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US-China trade

The changing face of Chinese capital

Published 12 September 2023

The nature of Chinese outbound investment has in recent years undergone a quiet but dramatic transformation. What were once huge state-owned entities venturing into foreign territory to build up their own domestic profile has now become a nimble array of corporate changelings, especially new technology firms seeking growth and edge, discreet global roamers whose indeterminate identity is testing the limits of global regulatory powers.

Once, the phrase "Chinese outbound investment" evoked simple imagery: lumbering state-owned behemoths, under Beijing's aegis, amassing assets from African mines to European ports. But as China grapples with a deepening economic slowdown and increasingly fractious global geopolitics, the script for its outward engagement is being rewritten by a new class of small, nimble, and often privately-held, Chinese firms.

Domestic constraints ranging from a climate of regulatory unpredictability to market saturation are prompting a sea change in Chinese corporate identity. Chinese companies, especially new technology firms seeking growth and edge, are no longer content nor even sometimes able to confine their aspirations solely to their homeland. Instead, they're becoming discreet global roamers, scouting investment opportunities with a stealth born of necessity and becoming adept at deflecting increased international scrutiny.

As Western and allied governments increasingly close ranks to deter China’s rising geopolitical ambitions, economic dominance, and trade weaponization, Chinese firms – not all of whom spring from Communist cradles – find themselves in the crosshairs of foreign regulators. Simultaneously, China's own economic tepidity offers little solace: a moribund property sector, ballooning debt, and flagging exports. For outbound companies, it's a double-bind, encumbered by skepticism abroad and stymied by structural malaise at home.

Beijing’s mercurial governance has led many Chinese corporates to question whether the current administration can deftly navigate the policy labyrinth it has constructed. The scorecard is unsettling: A regulatory overhaul in August targeting the healthcare sector — once considered a golden goose for capital — erased US$27.4 billion in market value in just one day. Beijing’s iron-fisted pursuit of its zero-Covid policy before a volte-face, and its inability to wean off property leverage, further unsettle China’s business milieu. Such policy capriciousness is fueling an exodus of private enterprise seeking calmer waters abroad. Every Chinese entrepreneur I’ve spoken to described a political chill over business; a discomfort expressed silently by a multi-billion-dollar exodus from China's stock markets.

Ironically, these private entities once thrived so heartily in their domestic paddock that they seldom looked over the fence to foreign fields. Consider Tencent Holdings, the tech behemoth behind the Chinese super-app WeChat. After dominating China's domestic tech landscape, Tencent launched a half-hearted global expansion campaign for WeChat, which failed to gain significant traction.

This encapsulates a larger trend. For years, the domestic Chinese market served as a fertile crescent of opportunity. With low customer acquisition costs and an intimate understanding of local nuances, Chinese private firms had little impetus to venture abroad. In fact, the foreign ventures of some Chinese startups seemed less motivated by genuine business strategy than a desire to enhance their domestic allure and valuation, often in the lead-up to a listing. They were orchestrated masquerades, an attempt to project an international image that was mostly skin-deep.

Now, as Chinese entrepreneurs take to the road, their national identity has become an essential question for corporate strategy and regulators. A company emblematic of this changing landscape would be Tuya Smart. Though officially headquartered in California and specializing in Internet-of-Things (IoT) cloud platforms, its operational heart beats in Hangzhou, China. Its 2021 listing on the New York Stock Exchange, which raised US$915 million, aimed to do more than just fill coffers — it sought to remake the company's nationality.

Tuya's strategy isn't unique. Fast-fashion juggernaut Shein and e-commerce megastore Temu have strategically moved their bases to Singapore and Ireland, respectively. The likes of TikTok and solar panel manufacturer JinkoSolar are creating operational 'walled gardens', deliberately distancing their global pursuits from their Chinese heritage. Such moves aim, with varying degrees of success, to inoculate these companies from the increasingly toxic charge of being mere extensions of the Chinese Communist Party.

But even as these companies hedge their geopolitical risks, they find themselves sailing into legal storms. From ethical quandaries to regulatory scrutiny, these challenges are impossible to sidestep. Shein has come under fire for accusations ranging from producing goods made by forced labor in China’s Xinjiang region to copyright infringement and unfair labor practices. TikTok is under a US national security review, accused of transferring user data to Chinese servers and subject to influence from Beijing. JinkoSolar faces allegations of pollution and misinforming investors.

It's not merely marquee names in hot water. Even firms in the shadows attract controversy. Consider Meta's recent lawsuit against Octopus Data, which operates Chinese web-scraping service Octoparse. Although Octopus flies no Chinese flags visibly, it is a subsidiary of national champion Shenzhen Vision Information Technology. Meta accuses Octopus of data plunder, adding to allegations that Octopus deliberately clouded its state affiliation. For Chinese enterprises aspiring to a global footprint free of Beijing's omnipresent silhouette, the Octopus fiasco serves as a cautionary tale.

