From shop-till-you-drop metropolises to the desert sceneries of Xinjiang, China is a land of economic, cultural and geographic schisms. In recent years, the sheer size of its giant economic emergence has put it firmly at the centre of the global economic stage.
From 1990 to 2004, China's real GDP grew by an average of 9.7 per cent a year. The yin of revolutionary zeal is being balanced by the yang of economic pragmatism. In spite of the bird flu outbreak in 2005, its already-booming economy has been fuelled and accelerated yet again. According to the latest statistics from the National Bureau of Statistics, China's GDP surged by 10.9% in the first half year compared with the same period last year - more than a percentage point faster than that of last year.
On the timeline of China's development, 2005 and 2006 are widely recognised as the most crucial and fruitful years in all aspects. Undoubtedly, it has generated all-round benefits to all the law firms on the ground.
As China is getting closer to the end of its WTO implementation process, more sectors have been opened up for foreign companies at a faster pace. A great number of new and amended laws and regulations have been brought in to comply with WTO rules and new realities. Thus, the business scope of law firms has expanded and strengthened significantly.
Under the umbrella of the WTO implementations, there have been many developments. The significant share reform, tax reform, bank reform and RMB exchange rate regime reform were carried out last year, some of which have already achieved encouraging outcomes. China is fostering a more competitive, sophisticated, level playing field for all companies, including law firms.
In 2004, large Chinese enterprises started the 'going out' journey to invest or raise capital overseas. Today, China is a magnet for foreign direct investment (FDI) and attracts the most FDI in the world. In addition, China is also increasingly a source of FDI. It is extensively involved in world economic cooperation and competition. Consequently, law firms have followed their clients and gone global, setting up their own international presences and networks.
The past year was also the year of banking sectors, and law firms which assisted their clients in the banking industry had remarkable achievements.
The rapidly growing economy of China could possibly be worrying in some ways, and will inevitably slow down sooner or later. However, with more elements being pulled together - better corporate governance, refined laws, in-depth reforms and more transparency - the jigsaw puzzle of the Chinese legal market is starting to reveal a modern and impressive picture.
All firms benefit
A few individual outstanding firms could not represent a mature and sophisticated legal market. That's the reason that this the most significant time for the Chinese legal market. Some top local law firms, such as King & Wood and Jun He, are in the lead, but all Chinese firms are blooming.
In the legal service market, long-established players are expanding operations, new entrants are staking out sizeable positions and novel expansion strategies are giving access to markets opened through WTO commitments. Firms are moving forward at an unprecedented speed and the legal market is on the rise as a whole.
The modern private partnership law firms started to germinate after 1992, following legal reform in China. The fast initial developing period for all the local firms was the decade from 1992 to 2002. However, firms' development in these 10 years was mainly based on quantity and litigation. Partners of most firms were busy bringing in business and increasing revenue, while firm management, development strategy and expertise building were mostly ignored.
King & Wood and Jun He are the two legal pioneers that stood out during that period and became top law firms in China. Ahead of other firms, they formed strong teams with extensive expertise, providing integral and high quality legal services to both domestic and foreign clients. Their practice areas included corporate, capital markets, banking and finance, IP, international trade, and litigation and arbitration.
The success achieved by King & Wood and Jun He heavily depended on their forward-looking vision, good business sense, advanced management philosophy and inherent expertise. Their achievement has provided a role model for the rest of the local firms. After 2002, most firms started to realise what they have missed out and so determined to make use of the extraordinary opportunities being offered by the market.
"Before 2002, our firm developed rapidly and built up a strong foundation. However, several firms went ahead of us," says Shuqian Wang, partner of East Associates in Beijing, who has witnessed the phenomenon. "After 2002, we decided to catch up with them by creating our own brand with extensive expertise in certain areas and ability to provide integral services."
In recent years, more firms have established their professional reputation both at home and abroad, such as All Bright, Global, Jingtian & Gongcheng, Zhong Lun, Haiwen, Commerce and Finance.
