A pandemic, trade war and slowing global economy have disrupted China’s outbound investment flow, but the dip may only be momentary as the nation picks up steam and investments regain momentum. Mithun Varkey reports

Chinese businesses have been prime movers of investments globally. The globalization spree has seen the country rank among the top three making the most outward foreign investment in the past couple of decades. Outbound investments gathered significant pace after it kicked off its ambitious Belt and Road Initiative, and global economies large and small, developed and developing, have all been vying for Chinese capital.

Chinese investors have built a reputation for their risk appetite and execution capabilities, and are at home both in the risky hinterlands of frontier economies and the glitzy tech havens of the world’s bustling metropolises. They have dug into conventional long-haul infrastructure and resource investments, the riskier real estate and sports and entertainment investments, as well as fast-growing high-tech and new-tech sectors.

ANTHONY-MCKENZIE---Managing-Partner---Carey-Olsen---Singapore

However, this year, following the covid-19 pandemic, global economic currents have been upended, and the flow of funds has seen disruptions and reversals. China, like every other economy, hasn’t been immune to the perils of the pandemic. Its investments in countries across the world seem to have plummeted, and this on the back of a trade war with the US and increasing scrutiny of Chinese deals in Europe and North America.

“The US-China trade war, covid-19 and prevailing economic conditions have put the brakes on global transactional activity, and will no doubt create challenges to China’s economy in the second half of 2020 and beyond,” says Anthony McKenzie, managing partner of Carey Olsen’s Singapore office.

US international law firm Akin Gump’s Beijing-based partner Allen Shyu says that for many Chinese industrial businesses, 2020 has been, and remains, tough. “Profits are lower across the board and labour costs are rising,” says Shyu. “We have seen many more bankruptcies in 2020. The consolidation of industries will be the main solution in the future. For example, more struggling smaller banks will be bailed out through merging with one of China’s larger banks.”

ALLEN-SHYU,-Partner,-Akin-Gump,-Beijing

McKenzie says that as China starts to move from crisis to recovery mode, and becomes more integrated with the global economy, he expects Chinese investment activity to pick up in the short to medium term. “Led by the expansion of state-owned enterprises and private companies overseas, the growing base of high-net-worth Chinese individuals and the continued liberalization of the renminbi, we are seeing strong enthusiasm for Chinese outbound investment into the global economy using offshore jurisdictions such as the Cayman Islands, the British Virgin Islands (BVI) and Bermuda,” he says.

“We anticipate that key industries such as financial services, IT, education and healthcare will likely become the driving forces from which significant outbound deals can be generated.” However, McKenzie warns that other industries such as hospitality, tourism and aviation are likely to require significant restructuring, and may emerge in different forms to those that existed pre-covid-19. Daniel Leung, a partner at Holman Fenwick Willan in Hong Kong, says: “We have been discussing Chinese outbound investment for some time but the development has been very slow.

“The current economic situation may be the best environment for the Chinese enterprises, e.g., the state-owned enterprises, to reach out to new emerging markets, as China may be one of the first countries emerging from a coronavirus-hit economy.”

DANIEL-LEUNG,-Partner,-Holman-Fenwick-Willan,-Hong-Kong

However, Leung says entering into a new market requires a lot of investment and effort, and will take time. “With a strong financial position, we hope Chinese outbound investment will substantially increase in the next few years, particularly in developing countries,” he says. “Understanding the legal environment will certainly be one of the key factors in those Chinese outbound investments.”

Continental ambitions

Continental Europe has been a major destination for Chinese capital of late. Large Chinese companies that are on the lookout for cutting-edge technology and mature businesses have been lining up for opportunities in Europe. However, this year has seen a slow-down in Chinese capital inflow.

Italy, for example, has been one of China’s strongest allies on the continent and continues to be a key Belt and Road partner in Europe. While the pandemic has caused a dip in bilateral trade and investment, diplomatic relations remain strong.

“As for the impact of the coronavirus in Sino-Italian economic relations, Chinese customs data for the first two months of 2020, compared to the 2019 data, indicate a decrease of 18.5% in Chinese exports to Italy, and 12.5% of Chinese imports from Italy, as well as a 16.2% reduction in trade between the two countries,” says Dong Lifang, managing partner of Dong & Partners in Rome. “The tourism sector was one of the hardest hit by the covid-19 pandemic.”

