Invest

China Targets Brazil for Long-Term Investments and Overseas Expansion

30 April, 2019
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"To successfully invest in Brazil, China must be hyper-cognizant of the cultural mood and priorities of Brazil's government, its people and its businesses."

As China continues to pursue overseas expansion and investment deals across the globe, country and government are learning that cross-cultural matters are key to successfully define the scope and depth of financial contracts and M&A opportunities.

In fact, navigating the nuances of cultural differences and biases is critical to China's efforts to invest in Brazil — the largest economy in South America, with a GDP of roughly $1.8 trillion and a population of more than 209 million people.1

Negotiating Cultural Crossroads

 

Strong relationships are key to productive negotiations, especially when conducting overseas expansion initiatives. However, building and maintaining productive relationships can be a formidable challenge. Cultural differences, language barriers and misaligned perspectives can result in costly misunderstandings, miscommunications and even feelings of being insulted, distrusted and underappreciated. For China to successfully invest in Brazil, both countries must be hyper-cognizant of the cultural mood and priorities of each other's government, people and businesses.

Investing in Common Long-Term Interests

 

In 2018, Brazil and China traded $113 billion worth of goods with each other. About $70 billion of China's investments went into local Brazilian agriculture, energy and logistics, and — importantly — infrastructure that will help Brazil compete in a global economy increasingly defined by advanced technologies and digital transformation. Given the opportunities that may result from investments, Brazil and China must be sensitive to the concerns and traditions that dictate how each country perceives relationships, conducts business and defines success.2

China employs a patient, long-term approach to its overseas expansion efforts. Chinese investors place less emphasis on catering to the short-term objectives; instead, they focus on future-oriented benefits and results that are cultured and negotiated according to longstanding relationships. This pragmatic approach to international investments has served China well in other regions of the world, such as Europe, and it informs its strategy now in Brazil. Both countries see the benefits of working together.3

The Synergy of Digital Transformation

 

The promise and impact of digital transformation on the future of local economies, such as Brazil's, and global geopolitics cannot be underestimated. Sweeping and rapid advances in technology are empowering once-developing nations to leapfrog decades of economic headwinds and compete in a connected world that increasingly conducts business online and in the cloud. The melding of financial and business interests through advanced technologies, such as machine learning and artificial intelligence (AI), presents investors, such as China, with unprecedented opportunities to offer, build and profit from international collaborations and M&A opportunities.

However, the accelerated integration of modern technologies into sluggish economies can result in new, formidable challenges. According to Mercer's 2019 Global Talent Trends Report, more than 70% of companies in Brazil expect to automate some work processes. Yet, only one-third of those companies use talent analytics to measure or predict how widespread automation will impact the country's workforce and larger society.

Both China and Brazil will have to find ways to accommodate the new workforce created by digital transformation while modernizing economy and infrastructure for the future. This will require building a strong, durable relationship.

Compromise in the Digital Age

 

As China invests more in its overseas expansion efforts, countries like Brazil — which can benefit tremendously from an influx of money, capital and resources — must find ways to balance their assets and needs while negotiating deals that offer value to discerning Chinese investors.

In the digital age, these transactions can quickly delve into sensitive matters that involve data management, privacy rights and protections, and other realms of cybersecurity, intellectual property and modern human rights. Preparing organizations and talent for the future will be a significant priority for all countries as the world moves deeper into the digital realm.

As the digital world pushes countries further into the future, Brazil must determine what concessions it's willing to make in order to modernize its infrastructure and economy. Additionally, the two nations must account for the cultural differences and perceptions that shape mutually beneficial deals. The consequences of poorly negotiated deals are too great and disruptive for both sides.

This codependency on the results may serve as the foundation for a compromise that ensures both Brazil and China strike deals to benefit both sides long into the future.

 

Sources:

1. "The World Bank | Data: Brazil." The World Bank Group. 2018, https://data.worldbank.org/country/brazil.
2. Adghirni, Samy. "China Says It's willing to Seek Trade, Investments Deals With Brazil." Bloomberg. 28 Mar. 2019, https://www.bloomberg.com/news/articles/2019-03-28/china-says-willing-to-seek-trade-investments-deals-with-brazil.
3. Spring, Jake. "China investment in Brazil hit seven-year high in 2017." Reuters. 18 Jan. 2018, https://www.reuters.com/article/us-brazil-china-investment/china-investment-in-brazil-hit-seven-year-high-in-2017-idUSKBN1F7387.
4. Brito, Ricardo; Paraguassu, Lisandra. "Brazil wants China to invest in its infrastructure." Reuters. 13 Jun. 2019, https://www.reuters.com/article/us-brazil-china/brazil-wants-china-to-invest-in-its-infrastructure-vice-president-idUSKCN1TE2YH.

