China is booming, and seemingly every company in the world wants to get in here. But while business people may be less starry-eyed these days than during the China boom of the mid-1990s, it is worth remembering that China deals can go wrong. The ratio of high rewards and high risks remains in force.
Two recent cases highlight the potential problems that can occur – Thames Water and Ningbo Steel.
Thames, a unit of Germany's-RWE group, was forced to withdraw from a water treatment project in Shanghai after the municipal government declared that the guaranteed rates of return it had originally been promised were illegal.
Thames had signed a 20-year contract to supply water to the city. It spent US$73 million building a plant and started pumping water in 1998. With almost 15 years to go on its contract, it suddenly had no deal.
RWE Thames Water, the world's third-biggest water supply company, is required to withdraw from a water treatment project in Shanghai and hand the project over to the state-run Shanghai City Water Treatment North Co. after the government changed rules on the rate of return for such investments.
It had been China's first private-sector funded water treatment plant, and the guaranteed rate of return had been approved on the basis that the relatively low price paid by Chinese consumers for water severely limits the potential returns on such an infrastructure investment.
The Shanghai government declared that the guaranteed rate of return as promised to be illegal in 2002. Negotiations over new terms resulted in Thames Water's withdrawal, and operation of the plant is to transfer to the Chinese side by July 26. Terms of the deal, including the amount of compensation to Thames, were not disclosed.
It took even less time for the Ningbo Steel project to unravel.
Ningbo Steel is a US$1.2 billion joint venture involving Tangshan Jianlong Steel, Shanghai Fosun High Technology and two investment companies from Hong Kong and the United States. Work was proceeding on the company's new plant with capacity to produce six million tonnes of steel plate annually, when Beijing suddenly ordered a halt to construction.
The company allegedly started construction of the plant without the approval of the central government. Another offence: it was alleged that company officers had breached financial regulations by transferring RMB 600 million in bank loans under an operating capital account to a fixed-asset investment.
The US and Hong Kong partners were not identified, and the implications of the closure for them were not clear. Before the operation was shut, the company had signed equipment supply contracts worth more than US$241 million.
The lesson is: keep yours eyes open, and make sure you have worked out how to handle some of the worst case scenarios before making the investment.