As an eventful 2017 draws to a close, offshore law firms discuss some of the key business trends in Asia this year, and what the year 2018 holds.
From a rebounding economy in Malaysia and local elections in Cambodia to political unrest in North and South Korea and demonitization in India, it’s been quite a ride for the region as yet another eventful year draws close to an end.
We look at how the year has panned out through the lens of offshore law firms and whether they think 2018, the Year of the Dog in the lunar calendar, will go to the dogs or be quite fetching.
After a somewhat sluggish 2016, things seemed to have picked up this year.
The International Monetary Fund's (IMF) economic outlook for Asia and the Pacific estimates growth for the region to increase this year to 5.5 percent, compared to 5.3 percent in 2016. The economic health of key markets in the region seem to be supporting this increase.
The head of the China Desk of the economics department at the Organization for Economic Cooperation and Development (OECD) recently noted that the economic performance of China during the first half of this year was “beyond expectations” and estimates that the second half will likely benefit from the carry-over effects once all is said and done.
Elsewhere in the region, the economic growth across the 10 members of the Association of Southeast Asian Nations (ASEAN) looks to be healthy after the second quarter of 2017 recorded the best GDP performance since the third quarter of 2013. Economic analysis company FocusEconomics expected regional GDP to grow 4.9 percent in Q3, keeping up with the trend shown in Q2’s 5 percent growth.
The steady momentum is backed by external demand that is supporting increased export flows from the ASEAN region. Recent trade data for Q3 from major economies have been looking optimistic: export growth raced up in Malaysia and the Philippines this July, and Indonesia’s trade balance returned to a surplus showing in August.
For offshore firms, healthy economic performances translates to booming business.
Collas Crill, for example, is reporting that “2017 has been one of the busiest years yet for our Singapore office since we opened in 2011.” The firm recently set up a new representative office in Hong Kong.
Meanwhile, Ogier, which has celebrated a decade in Hong Kong this year, also reports a bustling time. The firm says that its finance and corporate teams are “having a very busy second half of 2017” with work expected to flow steady into the new year.
“Through the third quarter of 2017, demand for offshore legal counsel in Asia remained strong for capital markets work,” says Christopher Bickley, partner and head of Conyers Dill & Pearman’s Hong Kong Office.
However, Bickley notes that M&A has not been quite as active.
“Growth in Asian M&A activity remains slow, with both deal volume and value declining. The first six months of 2017 saw 68 equity acquisitions among Stock Exchange of Hong Kong listed companies, with an aggregate deal value of HK$45.72 billion [$5.858 billion]. Active industry sectors included construction and engineering, consumer services and technology,” he says.
“The same is true globally, where strategic M&A transactions have decreased. This is not surprising given geo-political uncertainties. However, consortium bids led by private equity have offset some of this decline,” Bickley continues.
Anthony McKenzie, a partner at Carey Olsen’s Singapore office, shares a similar view. “During the first half of this year, there has been wider decrease across Asia. Inbound activity in the Asia Pacific region made up most of the deal and volume,” he says.
But McKenzie says that M&A value and volume in Southeast Asia is higher than it was last year. He expects the growth trend to continue.
“Generally, a lot of purchases have been happening in ASEAN countries, particularly Singapore, Indonesia and Malaysia. Fintech and renewable energy have been and will continue to be key sectors for corporate M&A in the ASEAN region,” he says.
But McKenzie observes that offshore insolvency and restructuring has “been a bit flat” this year. He believes this is due to the fact that Hong Kong and Chinese banks and bondholders have been reluctant to take enforcement on insolvency proceedings.
The IMF expects the growth rate for Asia to remain strong at 5.4 percent in 2018, as the region continues to be the leader of global growth.
“While there is a wave of protectionism and nationalism sweeping the globe at present, the opportunities offered by developed and developing markets in South Asia and Pacific are encouraging. In particular, what we see at present would suggest that Malaysia and Thailand will lead the way on a relative basis,” says Simon Fraser, the Hong Kong representative for Collas Crill.
Recent developments in the two countries seem to support Fraser’s view.
The outlook for Malaysia’s economy has been optimistic after GDP growth notably overshot expectations in the second quarter. Robust private consumption and an improved external sector boosted activity in the country. The buzz of activity is supported by an appreciation of the ringgit. The currency surged to a near 10-month high last month, after suffering a slump in recent years.
In neighboring Thailand, the military government is looking to kickstart a 1.5 trillion baht ($45 billion) investment plan before the country’s possible return to democracy late next year. Laws supporting the Eastern Economic Corridor initiative and construction of infrastructure projects vital to it could be in place by the end of the year.
“However, Myanmar will be a laggard, based on recent events. And any further escalation in tensions on the Korean peninsula could lead to a flight to safety from the region generally which would weaken near term expectations,” Fraser cautions.
McKenzie has his eye on another ASEAN country – Indonesia – which he says has seen a real resurgence since it received an upgrade by a ratings agency earlier this year. He also says the Australian Securities Exchange has attracted the attention of his Asian clients, who have listed Cayman corporations on the exchange.
For China, Bickley believes growth will remain largely similar to this year.
“The OECD predicts China’s GDP growth rate to decline further to 6.39 percent in 2018, whereas the IMF has predicted a rate of 6.5 percent. This is, however, stronger than the growth rate of 6.0 percent in 2016. We expect 2018 to be similar to this year,” said Bicklett.
In Hong Kong, Bickley says that as long as the Hang Seng Index continues to maintain its current levels, he expect the Hong Kong markets to remain strong for IPOs and capital markets work. He is not alone in his assessment.
