brigham young university
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Brigham Young University
Joseph Tse, Anthony Tam, Tony KwongDeloitte Touch TohmatsuMay 2, 2001Wing On CenterHong Kong
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A Review of Significant Events and
Trends
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1980-1988: Opening Up Foreign investment allowed Special economic zones and
development zones
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1989-1991: Wait and See End of cold war Gulf war Break up of Soviet Union Tiananmen Square Developing Pudong Income tax law reform
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1992-1997: The Great Flood 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
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1998-Present: Reality Check 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
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101520253035404550
Billion USD
90 92 94 96 98 2000
Foreign Direct Investment since 1990
Foreign Direct Investment over past 20 years
Others4%
Services11%
Infrastructure12%
Manufacturing53%
Real Estate20%
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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
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Foreign Investment Trends 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
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Relentless Reform To the Promised Land
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Market Economy: The Drivers
Production Consumption Savings Investment
Production Consumption Savings Investment
Production Consumption
Investment Savings
Market Economy
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Market Economy: The Regulators Interest rates Foreign exchange rates Tax rates Money supply
InterestRates Foreign Exchange
Rates
Money Supply Tax Rates
Market Economy
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Central Planning Economy: The Regulators Communist Party Governments and People’s Congress State-owned enterprises People’s Bank of China and state-owned
banks
CommunistParty
Governments/People'sCongress
People's Bankof China/state-owned banks
State-owned enterprises
CentralPlanningEconomy
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Foreign direct investment capital management technology and know-how marketing and sales skills
Capital Management
Marketing and Sales Skills
Technology
Foreign Investment
$
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Challenges
Moving from a planned to market economy
Shift from rural to urban base Transform a tightly controlled communist
to an open civic society
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Threats
Taiwan Rapid urbanization Widening gap between the coastal
provinces and inland China Different values and aspirations of the
next generation
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Breakers
Breakdown of banking system SOE unemployment from restructuring An aging population with one child family Environmental pollution Corruption
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WTO and ChinaShaping the Future
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WTO:Why for China 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
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WTO Means: 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 non-
discriminatory principle: the most favored nation treatment and national treatment
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Implications for FIEs
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
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Issues for FIEs
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
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Preparing for WTO
Strategic options: Expansion Restructuring Exit
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Preparing for WTO: Expansion Increase J.V. equity stake and control Establish new FIEs Acquire assets from Chinese companies
or other FIEs Chinese entrepreneurs
Acquire shares of listed Chinese companies
Private placement in Chinese companies limited by shares
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Preparing for WTO: Restructuring
Expand business scope Convert J.V.s to WOFEs Merger of FIEs De-register representative offices Expand holding company functions
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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
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WTO Requirements
Non-discriminatory treatment: Most favored nation treatment National treatment
Anti-dumping and anti-subsidy Transparency
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Hong KongGateway to China
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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
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Hong Kong: Finding a New Role
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
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Hong Kong: Finding a New Role
International Financial Center Entreport and logistics center: major hub
for cargo and passengers Regional headquarters for MNCs Center for product development and Q/C
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Raising Funds for Chinese Enterprises
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Funding Chinese InnovationPrivate investment, Public markets
China’s economic background Impressive economic growth Increasing international trade Anticipated WTO membership
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Funding high tech enterprises
Traditionally – Government ministries and SOEs
Change – a result of Internet boom Overseas and domestic venture capital
funds
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Funding high tech enterprises (cont’d)
Existing hurdles Quality of high tech ventures Restrictions of the legal and regulatory
framework Lack of exit
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High tech ventures in China
Advantages Huge domestic market Good basic infrastructure Strong manufacturing base Cheap costs Trained engineers and scientists
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High tech ventures in China (cont’d)
Problems Management resources Marketing Corporate finance
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Legal and regulatory framework
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
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Lack of exit for VCs
PRC stock exchanges 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
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Second board in Shenzhen
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
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Second board in Shenzhen (cont’d)
Concerns over long term potential Lackluster performance of HK GEM Quality of companies to be listed Share speculation Implementation of market rules and
regulations
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Conclusion
Hugh market for innovations General awareness of policy-makers and
practitioners• Gradual deregulation• Privatization
Constant economic reform and continued growth
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MNCPre-entry
MNCStart-up
MNCExit/Restructuring
MNCOperating
DTT China
•Investment appraisals•J.V. partner health check.•Feasibility study•Strategic entry advice•Financial modeling•Business valuation•Competitive analysis/ benchmarking•Regulatory services.
•Capital restructuring•M & A - business valuation•Fund raising / flotation assessment
•Company formation•License application/ registration•Accounting system•Personnel recruiting
•Control environment assessment•Financial monitoring•Business practice review•Operational review•Tax compliance/ Planning •Business information/ credit analysis
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