China's growth plan

By Robert Sawhney, Managing Director, SRC Associates

The Chinese government is getting serious about stimulating internal consumption. Its latest initiatives will have a significant impact on international law firms’ strategies.

China’s new five-year plan focuses on igniting internal consumption and developing second- and third-tier cities.

Foreign law firms will have to be more cognisant of FDI flows into and out of China, as well inter- and intra-regional investment. Smaller firms have traditionally relied on links with PRC firms in Shanghai and Beijing (or set up their own offices), but they will now have to examine those existing capabilities in light of investment moving from the east to the central and western parts of China.

Many law firms (such as the US-based Chang & Coté) are already taking an interest in second-tier cities such as Chengdu, Tianjin and Xiamen.

Foreign law firms will increasingly need a host of regional capabilities to advise on greenfield investments or M&A work. This is particularly relevant as mid-sized Chinese companies (which could be future powerhouses) from the less fashionable regions invest overseas.

Investment in infrastructure

China’s government recently said that it will spend US$1tn on infrastructure projects, including road and rail, presumably to stimulate the economies of central and western areas and spur the domestic consumption which the country so desperately craves.

FDI trends over 2000 to 2008 show a doubling (in percentage terms) of investment into the central and western areas, with a significant drop in the traditional hotbed of investment locations of the east. Aside from FDI, there is also growing intra-regional investment as both MNCs and local Chinese firms look at second-tier PRC cities as areas of real growth potential.

Activity in alternative energy

The Chinese government seems very concerned (at least openly) with alternative energy sources such as hydro, solar and wind power. A few firms such as Eversheds, Fulbright & Jaworski, Orrick, Herbert Smith and Mayer Brown JSM have done notable work in this area.

Some smaller law firms have been keen to tap this area for a while, although unwilling to open a China office. For example, Manatt, Phelps & Phillips hired a lawyer with decades of experience (Rongjie Ma) in China to scout potential work in the country in 2008, from a base in the US.

China’s largest wind power company, Longyuan Power Group, is planning to invest US$8bn in clean energy over the next five years, according to Bloomberg, with some of that money looking at US and EU markets.

Interest in biotechnology

Biotechnology is another sector receiving growing interest, not only in China but regionally (particularly Singapore).

The recent alliance of UK law firm Taylor Vinters and the Singapore-based Keystone Law Corporation is an interesting development. The two relatively small firms have linked up to tap the growing biotech investments across Asia and China, where Keystone has solid relationships.

Challenging opportunities

To attract more FDI, China recently revamped its regulations to improve conditions for foreign companies, while restricting funding for environmentally unsound projects.

Under the new rules, FDI in high-tech industries, service sectors, energy-efficient and environmental protection projects is encouraged, especially in the central and western regions. Qualified foreign-funded companies will also be allowed to go public, issue corporate bonds or medium-term bills in China.

These regulations follow confirmation that FDI inflows to China rose to US$23.44bn in the first quarter of 2010, bucking the downturn of the past eight months.

The increased investment between Chinese cities now means that domestic law firms have a significant advantage in location, since foreign firms can only set up in a limited number of locations and must wait three years between opening offices, subject to passing this probationary period.

Domestic firms are also challenging international firms for large-scale FDI work, whilst boutique firms within the country are beginning to challenge the larger local firms in certain practices such as IP.

Hong Kong may have an increasingly important role to play in the mainland if the request by the Hong Kong Law Society to allow local law firms to hire PRC lawyers in Guangdong province is accepted.