During the Chinese economic slowdown and its escalating trade war with the United States, countries in the Association of Southeast Asian Nations (ASEAN) — a combined market with over 600 million consumers — remains a relative bright spot for Chinese investors searching for investment opportunities abroad.
"ASEAN is expected to see a surge in Chinese investment over the next decade due to the geographical proximity, a rising consumer class, improving infrastructure and strengthening regional economic and trade ties," said Laurence He in an email reply to China Money Network. He is the Global Business Development director of Amsterdam-based professional services firm TMF Group.
The comments came as the growth of the Chinese economic growth rate is expected to slip to 6.2% in 2019 and 2020 amid the escalating trade dispute with the United States. ASEAN, on the other hand, will become the fourth-largest single market in the world by 2030, with a combined gross domestic product (GDP) of US$10 trillion. Regional consumer spending alone is expected to reach US$2 trillion by 2020.
However, such a rapidly-expanding investment hotbed bears some challenges for Chinese investors including the rising cost and complexity of running an international company structure. Companies in Singapore, for example, are required to have a resident director when they incorporate an entity, while the government in Thailand only welcomes investors in selected sectors like high tech to set up wholly-owned subsidiaries, otherwise, foreign companies have to search for a reliable Thai partner for a joint-venture business. In Indonesia, companies need to hire three local employees before they offer a position to one expatriate.
"Chinese companies can take time to prepare for a most updated international investment plan by speaking to strategy consultants, lawyers, tax advisors so as to make the organization to be agilely and sophisticatedly adapting to new business opportunities," said He, adding that Chinese companies should spend sufficient time on investment strategies to keep themselves away from legal, financial, and HR compliance risks.
Laurence He is the Global Business Development director of TMF Group. He has extensive experience supporting Chinese companies investing and expanding overseas, and knowledge and expertise in helping companies set up businesses in multiple jurisdictions and stay compliant with the complex local regulations.
His experience encompasses multi-jurisdictional company incorporation, corporate secretarial, HR and payroll, bookkeeping and tax compliance, fiduciary, PERE fund structuring, and mergers and acquisitions (M&A) structuring. He joined TMF Group in 2014 where he works with banks, law firms, and other partners to help Chinese companies localize their business expansion worldwide.
Laurence He will share his insights at China Outbound Forum 2019: Accessing the ASEAN Opportunity Through Singapore, which is the second event of the series to be jointly held by China Money Network and TMF Group on May 23 (Thursday) 2019, in Shanghai. The event will bring together local and regional corporate leaders, regulators and top dealmakers from multi-national companies to discuss and launch a comprehensive report on accessing the ASEAN opportunity through Singapore as a gateway.
Below is the interview transcript.
Q: What major trends have you seen in China outbound investment in the ASEAN market in the past decade?
A: I joined TMF Group in January 2014. In the past five years, I witnessed a large number of Chinese companies investing in ASEAN. Some observed major trends are as follows.
a) In the last three years, an increasing number of Chinese companies have chosen Singapore other than Hong Kong as a launchpad to expand their businesses regionally and internationally.
b) Chinese companies in the sectors of energy, TMT, and pharma tended to invest into Thailand, Vietnam, Malaysia, and Indonesia attributed to undeveloped markets, abundant natural resources, relatively well-educated workforces in these jurisdictions opposed to the rest of ASEAN countries.
Q: What are some of the key motivators driving China outbound investment into ASEAN?
Chinese companies are investing to ASEAN, EMEA, and South America however ASEAN is the first region for most Chinese companies to invest due to below key motivators.
Firstly, ASEAN is strategically located at the confluence of major trade routes which facilitate the passage of US$5.3 trillion worth of global trade each year. Secondly, as China looks to sidestep the impact of its trade conflict with the United States, ASEAN has become a primary destination for the country’s international expansion. Thirdly, it’s much easy to get access to these ASEAN countries in view of the geographical distances and intimate Asian cultures compared to the rest of the world.
Q: Are these likely to remain the same or change in the next 12 months?
A: ASEAN is expected to see a surge in Chinese investment over the next decade due to the geographical proximity, a rising consumer class, improving infrastructure and strengthening regional economic and trade ties.