NILS-KRAUSE,-Partner---Head-of-Corporate-and-M&A-for-Germany,-DLA-Piper,-Hamburg

Nils Krause, a partner and head of corporate and M&A for Germany at DLA Piper in Hamburg, says domestic macroeconomic headwinds and tightened regulatory scrutiny abroad have seen Chinese outbound investment slow down since 2016. “The covid-19 outbreak has further aggravated the problems on the firm’s financial stability and prevented deal-making in the first half of 2020,” says Krause.

Mark-Alexander Huth, a partner at Schulz Noack Bärwinkel (SNB Law) in Hamburg, adds that the worldwide economic slow- down and travel restrictions due to covid-19 are affecting Chinese outbound investment and this will continue, at least for the short to mid-term. “Consequently, Chinese investments in our region have decreased considerably both in numbers and scale,” says Huth.

WENDY-LIU,-Head-of-China-Practice,-Heussen-,Amsterdam

“Chinese foreign exchange control and recently tightened German investment restrictions for foreign investors are adding an extra burden for possible M&A transactions. Predicting the point of time when the volume of Chinese outbound investment in Germany will be back to the pre-pandemic level is a task similar to gazing into a crystal ball. Nevertheless, we are expecting, and hoping, to see a considerable increase of investment by the second half of 2021.”

Other western European markets like Belgium and the Nether- lands have seen a similar trend.

“Due to covid-19, we did see some of our clients who intended to incorporate their businesses in the Netherlands postponing their projects until the situation is more certain and stable,” says Wendy Liu, head of China practise at Dutch law firm Heussen based in Amsterdam. “Further, the closing of the border for travel is also an important reason why the Chinese entrepreneurs decided to slow down the process.” The Netherlands is the third-largest investment destination for Chinese enterprises in the EU, Liu notes.

AVA-TU-XIUFANG,-Senior-Associate---Head-of-the-China-Desk,-Monard-Law,-BrusselsAva Tu Xiufang, a senior associate and head of the China desk at the Brussels office of Monard Law in Belgium, also notes that projects from China have slowed, but adds: “There are still constant enquiries from Chinese companies on investing in Belgium.”

The overall dip may, however, be only temporary and at least in select markets, there may already be signs of Chinese investment picking up steam.

“Retail sales remain strong, despite fears around the trade war,” says Shyu from Akin Gump. “Additionally, despite market restrictions, real estate sales are growing, driven by urbanization and upgrading. With such domestic consumption driving economic growth, it is expected that this creates more opportunities for Chinese businesses.”

The hope is that some of the positive domestic developments and recovering business confidence will have a knock-on effect for outbound investment as well.

“We have in fact already seen an uptick in Chinese interest over the summer months,” says Jan Bogaert, a partner in Stibbe’s Brussels office. “We are positive on the prospects for Chinese investments in Europe. China was first to be struck, but has dealt well with the pandemic and is now in a good position to take advantage of opportunities as they present themselves,” he says.

DLA Piper’s Krause says: “As the first country to be hit by the virus and the first to bring the outbreak under control, the Chinese economy is gradually coming back since the second quarter of 2020, and we see a recovery of Chinese outbound M&A activities.

“Crisis is also a time for opportunities,” he adds. “Chinese firms, in particular PE investors with relatively stable financial status and access to offshore capital, may take advantage of the sharp drop in company valuations and step up for investments. As an effective tool of restructuring, strategic investors may use M&A to reshape their business focuses as well.”

Serbia is another European market that has attracted a lot of Chinese capital in recent years, which had fallen earlier in the year but has since seen a rebound. China was the largest source of direct investment in Serbia in 2019. Last year, Chinese companies announced 16 greenfield projects with a combined investment of US$625 million, says Ivana Kopilovic, the managing partner of Kopilovic & Kopilovic in Serbia’s capital, Belgrade.

“The global epidemiological situation had initially slowed down the progress and development of these projects,” she says, “but the situation has improved drastically, and therefore the activity on the projects has continued at an accelerated pace, while many new projects are also expected.”

