Touwai China Newsletter

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Economic Motivations for China’s Global Investments:

The first issue of the Touwai China Newsletter (Volume 1, Issue 1) introduced China’s “go global” or “go out” strategy. The reasons suggested for China’s global investments were:

• Escape brutal domestic [China] market

• Access foreign distribution and sales networks

• Increase foreign exports

• Build international brands

• Bring a brand name back to China

• Acquire technology

• Acquire management and know-how

• Seek safe place to preserve wealth, diversify portfolio to reduce risk

The above reasons can be labeled business reasons for China’s global investments. It is also important to identify the economic motivations for China’s global investments. The following list is a basic overview of these economic motivations:

•The Chinese government is encouraging businesses to invest overseas to reduce accumulating foreign reserves. “The explosion in reserves is…a headache for the central bank. It creates excess liquidity, which risks fuelling higher inflation, asset-price bubbles and imprudent bank lending.” [The Economist]
•The exchange rate is expected to change in the future and these changes will affect overseas investment decisions. “An appreciation of the RMB [Chinese currency] means higher export costs and lower overseas investment costs. These differentials are an incentive for companies to boost overseas investment.” As the Chinese currency (RMB) appreciates, China is interested in purchasing materials, patents and brand names.
•Chinese companies are beginning to respond to rising international protectionism. “Friction in trade is driving up export costs and destabilizing export prospects, meaning that the shift from export to investment has become an inevitable choice for many companies.” [Professor Jiang Xiaojuan, Graduate School of the Chinese Academy of Social Sciences]

Both the business and economic reasons will contribute to the growth of Chinese global investment. “China’s overseas investment is likely to average 15 billion dollars per year during the 11th Five-Year Plan (2006-2010), reach 20 billion dollars in 2010, and total upwards of 80 billion dollars during the entire period. A slowdown in the domestic economy could further aggravate the overproduction problem and result in continued RMB appreciation which is likely to boost overseas investment.” [Ibid]

Chinese SMEs Going Global

I recently spoke with a China economist and he noted that many Chinese small and medium size enterprises (SMEs) are interested in selling their products abroad, particularly in the US. The SMEs best suited for success are those that offer a unique product, such as a high tech product, and the SMEs that hold Chinese patents. According to the China Association of Enterprises, “currently 65 percent of the patent technologies are owned by SMEs; 75 percent of technical innovation projects are completed by SMEs, and 80 percent of new products are developed by SMEs.” Furthermore, “SMEs account for more than 90 percent of China’s total number of firms…The final products and service value of SMEs produce 55.6 percent of China’s gross domestic product and 62.3 percent of the nation’s total exports...” SMEs are most certainly the lifeblood of China’s internationalization. [SAP INFO]

Table of Contents

Page 1

Economic Motivations for China’s “Go Global” Strategy

Chinese SMEs Going Global

Page 2

News Briefs:

•China’s SMEs Taking Advantage of Greater Access to Financial Institutions

•China’s Booming Automotive Market

•China’s “Go Global” Investments “Go West”

•The China Construction Bank May Acquire Bank of America’s Hong Kong Operations

•NASDAQ’s Biggest Growth Market: China

Pages 3-4

Table of Chinese Companies Publicly Traded on the NYSE and the NASDAQ

www.touwai.com

News Briefs

China’s SMEs Borrow More Than $325 Billion in First Half of 2006

Chinese small and medium size businesses, numbering 776,600, borrowed RMB 2.64 trillion (about $326 Billion) during the first half of 2006. The growth and development needs of China’s SMEs are now being satisfied more than ever. “The Chinese government is sparing no efforts in helping the country’s myriad of privately-run small and medium size enterprises ” At the end of September of this year, the China Banking Regulatory Commission held a financing fair for SMEs. Over 100 banks and finance groups attended the event. It is important to note that the “non-performing loan ratio has dropped 1.87 percentage points.” China’s SMEs play a critical role in China’s economic development and are becoming major players in China’s “go global” strategy. “The Chinese Central Government has come to realize that SMEs are very important to China's economy in maintaining market competition, creating job opportunities, increasing fiscal income, promoting technology innovation and commercialization, and initiating further entrepreneurship.” Chinese SMEs are walking on to the domestic (China) and international playing field ready to compete.
[SinoCast China Business Daily News]
[Financial Times]
[International Journal of Commerce and Management]

