1 Brigham Young University Joseph Tse, Anthony Tam, Tony Kwong Deloitte Touch Tohmatsu May 2, 2001...

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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