Chinese interest in Europe is largely driven by cutting-edge technology, advanced manufacturing and other strategic assets, as well as the consumer products and healthcare sectors.

“Chinese companies are interested in investing in consumer-facing services, internet-enabled companies, and the health- care, education, travel and leisure sectors,” says Shyu, of Akin Gump. “Sectors where the Chinese government actively encourages investment include AI [artificial intelligence], manufacturing and the internet of things [IoT], biotech and advanced materials.”

Despite the inevitable contraction of international trade due to restrictive preventive measures, Chinese investments in Italy have not stopped, says Dong. “For instance, in June this year, the large Chinese automotive group FAW committed to investing €1 billion (US$1.17 billion) to develop an electric car innovation hub in the Italian Motor Valley [in northern Italy].”

Apart from consumer and high-tech industries, interest is also high in the logistics and real estate sectors. “Chinese companies are very interested in setting up logistics centres in Belgium, especially around the Liege airport, following the establishment of the Alibaba-Cainiao e-platform,” notes Tu, of Monard Law. “Chinese companies are keen to also invest in the high-tech, pharmaceutical, chemical and infrastructure sectors in Belgium, traditionally strong sectors here.”

Bogaert, of Stibbe, also notes Chinese interest for Belgian logistics assets, as well as “real estate, automotive, pharmaceutical, tech, and cleantech”. Huth, of SNB Law, says his firm has recently noticed “an increased Chinese interest for real estate projects”.

“In times of global economic instability/uncertainty, the image of real estate as ‘concrete gold’, safeguarding assets, seems widespread not only in Germany but among Chinese private investors,” he says.

MARK-ALEXANDER-HUTH,-Partner,-Schulz-Noack-Bärwinkel,-Hamburg

Krause says that, driven by the central government’s continual efforts to upgrade industry, “the appetite of Chinese companies for cutting-edge technology and advanced manufacturing, as well as other strategic assets in Germany, remains as strong as ever.”

Serbia, which has so far attracted Chinese investment in industrial and infrastructure projects, is now seeing interest in “IT, blockchain technology, electronics, artificial intelligence, digital surveillance and biotechnology,” says Kopilovic.

Israel’s cutting edge

Chinese demand for high-tech investments is perhaps most visible in Israel. Omer Ben-Zvi, a Tel Aviv-based partner and head of China practice at Israeli law firm Shibolet, says: “In a way, Israel, especially its high-tech industry, has benefited from the China-US trade war, following which Chinese investors began seeking alternative markets for their tech investments and relevant participation. Israel, being the second Silicon Valley, is a very attractive destination.”

Although deals have slowed down, “since Q3 2020, we began to get requests from prominent Chinese companies about some legal and regulatory overview in relation to their intention to establish entities in Israel in the near future,” says Ben-Zvi.

Meitar Law Offices’ Tel Aviv-based partner and head of China desk, Yoav Sade, adds: “We are actually seeing an increased interest during the past few months, both on the investment side and M&A. Mostly minority investments, strategic but also financial, in the Israeli high-tech sector, as well as participation by Chinese companies in Israeli infrastructure and construction projects.”

Ben-Zvi says that within high-tech, Chinese companies are most interested in life sciences, agritech and foodtech, watertech, semiconductors, and automotive/mobility tech.

OMER-BEN-ZVI,-Partner,-Head-of-China-Practice,-Shibolet,-Tel-Aviv

Emerging Central Asia

Central Asia is an emerging theme in Chinese outbound investment. The region remains one of the most popular destinations for Belt and Road projects, and there has been a steady increase in investment and cooperation among Central Asian and Chinese firms. A recent survey by China Business Law Journal shows Kazakhstan as the third-most-popular destination for Chinese law firms opening overseas offices, behind Hong Kong and the US.

“According to the National Bank of the Republic of Kazakhstan, China ranks fourth in terms of total direct investment in Kazakhstan, and is one of the key strategic partners of Kazakh-stan,” says Saniya Perzadayeva, a managing partner at Unicase Law Firm in Almaty.

