Chinese Companies and the Changing Business Landscape

Dr. Scott MacDonald's picture

Chinese multinational corporations (MNCs) are finding the new global business landscape daunting. In their transformation from being domestic-oriented firms into companies expanding into foreign markets and acquiring foreign enterprises, Chinese MNCs have benefited from easy access to international capital markets and foreign and Chinese state-owned financial institutions. However, this is changing. Looking at the turmoil in international financial markets, access to capital likely will be harder to obtain as foreign investors are now more risk-adverse and taking a harder look at corporate risk profiles. Furthermore, many state-owned Chinese companies have relatively high debt portfolios compared to many of their Western counterparts.

As international portfolio managers intensively screen potential investments, such highly leveraged companies are less attractive. The saving grace thus far is that many Chinese MNCs are state-owned, a factor that has provided a degree of investor comfort when these companies have tapped markets. But what happens if state ownership does not mean the state will actually bail out a company troubled with high debt and sagging revenues, like what is occurring in the West among high yield energy and mining companies? In an economically hard-pressed environment, bankruptcies are on the upswing in North American high yield companies. As for Chinese companies, one London financier recently stated in the Financial Times, “These companies are not viable without state funding.” This also raises political issues due to the close relationship between the party and most of the state-owned companies. The current anti-corruption campaign, which has netted many party members, could be potentially disruptive of management teams. In a world of tighter credit conditions, perceived political risk can serve to complicate Chinese outward bound M&A and erode their creditworthiness to investors. The economic and business environment has changed and Chinese MNCs are going to need to adjust.