China: Cross Border Transactions -- How Many Hardships does China Need to Overcome?

Last Updated: 29 September 2012
Article by Rupert Li

People frequently observe the cultural barriers which the Chinese companies find difficult to overcome in relation to China's nascent outbound investment program. Since China is culturally and politically different from the mainstream trading countries, an attribution of the anguish on both sides of the negotiation table to cultural barriers is indeed tempting but often misplaced. Any professionals operating in places other than in the rule setting non Anglo-American jurisdictions always have war stories to share with their colleagues. The Mexican tycoons prefer to negotiate their deals in the smoking rooms of their vast hacienda guarded by private soldiers. The Indians nod to signify their disapproval and shake their heads for approval, or sometimes vice versa. The Japanese entertain their foreign guests with stylized geisha dance and ocean dainties of whale meat and blow fish. These cultural idiosyncrasies would make our deal process more memorable, but they seldom torpedo deals as our professionals and their principals have rarely retreated from a deal purely on the ground of local habits which repel their sensibilities. Many have spent their formative years in august institutions learning foreign languages or foreign business practices ranging from Sharia law of the Middle East to China's Labyrinth of approval procedures. Companies have become nimble and adaptive while operating in foreign countries and they have soldiered on to make big profits in spite of occasional cultural clashes with their local partners, local staff and local regulators.

Japan made its massive investment in the US and around the world in the 80's and 90's in the last century. US and Europe deployed huge capital across into China in the last two decades. Neither had an easier time to transcend cultural barriers. While no one has come out perfect, few regrets have been heard from either business community. It is safe to infer that cultural barries are problems universal to all investors in foreign countries, but they are surmountable hurdles. If we are trying to debunk the myth of what is frustrating the Chinese companies' objectives in their pursuit of global reaches, we may have to look beyond the commonality of cultural barriers and ascertain those constraints relevant only to the Chinese companies and how they have impeded the momentum of China's quest for a deserving piece of the international M&A market.

  1. Unlike India and Japan whose mercantile class survived the vicissitudes of the last century, China abolished its market and implemented a pure planned economy for 30 years prior to its opening in 1979. The cessation of market activities gave rise to the disappearance of a few generations of business elites. Even though the Chinese have caught up faster than many had predicted, it may take another one or two decades to generate the sophisticated corporate governance and the veteran professionals to match the institutional prowess of the Japanese and the individual ingenuity of the Indians. At present, few of the institutions and their executives have the requisite experience to execute cross border deals with ease and confidence.
  2. The US has begun to smart over its two decades' support of China's economic growth. An economically prosperous China has not embraced the universal values as predicted and the country seems determined to remain a political outlier. While the US and its allies cannot disentangle themselves economically from China, they are instinctively inclined to create subtle and blatant roadblocks restricting the Chinese from buying strategic assets. The fact that Chinese companies are opaque in their investment motives and decision making process and that they receive unbridled credit support from China's state banks exacerbates the skepticism of both their Western competitors and the host countries. Nationalist politicians, journalists and competing corporates all find it extremely easy to denigrate, lampoon and second guess the Chinese. Other than local politicians, Wall Street bankers and other service providers, Chinese companies have few cheerleaders on their side.
  3. Most Chinese companies are run vertically with the CEO being the final arbiter for investment decisions. Most of these CEOs however do not have a mature understanding of what is expected of them in an M&A transaction. They habitually abstain from active participation in the process which will lead to an investment decision. Neither do they wish to delegate and devolve their authority to negotiating teams whose lack of authority is often maddeningly frustrating to everybody else involved. In the fast moving deal market, you will see many hapless Chinese executives with little or no authority to improvise any ideas or to make any decisions without headquarter approval.
  4. Many consider the Chinese SOEs as extensions of the Chinese government and sometimes rightfully so. As proxies of the state, the SOEs are seen less a profit seeking enterprises than entities mandated the task to buy resources around the world for the benefit of the country. After having been denied to buy equity of the name brand Western companies (e.g., Unical and Rio Tinto), Chinese companies have developed a jaundiced view about the fairness of the market as manipulated by the Anglo American business community and sometimes equally rightfully so. Their alternative is to invest directly at the assets level which in turn arouses suspicion that China fundamentally distrusts the market and wishes to create alternative supply channels of energy and metal ores which may challenge the existing dynamics. The strategy will not play out well for China. China has no colonial experience and its diplomatic playbook is still stuck in its non alignment past. The odds are poor that they will beat the Shells and Anglo Americans of the world in reaping decent returns in third world countries. In addition, China cannot change the geography and they will have to ship the iron ores or crude oil to China via sea lanes currently patrolled exclusively by the US navy and its allies. China should revisit the feasibility of joining force with the leading Western companies for mining and energy transactions and the West should also refrain from encouraging China to pursue wildcat tactics by denying them again and again the access to equity interests in their leading resources companies.
  5. Chinese companies drew the preponderance of their international experience from the days in the 80's throughout the 1990's and earlier 2000's when many of them negotiated with numerous MNCs for setting up joint ventures and other foreign investment enterprises in China. The Joint Venture Law of China created a modus vivendi whereby Chinese and foreign parties are forced to adopt a quasi-partnership template for their joint operation. In spite of its many ills, this legal regime has done a decent job in protecting or even favouring foreign investment projects. The governments at local level have become particularly beholden to those employment creating and tax paying MNC mega plants. This comfortable matrix sadly never exists elsewhere and the Chinese businessmen are often befuddled by the absence of any substantive protection of their investment in mature jurisdictions where the governments are powerless in interfering in the legal or other administrative process. The Chinese accustomed to the concept of paternalists protection will find rude awakening in both negotiation and operation stages of their overseas projects.
  6. The private companies seem to have a much better understanding of the synergy which their overseas acquisitions are likely to engender in their home market. But they are woefully outcompeted by both SOEs and MNCs in recruiting the top talent to execute their overseas deals. In addition, many founders of the business are still in their most robust deal making years and it is difficult for them to institutionalize and decentralize their empire to fit with the international business ethos. While the Chinese government in fact has given them more support to the private companies operating overseas than it is given credit for, it is still infeasible for the Chinese government, given its remnant ideological misgivings about China's home grown private sector, to support the replication of a Samsung or a LG under the Korean model.

These six constraints are by no means exhaustive. But each informs a unique disadvantage only applicable to the Chinese companies.

China's arrival in the landscape of international cross border transactions has been much sooner than anticipated and China once again has reinvented itself and defied the prediction of the pundits that its meaningful participation of global M&A could not have preceded the removal of the duel hurdle of the non-convertibility of RMB and of its closed capital account. While the Chinese companies are on track to become a dominant global M&A players, they still have much distance to cover and many obstacles are beyond their own endeavour to overcome. Only efforts by the Chinese Government to further liberalize its economic governance can facilitate greater progress. The Chinese are however resilient businessmen and the conditions of an extremely populous but resource deprived country dictate that their companies succeed in the realm of global cross border transactions. Hence, they have no choice but to overcome all hardships in this process.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
 
Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions