Chinese outbound investment is rising exponentially, providing international law firms with a new and increasingly important client base. Yun Kriegler reports
At the end of October Beijing became the home away from home for 700 Baker & McKenzie partners from 41 countries as the firm held its week-long annual global partners meeting in the capital city of the world’s second-largest economy. It was the first time a major international firm has held a global partners’ meeting in China. For Poh Lee Tan, Bakers China and Vietnam managing partner, it was an extremely busy but tremendously exciting week. She chooses the word ”opportunity” to sum up the general sentiment of that week.
“For some partners it was their first visit to China. It’s exciting to see and feel for themselves the dynamics and energy that are driving the economic growth and changes here,” Tan explains. “For many who’ve been to China before, it’s been a good opportunity to get to know the Chinese client base better, because they’ll increasingly service these clients in their home jurisdictions. Everyone was thrilled to see the opportunities and get a grasp of the size and scale of this important market.”
China in hand
In the face of the current eurozone crisis and fiscal problems in the US, the outlook for growth in the global markets looks bleak. This has made China an even more attractive market for many foreign firms, particularly those that are yet to gain strong footholds in the country.
According to China’s Ministry of Justice, there were 227 representative offices of around 140 foreign firms on the mainland at the end of 2010. Since the beginning of this year a dozen firms have opened new representative offices, either entering the region for the first time or branching out further across the country. A good number of other firms are also in the process of opening up new offices in China.
Depending on regulatory approvals and the recruitment process, Ashurst Asia managing partner Geoffrey Green expects to see an office in Beijing within the next 18 months. The firm first entered Greater China in 2009 when it launched an office in Hong Kong and established an association with local Hong Kong firm Jackson Woo & Associates as well as a formal alliance with Beijing-based Guantao Law Firm.
Ashurst’s profile in Asia was boosted significantly in September this year when it announced its tie-up with Australian firm Blake Dawson. The deal will see the pair combine their businesses in Asia and operate under the Ashurst banner from March 2012, with a full global merger on the cards for 2014.
“Blake Dawson has a small office in Shanghai and we’re going to apply for an office in Beijing,” reveals Green. “The offices in Beijing and Shanghai are subjective to the increasing flow of outbound work, which currently Blake’s Shanghai office sends to Australia. After the combination we should be sending work to a wider audience and the outbound work will continue to be strong in the energy and resources and financial services fields.
“Our presence is likely to remain small in China, but it will have an important and strategic function in our firm’s Asia and global network.”
Eversheds, meanwhile, which opened its first office in Shanghai in 2006 and a further office in Hong Kong in 2009, is also a relative newcomer to Greater China. But it has plans to strengthen its foothold further in the market.
“The launch of our Beijing office will help us target financial services and outbound work,” explains Stephen Hopkins, head of international at Eversheds. “At the moment Chinese companies are waiting to see how the European crisis pans out.
“In the aftermath we may begin to see opportunities as more Chinese companies look at outbound investment as well as cross-border investment by global multinationals.”
Out and about
When international lawyers talk about opportunities in China, one area that is mentioned most frequently is China’s outbound investment. This is in line with the Chinese government’s current five-year plan, which has an objective to reach parity of inbound and outbound investment flows by 2015.
In 2010 China was the world’s fifth-largest source of foreign direct investment (FDI) outflow, surpassing Japan and Germany. By the end of 2010 Chinese companies invested a total of $317bn (£200.52bn) in more than 178 countries and regions. This amount is less than a third of the total FDI China had received by 2010 – a staggering $1tr.
The set of figures by no means suggests that outbound work is a new area for international firms, but rather is an indication of the promising growth potential for their global networks.
Gregory Miao, a veteran M&A partner of Skadden Arps Slate Meagher & Flom in Shanghai, has witnessed a sharp increase in outbound activity over the past two years.
“Looking at all the transactions taking place in the global market, it’s not hard to identify a strong trend of growing outbound transactions by Chinese companies,” says Miao. “Outbound investment started around 2000, but the deals were small then. Since two years ago there’s been a very sharp increase in both volume and value of the outbound transactions.”
In 2011 Miao and his team advised on a number of outbound M&A transactions, including China National BlueStar Group’s $2bn acquisition of Norwegian materials and energy company Elkem and China Huaneng Group’s $1.2bn acquisition of a 50 per cent interest in international power company InterGen.
“With $2tr in foreign reserves and the strategic shift in economic development policies, there’ll continue to be significant outbound investment,” Miao forecasts.
Bigger and better
DLA Piper Shanghai partner Wan Li expects the quality of the transactions and the sophistication of the Chinese acquirors to grow alongside the volume of the deals.