Zhong Lun, one of the leading firms in the competitive Beijing market, has experienced significant growth recently. Its Guangzhou office was newly opened at the beginning of this year and the Tokyo office is expected to open this October. With more than 20 partners joining Zhong Lun by the end of this year, the firm's 30% annual turnover rate is very likely to continue or even increase.
"A key to remaining the top law firm in China is our differentiate development strategy," says Peng Wu, Zhong Lun's managing partner.
"Our clients are equally divided between domestic and international, which is different from King & Wood, the majority of whose clients are foreigners. With the ability to provide integral legal services, we can also build up substantial expertise in real estate and Japanese business areas," Wu continues.
For firms that have not yet entered the first-tier circle, the next three years are crucially important. The majority of the market share will be divided between a limited number of large firms in the near future.
"Following the path of the legal markets in developed countries, the same trend will take place in China. After all, only about 20 large integral firms could domain in the high-end market," says Wu.
Understanding this, many second-tier firms will kick off, jostling to become first-tier. Some large firms, used to dominating in domestic practice and traditional practice areas, are formulating new strategies to tap into the juicy international business arena. A large number of young ambitious firms are working hard to overtake established firms.
Established in 1992, Beijing Da Cheng law firm now has more than 320 legal professionals, including 60 partners in four offices across China. In 2005, the firm, whose revenue ranked eighth among all the Beijing firms, received an award from the All China Lawyers Association for being the most 'Excellent Law Firm in China',. However, only 20% of the revenue came from international business, which has not been sufficient for the firm's ambitions.
"Being in the new situation of a competitive market, we cannot afford to stop improving ourselves," says Zhongde Wang, managing partner of Da Cheng. Wang has led the partners' commission undergoing a series of reforms within the firm, including management reform and development strategy reform. "Our aim is to increase the international business ratio up to 50% and become a large integral international firm."
To strengthen its international network, Da Cheng has just formed official strategic co-operations with Central Chambers Law Corporation in Singapore and a local firm in South Korea.
East Associates is another old firm in Beijing, which has a strong domestic base but a young foreign investment team. The firm reviewed the saturated top-end market and has decided to cut into the market through providing premium legal services to small and medium foreign investors.
"There are much more small and medium-sized foreign investors in China than the World Fortune Top 500. Small to medium-sized foreign investors also have great demands for all kinds of legal services," says partner Shuqian Wang. "Because of their financial nature, these investors require more cost-effective and high quality services from firms."
"It is this is the part of the market, that has not yet been very competitive, from which we are gaining our market share," Wang adds.
In addition, East Associates keeps close relations with many small to medium-sized foreign firms that have not yet entered China to further strengthen their target client base.
A firm's age is no longer the indicator of its strength and vitality. There are many young but dynamic firms active in the market. Zhonglun W & D has not been around for very long, but it has caught up with the economic surge and had some eye-catching achievements.
It only took them a year for the firm to go from the 40th ranking when it was first established to the 29th ranking in 2005. The number of partners has also increased from five to the current 20 and the volume of foreign investment the firm has represented has grown 50% year on year.
Once the firm's offices open in Shanghai and London, Zhonglun W & D's revenue will soar. The firm is aiming to become one of the top 20 firms in three to five years.
"Our firm is currently aiming to have a significant turning point. The future is very bright if we cope well. The options are clear that either we keep moving forward and step up, or we will step out of the market," says Derong Zhang, one of the firm's partners.
Beijing, Shanghai, Guangzhou and Shenzhen are historically the most influential commercial centres and attract most of the FDI in mainland China. As a result, their markets for legal services, both facilitating and benefiting from the booming economy, are more advanced and sophisticated than in any other regions.
The legal markets in these regions are internationalised, and most of the foreign representative offices are based there. Consequently, the competition for business and legal talent is increasingly fierce in these markets.
Alongside the campaign to develop the vast western regions, the legal market has caught on, and law firms are beginning to recognise the potential of this region.