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The principles of Sharia-compliant investing are essential for success in the emerging markets of the United Arab Emirates (UAE) and Saudi Arabia. As the Middle East continues to rise on the radars of global investors, understanding the dynamics of Sharia-compliant investing is crucial to meet the requirements of many investors institutions in these countries. ESG vs. Sharia Investing   Traditional ESG (environmental, social and governance) investing focuses on the analysis of non-financial factors in assessing investment opportunities. The ESG analysis often includes evaluating a potential investment's impact on the environment, social and/or governance specific issues. Investing with Sharia compliance in mind is similar to ESG, as the analysis includes the assessment of ethical and religious aspects of investment opportunities. While ESG investing is subjective, based on a particular investor's priorities and values, Sharia investing adheres to strict rules of Sharia, which is a set of principles informed by the Islamic religion. Basic Tenets of Islamic Finance   All sharia-compliant investments must abide by the principles of Islamic finance, according to Mercer's report Sharia Investing: What You Need to Know. These principles include: Interest (riba) is prohibited. Islamic law prohibits the paying of interest. Sharia law views money as a medium of exchange with no real or intrinsic value. One cannot charge or be charged interest for the use of money, as charging interest provides an advantage to one party at the expense of another. Unreasonable uncertainty or speculation (gharar) is prohibited. If a transaction is uncertain, or if a lack of information could lead to an undesirable result, it is not allowed under sharia. That means investing in futures, which involves uncertainty, would not be permitted. Impermissible activities (haram) are prohibited. Sharia-compliant investors are not allowed to invest in companies involved in impermissible activities, such as alcoholic beverages, pork meat or gambling. Profits and losses must be shared. All parties must share in the risks and rewards of any investment. Assets must be tangible. All financial transactions must be backed by tangible, identifiable underlying assets, rather than speculative assets. Opportunities for Success   Clearly, the principles of Sharia restrict exposing a Sharia-compliant portfolio to conventional asset classes. While Sharia-compliant investing can present some challenges to traditional investment strategies, it also offers attractive opportunities for successful wealth building. For instance, the cash component of a conventional portfolio would often be invested in money market instruments. But in a Sharia-compliant portfolio, cash must be invested in non-interest-earning deposit accounts or Sharia-compliant contracts. Similarly, in a conventional portfolio, fixed income investments would usually include government and corporate bonds. Because of Sharia's ban on interest, those bonds are not permissible under Islamic rules. Instead, Sharia-compliant portfolios can invest in Sukuk instruments , which are Islamic financial certificates that are used to purchase assets, of which the investor has partial ownership. For example, one Islamic bank recently signed an agreement to invest in two oil tankers, which will allow investors to own a portion of a tangible asset.1 While conventional portfolios can invest in all types of sectors and industries, Sharia-compliant portfolios must avoid certain industries that are not Sharia-compliant. These include conventional financial institutions (except Islamic institutions) and any equity associated with, alcohol, tobacco, pork-related products, gambling, cloning, pornography, hotels, advertising and media (except newspapers), and weapons. In certain cases, revenues from non-compliant activities are permissible if they are below the threshold of 5% of total revenues. In addition, eligible companies' income must comply with a set of financial ratio screens, which exclude companies that are highly leveraged and/or with excessive cash/accounts receivables. Furthermore, the following instruments or any derivatives may not be held in the Sharia portfolio: Futures Forwards Preferred stock Options Swaps Short sales Any other instrument that involves the payment or receipt of interest. Although the majority of conventional investments don't fit with Sharia principles, there are other Islamic investment products that meet the evolving needs of Sharia investors. For instance, a number of endowment funds, such as the Al Rajhi Endowment, Alinma Enayah Endowment, and King Abdullah Endowment, offer a wide spectrum of Sharia-compliant investment opportunities. Many Muslims rely on Sharia to govern every aspect of their lives, including their financial wellbeing. For those investors who adhere to Sharia, investing in products or companies that violate their religious beliefs is not acceptable. However, it is important to note that there are investors who are very strict when it comes to adhering to Sharia guidelines that are commonly endorsed by Islamic scholars and other institutions such as AAOIFI (Accounting and Auditing Organization for Islamic Financial Institution). On the other hand, other investors are flexible in terms of compliance. In order to better understand the financial and investment needs of Muslim investors, investment professionals are well-advised to understand the Sharia principles and standards if they embark on marketing their investment products and services. Furthermore, conventional asset managers need to be innovative in developing new Islamic products that meet the evolving needs of Sharia-compliant investors, especially as Muslim investors are becoming more affluent and sophisticated. Sources: White, Maddy. "ADIB inks sharia-compliant deal to finance two oil tankers," Global Trade Review, 08 Jan. 2020, https://www.gtreview.com/news/mena/adib-inks-sharia-compliant-deal-to-finance-two-oil-tankers/.