SANIYA-PERZADAYEVA,-Managing-Partner-,-Unicase-Law-Firm-,-Almaty

Liu, of Dutch firm Heussen, also makes an interesting observation about an uptick in Chinese investment to Central Asia through the Netherlands, even as overall investments into the western European country has slowed down. “We noticed a growth of outbound investment to Central Asia through the Netherlands, as well as the continuing growth of European business expansion by Chinese companies that already have operations here,” she says.

Yelena Manayenko, an Almaty-based partner and head of M&A at AEQUITAS, says that even with a slowing economy in Kazakhstan, the pandemic, and restrictions and bans introduced by the Kazakh government, “Chinese companies are becoming more active on Kazakhstan markets from year to year”.

Perzadayeva also notes the body blow that the pandemic had dealt to Kazakhstan. “The transport and logistics industry, tourism, wholesale and retail trade, services, and commodity exports have suffered the most,” she says. “Nevertheless, some projects within the Belt and Road initiative are still being implemented, but their pace is significantly slowed or suspended for a while. However, previously ordered equipment for major projects in Central Asia is being shipped and construction work is underway, for instance, a plant for the production of polypropylene in the Atyrau region of Kazakhstan.

“We believe that the slowdown of co-operation between Kazakhstan and China due to the covid-19 pandemic is temporary, and should recover after the pandemic is over.”

Tajikistan, another Central Asian country with significant Chinese investment, seems to have bucked the trend of slowing investment. “We do not see any impact on Chinese investment in Tajikistan because of slowing global economic activity, the covid-19 pandemic and the trade war,” says Alisher Hoshimov, a senior associate at Centil Law Firm in Tajikistan’s capital, Dushanbe.

“Generally, Chinese investment to the Tajik economy is increasing year on year. Most of the deals are direct investments to local companies or projects, and state loans for infrastructure projects in Tajikistan.”

The focus of Chinese investment in Central Asia continues to be largely energy, resources and infrastructure. “Historically, most attractive are energy, including renewables, oil and gas, mining, transport and warehousing, finance, construction and manufacturing,” says Perzadayeva.

African renewal

China’s insatiable demand for resources, and ability to execute projects, have been key drivers of its involvement in Africa. Chinese investors have been in Africa for a long time and continue to be one of the largest foreign investors on the continent.

“China uses the fight against the pandemic in Africa to promote its businesses,” notes Hyacinthe Fansi, a partner at NFM Avocats Associés in Douala, Cameroon. “The pandemic is a godsend for the Chinese economic actors who are making numerous donations of material to African countries. Chinese investment in Cameroon and the Central Africa region has increased exponentially.”

Charles Douglas, the Johannesburg-based co-head of M&A at Bowmans in South Africa, believes that geopolitics will play a role in FDI into Africa, “with China, the EU and the US competing for influence on the continent, potentially to the benefit of African economies”. He adds: “China’s Belt and Road Initiative will continue despite a dip in demand for commodities and disruption caused by the pandemic.”

David Anderson, a partner in Bowman’s Johannesburg office, says China-related work in South Africa is “spread across M&A, banking and finance, competition and litigation practice areas. The sectors attracting the most interest include mining, transportation and logistics.”

Fansi adds: “In addition to major infrastructure projects – energy, healthcare, roads, etc. – thousands of Chinese entrepreneurs are also setting up operations in the region [central Africa] in various sectors ranging from retail, factories and agriculture to extractive industries.”

Morocco is another country seeing Chinese interests in sectors other than resources. “The most important project that reflects best the China-Morocco relationship is the Tangier Tech, also known as Mohamed VI City Tech,” says Azzedine Kettani, founder partner of Kettani Law Firm in Casablanca, Morocco.

“The smart city project, to be built in three phases over the next 10 years, is designed as the spearhead for the Tangier region as a gateway to Europe. The construction on the project has already started after China Communications Construction and China Road and Bridge Corp signed a memorandum of understanding with Morocco-based BMCE Bank,” says Kettani.

Latin America

Large infrastructure projects with long gestation periods are less prone to the vagaries of the markets, international politics, and even a global epidemic. The focus on such long-term projects is one of the successes of the Chinese investment strategy in South America, especially in Brazil.