In Sichuan province, for example, there are now over 6,200 lawyers practising. Many firms there have grown strongly to have more than 100 legal professionals. One example is Tahota which is headquartered in Chengdu and together with its office in Beijing has over 200 staff.
A few large national firms have already established their offices in Chengdu, Xi'an and Kunming whilst three Hong Kong firms have also arrived in the shape of PC Woo & Co in Chengdu, So Keung Yin & Sin in Chonquing and Sit, Fung, Kwong & Shum in Xi'an.
In accordance with the per capita ratio, there are seven lawyers for every 10,000 people in Beijing, which is equivalent to the level of moderately developed countries. However, the ratio is very low for China as a whole - less than one lawyer for every 10,000 people. China needs more lawyers and there is tremendous potential for firms to grow.
Corporate lawyers - the strategic partners for firms
The in-house lawyer is an integral part of a modern legal market. With government authorities requiring all enterprises to implement the General Counsel system, some significant improvements have been seen.
The legal departments of Chinese companies have been developing rapidly in recent years, which has pushed the Chinese legal market to a new high. The in-house lawyers and private practice law firms are strengthening cooperation based on their mutual benefit and a win-win prospect.
Two years ago, the state-owned Asset Supervision and Administration Commission (SASAC) of China has signed a MoU with the US-based Association of Corporate Counsel (ACC), gaining a comprehensive training and cooperation program.
Last year, a delegation of Chinese in-house lawyers, representing some of the largest state-owned enterprises, spent two weeks in Australia, visiting BHP Billiton, Telstra and the Commonwealth Bank of Australia to learn how their legal departments are organised.
China is working towards the formation of a national in-house lawyers association, and it would be the biggest in-house counsel association in the world with anywhere between 50,000 and 100,000 members, according to Peter Turner, the Australian Corporate Lawyers Association chief executive officer and general counsel.
Lenovo Group Limited, headquartered in Purchase in the US, is the largest PC company in China and the third largest in the world. Its legal department is one of the outstanding examples among many prestigious Chinese enterprises. The company is also one of the pilot companies assigned by the Ministry of Justice to implement the General Counsel system.
The legal department of Levono was established in 2000, when there were only three legal staff members. With its business scope surging and going global, its legal department is growing in line. Today, there are more than 50 in-house lawyers globally, including 23 in Lenovo China.
Zhikuan Zhang, the executive director of the Greater China region legal department, has led the team involved in the ground-breaking acquisition of IBM's global PC business valued at US$1.75bn last year. The team also successfully assisted the company to become the first Chinese company to join The Olympic Partner (TOP) Program in 2005 and support the Torino 2006 Olympic Winter Games earlier this year.
"Our legal department is a critical part of our company and our business. Every deal and action we take heavily involves legal matters," says Zhang. "If the financial department is the blood of a company, then the legal department is its air - the elements of life. It is fatally important, yet easily underrated."
When there are large or important deals or transactions, the legal department will turn to external counsels for extensive expertise and resources. A tender will be run to choose the best firms to work with. Zhang describes the selection criteria as: 'client driven, good understanding of our business, and able to provide practical and constructive advice, cost-effective and integral services'.
Herbert Smith partner Tom Chau clearly senses the changes occurring in Chinese companies' legal departments. "The corporate governance of Chinese companies has been improved dramatically, and the legal department is playing an important role at the decision-making level," says Chau.
The changes are not only in the size of legal departments, but also in their responsibilities and duties. According to Chau, in-house lawyers today are doing more frontline legal work than before, such as negotiating and drafting contrasts. Even though it may appear that in-house lawyers are taking some business away from external firms, Chau firmly believes the relationship between in-house lawyers and external firms is "not as competitors, but strategic partners".
Gide Loyrette Nouel's partner in Beijing - Jean-Jerome Khodara - has the same viewpoint as Chau. "The grown up legal departments reduce minor corporate works for external firms, and allow us to specify what is our real job and make the best use of our expertise," says Khodara.
In-house lawyers are going forward, and enhancing the service standards of external firms. Generally, they have higher expectations and requirements when cooperating with firms. As a result, firms have to work harder to keep the clients.
