Investors need to know their customers and stakeholders before taking a leap in China, warns PwC

Multinationals need to appoint local advisors and experts who know and understand the financial regulations and legislation of China before contemplating carrying out business in the country, warns professional services firm PwC.

“With no signs of a pickup in the euro zone and US economies, strong expectations are being placed on China for business and growth opportunities. However, doing business in China also means navigating the complexities that arise from the country’s unique political, legal, financial and regulatory contexts,” says Thomas Magill, Head of PwC China Desk for South Africa.

Despite the recent economic uncertainty, China has remained a bright spot for foreign investment for many Western multinational companies. By the year 2050, China, the US and India are likely to be the three largest economies, according to recent studies carried out by PwC global economists. The BRICS economies are expected to continue to drive world economic growth in 2013. Unlike developed economies, the authorities in the BRICS have far greater capacity to provide monetary and fiscal support.

South Africa will host the fifth BRICS Summit from 26 to 27 March 2013 in Durban. The aim of the conference is to bring about a number of initiatives, such as the implementation of a development bank of developing countries. BRICS is an acronym for the powerful grouping of the world’s leading emerging economies, namely Brazil, Russia, India, China and South Africa.

China is increasingly emerging as an attractive business destination for a number of African countries. Not only is there significant growth in trade between China and South Africa, but China is also viewing the potential that the rest of Africa has to offer. China has a great demand for African commodities and is moving from being the world’s factory to the world’s number one consumer.

China is not a single market, says Magill. “Investors looking to enter or grow in the country will need to develop a good relationship with a relevant government department and/or officials, obtain appropriate market analysis, capability building and investment structuring.” PwC’s new guidebook ‘Doing Business and Investing in China’ presents perspectives from industry professionals and specialists based in China, that are helpful in a due diligence exercise and market research, particularly for those businesses whose investigative resources are considered insufficient.  The guidebook covers 10 main focus areas including government relations, human resources, tax and financial reporting, doing deals and managing risks.  It also provides insights on a number of business issues in China, such as the resilience of risk, joint ventures and mergers and acquisitions (M&A),  and sustainable supply chains.

The report highlights a myriad of operational and regulatory risks that multinationals may be confronted with.  Magill says that it easy for foreign business partners to actually appear bigger than they are or to exaggerate the potential financial benefits of a deal. “The introduction of a ‘middle man’ in a deal or transaction simply cannot be trusted. Therefore companies need a due diligence to be carried out beforehand.

“Companies without insight into local Chinese business practices and culture may find themselves unprepared for the underlying risks. With more and more businesses implementing lean operations, the resulting reduced controls and streamlined processes are also imposing an increasing risk.”
“In the current economic climate and change in leadership, there is an increasing liberalisation of the Chinese market to foreign investment,” says Jenny Chen, Vice- Head of PwC China Desk for South Africa. Rapid changes in demographics and market forces are opening up new sectors and opportunities that would never have taken place years ago, much less open to foreign investment.

In addition, in November 2012, the 18th National Congress of the Communist Party of China (CPC) sent the international community a clear and consistent message that the new leadership remains committed to “deepening reform and opening up”.
Good deals are hard to come by. “Investors should be flexible, patient and persistent. They need to adopt a holistic and China-specific risk management framework – one that addresses both strategic and sustainability drivers,” says Chen.

Businesses should work with officials they are comfortable with and strive to maintain these relationships. Companies should have a general understanding of the differences among the various accounting regulation systems in China. Furthermore, the tax system is complex, with policies changing rapidly to keep pace with economic development.

“Multinationals must ensure that they are fully prepared and committed before investing in China. Careful planning is key to any business strategy, particularly in entry and growth. The best way for investors to mitigate on-the-ground risks is by knowing their customers and partners, government touch points and stakeholders,” concludes Magill. “Tailored due diligence with trusted and independent sources is the strongest safeguard.”