Preliminary evaluation of China's political risk situation?

I. Turning to Political Violence Risk

Traditionally, war risk (political violence risk) refers to wars, civil wars, and acts of terrorism, etc., such as the war insurance currently underwritten by China Export and Credit Insurance Corporation (CECIC) refers to wars, civil wars, acts of terrorism, and other war-like acts in the countries where the investments are made. At present, the main political violence risk faced by Chinese enterprises in cross-border operations is not the traditional war and civil unrest risk, but the political violence risk driven by trade protectionism in a peaceful environment, and the political violence risk caused by labor rights and interests is also on the rise. The moral hazard of certain politicians and public figures in the host country plays an important role in the process of the brewing and eruption of these risks of political violence. In many developing countries and countries in transition, the combination of a free market economy and universal suffrage democracy has also increased the risk of political violence.

(I) The risk of political violence driven by trade protectionism continues unabated

The traditional risk of war, civil unrest, and acts of terrorism exists mainly in some developing countries and countries in transition, such as Iraq and other countries in West Asia, Venezuela in South America, the Congo and other countries in Africa, the countries of the former Yugoslavia and Cyprus in Europe, as well as the Caucasus in the CIS region, etc. In terms of both exports and investment, the risk of political violence has also increased in many developing countries and countries in transition. Whether measured by the amount of exports or investment, these countries and regions are far from being the focus of cross-border operations of Chinese enterprises. Of the 14 countries with a high risk of traditional wars, civil strife and terrorist acts (Afghanistan, Pakistan, Iraq, Israel, North Korea, Nepal, Cyprus, Democratic Republic of the Congo, Serbia and Montenegro, Croatia, Bosnia and Herzegovina, Macedonia, Georgia, Venezuela), in 2003, China's total import and export trade with these countries was about $4.5 billion. In the foreseeable future, these countries and regions with high risks of traditional war are unlikely to become the focus of cross-border operations of Chinese enterprises, because the main objectives of the cross-border operations of Chinese enterprises can be summarized as the expansion of the export market, access to domestic shortages of resources, and access to advanced technology, and the actual or even potential risk of war in itself reduces the income of the inhabitants of these countries and regions and weakens their ability to absorb Chinese goods and services, at best, but not at all, and at best, they will not be able to absorb Chinese goods and services. The actual or even potential risk of war itself reduces the income of the residents of these countries and regions, weakening their ability to absorb Chinese goods and services, at most, can only satisfy the second goal of Chinese enterprises' cross-border operations. Therefore, at present and in the foreseeable future, China's enterprises focus on cross-border operations can only be the absence of war and civil strife in developed countries, newly industrialized economies, as well as some developing countries. From the incident in Elche, Spain, it is not impossible for political violence to occur in these countries, resulting in the loss of assets and income of our enterprises and nationals, but political violence is unlikely to come from war and civil unrest, and acts of terrorism in the final analysis are only a very small number of acts, mainly from the losers in the international business competition (the host country's manufacturers, workers and other stakeholders) to take the over-aggressive behavior, and such violence from the potential risks of the The main reason for this is that the violence is often organized by the far-right, which is responsible for transforming the potential risk into reality.

Take the European Union, for example. The enlarged European Union has become our largest single trading partner, but in recent years across Europe against foreign immigration, opposition to European integration and the single currency of the far-right parties are becoming more and more rampant, Germany's *** and the party, Italy's social movement and the National League and other parties have inherited the mantle of fascism, the German People's League, the French National Front, Italy's Northern League, the Flemish Group in Belgium, and other far-right political parties have also made the opportunity to take power. The far-right parties such as the German People's Alliance, the French National Front, the Italian Northern League and the Flemish Group in Belgium also gained access to power. In the elections for the local councils of the eastern German states of Saxony and Brandenburg, which were announced on September 19, 2004, far-right parties such as the National Democratic Party (NPD) and the German People's Alliance (DAP) increased their vote shares significantly and gained influence over local politics. Only for Germany, France, Italy and Belgium, where far-right parties gained the opportunity to govern, their total trade with China in 2003 amounted to 73,703.59 million U.S. dollars, equivalent to 10.7 times the total trade of China with the above 14 countries with traditional risks of wars and civil strife in the same year, and accounted for 8.7% of China's total trade in goods in the same year (85,120.79 million U.S. dollars); from January to July 2004, it was 52,929.9 million U.S. dollars, representing 8.7% of China's total trade in goods. In January-July 2004, it amounted to 52,965.76 million U.S. dollars, equivalent to 10.2 times of the total trade volume of 14 countries with traditional risks of war and civil strife in the same period, accounting for 8.5% of the total trade in goods of China in the same period (623,112.27 million U.S. dollars). Obviously, compared with the traditional risk of war and civil unrest, the risk of political violence driven by trade protectionism in a peaceful environment has a much greater impact on the cross-border operations of Chinese enterprises.