"In-house lawyers give external counsels much shorter responding time and serious punishment if you fail to reach their timing and quality requirements," says Hongjiu Zhang, partner of Jingtian & Gongcheng. "It is a challenge for firms' efficiency and service quality. At the same time, it pushes firms to move forward."
In-house lawyers have also led the legal market towards a more transparent and fairer direction by running tenders and 'beauty contests' frequently. "When there is an important cross-border deal, more Chinese companies are willing to find the most competent firm through beauty contests. In-house lawyers bring more transparency and fairness to the legal market," Zhang continues.
Foreign firms in China also realise the improvements of Chinese in-house lawyers. However, much more still needs to be done before the tremendous potential demands can be utilised.
"We see improvement, first of all, in terms of the recognition by management of the importance of legal matters," says Robert Lewis from Lovells Beijing offices, who is providing training programs to help Chinese in-house lawyers.
However, for most Chinese companies the legal department is still a new function, which has only been developed in the last few years. Lewis points out ,"Chinese companies have not yet invested enough in their legal departments, and have not yet put all the procedures in place in order to make legal departments work effectively".
More diversified areas of practice
In the past, FDI used to be the backbone of firms' revenue. The forms of investment were relatively simpler and the techniques were less sophisticated. Helping foreign investors set up representative offices and foreign invested enterprises (FIEs) made up most of firms' business. Today, firms' areas of practice are much more diversified and have been extended into more sectors and industries.
With the WTO commitments being implemented steadily, more sectors are available for foreign investors to tap into, such as the financial, distribution, retail and service sectors.
"More sectors being opened to foreign investors means firms have been permitted to have more 'market access'," says Yan Liu, partner from Tian Yuan law firm in Beijing, who also thinks lawyers' workload in the firm has increased by 40% since 2005.
Khodara says Gide's key growth is in the distribution sector. "The WTO commitments broadly open the market to foreign investors. Distribution is one of the key growing sectors through which we have tremendous legal service development."
Allen & Overy's partners see the area which has considerably interested his own and other firms last year and this year is investment in financial institutions. Allen & Overy has represented a lot of foreign investors investing in not only Chinese banks but also group finance companies and trusted investment corporations.
In 2005, the foreign direct investment (FDI) actually utilised in China amounted to US$60.3bn, which unarguably established China's position as the world's unarguably largest recipient of FDI.
However, the form of investment has shifted from Greenfield projects into mergers and acquisitions (M&A). All firms interviewed claim the number of M&A deals and transactions they represented has grown significantly during the past year.
"Greenfield investments are less favoured by foreign investors, while the number of M&A deals we have done is increasing dramatically since the beginning of 2005," says Ling Wang, the managing partner of King & Wood.
Wang also points out that to some extent the recent legislative and regulatory updates regarding M&A, such as the draft Administration of the Takeover of Listed Companies Procedures published by CSRC, are the mirror reflection of the market trends.
The total number of M&A deals done in China hit 1,251 last year, of which 10% were done by foreign investors, totalled US$46.6bn. Banking, insurance, telecom, automobile, distribution, retail, energy, steel and IT are the top industries attracting most of the foreign investment. QFII and offshore private equity funds were the major sources of the financing.
The private equity funds have been playing a more important role in the Chinese M&A arena recently. Some remarkable deals have taken place since 2005, for instance, Carlyle Group's US$255m acquisition of 85% shares of Xugong Group Construction Machinery, Goldman Sachs' acquisition of 10% of ICBC shares valued at US$3.78bn, and the US$50m M&A deals between Morgan Stanley and Shanghai Yongle Electronics, China's third-largest electronics retailer.
"M&A will be the most popular form of foreign investment for a long time. So it will still be one of the most important areas of our practice," Wang adds. The Administration of the Takeover of Listed Companies Procedures" will certainly fuel the M&A prosperity.
