This article was written by Raymond Wong (partner) and David Eliakim (partner).
Attracting Chinese investment is becoming more and more globally competitive with both developed and emerging economies vying for capital injections into their high value industries to support growth and boost productivity. However, many countries are still coming to terms with public and political debate over land ownership and allowing FDI by government owned and controlled enterprises.
Historically, one of the major challenges for Chinese investors looking to expand internationally has been the regulatory environment. There are valuable lessons to be learned from examining how other countries have responded to these challenges to send a message that Chinese investment is welcome, while still protecting their national interests.
In late 2013, China became Africa’s largest trading partner, reflecting a sustained increase in investment into the continent over the past decade. Official MOFCOM statistics show that Chinese FDI flows in Africa increased six-fold from 2005 to 2012, to US$2bn per annum.
For the most part, African nations have been welcoming of Chinese investment as it contributes to economic development and builds political legitimacy. China has historically had the advantage of not being seen as a Western coloniser. In addition, African officials have been particularly receptive to China’s willingness to provide soft loans and support infrastructure development, with few strings attached.
Accordingly, to date, there are only limited instances where capital-hungry African nations have established a legal framework to block foreign investment or impose conditions on foreign investors, with notable exceptions being in the banking and media industries. This is not unfamiliar to China which had similar experiences in its own economic development. China has responded to criticisms of its presence in Africa by modifying its policy.
"Despite generally positive perceptions of Chinese investment, a number of African nations have expressed frustration with China in relation to labour conditions, unsustainable environmental practices and job displacement. With the world’s youngest and fastest growing population, African governments are under pressure to provide jobs and boost the skills of their workforce."
David Eliakim, M&A Partner, King & Wood Mallesons (Australia)
In a speech given at the 2012 Forum on China-Africa Cooperation (FOCAC), China's President, Hu Jintao, stated that China intended to redress the trajectory of trade in favour of investments that provide long-term economic benefits to Africa.
In the 2012 FOCAC Action Plan, China pledged to create more local jobs, transfer more technology, improve working conditions and increase training for African workers through scholarships and broad-based industry training programs.
Measures to improve the skills and utilisation of African workers will help China escape rising labour costs domestically as Chinese manufacturing and production moves up the value chain. Continued China-Africa cooperation is a positive sign, encouraging growth in both regions.
China has also sought to reshape its relationship with Africa and improve its image through a range of soft power initiatives. The Chinese government has maintained a robust diplomacy program, fostering educational exchanges, Mandarin language training and greater interaction between non-official state actors such as universities and think tanks.
China has also expanded the number of Chinese owned news outlets in Africa to provide the public with Chinese perspectives on topical issues and a better understanding of Chinese culture.
"We expect that, over time, African states will increasingly impose conditions on foreign investment, including by the Chinese. This is partly because, as more countries engage with Africa, foreign investments will be evaluated with a more discerning eye. It also reflects a general trend in resources nationalism. Companies operating in the region can mitigate regulatory risks by carefully managing negotiation of necessary regulatory approvals and seeking appropriate deal protections. We also see that Chinese investments intoAfrica will become more diversified, migrating from natural resources to agriculture, textile, real estate and other sectors."
Raymond Wong, Corporate & Securities Partner, King & Wood Mallesons (Hong Kong)