It pays to be more than duly diligent

Searching for safe and efficient financial resources is a key task for Chinese enterprises

Africa's abundant natural resources and market potential have prompted accelerated direct investment from China, and the continent has become one of the country's most important destinations for overseas investment.

That investment bears witness to growing China-Africa economic and trade cooperation and is an example of successful South-South cooperation.

Even as the global financial crisis lingers, the flourishing China-Africa economic relationship shows no signs of wilting. Last year bilateral trade was worth more than $200 billion. China continues to remain Africa's largest trading partner, and China's investment amounts to more than $40 billion, of which $14.7 billion is direct.

Africa has thrown open enormous business opportunities to Chinese enterprises, and the country's financial services industry will play an increasingly important role in boosting China-Africa trade and investment.

In the early days the investment was mainly from large state-owned enterprises in energy-related industries. However, with the development of the African economy and China's going-out policy, more private companies have joined in.

Chinese private enterprises have long recognized that Africa will become a global manufacturing center and a market with huge consumption potential. Africa's future is promising, but there are challenges, especially in finance.

Each of Africa's 54 countries has its own culture, business environment and legal system, and any Chinese company that lacks a thorough understanding of local financial markets and that has not built a good partnership and obtained stable bank loans needs to assess its financing capacity.

In fact, searching for safe and efficient financial support is one of the prerequisites for any Chinese enterprise that wants to invest in Africa. During the process, such enterprises should pay attention to the following:

First, when selecting investment projects, it is not only the rate of return that needs to be calculated, but investment risk as well. The countries to invest in are those that are politically stable and offer policy continuity.

Before the project gets off the ground, carry out due diligence, thoroughly research the target country, assess the project's risks and develop appropriate strategies for emergencies.

In addition to the financial support from central government, any investor will need to work with specialized financial service providers to explore a wider range of financing channels, reduce financing costs and avoid financial risks.

Second, when it comes to product exports, Chinese enterprises should focus on financial and technical exports, personnel training, and promote Africa's economic and social development at the same time.

China-Africa economic and trade cooperation has now extended from contract work and infrastructure construction to investment and finance. Chinese enterprises have expanded from exporting simple products to technology. They now pay more attention to personnel and culture to achieve sustainable development in Africa.

In recent years political uncertainties in some African countries have affected the continuity of their investment policy, and the downsides of investment have increased.

Examples that come to mind are political unrest in Egypt, Libya and other countries, resulting in big economic losses for Chinese enterprises and putting Chinese employees in physical danger.

Investment needs to be made in a sound legal environment, and that includes being within the parameters of the destination country's financial system. The projects of many Chinese enterprises in Africa are long-term ones that require a lot of capital, and Chinese and African banks need to work together effectively. To ensure that things run smoothly, Chinese private enterprises are advised to co-establish an overseas investment insurance system with the government.

In the investment destination, overseas investment insurance should cover political or policy risks such as war, confiscation, and foreign exchange risk, rather than general business risks.

The Chinese government could learn from the practice of the US government and set up an agency specializing in overseas investment insurance for private enterprises directly under the State Council.

It could provide financial services that most commercial financial institutions do not have to help private enterprises to expand investment in Africa. These services include long-term political risk guarantee, recourse limited project financing all under the reputation and credit of the government. This agency could profit through the sales of such services to achieve self-financing to avoid adding extra economic burden to the government.

Although private enterprises face a variety of risks in Africa, they also enjoy a plethora of opportunities.

The government can establish a sound financial support mechanism to continuously improve investment policy, one that would open the door to harnessing energy resources and promoting the development of China's economy and industrial restructuring.

The author is vice-chairman of the China Council for the Promotion of International Trade. The views do not necessarily reflect those of China Daily.

(China Daily 03/29/2013 page7)