Meanwhile, China is updating its legal system according to its need to implement WTO commitments. So far more than 3,000 legislations and regulatory updates have been down due to the WTO implements. "Lawyers and firms will be functioning better in a more sophisticated legal system," says Jihong Chen, a partner from Zhonglun W & D who welcomes the frequent regulatory and legislation changes.
The most recent and significant regulatory updates fall under the new Company Law, the new Securities law, and the draft Administration of the Takeover of Listed Companies Procedures. Following the government's share reform plan, both Shanghai and Shenzhen markets will be back on track and together should become the true barometer of the country's economy.
The good sign is that some large and prestigious Chinese companies listed overseas start coming back to the domestic capital markets. The Bank of China which listed H-shares in Hong Kong in June, after the world's fourth largest IPO raised $11.2 billion, has just raised US$2.6bn on the Shanghai stock market. Its debut is the country's largest domestic IPO and the first big company to list domestically since Beijing lifted a year-long ban on stock offers.
In the past, China's top companies largely shunned its domestic stock markets in favour of deeper, more stable markets in Hong Kong and overseas. Firms start to see Bank of China's listing as the first step towards reversing that trend. CNOOC and ICBC are both reportedly to be listed in the domestic stock markets soon.
"The more refined and defined laws and regulations have dramatically extended firms' areas of practice. More advanced and sophisticated techniques can be used to facilitate clients and their businesses now." Liu says.
Leveraged buyout, tender offers, private placement and backdoor listing are commonplace in the practice of firms.
While the capital markets' functions are improving, the takeover procedures are providing fair and free-market principles for the takeover of publicly listed companies. It can be expected that an era of the takeover of listed companies will really come to China.
Liu explains two other possible trends for the near future: "The surging takeover deals will in turn surge firms' practice in anti-takeover and anti-trust." In China, the anti-trust or anti-monopoly law has attracted a lot of discussions lately and has been considered by China's legislators.
Partners at Allen & Overy also see the potential demand in the anti-trust area. "Under some earlier legislation, when foreign companies merge with or acquire another company, they are required to file with the Ministry of Commerce if they need certain thresholds," says partner Thomas Jones.
"So the Chinese government has the chance to veto a merger to take place offshore China if it will adversely impact on competition. It is similar to what the US and the EU anti-trust regulators can do." According to Jones, the firm has filed over 10 M&A to the Ministry of Commerce so far and is very confident that it will continue to grow.
In addition, intellectual property is another area in which most firms are experiencing a strong growth. China has established a comprehensive legal system for IP protection. Chinese government has shown the determination and strength to strike IP infringement activities.
Zhonglun W&D's IP workload is experiencing a 30% growth year on year. Leading partner of the IP team Jihong Chen says: "Chinese legal services in IP area is raising rapidly, which developed countries, such as the US and the UK, could not compete with."
King & Wood's IP team is also busy advising on and implementing intellectual property protection and IP litigation strategies for many multinational and high-tech companies. "We have seen tremendous demands in the IP legal service market both internationally and domestically. Our IP team will keep growing fast in the coming years," says Wang.
The globalisation of Chinese enterprises and firms
The twenty-first century has been dubbed the Chinese century. If the theme before 2005 was about "the world coming to China", then it has certainly shifted into "China goes out to the world" since 2005.
As China becomes an important world economic participant, its enterprises increasingly look to distant shores overseas and are emerging onto the world stage. Promoting outbound investment and encouraging domestic companies to go out have become one of the country's important strategies in participating in global economic cooperation and competition.
Law firms driven by their clients have also gone globalised. Some have set up overseas offices, while many have formed strategic alliances with firms in other countries.
The globalisation process of companies is the utilisation of resources around the world, under international laws and regulations. This consists of two dominant activities, raising capital overseas and outbound investment. During globalisation, the legal advisor has an integral part in the procedure and plays a critical role.
Chinese companies, both state-owned and private, have sought to tap into the world's capital markets in order to raise capital for future expansion, enhance their international profile, and to raise standards of corporate governance, transparency and risk management.
Hong Kong has traditionally been the overseas market choice for Chinese companies. New York, Singapore and London are also the hot places for Chinese companies to raise capital. In addition, some firms are preparing for their Chinese clients to be listed in Japan and Korea later this year.
