Since foreign investment started to flow into China more than 20 years ago, multinationals have generally led the way. Now, though, the so-called second-tier players, who have not yet made it into the Fortune 500 of leading corporations, are starting to arrive in force.
Desmond Yuen, partner and head of China services at Grant Thornton in Hong Kong, views this as the second wave of foreign investment in the mainland. Typically, it is being seen in the form of wholly foreign-owned enterprises, rather than in the kind of joint ventures which were more commonly used as investment vehicles in the past.
Among the reasons for this, says Mr Yuen, are that new investors are now better informed and have been able to draw on the experience of their forerunners, as well as the support of professional advisers. Even so, it still remains a major challenge for any prospective investor to sift through the available information to find what is useful and then to analyse the market situation accurately.
Eager for capital
Mainland enterprises are eager to raise capital for expansion and they can do this either by going for an initial public offering or by attracting strategic investors. At present, Mr Yuen believes there is no end in sight to the inflow of foreign capital and that merger and acquisition (M&A) activity in China will continue at a robust pace.
When acquiring a mainland enterprise, overseas investors must pay special attention to two things: the legal requirements and how the operations of the target company are managed. For the second of these, the advice of a professional accounting firm can be particularly important.
"Foreign buyers should carefully study the mainland business and see whether there is synergy between them," Mr Yuen recommends. "Also, through the due diligence process, they must assess the business performance and financial situation of the target company and always consider the issue of tax compliance."
He adds that many of the second-tier players can negotiate possible deals with a more direct approach and clearer business strategy than their predecessors. The first generation of foreign investors usually had to start by setting up representative offices to seek out business development and sales opportunities. "Foreign CEOs and presidents are definitely more demanding now," Mr Yuen says. "The turnaround time is faster and the investment cycle is much shorter."
According to a research conducted by Grant Thornton Corporate Finance, over 250 Chinese companies were bought by overseas companies between July 2005 and June 2006 in deals worth in excess of US$14 billion. These transactions involved 266 foreign investors from 41 different countries, with the total value of deals jumping 52 per cent from the previous 12-month period.
US companies were the largest deal makers in terms of value and were followed in that category by the UK. In terms of the number of transactions completed, Hong Kong ranked second, completing 51 deals during the period compared to 62 by the US.
Mr Yuen believes that the Chinese government's reform of stock markets and the introduction of new legislation to foster investor confidence will have a noticeable impact on business, but may slow M&A activity. For example, foreign investors are now required to get approval from three major authorities including the Ministry of Commerce and China Securities and Regulatory Commission if they plan to acquire a mainland enterprise. In the short term, this may discourage some potential overseas buyers from making a move.
Further ahead, there will be different challenges and competition from other developing countries. Mr Yuen therefore thinks that China must continue to move up the value chain, instead of focusing mainly on offering a cost advantage. Besides, he stresses that it is important for the government to show persistence and consistency in implementing rules and regulations right down to the local level.