What to expect in Q1 2018, One Belt One Road (in Chinese: 一带一路) Creates Opportunities for Business and Legal Professionals in China and Abroad.
As a senior fellow at the Chinese Academy of Social Sciences “CASS”(中国社会科学院) and legal affairs commentator on China Global Television Network (CGTN) (中国中央电视台), I assisted in media coverage of the 19th National Congress of the Communist Party of China (十九大) held at the Great Hall of the People in Beijing between 18 and 24 October 2017, where 2,280 delegates represented the Party’s estimated 89 million members. My “takeaway” in an attempt to “read between the lines” as to an impact on business coming out of the National Congress is that a rebound in Chinese companies’ overseas mergers and acquisitions is on the horizon. This is come about due to the Party’s unmitigated promotion and reliance upon the Rule of Law within the Party, the continued commitment of the “zero tolerance” as to official corruption, and the continued implementation of the One Belt and Road “OBOR” initiative.
While, cross-border M&As by Chinese companies had slowed during the first half of this year due to regulatory tightening, we are quite confident that despite the short-term financial constraints on doing deals, the underlying drivers for doing deals and business opportunities are real, and collectively businesses and professional services firms such as Lehman, Lee & Xu 雷曼律师是我所 are already starting to see a pickup in M&A activity.
CASS which is described by Foreign Policy magazine as the top think tank in Asia （it is affiliated with China’s State Council）analyzed trends across sectors and markets and predicted that global M&As will rise to $3 trillion in 2018, up from an estimated $2.6 trillion this year. What this means is increased work for professional services firms and increased win-win M&A’s for Chinese and foreign businesses.
That rise will likely come from an expected rebound in overseas M&As by companies from the Chinese mainland and lead by teams primarily in Beijing, Shanghai, Shenzhen and Guangzhou, not as much in Hong Kong SAR where some have reported the outbound legal and professional services sector is actually contracting.
In August, Beijing tightened norms for Chinese outbound direct investment or ODI, following a rapid decline in foreign exchange reserves last year. The government restricted mainland Chinese companies’ ODI in certain sectors, including real estate, hotels, entertainment and sports clubs.
Projects that do not meet the host country’s standards for environmental protection, energy consumption and safety were also included in the list of restricted outbound investment.
Such policies were a foundational correction toward good business practices for newly emerging “red-hot” China based MNC’s which had impacted the previous short term correction. The policy was designed to actually help Chinese companies to implement their outbound investment strategy on a sustainable and long-term basis.
Since 2015 the OBOR initiative has become a dominant driving force behind China’s outbound investment, soft influence and leadership in Asia, in some ways replicating, and certainly drawing comparisons to what the USA’s “Marshall Plan” had done in Europe after World War Two.
Proposed by President Xi Jinping, the OBOR Initiative aims to set up or strengthen economic connectivity among Asia, Europe, Africa and their adjacent seas through massive transport infrastructure and communication links, to boost business, trade, and economic partnerships.
Lehman, Lee & Xu, a Chinese law firm, has noted most Chinese companies are pro-actively developing OBOR projects－mostly infrastructure in the power sector and high-speed railways in some key countries and regions participating in the initiative. But, there is also a trend for these companies to gravitate towards purchase of intellectual property as well as developing their continuing status as a power in the region and throughout the world in both the private and public sectors.
China Ministry of Commerce data show new investments by Chinese companies in 47 economies related to the OBOR Initiative increased by 6 percentage points year-on-year to $6.61 billion in the first half of this year, while China’s non-financial ODI fell almost 46 percent to $48.19 billion.
We were pleased to see the announcement by Qian Keming, China’s Vice-Minister of Commerce, at a news conference in July: “Irrational outbound investment has been effectively curbed.” This has made the new M&A deals based more on longer term goals for betterment of Chinese MNC’s and the government initiatives under the OBOR.
It is our observation based upon experience, an increasing number of Chinese companies are paying closer attention to post-M&A operational risks, to mitigate legal risks and to protect their investments, this may seem obvious to the rest of the world, but this is a “Brave New World” for Chinese MNC’s some of whom are not used to adhering to foreign legal systems.