China’s First Automotive Works (FAW) Aims Sales Targets High

China’s First Automotive Works (FAW) hopes to reach sales of over 2 million vehicles a year by 2010. FAW is one of China’s big five auto companies (the other four are Shanghai Automotive Industrial Corporation (SAIC), Chery, Dongfeng Motors, and Chang’an Motors). As China’s automotive market continues to grow, there are tremendous opportunities for foreign auto parts companies in China. Touwai’s Auto Parts Industry Snapshot will be released soon. For more information, email
Seth.Harlem@touwai.com.
[People’s Daily]

China Development Bank Playing a Role in Infrastructure Development of a Central Asian Neighbor

Kazakhstan’s Prime Minister, Daniyal Akhmetov and China Development Bank’s (CDB) President, Chen Yuan met recently to discuss joint opportunities. The Kazakh government is encouraging CDB to participate in various infrastructure projects including the development of a power plant, a power line transmission and a hydropower plant. Akhmetov extended an invitation to the China Development Bank to open a representative office in Kazakhstan. This is another example of how China’s global investments are contributing to the development of the developing world. Touwai will focus heavily on this topic in future reports and newsletters.
[Interfax]

The China Construction Bank may Acquire Bank of America’s Hong Kong Operations

The China Construction Bank has its eyes on Bank of America (Asia), the Hong Kong based subsidiary of Bank of America. Shareholders of the China Construction Bank approved acquisition plans. “The bank [China Construction Bank] considers the acquisition to be a milestone in its overseas development, as it bids to mature into a leading international commercial bank.” Chinese companies are eager to build global brands and overseas acquisitions are a key strategy for doing this.
[NASDAQ News]

China: A Major Growth Market for the NASDAQ

The NASDAQ has its arms wide open to Chinese companies. Chinese businesses are increasingly interested in listing on either the NYSE or the NASDAQ. The NASDAQ wants to be the bourse of choice for Chinese firms. In May of this year, NASDAQ signed Memoranda of Understanding with Zhejiang Province and Jiangsu Province. “Both provinces have…agreed that NASDAQ will be the preferred stock exchange for Zhejiang and Jiangsu companies when listing in the United States.” NASDAQ currently has an impressive 28 Chinese companies listed. There is no question that a public listing on an American stock exchange is a strategy of choice for many Chinese companies going global.
[NASDAQ]

See list of Chinese companies publicly listed on the NASDAQ and the NYSE on pages 3-4. Note: The following list is not in any way investment advice.

China-Based Companies Publicly Listed in US (NASDAQ & NYSE only)* ^ **:

*This list has been compiled using various sources including Abacus Consulting, Reuters, NASDAQ, NYSE, and Google Finance.

^Touwai cannot guarantee the accuracy of this information. This list of public Chinese companies is not investment advice and should not be construed as investment advice.

**The China-based companies traded on exchanges other than NYSE and NASDAQ are not listed here.

Touwai News

•Touwai was a Marketing Sponsor of the Haas School of Business, University of California, Berkeley conference, “Investing in Emerging Markets: China, India and Russia” held on October 6.

•Seth Harlem was recently appointed to the Young Professional’s Steering Committee of the Asia Society.

About Touwai

Touwai facilitates China-Global business by enabling Chinese entities to find international investment and partnership opportunities, and by assisting foreign (non-Chinese) entities in increasing their visibility in China.

About Seth Harlem

Seth Harlem graduated from Trinity College in Hartford, Connecticut with a degree in International Studies, Asian Studies concentration, and a minor in Chinese. He has also studied at Zhejiang University in Hangzhou, China, and at Fudan University in Shanghai, China. Seth has worked for General Motors China in Shanghai, and has consulted with CITIC Capital Partners, the private equity affiliate of CITIC Group, China’s largest industrial and financial services company. Seth, who speaks Mandarin Chinese, has been featured in the Shenzhen Daily, Shenzhen, China’s largest English language newspaper and has been a guest on Voice of America’s (VoA) mandarin broadcast to China several times. Seth also sits on the Young Professional’s Steering Committee of the Asia Society.

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