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As China continues to pursue overseas expansion and investment deals across the globe, country and government are learning that cross-cultural matters are key to successfully define the scope and depth of financial contracts and M&A opportunities. In fact, navigating the nuances of cultural differences and biases is critical to China's efforts to invest in Brazil — the largest economy in South America, with a GDP of roughly $1.8 trillion and a population of more than 209 million people.1 Negotiating Cultural Crossroads   Strong relationships are key to productive negotiations, especially when conducting overseas expansion initiatives. However, building and maintaining productive relationships can be a formidable challenge. Cultural differences, language barriers and misaligned perspectives can result in costly misunderstandings, miscommunications and even feelings of being insulted, distrusted and underappreciated. For China to successfully invest in Brazil, both countries must be hyper-cognizant of the cultural mood and priorities of each other's government, people and businesses. Investing in Common Long-Term Interests   In 2018, Brazil and China traded $113 billion worth of goods with each other. About $70 billion of China's investments went into local Brazilian agriculture, energy and logistics, and — importantly — infrastructure that will help Brazil compete in a global economy increasingly defined by advanced technologies and digital transformation. Given the opportunities that may result from investments, Brazil and China must be sensitive to the concerns and traditions that dictate how each country perceives relationships, conducts business and defines success.2 China employs a patient, long-term approach to its overseas expansion efforts. Chinese investors place less emphasis on catering to the short-term objectives; instead, they focus on future-oriented benefits and results that are cultured and negotiated according to longstanding relationships. This pragmatic approach to international investments has served China well in other regions of the world, such as Europe, and it informs its strategy now in Brazil. Both countries see the benefits of working together.3 The Synergy of Digital Transformation   The promise and impact of digital transformation on the future of local economies, such as Brazil's, and global geopolitics cannot be underestimated. Sweeping and rapid advances in technology are empowering once-developing nations to leapfrog decades of economic headwinds and compete in a connected world that increasingly conducts business online and in the cloud. The melding of financial and business interests through advanced technologies, such as machine learning and artificial intelligence (AI), presents investors, such as China, with unprecedented opportunities to offer, build and profit from international collaborations and M&A opportunities. However, the accelerated integration of modern technologies into sluggish economies can result in new, formidable challenges. According to Mercer's 2019 Global Talent Trends Report, more than 70% of companies in Brazil expect to automate some work processes. Yet, only one-third of those companies use talent analytics to measure or predict how widespread automation will impact the country's workforce and larger society. Both China and Brazil will have to find ways to accommodate the new workforce created by digital transformation while modernizing economy and infrastructure for the future. This will require building a strong, durable relationship. Compromise in the Digital Age   As China invests more in its overseas expansion efforts, countries like Brazil — which can benefit tremendously from an influx of money, capital and resources — must find ways to balance their assets and needs while negotiating deals that offer value to discerning Chinese investors. In the digital age, these transactions can quickly delve into sensitive matters that involve data management, privacy rights and protections, and other realms of cybersecurity, intellectual property and modern human rights. Preparing organizations and talent for the future will be a significant priority for all countries as the world moves deeper into the digital realm. As the digital world pushes countries further into the future, Brazil must determine what concessions it's willing to make in order to modernize its infrastructure and economy. Additionally, the two nations must account for the cultural differences and perceptions that shape mutually beneficial deals. The consequences of poorly negotiated deals are too great and disruptive for both sides. This codependency on the results may serve as the foundation for a compromise that ensures both Brazil and China strike deals to benefit both sides long into the future.   Sources: 1. "The World Bank | Data: Brazil." The World Bank Group. 2018, https://data.worldbank.org/country/brazil. 2. Adghirni, Samy. "China Says It's willing to Seek Trade, Investments Deals With Brazil." Bloomberg. 28 Mar. 2019, https://www.bloomberg.com/news/articles/2019-03-28/china-says-willing-to-seek-trade-investments-deals-with-brazil. 3. Spring, Jake. "China investment in Brazil hit seven-year high in 2017." Reuters. 18 Jan. 2018, https://www.reuters.com/article/us-brazil-china-investment/china-investment-in-brazil-hit-seven-year-high-in-2017-idUSKBN1F7387. 4. Brito, Ricardo; Paraguassu, Lisandra. "Brazil wants China to invest in its infrastructure." Reuters. 13 Jun. 2019, https://www.reuters.com/article/us-brazil-china/brazil-wants-china-to-invest-in-its-infrastructure-vice-president-idUSKCN1TE2YH.

