As lawyers ponder Hunan Valin Iron & Steel Group's A$1.2bn investment in Fortescue Metals and Chinalco's US$19.5bn courting of Rio Tinto, there is no doubting the potency of the outbound Chinese FDI juggernaut. But it also pays to keep an eye on investment flowing in the opposite direction
The sheer power of China's acquisitive capability means that outbound FDI from Australia to China is dwarfed by the inbound stream the other way, says Mallesons partner Stephen Minns. And while the level of inbound FDI is on the rise, he says that the outbound work has been more modest. "Australian investment is going into a whole range of industries - manufacturing, consumer products, financial services for example," Minns says.
Outbound investment from China into Australia has been almost exclusively in the resources sector. "Certainly the outbound work is a lot more significant than what it was even a year ago, and the importance of resources [for China] and the decline in prices has made Australian assets more attractive," he says. And while there has been some uncertainty among purchasers as to the right time to buy and some occasionally unrealistic valuations from vendors, there is no evidence of a stalemate between buyers and sellers. "The Chinese are definitely interested in investing now - and they're not about to wait," Minns says.
Waiting, however, is not always a matter of choice, with the ultimate approval usually resting with Australian treasurer Wayne Swan and the Foreign Investment Review Board (FIRB), which is currently reviewing a backlog of highly significant proposed deals. "It's clear that the government wants to be comfortable that Australian companies continue to operate independently," Minns says.
The challenge for legal advisors is to structure deals in a way that reflects this requirement - not an easy feat and one which requires some layers of complexity. "There is a strong desire on the part of the Chinese companies to understand these regulatory requirements so that their deals can go ahead," Minns says, describing this as one of the most important parts of his work. The issue of protecting national interest, of course, is not limited to Australia. China also vets foreign investment and recently vetoed a bid by US-based soft drink giant Coca-Cola to take control of China Huiyuan Juice, China's biggest juice maker. It is a decision that was seen by some commentators as a reflection of renewed Chinese nationalism and a corresponding aversion to large-scale foreign investment.
However, Zhang Danian, managing partner at Baker & McKenzie's Shanghai office, says there was more to the decision than sentiment. "What the Coke/Huiyuan rejection shows is that government authorities will increasingly vet proposed foreign investments thoroughly on both national security and antitrust grounds. In addition, it is clear that the PRC authorities will take concerns of small and medium competitors as well as any possible threat to Chinese consumers very seriously in determining whether to grant antitrust approval," he says.
Investment into China
It is no surprise that outbound Chinese investment continues to dominate headlines in Australia. But as lawyers from other parts of the region point out, Chinese FDI is not necessarily a one-way street - and nor is investment limited to M&A. M&A is the type of FDI which generally attracts the most discussion, but there are other forms of FDI that also warrant attention, such as franchising and greenfield investment.
Stanley Jia, managing partner at Baker & McKenzie's Beijing office, says there are several drivers for greenfield investments in China, which could take the structure of wholly-owned foreign enterprises as well as joint ventures. "A greenfield investment is attractive to those foreign investors who would like to avoid inheriting legacy issues and historical liabilities of an M&A target," he says. "Whether a foreign investor would consider greenfield to be a more suitable investment option will depend on how steep start-up costs are as compared to acquisition costs, the importance of having an already-established sales and distribution networks, and whether there is a tight timeline for starting up the business."
Another significant type of FDI into China is franchising or licensing agreements, according to Zhang. "This is attractive for companies that are interested in building brand recognition without the need to invest considerable manpower or capital in a foreign jurisdiction, especially if companies are able to work through concerns of possible IP infringement," he says. "This will be an attractive means of FDI this year, especially for foreign companies hesitant to invest in a new market during volatile economic times."
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