Not only some of the EU countries, some other countries also have a similar risk of political violence. Australia is our ninth largest trading partner, and the China-Australia free trade agreement negotiations are underway. However, Australia's residents have a high level of welfare, its manufacturing sector is far less competitive than its Chinese counterparts, manufacturing interests are trying to block China-Australia FTA negotiations, and white racist political parties and their political views once had a greater impact on the country's political arena, and in the context of trade liberalization is not without pain, the process of industrial adjustment, the outbreak of political violence against China and other East Asian economies is a few times more likely. In the painful process of industrial restructuring in the context of trade liberalization, the chances of political violence against China and other East Asian economies cannot be underestimated.

(2) The risk of political violence due to labor rights issues is still on the rise

Labor rights issues have a potentially crucial impact on social stability and business management in China, but this potential impact has not yet been fully realized due to the following reasons: China's national temperament is mild; the domestic labor market is generally oversupplied; the current cadre appraisal system incentivizes government officials to become more active in labor disputes. Officials in labor disputes more in favor of the management, and the government's ability to act; ...... all these factors lead to China's domestic management power has a greater advantage. Because of this, the management of enterprises in China lacks experience in dealing with labor rights issues in different environments. However, the above factors are not available in many countries, Chinese enterprises in the process of cross-border operations, due to labor rights issues caused by the higher risk of political violence, in which the following two types of projects are the most prominent risk:

In some developing countries where the rule of law is not very sound to invest in the development of resources projects. At present and for a long time to come, China's large-scale overseas investment projects are mainly extractive industry projects, the chance of labor unrest in enterprises with more employees is relatively high, and the extractive industry workers are generally tough, the probability of labor unrest is even higher. Shougang Peru Iron Ore S.A., which was plagued by labor disputes soon after it was established, lost $3.51 million in direct losses from a strike that began on June 1, 2004, is a case in point.

Manufacturing investments, especially M&A investments, in newly industrialized economies with higher average income levels than China's and democratization. This is so, firstly, because these economies are more obviously competitive with China, and workers are more worried about losing their jobs if production moves to China. Secondly, workers fear that their income levels will be reduced. Thirdly, these countries have not implemented democratic institutions for a long time, and have not yet formed a mature mechanism of mutual checks and balances among social classes similar to those in Europe and the United States, and their nationals' enthusiasm for exercising their democratic rights is high, but their awareness of fulfilling their obligations is relatively low, which makes it easy for them to form extreme group behaviors. Shanghai Automotive Industry Group Corporation plans to acquire Ssangyong Motor Company in South Korea, Ssangyong labor union is one of the biggest obstacles.

(3) The moral hazard of certain politicians, public figures and groups in the host country is becoming increasingly prominent

In the process of the brewing and outbreak of the risk of political violence driven by trade protectionism, the moral hazard of certain institutions of the central and local governments of the host country, and of certain politicians, public figures and groups is quite prominent, and the vicious incidents are usually indispensable for them to connive at or even encourage. In the Elche incident, the most alarming thing is not the mob arson, but the local police stand by and watch such a serious crime, Elche some of the city's top figures even openly for the mob and police misconduct excuses. No society can be without thugs, the fundamental difference between a well-governed society and a poorly governed society does not lie in the presence or absence of disruptive behaviors and people, but rather in the social order of the maintenance of the social order can be loyal to their duties, lies in the disruptive behavior can be adequately prevented beforehand, and after the incident in a timely manner to be punished with sufficient force. In the case of Elche, the moral hazard of the local police, the mayor, and the Spanish Shoe Industry Association (ASPA) has led to a breakdown of social order in the city. The reason why these people have such moral hazard, in addition to psychological and emotional factors, more mainly for political and economic interests.

