Enter the Dragon

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Fraser MendelDespite 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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