Chau, the Herbert Smith partner who splits his time between Beijing and Hong Kong, explains the advantages of Hong Kong capital markets: "Compared to China, Hong Kong has more flexibility in terms of the economy, policy, information and taxation. Chinese companies listed in Hong Kong can benefit from shorter approval time and a broader investor base. Hong Kong gives Chinese companies extensive international visibility."
According to Zero2IPO Research Center, 79 Chinese companies' IPOs debuted on six overseas markets (NASDAQ, NYSE, Hong Kong Main Board, Hong Kong GEM, Singapore Main Board and Singapore GEM) with their total offer amount receiving US$20.4bn in 2005.
During last year, 37 IPOs debuted on HKMB, accounting for 47% of the total number. The total amount of funds raised in Hong Kong was US$38.9bn, of which US$20.5bn (or 53%) was attributable to H-share companies.
Since the beginning of this year, 40 Chinese companies have launched their IPOs overseas with the amount raised up to US$13.8bn, representing an increase of 126% over the same period last year.
Upon the completion of the reform, the shareholding structure of Chinese companies will become closer to that of overseas listed companies. Thus, it is predictable that more interest will be attracted from international investors and more Chinese stocks will list overseas.
Through the overseas IPO wave, Chinese firms have built up an overseas expertise and presence that has seen them active in Nasdaq, NYSE, SGX and HKSE listings. Four Chinese firms - King & Wood, Jun He, Chen & Co and (CHECK) - have set up their branch offices in Hong Kong since the beginning of this year.
These offices in Hong Kong are not simply to assist Chinese companies' IPOs. More importantly, Hong Kong is a platform for Chinese companies to expand overseas. "After PRC companies listed in Hong Kong, they then look to further expand internationally. We assist them on the ground with support from other offices on relevant PRC laws affecting their expansion, financing, operation and business strategies," says Hubert Tse from Chen & Co in Shanghai.
Regarding the transactional side of the Chinese companies' 'going out' activates, many have pursued joint ventures, strategic partnerships or M&A to accelerate their global presence.
The ambition of Chinese companies to expand globally by securing assets and capabilities that can enhance their competitiveness is highlighted by Lenovo's purchase of the IBM PC Division, Shanghai Automotive Industry corporation's (SAIC) acquisition of 50.6% shares of Korea's Ssangyong, China National Petroleum Corporation's (CNPC) US$4.2bn acquisition of PetroKazakhstan, CNOOC's bid in the US$18.5bn to Unocal Corporation in the US, and Haier's unsuccessful bid for Maytag in 2005.
In 2005, according to statistics from the Ministry of Commerce, 1,067 Chinese companies have approved and invested overseas. The aggregate amount of outbound investment by Chinese companies in non-financial sectors reached US$6.9bn, an 87.3% increase year on year. The Ministry of Commerce also predicted that until 2010, China's direct overseas investment will grow at 22% annually. Many analysts say that in the next decade China will become the world's most important foreign investment source.
This phenomenon gives both Chinese and foreign firms great business opportunities. All firms are adopting new strategies for developing the Chinese outbound investment clients.
"Some large Chinese enterprises are wealthy and strong enough to acquire companies overseas. In the outbound investment, there must be Chinese firms' involvement, but foreign firms will have a more important role," says Chau. Herbert Smith , who advised CNOOC in its acquisition of Unocal and Sinopec's outbound investment, has realised the great potential and looks to gain more market share in this area.
The current Chinese legal market is estimated at a value of US$2bn. However, Robert Lewis is very optimistic about the future. Lewis believes that China has a largely untapped legal service market - a market for SOEs' outbound investments. "Chinese companies are doing more international transactions, and they are more integrated into global economy. That means they will have much more internationalised legal problems, in which lies the business opportunities for firms, especially foreign firms," says Lewis.
"In a 10 to 15 year timeframe, the overall market is going to grow to over US$20bn. Foreign firms' business ratio from Chinese clients will grow from the current average 15% to 60%," Lewis continues.
