Companies Urged To Up Their Risk-management Overseas

- Oct 31, 2018-

The China Council for the Promotion of International Trade has called for domestic companies to enhance their legal knowledge and mitigate risks, when heading overseas.

The intensified push comes as many Chinese firms begin to deploy more resources and manpower globally, whether it is by looking to tap growth in emerging markets, by diversifying their global supply chains to add value, or by investing in economies related to the Belt and Road Initiative.

Zhu Hongren, vice-chairman of CCPIT's national committee for compliance management said that while strengthening supply systems and encouraging technological and managerial innovation, enterprises should also learn from international standards of compliance guidelines and put them into the field practice to improve their core competitiveness.

Despite rising protectionism and recent falls in stock markets around the world, the outlook remains strong. The International Monetary Fund predicts this year's global economic growth to match 2017's rate of 3.7 percent. With potential gains on offer, Zhu said firms should build strict and rigorous rules, and have patience to waitout short-term challenges in overseas markets.

Wang Zhile, a researcher from CCPIT's national committee for compliance management, said unlike mature markets such as Germany or the United Kingdom, conducting merger and acquisition activities in Southeast Asia, Latin America or African countries may carry larger risks, as many Chinese firms are not familiar with the local legal or commercial environment.

To protect tax revenue, many countries in Africa and Latin America do not acknowledge the legal status of companies registered in the Cayman Islands. Tribal rights and favoritism remains powerful in many African countries such as Ghana, Nigeria or Benin. All could cause potential pitfalls for Chinese firms.

As emerging economies, Wang said these markets pose other challenges, including a limited capacity to conduct commercial, legal, financial and human resources diligence.

To help improve compliance and safeguard earnings, the CCPIT said it will build a "bigger legal" service network. It will also establish commercial legal work agencies in key markets such as Brazil and India.

Long Guoqiang, vice-president of the Development Research Center of the State Council, said domestic companies can also take steps themselves when heading overseas, including strengthened oversight of overseas projects, or unified management mechanisms.

Because of different languages and mindsets across regional markets, reliable advice and authentic information from local financial and legal professionals are of paramount importance for overseas companies doing business in Africa and Latin America, said Hou Shezhong, head of department of legal affairs at China Railway Group, which runs construction firms in over 90 countries and regions.

"Chinese companies already have a high chance of securing contracts for infrastructure and industrial projects, as they enjoy the support of financial institutions such as the Asian Infrastructure Investment Bank and the Silk Road Fund, as well as governmental agreements. They should boost their chances even further by relying on experienced legal brains," he said.

To assist Chinese and partner countries' projects in overseas markets, the Beijing-headquartered Asian Infrastructure Investment Bank already runs a special unit on compliance, effectiveness and integrity, which reports directly to the management board to ensure the transparency and accountability of various projects.