“In the strategic markets that we are most closely focused on – which is to say Hong Kong, Shanghai and Tokyo – we see no reason for anything other than positivity and confidence, particularly in asset management work, and in the continued success of our dispute resolution and restructuring & insolvency practice,” said Nicholas Plowman, a partner at Ogier in Hong Kong.
“I think the offshore law firms will continue to evolve and grow in Hong Kong, however they will need to remain focused on the increasingly rapid pace of change in regulation and how that impacts their businesses. With the likes of Base Erosion and Profit Shifting (BEPS), Alternative Investment Fund Managers Directive (AIFMD), Foreign Account Tax Compliace Act (FATCA) and the Common Reporting Standard (CRS), the offshore jurisdictions will need to work closely with their onshore counterparts now more than ever to ensure the industry remains compliant and above reproach,” Plowman says.
Plowman also says that Asia's asset management space continues to grow at a phenomenal pace and he expects that to continue, particularly out of China and Japan. He cites public and private M&A and general capital markets work as presenting enormous growth potential.
“We have seen really positive growth in demand for our dispute resolution services, which cover British Virgin Islands (BVI) and Cayman law delivered by some of the most experienced practitioners in the region. The primary drivers for growth in the offshore dispute resolution space in Asia are the disputes in several key areas, namely contentious private client work via offshore trust structures, shareholder disputes arising out of both publically listed and privately owned offshore vehicles and contentious restructuring and insolvency work involving offshore structures. I expect China will continue to drive this work as one of the key markets for the offshore law firms in Asia in the year ahead,” Plowman adds.
THE (BELT AND) ROAD AHEAD
China’s Belt and Road initiative has created considerable buzz and excitement since its inception in late 2013.
“The initiative is designed to connect 68 countries in Asia, Europe and Africa through an infrastructure building plan funded by China.The Belt and Road Initiative is an interesting and ambitious undertaking. At a time when populism and anti-globalism seems to be spreading across the globe, the Belt and Road is an initiative in stark contrast,” explains Stephen Adams, managing partner of Collas Crill’s Singapore office.
As work begins on the first wave of infrastructure projects, observers are keeping a close eye on each move.
“Despite the significant funding commitment from China and the development of the Asia Infrastructure Investment Bank and the Silk Road Fund, among others, it is generally thought that there is a substantial gap between the funding committed and the funding that is required to build out the infrastructure in Asia over the next decade or two. The ability to encourage the investment of private funds alongside the funds on offer by China will be critical to the success of the overall plan,” says Adams.
McKenzie believes that the full investment potential will unfurl as the initiative progresses. He states that because the scale and ambition of this initiative is unprecedented, observers will need to understand where they stand in the bigger picture of it to fully tap into the potential for them.
“Though the Belt and Road isn’t opening up mainstream investment opportunities just right now, most people are believers in it because it makes sense. A lot of our clients are making sure they are part of the dialogue,” he says.
Bickley says the initiative will continue to impact economies worldwide, mostly in Asia, Africa and Europe.
“Significant construction projects are underway, driving demand for infrastructure investment. Offshore Financial Centre (OFC) vehicles have been at the core of the development and financing of Asian infrastructure projects and cross-border deals for over 30 years, which we expect will continue as this initiative progresses,” notes Bickley.
“The timing of the initiative is particularly significant – as China's economy is slowing and when restrictions on capital flows exiting the PRC have actually slowed the pace of outbound investment. We have seen this latter dynamic cause some difficulty for investors subject to capital calls in existing joint venture and equity structures. The Belt and Road initiative signals that the PRC government wants its businesses to make quality outbound investments, particularly in the infrastructure space,” says Plowman.
McKenzie believes Belt and Road driven investments could balance out the restricted capital flow from China.
As the investments will take place in countries along the Belt and Road that have different languages, cultures and legal systems in various levels of development, Adams also believes OFCs have an important role to serve.
“OFCs have traditionally been used in cross border investments as the conduit through which an investment is structured. Most OFCs offer tax neutrality, flexibility, stability and legal certainty that many times is not available in the country where the investment is made,” he says.
Adams notes that the ability to structure a foreign investment through an OFC offers investors the certainty they require which may not otherwise be available through a direct investment. From an investee country’s perspective, the use of an OFC enables it to have access to a pool of highly qualified and experienced professionals that may not be available locally.
“History shows that OFCs generally, in particular the BVI, have played this conduit role in the case of foreign direct investment over many years, particularly in Asia. However, it is a supporting role. Whether this private capital is mobilised in Hong Kong, London or Singapore, the OFCs have always acted in a complementary fashion with those jurisdictions and we would expect that investments made along the Belt and Road route to be structured similarly through an OFC,” Adams adds.
Plowman also believes that OFC vehicles offer flexibility for debt and equity financing, whether as investment funds, capital market offerings or bond issues. He predicts it will be popular with infrastructure clients looking to independently raise funds for Belt and Road related development, particularly in Western China.
“The traditional favourites of the PRC market (Cayman and BVI) will continue to be used – BVI entities as holding companies and Cayman entities as investment funds, both private equity and hedge. These jurisdictions have shown over time that they have the qualities to support international investment activities – including high level accounting and legal professionals and reliable and trusted courts. However, the offshore centres used in particular investments will depend on the location of the project and the tax treatment being sought.”
Overall, McKenzie thinks that the region will see slow yet steady growth in 2018.
“It will be neither boom or bust for the region but likely a pattern of steady growth as the Belt and Road projects make progress. A rebound in ASEAN economies will help maintain the region’s performance until we see more practical implementations of the visions in the initiative,” he says.
“Certainly there are geo-political tensions in the region and an expected slow down in China will mute growth and expansion,” Fraser adds. “But when compared with other regions of the globe, we feel Asia will be a relative outperformer.”