Breaking down the barriers

The fact that Chinese business owners are the most optimistic in the world is
not that surprising. What is surprising, however, is that the UK has remained
largely unaffected by the relentless boom in the “Dragon Economy”.

UK companies, it seems, are not the quickest to spot and take advantage of an
opportunity – especially when it’s in the “difficult to do box”, such as
breaking into the internal Chinese market. “EU companies stand out as being
among the slower to take advantage,” says Gabriel Azedo, managing partner of
Grant Thornton’s Hong Kong office and director of its Asia Pacific practice.

The places benefiting most include those one would expect (Hong Kong,
Malaysia, Australia and the US) as well as some surprises (the Netherlands and
Mexico), but British companies have remained neutral and, according to Grant
Thornton, this has to change.

The accounting firm has just completed the most comprehensive analysis of
Chinese business-owners and their views yet carried out – having worked with the
Chinese government to gain access to 300 company directors as part of its annual
International Business Owners Survey.

Although China’s huge property and real estate boom is having a knock-on
effect on commodities – the reason why the Australian Stock Exchange has
benefited so much over recent years, with its large amounts of raw material and
mining stock – there is also a huge appetite for services which, so far, the UK
has all but failed to take advantage of.

“One of the most significant appetites is for services in mainland China,”
says Jim Rogers, head of growth and strategic services at GT. “Services such as
architecture and surveying, for example. There’s a big opportunity for us to
exploit the services industry in China.”

Foreign companies face undeniable barriers to doing business in China.
Setting up joint ventures – the easiest way to get a foothold – can be a long
and drawn-out process. And just last month the EU and US jointly complained to
the World Trade Organisation about what it sees as illegal Chinese tariffs,
preventing the viable exportation of components for the Chinese automotive
industry.

But the Grant Thornton research proves that UK companies must get involved
regardless. Chinese business owners have an optimism balance of +79% about their
local economy and a turnover expectation optimism level of +86% – the third
highest and highest in the study respectively.

Calls for barriers to business to be removed were stepped up recently with
the release of an OECD report: Investment Policy Review of China 2006: Open
Policies towards Cross-Border Mergers and Acquisitions. While the OECD accepts
that China has improved the speed by which M&A activity can be carried out,
it says more needs to be done, listing five action points for the government.
They are to:

• Streamline the approval process for cross-border M&A and make it more
  transparent;
• Put in place a sound competition framework;
• Further open its capital markets to foreign investors;
• Encourage its firms to increase corporate transparency and provide more
  up-to-date and accurate financial information to make it easier to value a
  potential acquisition, especially regarding a firm’s liabilities; and
• Relax foreign ownership restrictions.

China may have little choice if it is to maintain its current rate of growth,
as one of the main concerns discovered by the GT survey was access to capital.
“China is facing some difficulties – prices are starting to rise, access to
capital [is becoming more difficult], labour shortages (labour is less mobile,
less willing to travel),” says Azedo.

He says that the shortage of working capital has led to the exploitation of
capital from outside of China. “In this respect they are accessing the capital
markets in a very big way,” says Azedo. “The trend of listing on foreign
exchanges is heading down into smaller businesses.” He lists London’s Alte
rnative Investment Market as a case in point.

“A high proportion of respondents in mainland China are clearly concerned
about a range of factors. Indeed, business owners in the country are among the
most concerned about constraints on expansion. Availability and cost of finance
are major issues and attraction of staff with appropriate skills also features
prominently. But surprisingly, shortage of orders was cited by 44% of
respondents in mainland China, despite the buoyant economic background,” says
the GT research.