Yuka Ono, a partner and head of Asian desk at Pinheiro Neto Advogados in Sao Paulo, Brazil, says Chinese investment in Brazil is mostly focused on long-term projects in infrastructure, energy, technology and privatizations. “Although the current scenario led to a general reduction in the number of new projects, and consequently adversely affected the volume of foreign direct investment, there are still investment opportunities going on,” says Ono.

Jenny Lu, an associate attorney at Pinheiro Neto Advogados in Sao Paulo, Brazil, agrees. “Despite the ongoing pandemic and the rippling effects of the trade war between China and the US, Brazil has had a positive performance in its bilateral trade with China in 2020 so far,” she says. “According to information provided by the Brazilian central bank, in 2019 China became for the first time one of the top 10 direct investors in Brazil. Most of these investments can be classified as greenfield and/or M&A operations.”

José Franceschini, a partner at Franceschini e Miranda Advogados in Sao Paulo, says: “This environment is, in my opinion, very much of interest for well-capitalized firms or ones with funds that have mid to long-term strategies. I do believe that the trade war may bring very interesting opportunities for new approaches and investments in important economic areas.”

JOSÉ-FRANCESCHINI,-Partner,-Franceschini-e-Miranda-Advogados,-Sao-Paulo

Chile is another major market for China in Latin America. “Chile has always been a jurisdiction that China sees as a friendly trading partner,” says Sergio Díez, a partner at Cariola Díez Pérez Cotapos in the capital, Santiago.

“I remember that the first free-trade agreement that China signed in Latin America was with Chile. Due to the crisis now, companies are cheaper to acquire, which clearly will be an opportunity for Chinese investors,” he says.

However, Mauricio Benítez Córdova, the China country desk leader at BDO Chile, also based in Santiago, says there has been seen a slowdown of Chinese foreign investment in Chile. “Chile suffered a general riot last year that caused the suspension of the Asia-Pacific Economic Co-operation (APEC) 2019 meetings that were scheduled to be held in Chile,” says Benitez Córdova. While cancelling APEC 2019 scuttled possible Chinese deals into Chile, “the covid-19 pandemic did not help in recovering the business landscape in the region”, he says.

In Chile, Benitez Córdova says the most dynamic sectors for investments are energy, especially renewals, infrastructure, fintech and digital transformation, and agribusiness, while Diéz adds that traditional sectors such as mining, infrastructure, aquaculture and energy are also popular.

Apart from infrastructure and energy, agriculture and meat products are major attractions for investment in Brazil. “Actually, the trade war, from what I see, enhanced trade relations between China and Brazil, especially in agricultural and meat products,” says Franceschini. “In 2018, the meat industry may have received increased investments of approximately US$750 million, while investments in agriculture were approximately US$7.3 billion,” he says.

Southeast Asia: closer to home

In Southeast Asia, the Belt and Road Initiative is the prime mover for Chinese investment. While there are significant investments across key Belt and Road sectors like infrastructure, logistics and energy, there is also rising interest among Chinese investors in nurturing startups and budding technology and e-commerce companies in the region.

Southeast Asia remains the focal point of Chinese investment into Asia, however, the trends so far this year in the region have been mixed.

While the region’s largest economy, Indonesia, is hot with Chinese investors, a host of reasons have held back investment into Malaysia, where in the first nine months of last year Chinese investment fell 50%, falling from the top source of FDI into Malaysia to third place. In the first quarter of this year, China fell another spot to be the fourth-largest source of FDI in Malaysia.

“We have seen a great number of investments coming in from multiple industries,” says Giffy Pardede, a partner with Indonesian firm ABNR in Jakarta.

“In energy and mining, we have seen investment in the mineral processing industry, where multiple Chinese metallurgy companies, backed by major Chinese banks such as Chinese Development Bank and ICBC, are focusing on the development of smelters in the relatively underdeveloped eastern half of Indonesia,” says Pardede.

“Our firm is also seeing major Chinese shipping and distribution companies having interest in Indonesia, especially those wanting to back up already existing Chinese e-marketplaces, such as JD and Chinese-invested local player, Bukalapak,” he says.

