Transcript A Time for Appreciation

Brigham Young
University
Joseph Tse, Anthony Tam,
Tony Kwong
Deloitte Touch Tohmatsu
May 2, 2001
Wing On Center
Hong Kong
1
A Review of
Significant Events and
Trends
2
1980-1988: Opening Up


Foreign investment allowed
Special economic zones and
development zones
3
1989-1991: Wait and See
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End of cold war
Gulf war
Break up of Soviet Union
Tiananmen Square
Developing Pudong
Income tax law reform
4
1992-1997: The Great Flood
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Deng in Southern China
Multinational corporations moved in
Hong Kong and Taiwanese investments in
processing trades
Large scale of investment and sophisticated
technology
Financial institutions arrived in Pudong
Deng’s passing, Zhu Ronji formed new cabinet
and soft landing achieved
Hong Kong returned
5
1998-Present: Reality Check
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Asian financial crisis
SOE reform: financial re-engineering
Declining foreign investments
FIE restructuring: focus on profitability and
localization program
Foreign banks allowed RMB business
Deflation and government stimulus
Internet and E-commerce
WTO
6
Foreign Direct Investment since 1990
Billion USD
50
45
40
35
30
25
20
15
10
5
0
90
92
94
96
98
2000
Foreign Direct Investment over past 20 years
Real Estate
20%
Infrastructure
12%
Services
11%
Others
4%
Manufacturing
53%
Foreign Investment Trends

FDI continued downward, but now WTO

FDI shifts focus
from labor intensive, export oriented
industries
 to high value added, domestic market
oriented sectors like banking,
insurance, pharmaceuticals,
automotive, retail, hi-tech,
telecommunications

9
Foreign Investment Trends


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MNCs brought in sophisticated management
system and tools to localize operations
China Holding company and WOFE are better
choice
Getting ready for RMB funding
M&A rather than greenfield
MNCs relocating entire production lines in
WOFE form
10
Relentless Reform
To the Promised Land
11
Market Economy:
The Drivers

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Production
Consumption
Savings
Investment
12
Production
Consumption
Market
Economy
Investment
Savings
Market Economy:
The Regulators

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Interest rates
Foreign exchange rates
Tax rates
Money supply
14
Interest
Rates
Foreign Exchange
Rates
Market
Economy
Money Supply
Tax Rates
Central Planning Economy:
The Regulators

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Communist Party
Governments and People’s Congress
State-owned enterprises
People’s Bank of China and state-owned
banks
16
Governments
/People's
Congress
Communist
Party
Central
Planning
Economy
People's Bank
of China/state
-owned banks
State-owned
enterprises
Foreign direct investment
capital
 management
 technology and know-how
 marketing and sales skills

18
Capital
Management
Foreign
Investment
$
Marketing and
Sales Skills
Technology
Challenges

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Moving from a planned to market
economy
Shift from rural to urban base
Transform a tightly controlled communist
to an open civic society
20
Threats


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
Taiwan
Rapid urbanization
Widening gap between the coastal
provinces and inland China
Different values and aspirations of the
next generation
21
Breakers
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Breakdown of banking system
SOE unemployment from restructuring
An aging population with one child family
Environmental pollution
Corruption
22
WTO and China
Shaping the Future
23
WTO:Why for China
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More efficient worldwide allocation of resources
and raise standards of living in China and its
trading partners
Promote internal economic reform and
development
Strengthen the rule of law within China
Encourage the adoption of modern technologies
Enhance Chinese people’s access to
communication and information from around the
globe thus greater choice about their lifestyles
and employment
Alan Greenspan, May 18, 2000
24
WTO Means:

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Substantial reduction of tariff rates
Improved market access to service industries
Elimination of quotas and licenses
Removal of non-tariff barriers: quotas,
licenses, and sanitary quality standards
Rights to import and export and related
services
Full implementation of WTO nondiscriminatory principle: the most favored
nation treatment and national treatment
25
Implications for FIEs
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No more foreign exchange balancing rules
No more local content rules
No more export performance and import
trade balancing rules
Existing contracts with these obligations will
not be enforced
Investment approvals will not be conditional
upon:
 Technology transfer
 Research and development in China
 Use of local goods
26
Issues for FIEs

