Given the number of foreign firms piling into the People's Republic of China (PRC) recently, it will come as a surprise to many that the total value of deals completed in China is significantly lower in the first half of 2003 than for the same period last year.
According to the Thomson Financial league tables (see below, right), just $5.49bn (£3.29bn) worth of deals have been completed up to June 2003, compared with $22.3bn (£13.3bn) for the whole of 2002.
Lovells is one of the latest overseas firms to spread its reach across the PRC, after winning a licence to open a second office on the mainland (The Lawyer, 9 June). The firm, which already has an office in Beijing, is planning to open a Shanghai base in September under the leadership of intellectual property partner Doug Clark.
Meanwhile, Squire Sanders & Dempsey's China practice has just scooped a team of lawyers from Coudert Brothers' Beijing office. The US firm hired partners James Zimmerman and Sungo Shim along with three associates for its own Beijing operation. At the same time, Squire Sanders and San Francisco-based Heller Ehrman White & McAuliffe revealed that they are planing to open offices in Shanghai and Beijing respectively later this year.
Don Kelly, Lovells' regional managing partner,
said the fall in the value of deals completed in China this year has not deterred the firm from opening in Shanghai. If it did not take up the current opportunity, there is a risk of a significant delay before any further licences are issued. “For us, [SARS] isn't a good enough reason to hold back,” he added.
Jones Day topped the league table after advising on five deals totalling almost $1.4bn (£838m). In June, the firm's 35-strong Shanghai office acted for one of China's leading auto manufacturers, Dongfeng Motor Group, on a $2bn (£1.19bn) restructuring and joint venture with Nissan. Earlier in the year it advised Morgan Stanley, which led a consortium that cooperated with China Huarong Asset Management in the largest portfolio sale of non-performing assets in China's history.
Mitch Dudek, Jones Day's Shanghai-based corporate partner, blamed the drop in the value of deals on the outbreak of SARS. He argued that this is a temporary glitch and that overall the Chinese market is growing rapidly. For example, last year the PRC overtook the US and became the largest recipient of foreign direct investment.
“China is a tremendously large market and it's no longer a dream – the economics of China are compelling,” said Dudek.
The head of Linklaters' China practice Zili Shao also believes that SARS has adversely affected the number of deals completed in the first six months of 2003. But he argues that last year's figures are distorted due to a series of mega initial public offerings, including China Telecom and Bank of China, that were completed in 2002.
“Overall, I don't see a drop in the volume of M&A work. I anticipate that there will be a rise in the amount of deals over the next two years,” he said.
However, even if the Chinese economy continues to grow at a rate that can accommodate the huge influx of foreign firms, there are still a number of other restrictions
in the legal market. Notably, foreign law firms are still banned from advising on Chinese legal issues, and should they employ a local lawyer, that lawyer's certificate to practise Chinese law would be suspended.
Foreign law firms are also prohibited from entering into joint ventures with local firms. A similar restriction was imposed in Singapore but was lifted in 2001. Baker & McKenzie's Hong Kong managing partner David Fleming said the Ministry of Justice may ultimately abolish this prohibition, but he does not expect such a change to come about quickly.
DLA partner Roy Chan, the chief representative of the firm's Shanghai office, said it is not as straightforward to get a licence for a second office as it might at first seem.
“Under the current regulations the representative office of a foreign law firm is required to be continuously operating [in the PRC] for more than three years before it can apply for a second licence,” he said. “There's no further mentioning of a relaxation of this rule under the World Trade Organization and no indication so far that such a rule will be relaxed.”
Fleming believes local firms are also credible competitors, particularly in relation to lower-value deals and less complicated advisory work. Nevertheless, despite the fall in deal-flow, the UK and US firms in the region remain optimistic about the future of China's economy and their own opportunities to prosper.