“Online gaming and social media platforms are also very important to Chinese players such as Tencent and ByteDance, which is not surprising given the speed with which internet penetration is growing in Indonesia – the highest in Southeast Asia – and also the country has the fourth-largest population in the world. So, Indonesia is the biggest market for Chinese online gaming, social media and e-commerce platforms outside the Chinese mainland.”

GIFFY-PARDEDE,-Partner,-ABNR,-Jakarta

In Malaysia, Teh Hong Koon, a Kuala Lumpur-based partner at Skrine, is less sanguine. “As a result largely of the trade war and the covid-19 pandemic, and to some extent the political scene in Malaysia, Chinese investment has plummeted,” Teh says. “We believe Chinese cross-border business and investment into this region, including Malaysia, will continue with the downward trend in the short term. In the medium and long term, we are cautiously optimistic.”

Ho Wei Lih, a partner at Malaysian firm Rahmat Lim & Partners in Kuala Lumpur, is more upbeat. “Chinese business is still aggressive in my region, and Chinese investment into Malaysia is picking up in this quarter,” says Ho. “There is interest in all sectors generally, but the ones that I have been approached/worked on include real estate, construction, logistics, mining, manufacturing and education.”

HO-WEI-LIH,-Partner,-Rahmat-Lim-&-Partners,-Kuala-Lumpur

Teh notes that the Malaysian government launched the China Special Channel on 20 January 2020, an initiative to accelerate FDI from China, spearheaded by InvestKL and, since August 2020, by the Malaysian Investment Development Authority (MIDA). “The government aims to secure at least MYR5 billion (US$1.2 billion) of investment from China through this channel,” she says. “In the short term, we are unlikely to see new mega-projects; relatively big projects and M&A are likely to go on. Malaysia’s advanced manufacturing sector is seen as the sector garnering the most interest.”

Infrastructure, construction, e-commerce, logistics and technology media and telecoms (TMT) are other sectors attracting Chinese interest.

Vietnam is among the hottest investment destinations, has bucked the covid-19 pandemic, and expects significant Chinese participation. “There will be a bigger wave of investment into Vietnam from China,” predicts Phuoc Bao Tri Nguy, a partner at JLPW Vinh An Legal in Ho Chi Minh City.

TEH-HONG-KOON,-Partner,-Skrine,-Kuala-Lumpur

According to Vietnam Chamber of Commerce data, China ranked third with a total registered investment capital of US$1.7 billion, or 9% of total investment in Vietnam in the first seven months of 2020. In terms of new projects, China ranked second with 237 projects, says Nguyen.

“Chinese businesses are expanding their factories in Vietnam,” he says. “Instead of slowing down business, they are acquiring local businesses in the energy sector, and establishing subsidiaries in Vietnam for manufacturing businesses to utilize the more than 17 free-trade agreements (FTAs). Other business sectors are gradually increasing their existence and capital investment in Vietnam to catch up with the big wave of foreign investors.”

A stable social and political environment, steady economic growth, abundant labour force, favourable policy environment and a large number of FTAs with major economies make Vietnam an attractive destination. But it is not alone in the so-called CMLV (Cambodia, Myanmar, Laos and Vietnam) bloc, with all these economies continuing to be favoured by Chinese investors.

“Despite an apparent dip in traditional M&A activity, we are starting to see a gradual recovery in China’s investment outflows into Southeast Asia,” says Robin Teow, a Phnom Penh-based partner and head of China desk at DFDL Cambodia. “Chinese investors are back to relocate their operations or set up facilities in our region, especially Vietnam, Cambodia and Myanmar, in order to escape the American tariffs on Chinese-made goods, and to acquire [Belt and Road] assets,” he says.

ROBIN-TEOW,-Partner-and-Head-of-China-Desk,-DFDL-Cambodia,-Phnom-Penh

“The pace of recovery is slower than expected, as Chinese investors are more cautious than ever in making investment decisions amid the current downward shift in global growth outlook and uncertainties associated with the covid-19 pandemic.” This view is echoed by Laos-based David Aristotle, managing partner of ZICO Law Laos in Vientiane. “We see that there is a continued consolidation of Chinese investment in Laos in major project sectors such as infrastructure, mining and energy, but at a less aggressive pace compared to pre-pandemic,” says Aristotle.

