China’s Outbound Investment – It’s Going into Asian Infrastructure Development
By Chris Devonshire-Ellis
Posted: 15th October 2013 09:30
Western MNCs need to be more savvy about Asia if they want to participate
It’s been a busy week for Chinese politicking as the nation has enjoyed its National Week Holidays. No rest for President Xi Jinping certainly, who has been running around Southeast Asia before speaking at the APEC CEO Summit yesterday, where he made the keynote speech. Yet while many executives may have been enjoying a few days off, for China the developments over the past few days point to a definite shift in policy – one that will impact the future strategies of multinational corporations (MNCs) around the world.
The message is this: China isn’t going to be investing in developed economies anytime soon.
Often during my trips around the world speaking at events about business opportunities in China I am sidelined by a city mayor, or occasionally a governor, and approached like this: “Chris – you’ve been in China a long time, and you must have loads of contacts. Can’t you get some of those Chinese companies and state-owned enterprises’ to invest here?”
It’s a request I always meet with a wry smile and an “I’ll see what I can do.” It’s never going to be very much, to be frank, because I know the Chinese aren’t coming to bail out the EU or America any time soon. Why would they?
What China does want to do is invest in developments that will give them a strong return. And those developments are not going to be happening in the West, they’re going to be happening in Asia. To illustrate this, Kishore Mahbubani, the well-known global thinker and two-time Singaporean Ambassador to the United Nations, said in his speech concerning “Future Trends” at the APEC Summit yesterday that Asia currently has about 600 million people with middle class incomes. Yet that figure is going to increase by a multiple of 3.5 to some 1.75 billion people by 2020. That’s some market.
This also means that Asian infrastructure development is going to pick up big time. China knows this, and so do the Asian economies concerned. It may have slipped past many China observers while they enjoyed the last week off, but Xi visited Jakarta last week, and became the first foreign leader to address the Indonesian Parliament. That honor was conferred upon him because Indonesia knows it needs Chinese financial assistance to develop its infrastructure – and, if necessary, to support what at present is a sagging rupiah. And hey, presto! China signed a US$20.5 billion currency swap deal, and signed off on billions of dollars worth of infrastructure projects, ranging from a Chinese-Indonesian joint venture to build the new Jakarta metro system, upgrade roads, rail and ports, to opening a Chinese Consulate General in Bali (China sent 1 million tourists to Bali this year).
Xi didn’t stop there. Next in line was Malaysia, where the same thing happened – billions of dollars worth of trade deals signed, an agreement to increase bilateral trade by 60 percent by 2017, and to set up a Xiamen University campus at Salak Tinggi (housing 10,000 students).
During both state visits, he also proposed the establishment of an ASEAN Development Bank to be partially funded by China. Xi has proposed a similar development bank for the BRICS nations, and just before his Southeast Asian trip, he proposed the setting up of a Silk Road Free Trade Zone to be funded by China which would promote trade across Central Asia.
The message is quite clear – apart from commodity purchases and investments, China’s sovereign wealth fund is investing in Asia. Why? Because that’s where the growth in wealth is going to come from.
This simple realization has huge implications for MNCs in the West. Some get it – an interesting statistic at the APEC Summit that caught my eye was that 49 percent of CEOs say public-private infrastructure models are important for corporate growth. If you’re not familiar with the concept of public-private partnerships (PPP) then you need to be – they are the new vehicle for attracting private capital into government-sponsored infrastructure projects and are catching on across Asia.
Basically what happens is that the state provides one half of the financing for a specific investment project, while the foreign investor provides the other half (including being allowed to borrow some of the cash from local banks, and receiving tax breaks and other incentives). These are typically big-ticket items, such as roads, rail, bridges, airports, ports and so on.
It is India that has lead the way in these, and we have written about them several times in the past, including here. As for India’s infrastructure needs, we have covered this extensively in dealing with PPP investments into highways, roads and rail, manufacturing and energy, airports and ports, telecoms, energy, oil and gas and via foreign investment through an investment trust fund.
Guess who has been picking up a lot of these contracts? China and Japan. India is in fact about to become the darling of foreign investors as it gets its act together – foreign investment is pouring in there and gurus such as Mark Mobius are highly bullish (as he should be). India is not just getting an infrastructure make-over, it’s also home to a huge middle class consumer base, currently estimated to be about 250 million. The India opportunity is very much at the forefront of Asia development thinking. As is that middle class dynamic – over 87 percent of the CEOs attending APEC say middle income consumers have the most influence on their growth strategies.
But if Asia is the next big thing, how can Western companies participate? Clearly, that growth in middle class consumerism to 1.75 billion people across Asia by 2020 is going to be a huge draw for Western corporations that “make stuff.” However, if you’re not familiar with Asia, then you need a base to start. Singapore is probably the most logical – it’s the center of ASEAN, houses the APEC secretariat and is the de facto regional services, finance and intelligence hub for Asia. It also has a low tax rate – 17 percent profits tax on corporations. It also possesses, through its membership of ASEAN, free trade agreements with both China and India, a whole raft of bilateral double tax treaties with many countries around the world and a free trade agreement with the United States.
No matter what sector your business is involved in – and Dezan Shira & Associates handles Western clients in Asia ranging from shipping companies to greeting card manufacturers, and from Disney merchandise to Tiffany diamond rings – Asia has a need for your product. But just don’t expect the opportunities to be coming very far out from Europe or the United States. The time is now ripe to reach out into Asia, and take part in what promises to be the largest uplifting of human wealth creation in history.
This article was first published on China Briefing.
Dezan Shira & Associates is a specialist foreign direct investment practice, providing corporate establishment, business advisory, tax advisory and compliance, accounting, payroll, due diligence and financial review services to multinationals investing in emerging Asia. Since its establishment in 1992, the firm has grown into one of Asia’s most versatile full-service consultancies with operational offices across China, Hong Kong, India, Singapore and Vietnam as well as liaison offices in Italy and the United States.
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