China wakes up to global clout of its small firms

By Lucy Hornby

BEIJING (Reuters) - Xing Houyuan's advice to investors who seek her out is patient and practical: do due diligence on any potential partner, clarify its ties to the government, and make sure you control any joint venture.

Her words would have sounded familiar to any firm trying to enter China in the 1980s and 1990s. But the nervous-looking man who had just shown Xing his proposal was Chinese, and he was looking to do business in Africa.

While Beijing has pushed aggressively to win major mining, oil and hydroelectric projects around the world, it is only now starting to pay attention the smaller companies that supply everything from cement to explosives for these mega projects.

Xing is director of multinational business at the Chinese Academy of International Trade and Economic Cooperation, which is affiliated with China's Ministry of Commerce. The academy offers policy analysis, market information, due diligence reports and advice -- originally for foreigners seeking to invest in China and now also for Chinese firms seeking to do business abroad.

Even though investment by small and mid-sized firms in Africa has taken off in the last six or seven years, the Chinese government only started to pay attention in 2006, when it hosted a gathering of African leaders in Beijing, Xing said.

While deals by big state firms get the most attention, smaller, private firms have been quicker to spot opportunities abroad, just as they have done inside China in the last decade. Oil, metals and telecoms are the most promising sectors in Africa, according to the Chinese Academy of Social Sciences, another government-backed research institute.

"Private companies are the most proactive in our own economy, and in many ways, the African market is suited to smaller players," Xing said. "Small and private companies are more likely to find projects and partners that fit their capability."

Last year, for the first time, Africa accounted for the greatest number of Chinese deals signed overseas. But the continent's share of China's foreign investment actually shrank, to 3 percent in 2006 versus 7 percent in 2005, indicating a shift toward smaller deals.

DISPENSING ADVICE

To help these smaller businesses, the government organized a Sino-African investment conference in Beijing in December, where Xing dispensed advice to people like the executive from a small steel company in Tangshan, east of Beijing, who was looking into investing an iron ore mine in Libya.

Beware of partners who can't deliver what they promise, Xing told the steel executive.

Other attendees ranged from the expected -- bankers hoping to lend to successful projects -- to the surprising. A representative from textile firm Hodo Group wanted information on mining projects in Madagascar.

China is also focusing on what it calls "development zones" in areas where Chinese investment is concentrated in Africa, where it aims to ease small and medium companies' access to credit and government channels.

"We are setting up the zones to help them access resources, and find and get access to local governments, partners and projects that are suitable to their size," Xing told Reuters.

"The governments there like it because they have an intermediary bigger than just that one company and we like it because we can keep track of our companies, especially if there is a problem."