25 November 2021
Obstacles and optimism: An offshore look at Chinese outbound investment
Will China continue to lead the way in reopening global investment pipelines following the impact of the pandemic? Here, Anthony McKenzie, managing partner of Carey Olsen Singapore considers the outlook and challenges for Chinese outbound investment and the role offshore has to play.
What is your outlook for Chinese businesses and investment as we approach the end of 2021?
China is, and will continue to be, the strongest market for offshore law firms in Asia.
China's outbound investment activity has been subdued since 2016, due to domestic constraints on outbound capital flows and tighter scrutiny of Chinese investments abroad. The COVID-19 pandemic and lingering trade and geopolitical tensions have accentuated the fall in outbound activity and remain hurdles to Chinese firms' global investment activities, particularly in the US, Europe and Australia. Despite this, and despite M&A continuing to have a domestic theme in China as a result of Beijing's Dual Circulation and Industrial Upgrade programs and SOE reforms, we expect overall levels of outbound China investment via offshore jurisdictions in 2021/22 to increase slightly from 2020 levels, particularly into the Asia-Pacific.
Offshore jurisdictions are tried and tested, familiar to market practitioners in China and provide a robust, flexible and clear legal framework to structure such Chinese outbound investments into the global economy. We are also seeing a significant increase in enquiries and instructions from Chinese clients in relation to distressed assets, structures and businesses. As a result we continue to invest in our Singapore and wider Asian restructuring and insolvency practice as Chinese and other Asian businesses deal with the aftermath of the pandemic.
What are the practice areas and sectors you see attracting the most interest from Chinese companies?
China continues to be the source of significant offshore deal flows, ranging from Chinese fund managers launching offshore funds, to joint ventures, IPOs of Chinese businesses using offshore listing vehicles, preference share financings and large global M&A transactions. Cayman and BVI structures in particular continue to have a central role in these deal flows, having already become embedded in Chinese structures since the late 1980s, and Chinese investors remain responsive to innovative products introduced by these offshore jurisdictions.
Carey Olsen advises on the laws of the three most popular jurisdictions for China's outbound investments after Hong Kong SAR– BVI, Cayman Islands and Bermuda. The laws of these three jurisdictions have evolved to cater to the needs of Chinese clients and international players. Carey Olsen is able to provide a true “one-stop” service to such Chinese clients from nine offices globally, including Singapore and Hong Kong. We are the only offshore firm in Asia with a dedicated 'Channel Islands Desk' (practising Jersey and Guernsey law) which is based in our Singapore office.
What are the major challenges faced by Chinese companies in terms of regulations, approvals, dispute resolution, etc.?
The pandemic and geopolitical tensions have created unprecedented circumstances for business operations globally, including the offshore jurisdictions through which Chinese businesses invest.
The local Chinese regulatory landscape is also a key factor that will impact Chinese outbound investment patterns. A proposed outbound investment by a Chinese investor in overseas assets (or a proposed IPO of a Chinese business on a foreign exchange) remains subject to various approval, filing and reporting requirements with Chinese authorities. Foreign exchange control policy and availability will impact capital inflow and outflow and continue to affect the ability of Chinese investors to bid for overseas assets.
Are there any recent regulatory developments that has or will impact Chinese investors?
On the leading US and Asian exchanges, Cayman, BVI and Bermuda remain the favoured jurisdictions for China-based sponsors looking to raise capital by way of an IPO. US exchanges in particular have long been popular listing venues for Chinese businesses attracted by high valuations, prestige and deep liquidity. In April this year the US SEC implemented rules to exclude foreign companies from US exchanges if they did not comply with certain US auditing standards. This resulted in a tapering off of the SPAC IPO frenzy witnessed throughout 2020 and the first quarter of 2021. More recently, Chinese regulators have announced policies aimed at tightening control of cross-border data flows and the ability of Chinese businesses to list overseas. As a result, we expect overall uncertainty on IPOs of Chinese businesses on US exchanges to linger in the short term until there is clarification on certain policies and regulations.
As US exchanges become less welcoming to Chinese businesses, China continues to carry out domestic reforms to encourage listings of Chinese businesses in China, including on Shanghai's newly launched SSE STAR Market. We are currently working on a number of listings of Cayman-incorporated Chinese businesses on the new STAR Market and we are seeing Chinese tech clients viewing the STAR Market as an alternative to a US or Hong Kong listing.
5. What have been some of the challenges you have faced in working with Chinese law firms and/or clients and how did you solve them?
The pandemic has exposed inefficiencies in law firms' traditional ways of working. As a result, the legal services industry as a whole is undergoing significant adaptation – remote working, alongside fewer opportunities to interact face-to-face, has led to significant changes in the way organisations conduct their business, and law firms (both offshore and Chinese law firms alike) need to be aware of clients changing expectations in order to integrate them going forward.
Law firms with strong knowledge of their clients' businesses will be better placed to weather the pandemic and react quickly. Our emphasis has been solidifying one-on-one relationships with our key Chinese clients (and their law firms) in order to better understand their businesses and strategic needs. We employ PRC qualified lawyers in our Singapore and Hong Kong offices to interface with our Chinese clients and their service providers.
In terms of specific business challenges, Chinese clients and their domestic and offshore service providers alike must increasingly stay on top of local Chinese regulations and tax legislation. China, contrary to the common law systems of most offshore jurisdictions, is a rules-based system. This can lead to some inconsistencies and difficulties, particularly in connection with corporate governance structures. However, the offshore industry will continue to evolve and adapt to deal with new Chinese regulations and requirements as they emerge.