“We also observed that there is a slowdown in new investments, with projects and financing taking more time to complete,” he says. “We have received interest in mining [gold], banking, and fintech-related investment.”

Teow, of DFDL sees strong interest in technology, infrastructure and power investments, followed by manufacturing, financial services and real estate. “Also, there is a surge in disputes around commercial contracts, and enquiries about restructuring of contracts, employee rights and employer obligations, as well as a few prospective enquiries relating to debt refinancing,” he says.

South Asia

The most interesting trend in this gloomy global economy is the surge in Chinese interest in South Asia, and even the Middle East. The region, perhaps with the exception of Pakistan, has never been among the most popular destinations, but now there is quite obviously a Chinese pivot to the region.

“Chinese business in South Asia, especially Bangladesh, has considerably grown in recent times,” says Nasirud Doulah, a partner at Doulah & Doulah in Dhaka, “although it still lags the growth expected in comparison to the same in the ASEAN region, which may be to some extent explained by the cultural difference and lack of government patronization of local investment or regulatory regime.

“The impact of covid-19 on Chinese investment in Bangladesh has been drastic during the first half of 2020, however, it seems to have been diminished from the beginning of the second half,” says Doulah. “So far we have found Chinese investors to have been highly interested in the infrastructure and construction sectors, both in the form of investments and construction contracts. While interest in the services sector seems to be very low, Chinese investors are particularly interested in ready-made garments, leather and pharmaceutical manufacturing sectors.”

Pakistan, though, has long been popular with Chinese investors. Maheen Faruqui, a partner at Kabraji & Talibuddin in Karachi, says China has expressed its commitment via several projects under the China-Pakistan Economic Corridor (CPEC), a major component in the Belt and Road Initiative.

“The covid-19 pandemic has had a significant impact on CPEC projects, including the imposition of travel restrictions, and unavailability of local labour for projects due to the announcement of a nation-wide lockdown,” says Faruqui. “Consequently, the CPEC projects have faced considerable delays and a rise in costs. The pandemic has also delayed Pakistan’s plans to establish special economic zones under the CPEC projects,” she says.

Further to the south, in Sri Lanka, Savantha De Saram, a Colombo-based senior partner of local firm DL&F De Saram, says the recent change in government, and the fact that the “local leadership is heavily aligned with Beijing”, will see an uptick in Chinese investment.

“Chinese funding is the single-largest contributor to FDI in Sri Lanka, with large private investments allowing Chinese companies to gain local market dominance,” says De Saram, adding that the efficient way with which the government handled the pandemic will attract more investment.

“The pandemic will most likely see immense reciprocity towards Chinese investors because the Chinese government and companies stepped up to donate masks, PPE and test kits to Sri Lanka,” he says. “Additionally, China also granted Sri Lanka a concessionary loan of US$500 million, upon request, to aid its efforts to combat the pandemic.

“With continuous aid, which makes China seem like a friend in need, and their assistance in tackling the response to covid-19, many fractions of Sri Lankan society no longer see Chinese economic dependence as a compromise to Sri Lankan sovereignty, but a welcome helping hand in light of Sri Lanka’s own economic turmoil.”

De Saram says the two countries are preparing to sign an FTA, which has been under negotiation since 2014.

SAVANTHA-DE-SARAM,-Senior-Partner,-DL&F-De-Saram,-Colombo

Nepal has a similar story. “In the past three fiscal years [2016- 2018], China has been the biggest investor in Nepal, as per data provided by the Department of Industries,” says Anup Raj Upreti, managing partner of Pioneer Law Associates in Kathmandu. “As per the Economic Survey of the Ministry of Finance, until the third quarter of the last fiscal year, almost 44% of FDI originated from China.

With Nepal being a reservoir of unexplored natural resources, Upreti says investment is mostly clustered in energy-based industries. “However, there has been a shift in areas of Chinese investment to mining-related industries, construction and forest-based industries, among others,” he says.

“The relationship between the two governments is expected to grow further as the two had signed two agreements in the areas of connectivity, security, border management, trade tourism and education during the historic visit of President Xi Jinping in 2019.

“However, much of this will depend on how quick Nepal can recover from the economic shock brought on by the pandemic. It will also depend, amid a growing wind of de-globalization, on the immediate priority of the government from where investments originate.”

