Despite cultural and economic ties that span 600 years, only a few Singaporean firms have offices in China. However, as ALB discovers, this simply means servicing the dragon economy can best be done from home.
The numbers are staggering. Thus far in 2009, China has logged 22 announced outbound M&A deals, including two of the largest on record, achieving a cumulative deal value of US$16bn – a new record, according to Dealogic.
Still boasting a relatively robust economy, China continues to be lucrative market for both international and local firms, but just where do Singaporean firms fit into the picture?
Listings
In years past, a major source of work for Singapore firms was Chinese companies looking to list offshore. “This was until September 2006, when a new requirement was introduced where PRC domestic companies effectively needed to seek MOFCOM and CSRC approval to list overseas – that put a dampener on this type of work,” says Drew & Napier director Boon Ann Sin. There was a transition period, whereby companies who had already transferred their assets prior to September 2006 were permitted to list without approval, but this window has now closed. Drew & Napier had an office in Shanghai but it closed in 2008.
“Prior to September 2006, business was picking up nicely and we had a number of clients looking to list offshore, but the regulatory changes have basically made this difficult,” Sin says.
Outbound M&A
Loo Choon Chiaw of Loo & Partners says there has been a shift in the direction of Chinese investment. “Since the early 1980s, the PRC has been the biggest beneficiary of foreign direct investment. The statistics suggest that the trend may soon be reversed as PRC enterprises begin to venture abroad ,” he says.
Over the past nine months, Loo & Partners has been instructed by PRC State-linked conglomerates on several substantial acquisitions of coal and other minerals in Mongolia, Russia and Indonesia, the building of an electricity and heating plant in Russia on a BOT basis, and the design and building of a coal dedicated port terminal in Russia.
There is little doubt that outbound China M&A will continue to rise. “It has not fully taken off yet, but there is an increasing level of interest,” Sin says. “The bigger Chinese companies are resource hungry and there will be opportunistic buying – we’ve had queries, for example, from oil and gas entitles looking to buy assets.”
Loo agrees: “I expect our Greater China practice to receive more instructions from our PRC clients on outbound FDI in the natural resources and energy space,” he says. “The negative impact of the global financial crisis may ironically turn out to be a catalyst in expediting the PRC outbound FDI as the costs of overseas acquisitions become cheaper to our PRC clients.”
However, some suggest that if the predicted M&A spree does occur, it will not necessarily prove a bonanza for Singaporean firms. “If prices fall, Singapore is only one of many potential target countries,” Sin says. “Particularly with the focus on commodities, other markets such as Australia and South Africa will be more attractive.”
Inbound M&A
In contrast to outbound FDI from China, the inbound side of the equation has been somewhat slow. Thomson-Reuters calculated in April that China’s cross-border inbound volumes had reached US$3.4bn from 103 deals, down 42% from the same period last year.
But the work is still there for firms who choose to look for it – particularly those based in Singapore. “China and Singapore have enjoyed a strong trading relationship for many years,” says Lin Song, co-head of KhattarWong’s international China practice. “According to International Enterprise Singapore, China has been Singapore’s top foreign investment destination since 1997. For the past three years, bilateral trade has been growing by more than 25%, making Singapore the eighth largest investor in China.”
Sin says that there is still a significant level of interest from Singapore firms looking to invest in China. “They are at saturation point in Singapore, so they are looking to invest in China – often in a different area of business.”
There may also be opportunity in other areas. “Our international China practice has seen an increase in arbitration work and we predict that workflow in this area will continue to grow strongly. Thus far this year, our firm has handled multi-million dollar claims involving parties from America, Asia and Europe,” says Hee Theng Fong, Head of International China Practice at KhattarWong, “While the global financial crisis may affect M&A activities adversely, it is a factor that has contributed to the rise of arbitration cases.”
Relationships with local firms
Given the prohibition on foreign firms advising on local law, Singaporean firms need to have close relationships with their local counterparts. Drew & Napier works with a number of Chinese firms. “We work together on long drawn projects, and quite often we are in daily communication,” Sin says. “Having worked on other transactions together, the partners know each other fairly well.”
KhattarWong has formed relationships with local firms which Song describes as “counting as family.” are by and large the bigger “Essentially, we have grown our capabilities to be an offshore firm with onshore capabilities and an international outlook,” he says.
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