From Chinatown to China City: Focusing on COETZ

From Chinatown to China City: Focusing on COETZ

Author: Jeffrey Chen, Legal Practitioner (Shanghai)

China's outbound investment data

Chinatowns located in major cities around the world have always been a symbol of hard-working Chinese businessmen adapting to local environment.

However, Chinatown-based firms featuring low added value and labor-intensive characteristics reflect the frontrunners of overseas Chinese lack of capital adequacy, knowledge and innovation.

Today, China's comprehensive national strength has led to a surge in the number of Chinese enterprises "going out" in full swing, reflecting that the country is developing from the world's largest recipient of investment into a key country investing capital globally.

China's outbound direct investment has been increasing rapidly. In 2008, China's outbound direct investment (excluding financial investments) reached US$52.15 billion, up 96.7% year on year. In the first five months of 2011, China non-financial outbound direct investment reached US$20.035 billion, covering 1,613 companies in 110 countries and regions.

However, China's outbound direct investment is still at a low level. Usually, a country inbound direct investment and outbound direct investment should have a reasonable ratio; the average ratio of inbound to outbound direct investment worldwide is 1:1.1 and in developed countries it is 1:1.4. The proportion of inbound direct investment against outbound investment in China is just 1 : 0.48.

Therefore, nnovating outbound investment and cooperation methods, supporting companiesglobal operations of R&D, production and sales and stepping up cultivating China's multinational companies and international brands" should not remain at the initial stage where the government showed its support and investors just listened to it without taking any actions.

China Overseas Economic and Trade Cooperation Zone: a new way of outbound investment

In late 2005, China Ministry of Commerce announced, with several follow-up policies, the China Overseas Trade and Economic Cooperation Zone (COETZ) as a new strategy for outbound investment and an important channel for implementing the "going out" strategy. These overseas economic and trade cooperation zones are led by the Ministry of Commerce. After reaching agreements with countries that are politically stable and have good relations with China, the projects are led by domestically approved enterprises, supported by a certain amount of financial support and long-term loans. Domestic companies sign agreements with foreign governments with an aim to attract domestic and foreign enterprises to settle in the zones and form industrial clusters. The goals of the China Ministry of Commerce are:

  • To provide a new platform for Chinese enterprises to make outbound investment;
  • To offer a good business environment for overseas-based Chinese companies;
  • To ease trade conflicts and to create harmonious trade relationships;
  • To facilitate the internationalization process of Chinese companies with comparative advantages;

To step up growth of outbound investment with a view to quicken the adjustment of China imbalanced international trade and investment

Leading companies in the projects appear to recognize the government intentions. Most entrepreneurs say the COETZs are backed by government support helping to mitigate individual companiesrisks and to avoid trade frictions and disputes, thus enhancing the chances that companies will achieve success in their overseas investments. However, COETZs have yet to arouse the attention of all potential outbound investors.

Current situations of COETZ

COETZs are different from free trade zones in a broad sense. According to the interpretation of the World Trade Organization, the so-called "free trade zones" refer to areas where two or more sovereign countries or customs territories sign agreements to further open up to each other market based on the MFN term under the WTO, phase out tariffs and non-tariff barriers on most of the goods and improve market access for services and investment in order to realize the formation of special free zones for trade and investment. COETZs, on the other hand, are small-sized special areas for Chinese enterprises with preferential tax and specific regulatory policies.

The Ministry of Commerce launched two rounds of tenders to seek cooperation areas in June 2006 and July 2007. By the end of 2008, the Ministry of Commerce had approved in two batches a total of 19 overseas economic and trade cooperation zones, located in 15 countries. In addition, on June 30, 2010, the signing of ortugal - China Economic and Trade Cooperation Zone" marked the beginning of the third round of tender.

As of the end of June 2009, 19 cooperation zones had invested US$423 million while companies in the zones invested about US$1.26 billion. The combined investment totaled US$1.683 billion. The total area in use has reached 10.33 million square meters. Seven cooperation zones have had companies to set up business, with the total amount of corporations reaching 69.

Existing COETZs have four kinds of growth patterns: brand-led (for instance, Haier-Ruba Economic Zone in Pakistan); resource exploration-led (for instance, Zambia-China Economic and Trade Cooperation Zone); advantageous industry-led (for instance, Mauritius Tianli Economic and Trade Cooperation Zone); learning-led (for instance, South Korea-China International Industrial Park). However, no matter what growth mode a single zone adopts, all investors must deal with ocation-selectingand ndustry-orientationissues.

Characteristics of COETZ

Expansion of overseas trade and economic cooperation zones into more areas is similar to the traditional model of outbound direct investment. Both expand from developing countries with good relations with China into more developed countries.

Most of the existing 19 COETZs are located in developing countries in Southeast Asia, Africa, South America and East Europe;

  • Southeast Asia has six COETZs, Russia three and South Korea one
  • Africa has seven COETZS, of which two are in Nigeria
  • South America has two, one in Mexico and one in Venezuela

Most of these countries or regions belong to less developed areas. The proportion of industrial output against GDP is relatively small in these areas and the majority of their urban infrastructure relies on imports. These countries or regions either have geographical ties with China; feature relatively low costs; or have good political, economic and trade relations with China and are rich in resources.

It clear that Chinese enterprises invest in these areas to avoid political risks of overseas investment. Additionally, they can tap local labor and natural resources while continuing to maintain the price advantages of Chinese goods. These COETZs often focus on areas in which China has a comparative advantage over these developing countries such as textiles, home appliances, electronics and microelectronics in which China has a comparative advantage over these developing countries. Other industries include resource development and R&D.

Existing problems of COETZ

Apart from the above features, growth of the cooperation zones lack of a uniformed format. For example, leading companies are mainly large and medium-sized enterprises in Chinese provinces with strong economic power; these cooperation zones are of various sizes; the forms of cooperation zones include industrial parks, export processing zones, technology parks and overseas resource development cooperation zones as well as free trade zones. These issues certainly require investors to exam the projects in advance. They can also compromise the initial efforts made by project leaders.

In addition, construction of these COETZs have also faced problems. For example, some host countries have poor investment environments; companies face financing difficulties after making investments; invested companies lack talent in international business management; and the positioning of cooperation zones is not clear. These issues should be seriously considered by investors in determining their long-term development plans.

Fortunately, leading companies in the cooperation zones have already noticed the above problems and concerns. They point out that these are issues requiring coordination between policies and corporate strategies to help ensure the independence of the zones, create a complete industrial chain, and provide efficient management services.

Despite these difficulties, COETZs can be expected help Chinese outbound investment leave the street of the Chinatown and begin to construct a Chinese "road."

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