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Will FIEs be able to remain competitive
when direct import increases
Will the J.V. partner agree to make
changes
Will FIEs be able to maintain their
competitive edge over local players
Will domestic enterprises corner the
market before foreign companies or FIEs
are allowed to enter
27
Preparing for WTO

Strategic options:
 Expansion
 Restructuring
 Exit
28
Preparing for WTO:
Expansion
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Increase J.V. equity stake and control
Establish new FIEs
Acquire assets from Chinese companies
or other FIEs

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Chinese entrepreneurs
Acquire shares of listed Chinese
companies
Private placement in Chinese companies
limited by shares
29
Preparing for WTO:
Restructuring

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Expand business scope
Convert J.V.s to WOFEs
Merger of FIEs
De-register representative offices
Expand holding company functions
30
Preparing for WTO: Exit


Dispose FIE equity interest
 Direct sale of FIE interest
 Sale of intermediary holding
company interest
Liquidate FIE
 Voluntary liquidation
 Special liquidation
31
WTO Requirements

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Non-discriminatory treatment:
 Most favored nation treatment
 National treatment
Anti-dumping and anti-subsidy
Transparency
32
Hong Kong
Gateway to China
33
Hong Kong: Finding a New Role

“As pioneers in modernization, Hong Kong
and Singapore can act as catalysts to
accelerate the transforming of traditional
agricultural societies around them… they
may become dissemination points, not
simply of the sophisticated manufacture of
the developed world, but more vital, of social
values and disciplines, of skills and
expertise.”
Lee Kuan Yew, Feb. 1970
34
Hong Kong: Finding a New Role
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Strong institutions
Management expertise
Sophisticated financial markets
The rule of law
The transparency of legislation and
regulations
A level playing field for all
A cosmopolitan lifestyle with English as
the language of business
35
Hong Kong: Finding a New Role
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International Financial Center
Entreport and logistics center: major hub
for cargo and passengers
Regional headquarters for MNCs
Center for product development and Q/C
36
Raising Funds for
Chinese Enterprises
37
Funding Chinese Innovation
Private investment, Public markets

China’s economic background
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Impressive economic growth
Increasing international trade
Anticipated WTO membership
38
Funding high tech enterprises
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Traditionally – Government ministries and
SOEs
Change – a result of


Internet boom
Overseas and domestic venture capital
funds
39
Funding high tech enterprises
(cont’d)

Existing hurdles

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Quality of high tech ventures
Restrictions of the legal and regulatory
framework
Lack of exit
40
High tech ventures in China
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Advantages
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Huge domestic market
Good basic infrastructure
Strong manufacturing base
Cheap costs
Trained engineers and scientists
41
High tech ventures in China
(cont’d)
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Problems
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Management resources
Marketing
Corporate finance
42
Legal and regulatory framework
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Difficult for high tech ventures and
private enterprises to raise finance
No provision for creation of any variety of
equity instruments
Severe restrictions on lending
Restrictions on foreign investments
43
Lack of exit for VCs
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PRC stock exchanges
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Cater largely to SOEs
Few private companies listed
Company Law imposed restrictions
Private sales – regulatory approvals
Overseas listing of a PRC operation
subject to approval of CSRC
44
Second board in Shenzhen
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Revised draft market rules released in
October 2000
Caters to small to medium size private
enterprises with growth potential
Modeled on established stock exchanges
New source of funding for high tech ventures
New route of exit for VCs
Opening date not yet announced
45
Second board in Shenzhen
(cont’d)

Concerns over long term potential
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Lackluster performance of HK GEM
Quality of companies to be listed
Share speculation
Implementation of market rules and
regulations
46
Conclusion

Hugh market for innovations

General awareness of policy-makers and
practitioners
• Gradual deregulation
• Privatization

Constant economic reform and continued
growth
47
MNC
MNC
Pre-entry
•Investment appraisals
•J.V. partner health check.
•Feasibility study
•Strategic entry advice
•Financial modeling
•Business valuation
•Competitive analysis/ benchmarking
•Regulatory services.
Start-up
DTT
China
•Company formation
•License application/
registration
•Accounting system
•Personnel recruiting
MNC
MNC
Operating
Exit/Restructuring
•Capital restructuring
•M & A - business valuation
•Fund raising / flotation assessment
24
•Control environment assessment
•Financial monitoring
•Business practice review
•Operational review
•Tax compliance/ Planning
•Business information/ credit analysis