Chinese Firms' Global Expansion Presents Lucrative Opportunities for Citigroup

Chinese companies are racing to expand globally amid a competitive domestic market and slower consumption at home.

Despite cultural hurdles, this global expansion offers medium to large Chinese firms significant opportunities for profit and risk diversification, creating business opportunities for lenders like Citigroup, according to a top executive.

"Chinese companies are especially looking at emerging markets like the Middle East, Asean, and Africa," said Lin Hai, head of Citi Commercial Bank (CCB) for China. "But some of the biggest challenges they face include lack of local know-how."

These expansion plans are accelerating as China experiences slower economic growth. The economy grew by 4.7% year on year in the second quarter, after a 5.3% growth in the first quarter. The government has set an annual GDP growth target of around 5% for this year.

China’s retail sales, an indicator of consumption, increased by 2% in June, a significant slowdown from the 3.7% rise in May, adding further impetus for the overseas push.

Some Chinese brands are targeting Asian countries where their products, like bubble tea, are more familiar to consumers. Others, such as car makers, are looking to the West, where their products can command higher prices than in China.

Cosmetics maker Maogeping and Midea, the world’s largest home appliances maker, are planning to expand globally after listing publicly in Hong Kong. Maogeping is the only domestic player among the top 10 premium beauty companies in China, ranking eighth by retail sales in 2022, according to data from consultancy Frost & Sullivan.

Like Midea, Maogeping's prospectus outlined its plans to use part of the proceeds from the proposed IPO to enhance its global brand presence and increase market penetration overseas.

Companies like Kuaishou Technology, China’s second-largest short video and live streaming platform operator, are continuing to capitalize on their popularity in the Middle East and South America. The tech company announced it would soon establish an office in Riyadh, Saudi Arabia, and expand in countries like Brazil and Indonesia.

These moves make sense as emerging markets are experiencing rapid economic growth, have a growing middle class, and large populations, making them attractive to Chinese companies, said Lin. Global expansion is also a strategy to diversify risk, he added.

As a result, Citigroup has been receiving increasing inquiries from companies about setting up manufacturing capabilities in other markets and getting products closer to the end buyer. Over the last 18 months, the US bank has seen cross-border activity with Latin America double and triple with the Middle East and Africa.

"Amid ongoing geopolitical tensions, it is important for corporations to have a diversified strategy and not put all their eggs in one basket," Lin said. "If you just concentrate all your business in one country, there’s a higher risk of being impacted by tensions."

With more Chinese companies going global, Citigroup has seen a 20% increase in the number of mainland Chinese businesses setting up bank accounts overseas in the first quarter of this year.

"As a global bank, the execution [of loans] can be very fast and companies have been looking at various places, from Mexico and Brazil to Vietnam and Malaysia," Lin said.

However, global expansion comes with its own array of challenges. Local regulatory environments and tax regimes can be complicated, and figuring out how to best set up the company structure and fund local operations can be challenging. Another common issue is sourcing the right people. "Finding enough skilled and trustworthy mid-level management to manage overseas business is a common issue for Chinese corporations," Lin said.

Cultural adaptability and branding strategies are additional challenges Chinese companies will have to navigate as they increasingly head abroad, he added.

By fLEXI tEAM