Q: What are the most common mistakes Chinese investors usually make while investing in Southeast Asian countries?
A: Some Chinese companies expanded so fast as not to spend sufficient time on investment strategies that can help to keep themselves away from legal, financial, and HR compliance risks.
Firstly, many of them engaged local law firms to set up the local companies however law firms usually do not take care of the on-going corporate secretary work to keep the entities in compliance of local regulations. Unfortunately, failure to comply with local regulations usually leads to fines or even unexpected cease of business in particular jurisdictions.
Secondly, legal, finance, and HR are not internally aligned well. They source different vendors to meet their own needs since they do not know they can get aligned to source a single vendor providing a one-stop solution including corporate secretary, bookkeeping, tax compliance and HR payroll to assist them to fast expand into new countries. The more countries they invest into, the more vendors subsequently they are a headache to deal with.
Q: What are the unique compliance challenges facing Chinese companies in ASEAN countries?
A: In spite of intimate Asian cultures among ASEAN, the compliance requirements vary from country to country.
Companies are required to have a resident director to be appointed when they incorporate an entity in Singapore. Law firms usually do not provide directorship service so it is not possible to rely on law firms to fulfill all regulatory requirements when incorporating a Singapore entity.
Thailand government only welcomes some investors in selected sectors like high tech to set up 100% owned subsidiaries in Thailand. Foreign investors doing business activities that are likely not to receive approval from the Foreign Business Licensing committee may have to consider to set-up an entity in joint venture with local Thai(s) or with local Thai company (ies). It takes time for Chinese companies to look for a reliable Thai partner to form the joint venture business.
Most Chinese companies have international assignments to relocate Chinese talents to overseas countries in order to lead the business team locally to develop the new markets. However, a certain hiring ratio in local and expat is usually put in place by the local government to secure job opportunities for the local workforce. For example, three local employees should be hired first before one expatriate can be hired in Indonesia.
Q: What target sectors and jurisdictions are likely to have the most challenging regulatory environments for China outbound investment in ASEAN in the future?
A: Vietnam is the most complex jurisdiction among the rest of the ASEAN countries in terms of accounting and tax compliance requirements. Financial investment and energy sectors have the most challenging regulatory environments for China outbound investment.
Q: What advice would you give to Chinese investors backing businesses, or seeking to back businesses in ASEAN, especially amid the current global economic slowdown and escalating Sino-US trade dispute?
A: We’re living in a dynamic and changing environment. The Economic Substance (Companies and Limited Partnerships) Act, 2018 (the Act) came into force on 1 January 2019 in British Virgin Islands (BVI). It addresses the concerns of the EU Code of Conduct Group for Business Taxation, and the recent Organization for Economic Co-operation and Development (OECD) guidance around the economic substance of entities in jurisdictions with low or (like the BVI) zero corporation tax.
The Act demonstrates the BVI’s continued commitment to international best practice including the BVI’s implementation of the OECD’s Base Erosion and Profit Shifting (BEPS) framework and related EU initiatives. The Act follows closely the approach taken to address the same issue by the Crown Dependencies of the UK (Jersey, Guernsey and the Isle of Man) and the other UK Overseas Territories including the Cayman Islands and Bermuda.
The cost and complexity of running an international company structure are rising due to the irreversible trends of intense international tax compliance requirements. During the period of economic slowdown and escalating Sino-US trade dispute, Chinese companies can take time to prepare for a most updated international investment plan by speaking to strategy consultants, lawyers, tax advisors so as to make the organization to be agilely and sophisticatedly adapting to new business opportunities when economies are turning to active.
Q: What major trends do you expect to see in China outbound investment in ASEAN?
A: ASEAN will continue to present one of the world’s most compelling growth stories for Chinese investors. Singapore, a consistent partner of China’s integration with the global economy for decades, will continue to support the ASEAN ambitions of fast-expanding Chinese firms by serving both as a testbed and jumping-off point for an extensive regional presence; and by contributing to ASEAN’s overall integration, economic advancement and capacity for long-term innovation.