The People's Bank of China's decision in June to proceed  further with the reform of the RMB exchange rate regime and to increase the exchange rate flexibility has been welcomed by the global markets, and country leaders such as US President Barack Obama. To the world, a more flexible RMB exchange rate is a constructive step that can help safeguard the economic recovery and contribute to the rebalancing of the global economy. Within the country, however, the new mechanism has led to some debate over its effect on the domestic economy and certain industries such as export and manufacturing.

Greater currency flexibility will also correspondingly affect the legal services sector. But most market participants anticipate positive changes and have responded enthusiastically to the new arrangements. "Though the appreciation of the RMB is not expected to cause a profound short-term impact, it does represent a significant step towards China's export economy turning inward," said John Huang, the managing partner of Shanghai-based MWE China. "In the long run, I also believe that with the revaluation process, RMB will move a step closer to becoming a preferred settlement currency in Asia."

A gradual rise
Unlike the large scale, one-off RMB appreciation in July 2005, the majority of the legal fraternity - echoing bankers and economists - expect the currency to appreciate gradually in coming years. The market is widely foreseeing a 2-3% rise in RMB value against the US dollar over the next 12 months, and a further 5-7% in 2011.

If the rate rises do come gradually their impact on the legal services market will be subtle and continual. "There isn't a big correlation between the amount of legal work and the exchange rate. But wild fluctuations in the exchange rate definitely would be no good to any industries, as it introduces too much uncertainty in the economy," said Alan Wang, a partner with Freshfields in Shanghai.  "With the anticipation of the exchange rate going up in a gradual fashion and people planning their transactions based on that expectation, we may see slightly less inbound investment in the manufacturing sector, but that should be offset by more transactional work in terms of outbound investment by Chinese companies," he added.

When the value of the RMB against the US dollar goes up, doing business and making investments in China will be more expensive. However, in no way does this suggest the total amount of foreign investment will decrease. "In the short term, we may see 'hot money' trying to enter China to capitalise on currency appreciation. But ultimately people come to China to take advantage of the vast domestic market" said Wang. "With RMB becoming stronger, the transition to a more consumption-driven economy will be hastened. Consequently, China could be a more profitable market [when measured in US or Euro terms] for a lot of foreign investors and companies."

On the outbound side a stronger RMB will boost China's purchasing power and should have a positive impact on the overseas M&A activity of domestic companies. "No company would make acquisition decisions based on price alone. So for companies that have no intention to expand or invest overseas, the influence of a higher exchange rate is negligible," said Wan Li, a partner of DLA Piper in Shanghai. "But for companies that are venturing out and making acquisitions in other countries, the RMB appreciation is likely to encourage them to shop more aggressively. The price of foreign target companies, assets or commodities will become relatively less expensive."

Wan has extensive experience representing Chinese companies - many of whom are state-owned enterprises - in overseas M&A transactions, particularly in the natural resources and energy sectors. He sees the government's approach to allow greater flexibility of the RMB exchange rate offering long-term benefits for his Chinese clients, and his firm's outbound investment practice.  

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