involved is great.

Opportunities & Guidance

1. Belt and Road

China’s planned ‘Belt and Road’ or more commonly known ‘One Belt One Road’ proposes ambitious, interesting and significant investment opportunities. Under the initiative Chinese companies are encouraged to, whilst meeting guidelines, go internationally to invest, partner, develop and operate in designated countries, industries and Chinese areas of interest and influence.

The countries China plans to engage with represent 55% of World Gross national Product, 70% of the world’s population and 75% of known energy reserves. The initiative is funded with $100 billion from Asia Infrastructure Investment Bank (AIIB) and $40 billion from the Silk Road Fund**.

2. Catalogue for the Guidance of Foreign Investment Industries

One must not forget the rules and regulations to be adhered when investing in China due to the strict control of the state, which cannot be underestimated. July 28 2017 saw the new Catalogue for the Guidance of Foreign Investment Industries come into effect, updated from the previous 2015 edition. The updated catalogue sees a negative list introduced nationwide, which includes both restricted, those which must receive approval from MOFCOM, and entirely prohibited industries. Good news however, the catalogue has reduced the number of restricted foreign investment opportunities from 93 to 63.

Whilst this may look relatively hostile to foreign investment, encouraged industries also benefit from incentives such as reduced tax rates, imploring investors to bet on China. Harness an opportunity in one of the encouraged industries, such as their world leading stance in Green technologies and experience how much China is open for business.

Negative list: Aerial photography mapping, editing and publishing of books, newspapers, and periodicals, internet public information services, radio, television video-on-demand businesses, and satellite television broadcasters receiving facility installation services

Encouraged industries: rail transportation equipment, motorcycles, new energy vehicle batteries, civil satellites, unconventional oil and gas development, high-tech industries: such as virtual reality (VR) and augmented reality (AR) devices.

Navigating the Chinese business landscape is challenging, but as Salamanca Group has demonstrated, with the right advisors and technical insight, it is a journey worth exploring.

Salamanca Group China Transactions

Industrial
US$7m: Investment into Chinese drilling equipment manufacturing company

Industrial
US$30m: Acquired shares in new Chinese shipbuilding company

Mining
US$85m (in two tranches): Investment into a world class polymetallic mining asset

Mining
US$22.5m: Investment into a chinese gold producer pre-IPO

Mining
US$30m: Investment into a Chinese iron ore mining exploration and development company operating in Indonesia

Real Estate
Acquired a medium sized investment portfolio of pre-developed residential flats on behalf of a Client in a development in Nanjing from a well-known developer

This article was written by ShaRon Kedar, Group Director of Salamanca Group. He speaks Mandarin, as well as his native Hebrew and English, and has a long career history of doing business with Chinese businesses and decision-makers.

*Tradingeconomics.com
**lse.ac.uk

This article is part of our May 2018 Group Newsletter

To read the PDF version online, click here, or to read another article online, please follow one of these links:
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