Riddles to solve

While China’s swift recovery from the pandemic gives it a head start in growing its global presence and investment, there are pressing issues that investors need to face. A combination of regulatory, political, logistical and cultural challenges are making outbound investment harder for Chinese businesses.

“Chinese investors face continuously tightened regulatory regime on foreign investment in Germany,” says Krause of DLA Piper. “The German government has lowered the threshold for a review of investments concerning ‘critical infrastructure’ and security-sensitive IT products from 25% to 10% of the voting rights of a German target company.”

“Along with the regulatory scrutiny, high-profile Chinese overseas investments are at risk of politicization,” he says. “As in the case of the recent block on certain Chinese technology firms, there is increased political intervention on investments where strategic and geopolitical balance considerations may outweigh the commercial benefits.”

Although Belgium has no such security review, Tu, of Monard says: “The major challenges lie on the compliance of operation by Chinese companies in Belgium, such as GDPR, tax and labour law compliance.”

Stan Robbers, the founding partner of Heussen in Amsterdam, points to challenges arising from differences in culture and conventions. “From our point of view, how to set up a management model, including the management of local employees, distributors, clients and customers, is the major challenge faced by Chinese companies in the Netherlands,” he says.

“Some of the companies apply a management model that they use in other jurisdictions [mostly China] directly to their Dutch entity. The same goes for the use of template contracts. However, this may be problematic as it usually does not fit the Dutch system, not only from a legal perspective but also from a cultural and implementation perspective.”

Wing Cheung, a partner at Holman Fenwick Willan in Hong Kong, says companies in the PRC are actively looking for outbound M&A opportunities because of their accumulated wealth. “A significant number of small to medium-sized private companies sit on significant reserves,” says Cheung. “However, there are two issues with outbound M&A that stand out – if the target operates in the US, or is otherwise subject to the administration’s trade restrictions, the project might be put on hold; and the PRC government’s supervision of outbound investment and outbound payments has also been tightened.”

McKenzie, at Carey Olsen, agrees the local Chinese regulatory landscape is a key factor that will impact China’s outbound investment patterns. “A proposed outbound investment by a Chinese investor in overseas assets is subject to various approval, filing and reporting requirements with Chinese authorities,” he says. “Foreign exchange control policy and availability will impact capital inflow and outflow, and continue to affect the ability of Chinese investors to bid for overseas assets.“

Investment approval from Chinese authorities is also a problem for Israeli deals, adds both Sade, of Meitar, and Ben-Zvi, of Shibo- let. “The major challenge for Chinese investors is to get the ODI [overseas direct investment] approval from the Chinese authorities for the investment transactions and transfer of funds,” says Sade. “Since the Chinese investors are competing on Israeli targets with disruptive technologies that have an alternative source of funding [from the US, Europe and Israel], they need to convince the Israeli target about their seriousness and ability to close the deal.”

Ben-Zvi adds: “Companies subject to China’s ODI control can sometimes kill a deal that has gone a long way in negotiation.” Gaps in business culture and language are also challenges, he says, which can only be bridged by intermediates who work with both sides for a long time.

Cultural challenges are among the most often cited issue in other jurisdictions, from South America to Central Asia and Eastern Europe. Some of the countries also have other localized problems.

In Brazil, for example, the different legal systems, the complexity of the Brazilian tax environment, and a large number of labour claims and complex rules in that area are a challenge, according to Lu, of Pinheiro Neto.

While cultural challenges and language barriers are an issue closer to home in Southeast Asia and South Asia, geopolitical issues also add to the difficulties.

Teow, of DFDL, says challenges include “South China Sea tensions, human resources, cultural differences and poor governance [in the target countries].”

Local regulatory and bureaucratic hurdles are also problems in frontier markets.

In dealing with all these challenges, Dong of Dong & Partners in Rome, says: “It is important to rely on a competent and international team to resolve technical and complex issues concerning the protection of Chinese outbound investments.”

While Chinese investors can rely on solid legal advice from local experts and specialist firms, the key to navigating these systemic challenges is to build legal teams that have an international vision and offer the best assistance to multinational clients.