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The principles of Sharia-compliant investing are essential for success in the emerging markets of the United Arab Emirates (UAE) and Saudi Arabia. As the Middle East continues to rise on the radars of global investors, understanding the dynamics of Sharia-compliant investing is crucial to meet the requirements of many investors institutions in these countries. ESG vs. Sharia Investing   Traditional ESG (environmental, social and governance) investing focuses on the analysis of non-financial factors in assessing investment opportunities. The ESG analysis often includes evaluating a potential investment's impact on the environment, social and/or governance specific issues. Investing with Sharia compliance in mind is similar to ESG, as the analysis includes the assessment of ethical and religious aspects of investment opportunities. While ESG investing is subjective, based on a particular investor's priorities and values, Sharia investing adheres to strict rules of Sharia, which is a set of principles informed by the Islamic religion. Basic Tenets of Islamic Finance   All sharia-compliant investments must abide by the principles of Islamic finance, according to Mercer's report Sharia Investing: What You Need to Know. These principles include: Interest (riba) is prohibited. Islamic law prohibits the paying of interest. Sharia law views money as a medium of exchange with no real or intrinsic value. One cannot charge or be charged interest for the use of money, as charging interest provides an advantage to one party at the expense of another. Unreasonable uncertainty or speculation (gharar) is prohibited. If a transaction is uncertain, or if a lack of information could lead to an undesirable result, it is not allowed under sharia. That means investing in futures, which involves uncertainty, would not be permitted. Impermissible activities (haram) are prohibited. Sharia-compliant investors are not allowed to invest in companies involved in impermissible activities, such as alcoholic beverages, pork meat or gambling. Profits and losses must be shared. All parties must share in the risks and rewards of any investment. Assets must be tangible. All financial transactions must be backed by tangible, identifiable underlying assets, rather than speculative assets. Opportunities for Success   Clearly, the principles of Sharia restrict exposing a Sharia-compliant portfolio to conventional asset classes. While Sharia-compliant investing can present some challenges to traditional investment strategies, it also offers attractive opportunities for successful wealth building. For instance, the cash component of a conventional portfolio would often be invested in money market instruments. But in a Sharia-compliant portfolio, cash must be invested in non-interest-earning deposit accounts or Sharia-compliant contracts. Similarly, in a conventional portfolio, fixed income investments would usually include government and corporate bonds. Because of Sharia's ban on interest, those bonds are not permissible under Islamic rules. Instead, Sharia-compliant portfolios can invest in Sukuk instruments , which are Islamic financial certificates that are used to purchase assets, of which the investor has partial ownership. For example, one Islamic bank recently signed an agreement to invest in two oil tankers, which will allow investors to own a portion of a tangible asset.1 While conventional portfolios can invest in all types of sectors and industries, Sharia-compliant portfolios must avoid certain industries that are not Sharia-compliant. These include conventional financial institutions (except Islamic institutions) and any equity associated with, alcohol, tobacco, pork-related products, gambling, cloning, pornography, hotels, advertising and media (except newspapers), and weapons. In certain cases, revenues from non-compliant activities are permissible if they are below the threshold of 5% of total revenues. In addition, eligible companies' income must comply with a set of financial ratio screens, which exclude companies that are highly leveraged and/or with excessive cash/accounts receivables. Furthermore, the following instruments or any derivatives may not be held in the Sharia portfolio: Futures Forwards Preferred stock Options Swaps Short sales Any other instrument that involves the payment or receipt of interest. Although the majority of conventional investments don't fit with Sharia principles, there are other Islamic investment products that meet the evolving needs of Sharia investors. For instance, a number of endowment funds, such as the Al Rajhi Endowment, Alinma Enayah Endowment, and King Abdullah Endowment, offer a wide spectrum of Sharia-compliant investment opportunities. Many Muslims rely on Sharia to govern every aspect of their lives, including their financial wellbeing. For those investors who adhere to Sharia, investing in products or companies that violate their religious beliefs is not acceptable. However, it is important to note that there are investors who are very strict when it comes to adhering to Sharia guidelines that are commonly endorsed by Islamic scholars and other institutions such as AAOIFI (Accounting and Auditing Organization for Islamic Financial Institution). On the other hand, other investors are flexible in terms of compliance. In order to better understand the financial and investment needs of Muslim investors, investment professionals are well-advised to understand the Sharia principles and standards if they embark on marketing their investment products and services. Furthermore, conventional asset managers need to be innovative in developing new Islamic products that meet the evolving needs of Sharia-compliant investors, especially as Muslim investors are becoming more affluent and sophisticated. Sources: White, Maddy. "ADIB inks sharia-compliant deal to finance two oil tankers," Global Trade Review, 08 Jan. 2020, https://www.gtreview.com/news/mena/adib-inks-sharia-compliant-deal-to-finance-two-oil-tankers/.

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