September Edition 2019

25 24 them look good. How do we make them look good? We show them how the opportunity aligns with government policy, and more importantly how the opportunity advances government initiatives. When the government official sees that and shows the opportunity to their higher-up, they look GOOD. They feel good. The opportunity looks more than good. They say, “OK.” Howdo you achieve this charmer effect? Youmonitor government websites and you pay attention to every policy statement the government issues relevant to your business. You have to stay on top of it, because government policies (and thus market opportunities) can, have, and will change from one day to the next with little to no warning. Remember the outbound investment restrictions in early 2017 that sent the international M&A world into an absolute tailspin? This was a reaction to flamboyant spending fueled by the Go Global Policy instituted almost 20 years prior. Enough was enough, the government decided, so the government shut it down until it could get some reasonable policies in place - which happened about 10 months later. Let’s look at an example of an entire ecosystem affected by a single governmentpolicystatement,quietlyuploadedtotherelevantdepartment’s respective website. Medical cannabis: Once a beacon of hope in China, it’s a no-go - for now. Let’s step back to 2018, a turning point for the global medical cannabis (CBD) industry, with legalization in North America and venture investment to the tune of USD 13.8 billion. China is one of the largest producers of industrial cannabis (hemp), owning 309 of all 606 cannabis-related patents worldwide for hemp and CBD. Things started to look rosy for cross-border cooperation and R&D in various fields including pharma, as overseas companies began signing agreements with local Chinese producers and growers. In late 2018 and early 2019 it was reported that mainland JVs were forming to produce CBD. The JVs were both Sino-foreign and locally owned. JV partners were both private companies and state-owned enterprises. However 0nMarch 27, 2019 dreams of cross-border dealmaking in the CBD sectorwererudelyawakened.ChinaSecuritiesNewsreportedthat theOffice of the National Anti-Drug Committee issued a "Notice on Strengthening the Control of Industrial Cannabis” a few days prior, which sternly reminded companies that any side-stepping the UN Single Convention on Narcotic Drugs of 1961 would result in revocation of production licenses. As a State party to the 1961 Convention, industrial cannabis production is legal in China, but only for cultivation of hemp fiber and seeds. The notice stated that China has never approved industrial cannabis for medical use or for food additives. After the China Securities News report and within the same day, seven listed companies published formal statements clarifying how their industrial cannabis production falls neatly within the confines of the law and the 1961 Convention, and if anything contradictory has been published by them or in the news then it was untrue, or at best, a misunderstanding of their actual business. It is not clear what happened to the JVs formed in late 2018 and early 2019 after the notice was published; presumably their licenses are being reviewed by authorities to ensure they are operating within the law. In any case, business is likely not panning out how they imagined at the outset. How to keep up with government policy statements Powerful,industry-rattlingstatementsreleasedquietlybythe Government's is nothing new and should be expected to happen in any and every sector in China. It is rare to predict these statements, as they tend to appear unexpectedly and take companies by complete surprise. In the cannabis case, the notice only got widespread attention “a few days” after the actual release, thanks to an attentive news source. While you can’t really avoid surprises, you can be one of the first to catch them and to react, much like the seven listed companies in the cannabis example. Regular news and government website monitoring will keep foreign businesses aligned with government policy and smooth out the always exciting ride in the Chinese market. Sources: SCMP, PE Daily, China Securities News, Beijing News Network