A quieter segment of smaller Chinese companies is trying a different tack to redefine their global identity. Joyoung, known for its kitchen appliances, acquired a stake in SharkNinja, an American entity recently detached from Hong Kong's JS Global Lifestyle, before making a move into the US market.

These tactics mark a departure from Beijing's state-led playbook. The emergent class of Chinese enterprises is adroit at negotiating a maze of regulatory environments, skillful at garnering international capital, and adept at marketing to diversified demands. 'Chinese-ness,' once akin to an immutably stitched label, is evolving into something closer to a quick-response (QR) code, an assembly of variable attributes rather than a badge of fixed identity.

This metamorphosis is leading to a seismic shift in how the world views and traces Chinese outbound investment. Tracking a yuan note from a bank vault in Beijing to an overseas venture has become less a trail of linear movement and more a story winding through a complex maze of international financial architectures — ending perhaps in an injection of capital into a Silicon Valley upstart or the acquisition of a mid-tier European enterprise.

Chinese outward FDI stock, 2018-2021 average, US$ billion

In this intricate dance, Shein is a case study in the new fluid identity of Chinese enterprise. Previously pigeonholed as a Chinese behemoth, the firm now identifies as a Singaporean entity with a global footprint that defies easy labels. In the United States, it acquired a stake in California’s Forever 21's operator SPARC Group; in India, it staged a market re-entry in a strategic alliance with India’s Reliance Retail; and, in Brazil, it funneled US$150 million to modernize local manufacturing. These are not mere financial maneuvers but rather pieces in Shein’s global geopolitical chess.

Then take Tencent. What began as minority holdings in the European gaming sector have metamorphosed for the tech giant into far more significant commitments. Tencent's outbound investment portfolio now speaks to a grander vision: it last year became the largest shareholder in French game publisher Ubisoft, and has purchased sizable stakes in Japan's FromSoftware and Copenhagen-based Sybo Games. Each move hedges against Beijing's policy turbulence while embracing risk in politically stable foreign markets.

In this landscape of shifting Chinese business identities, Western policymakers and investors must reconsider how they engage with this burgeoning class of enigmatic actors. Figuring out what truly makes a company 'Chinese' is becoming increasingly complicated. There was a time when China's outbound investment strategy was straightforward — state-owned enterprises flinging money at hard assets and technology. Now, as firms like Tuya Smart, Shein, and Tencent redraw the investment map, they are trying to shape a narrative that Chinese firms abroad can be unburdened by the stigma of being subjects of Beijing's puppetry.

However, the very dynamism that these companies show in shaking off geopolitical baggage creates new burdens for global regulators. Just as Chinese outbound investment no longer follows a linear path, these emergent enterprises bring with them a Pandora's box of regulatory tangles in data privacy, antitrust governance, and intellectual property protections — all thorny issues to begin with —complicated by the ambiguous nature of these companies' affiliations and operations. Indeed, these firms are not merely operating within existing regulatory frameworks; they are forcing the very architectures that govern international business to keep up.

As the narrative of Chinese outbound investment changes, the global regulatory playbook must be revised, if not rewritten. The indeterminate nature of these firms, pivoting effortlessly from Chinese entities to global corporations, obliges global policymakers to rethink their regulatory toolkits.

For instance, Tencent's cloak-and-dagger approach to venture capital investments, often made without public announcement, represents a new style of shadow diplomacy. The opacity not only obfuscates Tencent's own influence but also spurs global regulators to view such firms as targets in a game of Whac-A-Mole. Similarly, as Shein pivots from a Chinese fast-fashion brand to a Singaporean intercontinental investor, regulators must ask: Is our existing policy infrastructure equipped to understand, let alone regulate, these entities?

The dynamics of Chinese outbound investment have undergone an irreversible transformation. The stage has expanded; the actors have changed their costumes. The state-owned galleons of yesteryear now increasingly cede the limelight to smaller, nimbler vessels, whose flags are as replaceable as their investment portfolios.

As these evolving Chinese enterprises mutate from state emissaries to global players dancing across borders, they create a confounding geopolitical riddle. A new vocabulary is urgently required—one that can articulate the complex dimensions of what was once simplistically termed "Chinese investment". However, vocabulary is not enough. The West must also adapt its rulebook, given the old statutes were penned for a landscape where Chinese capital flowed predictably along the lines of state policy.

The stakes are higher than ever. To misunderstand or underestimate these shape-shifting entities is to risk falling perilously behind in a fast-paced contest of international finance and geopolitics. With their newfound dynamism, firms like Tencent and Shein are turning traditional narratives on their heads and forging uncharted paths in global investment.

For policymakers and investors seeking to navigate this labyrinth, the challenge is nothing short of existential: Adapt, or find yourself relegated to the sidelines of the great global economic reshuffle.

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Keith Zhai

Keith is Senior Adviser to Global Counsel. Prior to joining Global Counsel, Keith was Senior Correspondent with The Wall Street Journal. He has more than two decades of journalism under his belt, and specializes in decoding China's complex political and economic landscapes. His work has been featured in top global publications including Bloomberg, South China Morning Post, and Thomson Reuters.

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