4 Nov 2016

China Go Abroad (4th Issue) - Key connectivity improvements along the Belt and Road in telecommunications & aviation sectors

Albert Ng, Chairman, China Managing Partner, Greater China, EY:

“China’s outward FDI reached USD99 billion in the first half of 2016, an over 50% increase compared with the corresponding period of 2015. It reflected the increasing Chinese interests in internationalization due to the country’s economic transformation and the changes in global markets. However, the desire for expansion poses a critical test on the overseas investment and operating abilities of Chinese enterprises. “Going out” is not the ultimate goal, rather, the key is how far you can go and how successful you become. EY expects China’s outward FDI in 2016 is likely to exceed USD170 billion for the whole year, reaching another historical record high. In the coming years, the tide of China’s overseas investment will continue to rise and maintain a double-digit growth rate. The challenges for Chinese enterprises are to improve their strategic decision-making and operating capabilities, seize the opportunities and generate new drivers for growth in order to survive ‒ and thrive ‒ in the international markets.”

Loletta Chow, Global COIN Leader, EY:

“Stepping into 2016, Chinese enterprises are performing remarkably well in the global investment market: as a net capital exporter, China's outward investment has exceeded the inward investment. The underlying high growth is the fresh and energetic momentum released by the Chinese outbound investment. A decelerated return growth rate for domestic investment and expectation of renminbi devaluation are the key concerns for capital and funds to look for better alternative opportunities. On the other hand, Chinese enterprises need to accelerate their internationalization process to enhance their competitiveness. In addition, with the implementation of encouraging national strategies such as “One Belt, One Road”, China’s outbound investment is expected to continue to grow in the future.

“The manufacturing industry has experienced a remarkable growth in China’s outbound investments. It indicates that the policies to promote the sector’s “going out” and strengthen international capacity cooperation have been successful. Technology-rich assets are the most sought-after currently as Chinese companies move up along the value chain. Thus, European and American countries with advanced technologies, stable economies, and healthy investment environments continue to be the most popular investment destinations.

“This year, 2016, is also witnessing China’s continued implementation of the “One Belt, One Road” initiative. Spanning more than 60 countries cross Europe, Asia and Africa, the initiative is fueling this round of outbound investment. In our last China Go Abroad report6, we focused on the rising high-end manufacturing power in China - the “going out” of high-speed rail and nuclear power. In this issue, we will turn to another two important sectors which also play an important role in the “One Belt, One road” strategy - the telecommunications and aviation sectors. From the “Information Silk Road” to the “Aerial Silk Road”, both large state-owned and private enterprises are actively developing their investment blueprints. And we expect to see substantial and robust development of the related investments driven by the “One Belt, One Road” initiative in mid-to-long term. However, careful due diligence and risk assessments will become the key for enterprises in their efforts to succeed due to the unique ‒ and often high risk ‒ investment environments along the Belt and Road.

“Outbound investment requires significant funding and needs to consider many sophisticated factors. A good financing structure will increase the success rate of investment. In the regional analysis of this issue, we will focus on Hong Kong and explore its important role in developing the “One Belt, One Road”. Because of its advantages in policy, talent and international experience, Hong Kong can serve as a strong platform from which Chinese enterprises are able to “go out” more smoothly. Relating to this, the EY Overseas Investment Growth Navigator has been developed to help Chinese enterprises to understand their possible financing difficulties and solutions, and we will look at a tax planning case study showing the importance of thorough investment and financing planning.

“For those involved in this new wave of outbound investment, enterprises should not just blindly follow existing trends. Instead, they should foster their own international market perspective and undertake long-term strategic planning. We look forward to seeing Chinese enterprises embrace the world with a better market understanding and show the world a new image of the mature Chinese corporation.”

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This material has been prepared for general informational purposes only and is not intended to be relied upon as accounting, tax, or other professional advice. Please refer to your advisors for specific advice.