Political interest motives, that is, some politicians hope to gain votes by condoning or even encouraging the exclusion of foreign goods, enterprises and labor, or demanding excessive labor treatment. This moral hazard varies with the level of government and the political system of the host country. While national politicians with a focus on the power of the central government have to take more account of the country's diplomatic interests, local politicians do not have to take account of the country's diplomatic interests, and therefore the moral hazard of the central government is lower than that of the local government. The level of this moral hazard in the local government of the host country depends to a considerable extent on the political system of the host country. Other conditions being equal, in countries or regions where local autonomy is practiced, the central government has relatively fewer and often less forceful means to restrain local politicians, who pay more attention to local public opinion (no matter whether this public opinion is rational or narrow), and the level of moral hazard of the local government is higher; in countries where the head of the local government is appointed, the central government's means of restraining local politicians is lower than that of the local government, and the central government's means of restraining local politicians is lower than that of the local government. "In countries where the head of the local government is appointed, the central government's constraints on local politicians are relatively strong, and local politicians' intrinsic motivation to blindly cater to local public opinion is relatively weak, so the level of moral hazard in local governments is correspondingly low. After the Russian Revolution, the system of local autonomy has been practiced so far, and local leaders are elected by the local residents, which often makes them stand apart from the federal central government with their own public opinion base. Given that Russia is expected to implement political reforms after the Beslan hostage tragedy, local leaders from elected to appointed, the political risk of such local politicians going against the central government is expected to be reduced.

Economic motivation. Certain trade associations, chambers of commerce, and business leaders are trying to snipe at Chinese goods and companies through unusual means, to maintain or even expand the sales and market share of their members, or to acquire certain assets. Most of the oligarchs who control Russia's economic lifeblood have made their fortunes through irregular means, and when Russia's political and economic order is not fully on the right track, they are naturally more inclined to continue to seize economic resources at low cost through irregular means. In the auction of Slavneft in December 2002, Sibneft boss Abramovich, Alfa Group (which controls Tyumen Oil) boss Friedman, two oligarchs manipulated public opinion and the State Duma legislation to force PetroChina to withdraw from the company, thus obtaining the company's valuation of more than $3 billion for $ 1.86 billion.

Chinese companies aspiring to do business across borders should note that since the early 1990s, marked by the dramatic changes in the Soviet Union, free-market economies and universal democratic political systems have swept through many developing countries and countries in transition under the vigorous export of the West, making for a spectacular spectacle. According to some scholars, free market and universal suffrage are the guarantee of private property rights and economic prosperity, but in practice, even if we do not take into account the full-scale civil war in many developing countries in the process of the introduction of multi-party system, for the multinational enterprises (especially those relying on businessmen who settled abroad to carry out multinational business), the biggest side effect of this change is to increase the risk of political violence.

Second, the risk of expropriation by encroachment is becoming increasingly prominent

The risk of expropriation is the risk of expropriation, confiscation or nationalization by the host government of a foreign-owned enterprise. In the 1960s and 1970s, developing countries once set off the climax of nationalization, when the risk of expropriation is more prominent.

Since the 1980s, the risk of expropriation has been greatly reduced, and now the governments are competing to attract international investment in the majority of countries that have established a normal political order, the risk of open and direct expropriation is basically negligible.

Nevertheless, in the cross-border operation of Chinese enterprises, the risk of "creeping expropriation" (also known as "indirect expropriation") still exists and has even increased. The original meaning of "creeping expropriation" refers to the host government and foreign investors in the investment contract agreed in advance, foreign investors in a certain number of years, according to a certain proportion of its shares gradually transferred to the host government or nationals, so that the host country party's shareholding of more than 51%, or even 100%. Later its connotation gradually enriched, development, according to the OECD Development Assistance Committee Investment Guarantee Specialized Committee "on the protection of foreigners' property in the treaty" article 3 of the note, nibbling expropriation refers to inappropriate arbitrary taxation, restriction of remittances, prohibition of dismissal, refusal to authorize the import and export of raw materials, and so on. The relevant materials of the U.S. House of Representatives, on the other hand, characterize cannibalistic expropriation as discriminatory treatment of foreign investors, changes in foreign investment policies, forced nationalization, borrowing restrictions, restrictions on the employment of foreigners, forced exports, price fixing, and so on. To summarize the specific behaviors of cannibalistic expropriation, it can be defined as the host country's central and local governments do not openly announce the direct expropriation of the enterprise's tangible property, but use various measures to hinder foreign investors from effectively controlling, using and disposing of the enterprise's property, so that the rights of foreign investors as shareholders are greatly restricted, or practically eliminated, thus constituting a de facto act of expropriation. The risk of expropriation faced by Chinese enterprises and overseas Chinese businessmen is mainly of three kinds, namely, expropriation as a tool of trade protectionism, expropriation combined with corrupt motives, and expropriation caused by changes in host country's policies and regulations.

