Understanding Chinese Investments (Part 1)

This is going to be a series of semi-short rants regarding Chinese investment climate and the fight for Chinese investors to invest overseas. As Managing partner of a cross-border financial advisory firm I have gathered quite the extensive knowledge (and subsequent built up anger) during my 4 years in the land of Xi Jinping. I will hastily discuss SOEs in this first part, skimming through the powers that these companies have. With any interest, I will follow up with more detailed insider analysis and insights in coming parts with focus on cross-border investments. Perhaps even a case study for shits and giggles. Feel free to come with topic suggestions!

  Part 1: The Almighty SOEs

As expected, the government plays a massive role in the life and struggles of any company in China. In fact, the most powerful (not necessarily wealthiest) companies in China are what we call SOEs, or State Owned Enterprises. These companies exist in all industries but are most prominent in e.g. infrastructure, energy, manufacturing, utilities, insurance and banking. This is fairly normal in any economy, especially developing ones (yes, China is still considered developing). Where things get very interesting, however, is when you look at what happens behind the scenes. In an effort to retain control over its market and economy, the government regularly use SOEs, or their subsidiaries/investment arms, to invest in private companies. It should be worth noting here than any company that's been invested in by an SOE is considered quasi-SOE. They maintain a lot of the benefits that regular SOEs have. We represent quite a few of these SOE driven investors and the lengths they go to are sometimes quite extraordinary.

A very fresh examples that comes to mind is the case of Tencent, the developer of extremely popular social media platform WeChat. With a market cap of close to $350 billion and with nearly 1 billion active users on WeChat, Tencent is an amazing success story and, together with Alibaba, Baidu and JD.com, motivation for a whole generation of entrepreneurs that want to make it as individuals in a country focused on the collective. However, for Chinese companies loads of money also means responsibilities. The government was fairly unsuccessful in harnessing the growth of Tencent so they did the next best thing instead: made sure that they could reap monetary benefits from their success. As influential people inside Tencent have told me, the mood among top brass was less than depressing when the news came that the IT giant would invest in two SOEs: telekom company China Unicom and oil/petroleum company SinoPec.

On the face of it, an investment in Unicom, the fourth largest mobile service provider globally, and SinoPec, #25 on Forbes top 2000 list, seems like an obvious route for a giant like Tencent. Yeah, not so much. Facing penalties and burdening regulations, Tencent reluctantly and with a fake smile on founder Pony Ma's face made the investments. The point of this example is simply to highlight that the government will find ways to interfere and gain from your business, regardless of your size and public status.

In relation to this, SOEs also receive massive regulatory benefits over their competitors. This is not to say that they are exempt, they're just having an obvious advantage when it comes to preparing, circumventing and adapting to regulatory changes. Just a few days ago, the government decided that certain online platforms used for live streaming and live chatting would have their licenses temporarily revoked. The reason? They were simply tired of having to censor live content that was produced at a faster pace than they could manage. On of the largest players in this field, Weibo, was hit the hardest with a large portion of influential and popular users suddenly finding themselves unable to post. No warning, just an overnight block. It might be worth mentioning that Weibo is a Nasdaq listed company. What about the SOEs then? Well, they were unsurprisingly unfazed.

Global implication stemming from domestic level restrictions is something everyone should consider when dealing with Chinese companies. This is something I will discuss in the next post where I will discuss Chinese investors doing global investments. Taking Chinese money and gaining access to the growing Chinese consumer market and its buying power is a lucrative proposal, but one that shouldn't be taken lightly.

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