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Brigham Young University

Brigham Young University. Joseph Tse, Anthony Tam, Tony Kwong Deloitte Touch Tohmatsu May 2, 2001 Wing On Center Hong Kong. A Review of Significant Events and Trends. 1980-1988: Opening Up. Foreign investment allowed Special economic zones and development zones. 1989-1991: Wait and See.

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Brigham Young University

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  1. Brigham Young University Joseph Tse, Anthony Tam, Tony Kwong Deloitte Touch Tohmatsu May 2, 2001 Wing On Center Hong Kong

  2. A Review of Significant Events and Trends

  3. 1980-1988: Opening Up • Foreign investment allowed • Special economic zones and development zones

  4. 1989-1991: Wait and See • End of cold war • Gulf war • Break up of Soviet Union • Tiananmen Square • Developing Pudong • Income tax law reform

  5. 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

  6. 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

  7. 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

  8. 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

  9. Relentless ReformTo the Promised Land

  10. Market Economy: The Drivers • Production • Consumption • Savings • Investment

  11. Production Consumption Market Economy Savings Investment

  12. Market Economy: The Regulators • Interest rates • Foreign exchange rates • Tax rates • Money supply

  13. Interest Rates Foreign Exchange Rates Market Economy Tax Rates Money Supply

  14. Central Planning Economy: The Regulators • Communist Party • Governments and People’s Congress • State-owned enterprises • People’s Bank of China and state-owned banks

  15. Communist Party Governments /People's Congress Central Planning Economy State-owned enterprises People's Bank of China/state -owned banks

  16. Foreign direct investment • capital • management • technology and know-how • marketing and sales skills

  17. Capital Management Foreign Investment $ Marketing and Sales Skills Technology

  18. Challenges • Moving from a planned to market economy • Shift from rural to urban base • Transform a tightly controlled communist to an open civic society

  19. Threats • Taiwan • Rapid urbanization • Widening gap between the coastal provinces and inland China • Different values and aspirations of the next generation

  20. Breakers • Breakdown of banking system • SOE unemployment from restructuring • An aging population with one child family • Environmental pollution • Corruption

  21. WTO and ChinaShaping the Future

  22. 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

  23. 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

  24. 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

  25. 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

  26. Preparing for WTO • Strategic options: • Expansion • Restructuring • Exit

  27. 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

  28. Preparing for WTO: Restructuring • Expand business scope • Convert J.V.s to WOFEs • Merger of FIEs • De-register representative offices • Expand holding company functions

  29. 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

  30. WTO Requirements • Non-discriminatory treatment: • Most favored nation treatment • National treatment • Anti-dumping and anti-subsidy • Transparency

  31. Hong KongGateway to China

  32. 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

  33. 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

  34. 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

  35. Raising Funds for Chinese Enterprises

  36. Funding Chinese InnovationPrivate investment, Public markets • China’s economic background • Impressive economic growth • Increasing international trade • Anticipated WTO membership

  37. Funding high tech enterprises • Traditionally – Government ministries and SOEs • Change – a result of • Internet boom • Overseas and domestic venture capital funds

  38. Funding high tech enterprises (cont’d) • Existing hurdles • Quality of high tech ventures • Restrictions of the legal and regulatory framework • Lack of exit

  39. High tech ventures in China • Advantages • Huge domestic market • Good basic infrastructure • Strong manufacturing base • Cheap costs • Trained engineers and scientists

  40. High tech ventures in China (cont’d) • Problems • Management resources • Marketing • Corporate finance

  41. 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

  42. 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

  43. 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

  44. 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

  45. Conclusion • Hugh market for innovations • General awareness of policy-makers and practitioners • Gradual deregulation • Privatization • Constant economic reform and continued growth

  46. MNC Pre-entry MNC Start-up • Investment appraisals • J.V. partner health check. • Feasibility study • Strategic entry advice • Financial modeling • Business valuation • Competitive analysis/ benchmarking • Regulatory services. • Company formation • License application/ • registration • Accounting system • Personnel recruiting DTT China MNC Operating MNC Exit/Restructuring • Control environment assessment • Financial monitoring • Business practice review • Operational review • Tax compliance/ Planning • Business information/ credit analysis • Capital restructuring • M & A - business valuation • Fund raising / flotation assessment 24

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