Time, Patience Are Key to China Investment

The upside potential is clear, as Paul Hastings partner Mitchell Dudek explained, but the path to realizing that potential, he stated, "is strewn with investors" who couldn't unravel the political and cultural difficulties. On the upside, three prime drivers are propelling Chinese growth: government spending on infrastructure, demographics and pent-up demand.

While Americans bemoan the implications of eminent domain the Chinese government wields the power to take land as infrastructure growth demands, Dudek stated. "When they say move," he added, "you move."

In terms of population, Dudek characterized the internal shift of people as "the greatest migration in human history," and then backed the claim with numbers: "From 2001 to 2006, 100 million people have moved" from rural environments to cities," he said, "and in the next 10 years, another 250 million will go." Add to that the pent-up demand--post-Communism--that spurred a 680% growth in office development over the past five years, and still, "There are no high vacancies," he pointed out. Dudek explained that although China is still a Communist state, it is so only in name, based on a mid-1980s change of regime and an opening up of trade.

Tapping into that growth is a strong temptation, but Dudek followed these staggering numbers with some cold facts. Venturing into Chinese investment exposes players to an economy that can't be finessed, and economic "change can be totally unexpected."

So it is with regulatory and tax controls, which he likened to a bridge without guard rails, causing investors to wonder where the limitations are. It has been known to happen where the "government will pass a law that may not be enforced for 20 years," Dudek stated.

Increased hurdles placed last year before foreign investors didn't help matters, but, interestingly, neither did they hurt long-term. Key among those hurdles were new requirements for offshore players to form so-called foreign investment enterprises before laying money down in a Chinese investment. FIEs carry the further restriction that no debt would be allowed until the offshore entity ponies up 50% of the total investment in equity. Dudek said that such restrictions dampened interest only for a month or so before foreign investors rose to the new challenges and began playing by the new rules.

Summing up the rewards and challenges of Chinese investment, keynote speaker Ned Cloonan, president of international and corporate affairs for AIG, warned potential players that they should consider investment in China a marathon more than a sprint. "You must think long term."