Enter the Dragon

Despite the prominent place that the People’s Republic of China occupies in the world, its global investments have been comparatively small. While there have been a few prominent examples, they are paltry compared to the size of the Chinese economy.

What we have seen so far comes primarily from three sources: Chinese state-owned enterprises implementing government-mandated policies to secure long-term supplies of resources; Chinese companies that have publicly listed in non-Chinese jurisdictions and are making investments with capital raised outside of China; and individual investments made with money that has “leaked” out of China. What has been missing is direct outbound investment by private Chinese companies.

Foreign exchange regulations have long created hurdles for Chinese companies doing business outside China. Like a woven fish trap, the Chinese regulatory framework was designed to make it easy for foreign currency to come into the country, but difficult to leave. The past decade has seen a dramatic easing of regulations, which has permitted Chinese companies to engage in cross-border trade and import goods from outside China without government approval. However, remitting funds out of the country to make capital investments has continued to require Chinese companies to obtain multiple levels of governmental approval.

Although the government recognized the importance of Chinese companies being able to make investments abroad relatively early, many Chinese government officials were concerned that once capital was out of the country it would be difficult for the government to control. The desire to exercise tight control over the country’s monetary supply, and particularly its foreign currency reserves, drove this policy. This regulatory limitation started to ease a few years ago, and in 2008—just prior to the global economic meltdown—the Chinese government enacted new regulations relaxing the rules for Chinese companies to make outbound investments.

While actual implementation of the new policies has been slow due to fears about the global economy, some deals have been made. Many observers predict that over the next couple of years, there will be a rising tide of investment from Chinese companies seeking growth opportunities around the world. Some of the factors driving this outbound investment include the desire to diversify geographically, to build global market share, and to acquire companies with experienced management teams, as well as the ongoing drive to find advanced technologies and cheap assets.

The Pacific Northwest has almost everything necessary to be a key destination for Chinese companies. It is close geographically and has robust cultural ties to Asia. It has an extensive logistics infrastructure, including seaports, airports, rail and road links, that makes connections to the rest of North America simple. It has natural resources, abundant energy, clean water, high-tech infrastructure, universities and a highly educated workforce. These advantages combine with the fact that people in China are familiar with Seattle—the home of Microsoft, Boeing, Amazon and Starbucks and even the enduringly popular Sleepless in Seattle. These factors should put Washington at the top of the list when Chinese companies cross the Pacific.

As with all economic opportunities, it is critical that our government and business leaders recognize the potential domestic concerns and be ready to respond to them appropriately. But Washington’s past shows that there is an overall net benefit to the residents of the state when foreigners invest here. We need to prepare now so that Washington is positioned as the premier destination for the coming wave of investment from China.

Fraser Mendel is a shareholder in the Seattle office of regional law firm Schwabe, Williamson & Wyatt, where he practices corporate law with a focus on international transactions and investing in China. He can be reached at 206.407.1573 or fmendel@schwabe.com.

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