(a) as a tool of trade protectionism, the nibbling expropriation

This nibbling expropriation is usually by the host government departments in the name of checking tax evasion, smuggling, health, safety conditions, frequent searches of foreign-funded enterprises, unnecessary penalties, additional taxes, disruptions to normal production and operation, and even confiscation of foreign-funded enterprises on the basis of the pretext of the above goods. The Russian government departments are often used to confiscate a large number of Chinese exports to Russia on the grounds of "gray customs clearance" problem, is a typical example. Before the incident in Elche, the Spanish police have also suddenly searched the stores and warehouses of the Chinese businessmen in Elche, and held a gun to the head of the Chinese businessmen, rather abusive use of violence. Due to the host country's business environment is not standardized, the legal system is not sound, but also due to some overseas Chinese businessmen are greedy for small profits, or rely too much on price competition strategy, some overseas Chinese businessmen do have such and such problems, but also to the host country's government departments to provide an excuse for the cannibalization of expropriation.

(2) Epicurean Expropriations Combined with Corruption Motives

In some countries where the rule of law is unsound and the bureaucracy is corrupt, the interests of corrupt government agencies or corrupt bureaucrats and private capital ************************************************************************************ are habitually misappropriating assets of the government and public for self-enrichment, and it is difficult for foreign investors to be exempted from the same. The risk of expropriation by cannibalization is even more difficult to avoid when combined with corrupt motives. The risk of expropriation by cannibalism combined with corrupt motives is higher when mainstream consortia in the host country generally make their fortunes by looting state assets cheaply in the privatization process of state-owned enterprises.

The risk of expropriation by cannibalization is often the result of a combination of protectionism and corruption. After the political upheaval of Russia in the Transparency International and other organizations of the corruption list "top", when the Chinese businessmen, Chinese goods in the Russian society has occupied a certain position, in the ruins of the collapse of the Soviet Union gradually restored the Russian light industry wants to exclude the Chinese counterparts, the police department is coveted by Chinese businessmen's property, jealous of the customs officers from the Chinese goods "gray customs clearance". The police are coveting the property of Chinese businessmen, jealous of the rich profits that customs officers make from the "gray clearance" of Chinese goods, trade protectionism and corruption, since the end of the 1990s, the Russian police seized the goods of Chinese businessmen in a number of vicious incidents: in 1998, all the Chinese goods in the two buildings of the city of Moscow, the expansion of the East and the barracks, were seized; 2000-2001, there were incidents of seizure of Chinese goods in Russia, and in 2001, there were incidents of seizure of Chinese goods in Russia.

(3) Epicurean Expropriation due to Changes in Host Country Policies and Regulations

Sometimes, due to changes in the host country's policies and regulations, foreign investors are forced to withdraw from part of or even all of their investment stakes. For one thing, foreign investors usually withdraw from the equity against their intention; for another, due to policy changes, foreign investors are forced to focus on a short period of time to get rid of their equity, even if their assets can find a buyer, in this artificially created buyer's market, the market price of the seller's assets will also be greatly discounted; therefore, this is a kind of cannibalization of the expropriation risk. Typically, the Qatari government adjusted its policy on "sleeping guarantors" in 2004. Qatar's domestic law requires that, with the exception of agriculture, manufacturing, health, education, tourism, and local mineral development, all for-profit activities must be participated in by or represented by Qataris, and that expatriates wishing to engage in for-profit activities must form a joint venture company with Qataris on a 49% (expatriates) to 51% (Qataris) equity ratio. In practice, the Qatari government, courts and residents have for many years accepted an alternative approach, whereby the equity ratio on the books of the enterprise complies with the above legal requirements, but in reality the two parties enter into a private agreement whereby the expatriate provides all the capital and operates the business independently, acting as a nominal majority Qatari shareholder, and the company acts as a guarantor for a fixed guarantee fee, known as the "sleeping sponsor" (`sleeping sponsor'). "In July 2004, the Qatari government issued a new decree, expressly prohibiting this practice, violators are liable to confiscation of property, revocation of licenses, fines up to one year imprisonment, including China's enterprises, a large number of foreign enterprises are thus facing the risk of cannibalization expropriation.

China's enterprises often can not simply withdraw from the relevant countries and regions to avoid the above types of cannibalization risk, because many of the countries with a high risk of cannibalization is important for our country to ensure the supply of resources, or belong to the western competitors of China's enterprises in the blank area, China's enterprises often need to bear the above risks to open up the market in these countries.

