A growing number of Chinas state-owned enterprises (SOEs) are investing in troubled European companies South American infrastructure assets. Heres what they should consider.
State Grid Corporation of Chinas $4.6 billion acquisition of Spanish builder Actividades de Construccion y Servicios seven electricity transmission assets in Brazil is symbolic of the trend of large Chinese outbound investment into South America.
Shanghai-based King & Wood Mallesons partner Meg Utterback told IFLR that though the State Grid Corporation acquisition was substantial, a lot of pending deals have not yet been publicised. In large infrastructure projects, we are seeing other deals in the $2 to 3 billion range, she added.
Practitioners have seen activity across a broad range of sectors, such as natural resources, telecommunications, power, agribusiness and financial institutions.
But Chinese investors have encountered difficulties in investing in South America, as the region comprises a large number of countries with different traditions. And although many follow the same legal model from a civil law perspective, some countries have a more encouraging investment framework and are making specific efforts to attract Chinese investment.
Christian Roschmann, a partner at Sao Paulo firm Lefosse Advogados, said that Chinese state-owned companies face an enormous cultural gap in Brazil, and must be aware of vast differences in how they do business, ranging from negotiation to documentation andcommunication. He added that because neither the Chinese nor Brazilians are native English speakers, there is a lot of difficulty grasping what the other party is actually saying.
Chinese investors desire to own land also poses problems. There is great political debate about the enforcement of a law restricting foreign ownership of rural real estate since the Brazilian government noted that Chinese investors had acquired very large portions of rural real estate.
If investors buy a mill, theyll want to buy the real estate, Roschmann added. That is no longer possible without government approval, which takes up to two years to be obtained. It is a de facto barrier for foreign investors.
But there are investor-friendly jurisdictions elsewhere in South America. Venezuela has the strongest framework for Chinese investors, and has enacted specific legislative incentives not available to other investors.
James Douglass, a partner at Linklaters Beijing office, said that Venezuelas government tends to require strategic assets to be state-owned but has made exceptions for Chinese investors.
However, resource nationalism is a growing concern. Though recent actions in Bolivia
and Argentina have not been directed at Chinese interests, it is a trend that investors should consider. Chinese investors need to keep in mind that resource nationalism is more practised in Latin America than any other region right now, Douglass added.
In a Brazil-specific example, Roschmann also cited issues with local governments and sector-specific regulators, which have developed into a maze-like bureaucracy.
Theyre not helpful when you want quick, clear and forthcoming solutions or approvals, he said.
But Utterback warned investors to consider practicality when making a South America investment. She advised investors to perform adequate due diligence and to understand project requirements, local labour laws and tax. Too often there is an assumption that the money invested assumes project success, when in fact, implementation can veer far from the original investment plan, she added.
Another issue is dispute resolution. Because most Chinese companies invest in energy and infrastructure, they deal with governments that insist on local governing law and local courts for dispute resolution, Utterback said. She said she reminds clients of bilateral investment treaties between China and South American countries that could be very helpful if the investment runs into problems.
Though the Chinese economy is slowing down, practitioners do not anticipate a slowdown in Chinese investment. From a state-owned companys perspective, there is a twofold risk diversion: it is getting new sources of supply and it is investing in non-US dollar assets because Chinese companies are too exposed to the US dollar, Roschmann said.
Instead, many expect the rise of a new trend - South American countries looking into China. They note that the deal value is larger for investment from China but that there is an increasing volume of investment outbound from Latin America.