Most outbound M&A activities have traditionally been in natural resource and energy industries. Firms have witnessed Chinese companies' significant action in this sector in the past year and believe it will still be the hottest sector for Chinese outbound investment in the future.
However, Chinese companies have embarked on a wider range of outbound M&A activities, seeking to acquire brand names, technology and distribution networks. Lenovo's purchase of IBM's business exemplifies this mechanism. It is effectively swapping Chinese market resources for top technology and an internationally respected brand name.
Chinese firms are increasingly confident about their raising position because of their 'going out' clients. "Quite often foreign investors use Chinese firms recommended by foreign firms in China. However, we're going to see more Chinese firms represent their clients to find a competent foreign firm in the destination region. This trend will no doubt accelerate in the coming years," says Zhang optimistically.
The year of banking sector
When we review the legal service market by sectors, the past year is a truly landmark year of the banking sector. This year China will fulfil its final and most important WTO commitments in the fields of banking, which falls due on 11 December 2006. By then, China has to allow foreign banks to offer full local currency services and open an unlimited number of branches.
Major players, both Chinese banks and foreign investors, have made many significant moves to prepare for the approaching opportunities and challenges. 'Equity market deal of the year' and 'M&A deal of the year' in the 2006 China law awards both went to the banking sector.
The soaring value of recent investment marks the past eighteen months as a watershed for foreign banks in China. Foreign institutions invested approximately US$20.9bn in Chinese financial institutions between 2001 and 2005. However, the lion's share of that amount, US$17.6bn, was invested in 2005 alone.
Since 2005, ING has invested US$205m in Bank of Beijing, HSBC bought a 19.9% stake in Bank of Communications for US$1.7bn and Bank of America invested US$3bn in China Construction Bank. Led by Goldman Sachs, the international consortium has acquired 10% stakes of the Industrial and Commercial Bank of China valued at US$3.6bn. RBS headed a consortium acquired 10% stakes of the Bank of China for US$3.1bn.
King & Wood as the PRC counsel has involved in some of the large deals. Managing partner Wang Ling says: "Under the WTO rules, China will fully open its banking sector to foreign banks starting on 11 December 2006. Chinese banks are actively reforming and preparing for the coming challenges from strong foreign competitors. This year will be an unprecedented year for the banking industry in China."
"Attracting foreign investment and foreign strategic investors are an important part of China's bank system reform. Regulators hope foreign investors can improve corporate governance at domestic banks, and inject management expertise and risk management system." Wang adds.
Chinese banks also have had some monumental performances in the international capital markets. In June 2005, Bank of Communication (BoCom) was the first commercial bank in mainland China to complete a global offering and to list on an overseas stock exchange. With a US$2.16bn debut, it had the world's second largest IPO in 2005 at the time of the offering.
China Construction Bank followed BoCom and became the first of the big four banks to have completed its listing and IPO in Hong Kong. With the US$9.23bn raised, this is the largest ever IPO by a PRC issuer, the largest IPO in over 5 years and the largest bank IPO since 1980.
Bank of China (BOC), the second-largest of the Big Four state lenders broke that record in this May when BOC launched its H-share IPO in Hong Kong and raised US$11.2bn. Two months after, it launched its A-share IPO in Shanghai in July and raised US$2.5bn domestically.
Allen and Overy has involved in the IPO and listing of H shares of BOC in Hong Kong. Simon Black, the managing partner of the firm's Shanghai office says: "There are two features that encourage them [Chinese banks] to go overseas. Firstly, the regulator was encouraging the overseas listing to boarder their shareholder base, aiming to bring better management, particularly risk management and transparency into the banks."
"Secondly, even the major Chinese banks are still on the capitalised, and tapping the international markets is a way of dressing that. After the Hong Kong listing, BOC rapidly went to Shanghai and did a domestic listing. The duel listing both in and outside China is a formula expected to continue."