Third, the high incidence of financial crisis in the transfer of higher risk

Exchange restriction risk (transfer risk) that the host country balance of payments difficulties and the implementation of foreign exchange controls, prohibit or restrict foreign investors, foreign investors will be the principal, profits and other legitimate income transferred to the host country outside. Since the 1980s, under the impact of the wave of worldwide financial liberalization, most countries have gradually opened up the foreign exchange control, and the transfer risk has been substantially reduced accordingly. However, due to the frequent outbreak of international currency/financial crises since the 1990s, the transfer risk of developing countries and certain countries in transition should not be underestimated. In recent years, emerging markets have erupted in the Russian crisis in 1998, the Brazilian real crisis in 1999, the Turkish crisis in 2001 and the Argentine crisis in early 2002. If the host country is not an international reserve currency issuer, the capital account and domestic asset markets open faster and more thoroughly, and domestic asset markets are overheated, or the burden of foreign debt is heavier, such a country outbreak of currency/financial crises will be higher, the transfer risk is also greater.

Fourth, the default risk is concentrated in developing countries

That is, if the host government defaults on the contract, the investor is unable to resort to judicial or arbitration organs in a timely manner; or even if there is a ruling, the investor is unable to apply for enforcement. The government default covered by China Export and Credit Insurance Corporation (CECIC) means that the government of the host country illegally or unreasonably cancels, violates, fails to perform or refuses to recognize specific guarantees, warranties or concession agreements issued or signed by the host country in relation to the investment. This type of risk is usually found in some developing countries with unsound legal system and the former Soviet Union and Eastern European countries in transition.

Fifth, delayed payment risk can not be ignored

Usually refers to sovereign debt default risk, that is, due to the host government to stop paying or delayed payment, so that foreign investors can not be on time, full recovery of the due debt principal and interest and investment profits. Currently there is this risk is mainly a number of heavily indebted developing countries, the major developed countries of the currency is widely accepted international means of liquidation, its government can theoretically open the printing press unlimited debt repayment, so foreigners in the central government of the major developed countries in the transaction usually does not exist in the risk of delayed payment, but foreigners and developed countries in local government transactions may not be able to rest easy, because the local government has no Currency issuance rights, it is entirely possible to fall into financial insolvency, this example is not uncommon, and even New York, Munich and other world-renowned affluent city government has not been spared.

Six, third-country intervention risk rising

Third-country intervention risk can be divided into two categories, one is the risk of third-country governments to take direct sanctions, this risk is currently mainly from the United States, enterprises, if the United States with Iran, Sudan, North Korea and other so-called "rogue countries" listed in the United States to carry out economic and trade exchanges, may face this risk, it is possible, the risk of the United States, and the United States of America. If an enterprise carries out economic and trade transactions with Iran, Sudan, North Korea and other so-called "rogue states" listed by the United States, it may face this risk, and its potential losses include the inability to enter the U.S. market, the inability to raise funds in the United States, and the inability of the enterprise's senior management to enter the United States. When PetroChina was preparing for overseas listing in New York roadshow, some U.S. political forces sent a letter to the major investment funds, to PetroChina in the "evil country" Sudan to develop oil as a reason to ask fund managers to boycott PetroChina, and in the U.S. Congress to put forward a formal bill. 2004, the beginning of the year Sinopec Group to participate in the bidding for the Iranian oilfields, was also blocked by the United States. The company's bidding for Iran's oil fields in early 2004 was also blocked by the United States. Enterprises that are listed on the U.S. capital market, or have a large export business to the U.S., or are engaged in the development of strategic resources, or are engaged in sensitive industries, face a higher level of this risk. Although the U.S. Helms-Burton Act and the Byrd Act have been resisted by most countries around the world, as long as the U.S. status as the world's sole superpower remains unchanged, the U.S. will not stop this behavior. In the future, the European Union may also use the pretext of "human rights over sovereignty" to threaten the enterprises of other countries.

Another type of third country intervention risk is not the direct sanctioning action by the third country, but the risk of the host government defaulting on the contract under the pressure or temptation of the third country intervention. Due to Japan's involvement, the China-Russia oil pipeline project program has been repeated many times, PetroChina's initial investment in the Anda line all failed, and damage to China's energy strategy, is a typical case of this risk.

VII. Conclusion

With the growth of China's foreign trade and overseas investment, China's enterprises are faced with increasing political risk, in September-October 2004, less than a month will be the outbreak of the Elche incident and Pakistani bandits kidnapped Chinese engineers, two vicious cases, which is a full demonstration of this point. Although China has already established a cross-border business political risk response system including bilateral investment protection agreements, multilateral investment protection system, policy-based export credit insurance and overseas investment guarantee, this system is still unsatisfactory in many aspects such as dispute settlement and compensation efficiency, and the failure to effectively cover the new political risks is the most prominent defect. Therefore, it is imperative to develop and improve China's political risk response system.