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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.

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Presentation on theme: "1 Brigham Young University Joseph Tse, Anthony Tam, Tony Kwong Deloitte Touch Tohmatsu May 2, 2001 Wing On Center Hong Kong."— Presentation transcript:

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

2 2 A Review of Significant Events and Trends

3 : Opening Up Foreign investment allowed Special economic zones and development zones

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

5 : 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 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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9 9 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

10 10 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

11 11 Relentless Reform To the Promised Land

12 12 Market Economy: The Drivers Production Consumption Savings Investment Production Consumption Savings Investment

13 Production Consumption Investment Savings Market Economy

14 14 Market Economy: The Regulators Interest rates Foreign exchange rates Tax rates Money supply

15 Interest Rates Foreign Exchange Rates Money Supply Tax Rates Market Economy

16 16 Central Planning Economy: The Regulators Communist Party Governments and People’s Congress State-owned enterprises People’s Bank of China and state-owned banks

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

18 18 Foreign direct investment capital management technology and know-how marketing and sales skills

19 Capital Management Marketing and Sales Skills Technology Foreign Investment $

20 20 Challenges Moving from a planned to market economy Shift from rural to urban base Transform a tightly controlled communist to an open civic society

21 21 Threats Taiwan  Rapid urbanization  Widening gap between the coastal provinces and inland China  Different values and aspirations of the next generation

22 22 Breakers Breakdown of banking system SOE unemployment from restructuring An aging population with one child family Environmental pollution Corruption

23 23 WTO and China Shaping the Future

24 24 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

25 25 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

26 26 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

27 27 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

28 28 Preparing for WTO Strategic options: Expansion Restructuring Exit

29 29 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

30 30 Preparing for WTO: Restructuring Expand business scope Convert J.V.s to WOFEs Merger of FIEs De-register representative offices Expand holding company functions

31 31 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

32 32 WTO Requirements Non-discriminatory treatment: Most favored nation treatment National treatment Anti-dumping and anti-subsidy Transparency

33 33 Hong Kong Gateway to China

34 34 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

35 35 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

36 36 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

37 37 Raising Funds for Chinese Enterprises

38 38 Funding Chinese Innovation Private investment, Public markets China’s economic background Impressive economic growth Increasing international trade Anticipated WTO membership

39 39 Funding high tech enterprises Traditionally – Government ministries and SOEs Change – a result of Internet boom Overseas and domestic venture capital funds

40 40 Funding high tech enterprises (cont’d) Existing hurdles Quality of high tech ventures Restrictions of the legal and regulatory framework Lack of exit

41 41 High tech ventures in China Advantages Huge domestic market Good basic infrastructure Strong manufacturing base Cheap costs Trained engineers and scientists

42 42 High tech ventures in China (cont’d) Problems Management resources Marketing Corporate finance

43 43 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

44 44 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

45 45 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

46 46 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

47 47 Conclusion Hugh market for innovations General awareness of policy-makers and practitioners Gradual deregulation Privatization Constant economic reform and continued growth

48 24 MNC Pre-entry MNC Start-up MNC Exit/Restructuring MNC Operating 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


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