November 2011

Crossing Borders

Pauline Houl, managing director at corporate services firm Intertrust, talks about the rule of law, new expat taxes and how China’s cross-border investment is changing

Q: How have you seen investment into China change since the global economic downturn began?

A: The inbound investment market has been growing. We conducted a lot of analyses of our inbound business and one of the trends we have noticed is that many foreign companies now skip first-tier eastern cities in favor of western China. The labor costs are much lower there, and they can take advantage of government incentives – usually more favorable tax rulings – to establish in less developed areas.

Q: What do you notice as far as the outbound market?

A: More and more companies are going overseas – but to different places. In the past, Chinese companies mostly went to Africa or Latin America to access natural resources. But based on our analysis, there’s now more of a trend towards Europe.

Q: Is this the result of a shift in the types of companies going overseas – state-owned companies versus private companies? It seems that many of the outbound investment deals that make headlines are Chinese state-owned companies investing in natural resources.

A: People often say that it’s only the state-owned companies that “go out,” but our research indicates that the popular perception is wrong. If you look at a pie chart of the different types of companies, most are actually more private liability enterprises going out – about 57% of all Chinese companies investing abroad. However, in terms of investment value, it’s the reverse: Over 60% of the value of Chinese outbound investment is from state-owned companies. So in terms of numbers, it’s private companies but in terms of value, it’s state companies.

Q: What are the challenges Chinese companies face when they invest abroad?

A: Most Chinese don’t speak European languages, so finding the right people can be difficult. They also face some cultural differences. For example, many Chinese businesspeople think that having a good relationship with the government is enough to succeed. But in Europe, it’s more about company leadership than government relations. For that reason, it’s often more difficult for Chinese companies to invest abroad than for foreign companies to invest in China.

Q: What’s the biggest challenge for companies coming in to China?

A: The market in China is often very different from what they are accustomed to. There are many job opportunities in China, and people change jobs very fast. It’s quite difficult to keep people on board and high staff turnover is a real problem.

Q: Are there different management techniques required for operating in China versus other markets?

A: There’s more micro-management. You need more time and management to accomplish a certain objective in China than in Europe or the US. Take a travel company with operations in both the US and China. They provide the same service. But the China branch requires more people to produce the same amount of work.

Q: What role does regulation play?

A: Regulation in China is so complicated, often because it’s malleable. Sometimes you have a law, but officials in a certain city do not recognize it. It’s not like in Europe, where a law is created and it applies to everyone, everywhere. It’s also very difficult to get something – like a tax ruling – in writing in China. So you never really know whether a certain application of the law will be valid at the end of the day.

Q: Can you give me an example?

A: Yes – the central government recently announced a new tax deduction of RMB3,500 for some employees, effective September 2011. Most cities across China accepted the new deduction, but Shanghai city tax officials refused to accept that it applies in September. That’s a problem for us because while the official law says it applies in September, we have to explain to our clients in Shanghai that in reality, we can’t make the deduction.

Q: It seems this could be a big concern for companies and investors in China – the law says one thing on the books, but in practice it actually means something else. Do your clients express concern about the rule of law?

A: Yes, of course. It’s not just about this new regulation. There are many, many instances where the law says one thing, but in practice it’s very different.

Q: What are your thoughts on the new expat tax?

A: I think it’s not very fair. Most of these expats have already paid for social insurance overseas, and now they also need to pay it in China. Moreover, the benefits are not really applicable to foreigners in China, because most stay just 3-4 years and then go home. I think it’s probably the government thinking that expats make a lot of money, and they need to pay more.

Q: What do you see happening going forward?

A: I think that more Chinese companies go overseas with the 12th Five Year Plan, and I’m sure that it will be a huge market. The outbound business will become a larger market than inbound investment. We’re already seeing this happening: Economic troubles in Europe are having an impact on our inbound business. The economy is changing, and I think the world is expecting more Chinese investment overseas.

Pauline Houl served as CFO and a board member of Fortis Intertrust, a corporate services provider with a substantial presence in both Europe and China. Intertrust was spun off from the Fortis Group in 2009, and she is now managing director of the firm’s China operations. Houl spoke with Enterprise China about China’s crossborder investment market