As Black expected, the Industrial and Commercial Bank of China (ICBC), China's biggest lender, has been approved to raise $14 billion in a mega-IPO in Hong Kong and Shanghai at the same time in October. Both offerings will surely place 2006 in the record books.
Listing overseas and attracting foreign strategic investors have definitely enhanced Chinese banks financial competitiveness. But more importantly, alliances with foreign partners can provide banking management expertise, risk control system, transparency and advanced strategy to the underdeveloped Chinese banks.
For foreign investors, by acquiring stakes in China's domestic banks, they can benefit from the soaring value of the shares after the banks' mega-IPOs. They also can take advantage of the wide network of branches their local partners have built up in the last decade, giving them quick and easy penetration into the Chinese market.
The remaining banks are still seeking for foreign strategic investors, and the regulators are considering raising foreign ownership limits for domestic banks. Once the Newbridge - Shenzhen Development Bank experiment succeeds, foreigners might be allowed to take management control of other small and medium-sized banks.
Given the ambitious of the big four banks and foreign investors' eagerness to exploit the 2006 WTO liberalisation, foreign investment in the Chinese banking sector over the next one to two years looks set to dwarf even the past twelve month's record-setting levels. As legal service demand from Chinese and foreign banks will surge significantly, law firms' business in banking industry will also grow in line.
GROWING A LEGAL PRACTICE IN CHINA
WongPartnership shares some insights on the firm's leading role in China's legal market
The burgeoning China market and frantic pace of business activity in recent years has been good news for law firms. Deals are negotiated and closed daily, the vast majority of them typically involving cross-border elements and increasingly complex structures.
Law firms provide legal support and play a useful role in acting as a bridge between clients and their Chinese business partners and advisers. For WongPartnership, which has the largest China practice among law firms in Singapore, relationships and soft skills play a crucial role in the process.
"Clauses and mechanisms that are 'standard' for us foreigners may seem draconian and against the spirit of cooperation to the Chinese, so the challenge is to strike a balance so that both sides are comfortable executing the deal," says Gerry Gan, a partner in WongPartnership's China practice. "Based on our experience, it is productive to maintain an open mindset when negotiating with our Chinese counterparts, and this sometimes involves not trying to impose our way of doing transactions on them."
Gan, who is chief representative of WongPartnership's representative office in Shanghai,has been based there since the firm set up the office in 2004 to meet the demand for an on-ground presence. It has been active in China since the 1990s.
Today, the practice is supported by a team of 20 lawyers who are effectively bilingual and familiar with China and regional laws. Several of the team are China-qualified. The practice has acted as counsel for the listings of local and foreign companies that have operations and interests in China, particularly in the areas of manufacturing and production, and real estate investment and development. It is active in cross-border corporate and M&A transactions, as well as dispute resolution matters.
An able team of litigation lawyers led by partners Christopher Chuah and Chan Hock Keng support the effort to provide comprehensive and seamless legal support to clients on their China investments. The dispute resolution practice has advised and acted for numerous clients in disputes arising out of projects or transactions in China.
More recently, foreign investment interests have spread from traditional big cities like Beijing and Shanghai to second-tier cities like Chengdu, Dalian and Hangzhou. The regulatory regime in China is evolving as authorities finetune policies, laws and regulations to strike a balance between opening the China market and allowing the economy to grow at a sustainable pace. "Chinese enterprises are also looking beyond China for investment and fund-raising opportunities," observes Joseph He Jun, the China-qualified co-head of WongPartnership's China practice.
Law firms have been kept busy advising foreign clients on the relevant regulatory regime applicable to their transactions and the business climate in their particular sector. They also have to work closely with clients' business partners and advisers to explain why some things need to be in place, be they information and documents needed for due diligence purposes, or certain clauses or provisions in the transaction documents.
Over the years, WongPartnership has gained extensive experience in conducting due diligence on China companies and foreign investment enterprises. "Growing in China requires patience and the need to learn the market from effective and trusted business partners," says Rachel Eng, co-head of WongPartnership's China practice. "We look forward to fulfilling that role for our clients."