“In the past decade Chinese companies have learnt many valuable lessons from their mistakes and failures in overseas investment,” contends Wan. “Some of the larger state-owned companies have gained experience and capability on deal execution in the global market and have become more sophisticated in structuring the transactions. Several of our Chinese clients have prepared billions of dollars for future overseas acquisitions, but they’re still carefully selecting appropriate targets.
They not only want to make the right deal, but also want to ensure the successful post-merger integration. It’s also crucial for them to ensure strategic goals are realised and value is added through the international expansion.”
Up until now Chinese outbound investment has been concentrated largely in the resources and energy sector. But many lawyers have noticed a second wave of outbound investment where Chinese companies are investing in a wider range of sectors across a wider range of locations.
“There’s no question about the outbound deal flows, especially in the resources and energy sector,” says Stephen Harder, managing partner of Clifford Chance’s Beijing and Shanghai offices. “That’s the first wave – an easier wave in terms of getting government approval and bank financing. Global firms have already done a lot of work concerning this area. The second wave of China’s outbound investment has picked up pace in the past few years and is driven by companies outside the energy and resources sector, such as manufacturing, agricultural, financial services, healthcare and technology. In addition to state-owned companies, we’ve started to represent more large privately owned companies and sovereign wealth funds bidding for assets in Europe and Latin America.”
Last year Clifford Chance advised China Investment Corporation (CIC) on its equity investment in Banco BTG Pactual, Brazil’s largest independent investment bank. Linklaters was also involved in the same transaction, advising the consortium of more than 10 investors, including CIC.
In 2011 most top-tier international firms in China were influenced to a certain extent by the negative chain effects resulting from the European debt crisis and the downgrading of the US sovereign credit rating.
Chinese companies, meanwhile, fuelled by increasing financial strength and a desire to internationalise and compete on a global basis, remain very active in dealmaking. At this point in time strengthening relationships with Chinese clients and vying for outbound work are more important than ever.
“The growth of the China practice in international firms is generally flat in 2011, especially given the challenging market conditions in the second half of the year,” says Fang Jian, Linklaters’ newly elected national managing partner for China. “We expect our China revenue in 2011 to remain at the same level as in 2010.”
Although the pace of business is moderate in general, Fang specifies outbound M&A as an important source of growth this year and going forward.
“In the past we were busy with foreign investment-led China work – we didn’t have a particular focus on the outbound activity of Chinese clients, as it was a small part of our corporate work. But we’ve recently experienced an rise in representations of Chinese clients in overseas investment and taken initiatives to build up this area,” relates Fang.
This year Linklaters Beijing partner Thomas Ng led a multijurisdictional team advising Industrial and Commercial Bank of China (ICBC) on its $600m investment in the Argentinian operations of South Africa’s Standard Bank, the first Chinese investment in the country’s financial sector.
Another recent example is the firm’s representation of Shanghai-listed Pang Da Automobile in its equity investment in Saab and Swedish Automobile. Linklaters Amsterdam partner Peter Goes was a lead partner on the transaction and will relocate to Beijing in early 2012 to offer Chinese clients on-the-ground, pan-European M&A expertise.
“Going forward, our lateral hires and promotions will have an outbound capability focus,” says Fang. “But we’re conscious that it’s a long-term investment and it will take some years before we can reach its full potential.”
- Hey, big lenders
With Chinese companies venturing abroad on a larger scale, Chinese banks are playing a fundamental role in financing and funding Chinese companies’ global ambitions. As the banks become increasingly powerful lenders in the international market,
they have also become increasingly important and demanding clients of many law firms around the world.
“Our banking practice has continued its growth, with the major Chinese banks still supporting China outbound business and making bilateral loans,” says Philip John, head of North Asia at Norton Rose. “We’ve expanded our China team this year and have increased the size of our banking team to take advantage of the increased activity in China’s banking sector.”
China Development Bank in particular is one of the most active lenders and has instructed a significant number of law firms, including Clifford Chance, Hogan Lovells, Norton Rose, Shearman & Sterling and White & Case.
In 2010 the bank provided two loans, together valued at more than $20bn, to Venezuela’s Banco de Desarrollo Económico y Social de Venezuela. In this record-breaking financing deal, the bank instructed White & Case Beijing head Li Xiaoming for legal advice, while Hogan Lovells advised the borrower.
Hogan Lovells China managing partner Jun Wei was involved in the Venezuela deal. She was later engaged by the bank and China Export & Credit Insurance Corporation to advise on their $1bn project financing of a 600MW power plant on Luzon Island in the Philippines. Wei attributes much of the firm’s work to the recent merger between Hogan & Hartson and Lovells.
“The 2010 merger’s positive effects have started translating into an increased dealflow and fee income. We’ve won many large projects that neither of the legacy firms could have won by itself,” insists Wei. “The rise of Chinese companies and banks in the global market is inevitable. We need to place ourselves in the position where we can best facilitate this development and capitalise on it.”
Click table below to view larger image