Tuesday, February 11, 2014

Chinese Outbound Investments' Risks

Chinese companies are eager to enhance their international presence by buying foreign firms. In the latest examples, the state-owned CSR Corporation, the world's largest manufacturer of electric locomotives, acquired the rubber and plastics business of BOGE under Germany's ZF Group on Jan. 7 and Chinese conglomerate Fosun International purchased a 80% stake in Portugal's largest insurance company Caixa Seguros e Saude on Jan. 9.

The current business climate is certainly favorable for Chinese firms looking to break into foreign markets through acquisitions of their foreign counterparts. The US economy has yet to fully recover from the 2008 global financial crisis, and the European debt crisis has forced businesses there to turn to foreign investors for additional capital. Chinese firms, on the other hand, have been the least affected by the global financial crisis and the European debt crisis, and have been eager to expand their business abroad. This has been encouraged by the Chinese government.

However, Chinese companies investing abroad shall not overlook the risks involved in these transactions and their lack of familiarity with the culture and legal system of the countries in which they perform acquisitions. Chinese businesses should first investigate the target company's business thoroughly, then assess its value correctly and manage it properly after buying it.

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