Outbound investment vs. inbound investment: lessons for advisers

9 March 2010 – 9:13 pm

I attended a lunch today, around the theme of Chinese investment into the UK. 

It was graciously organised by Douglas Clark, director at RSM Tenon.  RSM Tenon bills itself as “one of the most progressive and entrepreneurial professional services firms in the UK today”.  The lunch brought together a loose coalition of individuals interested in advising Chinese firms investing in the UK.  These individuals network on a semi-regular basis and Douglas has done a fine job of nurturing a sociable and interesting group.

A lot of the conversation at the lunch centred around how to capture the China “outbound investment” market.   

NB: for me, viz-a-viz China, “outbound investment” means Chinese investing in foreign countries and “inbound investment” means foreigners investing into China. 

The China outbound investment market for the UK is definitely attractive.  At the lunch, the figures quoted by Courtney Fingar, the editor of fdi magazine, an offshoot of the FT Group, were promising (a 900% increase in 2007, a blip in 2008 and upwards since then).  Ms Fingar also took us through some noteworthy statisics on Chinese investment in the UK, suggesting that technology-intensive industries are a particular target of Chinese investors (consistent with their apparent desire for acquiring cutting-edge IP rights). 

All that said, the China outbound investment market is a reasonably tricky one to tap right now for advisers based in the UK.  

My experience is that, at the top end, Chinese firms will appoint premier global advisers such as Goldman Sachs, Deutsche Bank, KPMG, PricewaterhouseCoopers and UK “Magic Circle” or US “White Shoe” law firms.  Not unlike any other top-end corporation in any other part of the world.  But, in the smaller to medium-end, they will go with people with whom they have direct connections, relying on “word of mouth” referrals.  Many times, those connections will be Chinese  nationals who have moved to the UK.

I don’t see that this differs much from the approach that foreign investors adopted when investing into China initially.  So, let’s look back on the history of that over the last few years.  At first, there was a reluctance for such “foreigners” to deal directly with local Chinese advisors, because the cultural gap was perceived as too big.  Also, and I will say this based on what I heard at the time, the perception was that there was not sufficient knowledge within Chinese advisory firms as to what foreign companies wanted or needed. 

Time passed however, and things changed dramatically.  Many foreign investors hired local Chinese advisors with more than satisfactory results.  In fact, some comments I have heard are to the effect that, since these are the guys who know China, why not hire them directly and save costs without hiring a foreign intermediary?

Admittedly, I have an interest in maintaining the appeal of foreign advisors continuing to advise foreign investors into China. I am one. 

But I don’t fool myself that we can continue to do so without offering something that a local Chinese firm can’t.  I describe my services as being a chain in a link, someone who understands China from the perspective of a foreigner and has years of experience and empathy dealing with foreign investors into China.  Some clients feel they would like – and indeed need – that link.  But I assume not all feel the same way.    

So from the perspective of trying to appeal to Chinese investors into the UK, well, prospective advisers could perhaps put themselves in their shoes, with the understanding gained from the years of advising on inbound investment into China.  Many Chinese investors initially would like to deal with familiar faces and be able to conduct meetings in their own language, so they seek out Chinese nationals who have experience setting up investments in China.  Yet in time, Chinese investors will discern names they can trust who are not necessarily Chinese and as they grow in sophistication towards another culture. 

If you want to draw comparisons between both types of investments (inbound vs. outbound), the major shift towards using purely “foreign” advisors on “foreign” deals may be some time away for Chinese firms.  However now is a good idea to start capitalising on it and positioning for it, in much the same way that Chinese advisers did so with regards to foreign investments into China.

Therefore, the main message I have to those seeking to UK advisers wishing to capitalise on the Chinese outbound investment market is :

  • secure someone Chinese to assist or spearhead marketing for you and make sure they stay on the deal team;
  • ensure you maintain someone local to do the necessary liaison with government etc;
  • to build the bridge in the meantime, until we evolve towards Chinese firms becoming familiar with UK advisers, liaise closely with Chinese nationals working in the UK (or your relevant jurisdiction) who can act as a link in the chain and provide you with referrals;
  • if you are not full-service, team up, just as Douglas Clark has done with his networking group of international advisers.

The bottom line is that we have seen it before, just going the other way.  We should not ignore the lessons that arose for foreign advisory businesses when it came to foreign inbound investment into China. 

And if we have learned anything, then all advisers should be modifying our China “inbound investment” businesses (being more specific about what we offer) whilst expanding our China “outbound investment” businesses.

By Geraldine Johns-Putra | Posted in Economy, Foreign Investment | Tagged , | Comments (0)

Ten things about doing deals in China that are different from the West – Part 2

7 March 2010 – 12:16 am

This is the second instalment of my observations on China M&A and how it can be very different from doing deals in the West.  In this instalment, I focus on the approvals process, which begins once the contracts are signed and submitted to the relevant authorities for approval.

6. Government approvals: The approval itself is one of the key things about Chinese deals that are different from the West.  It takes some getting used to.  Any entry you make into China as a foreign investor, and many other changes thereafter that you make to the structure, requires the substantive approval of the Chinese government.  This was one of the first issues that I had to appreciate about China and it never got easier.  In many other jurisdictions, you understand that regulatory approvals are necessary, such as anti-trust clearances, but in China, they are integral to the deal.  Actually, after just one deal in China, you don’t forget it.  It contributes significant delays and stress to the outcome of any deal in China.  Be warned.

7. Feasibility study reports: Very much a feature of the approval process, the feasibility study report has traditionally been viewed as a necessary evil, but not too problematic.  The aim of the document, as the name suggests, is to present a business case to the government authority responsible for approving the transaction.  It used to be the case that a feasibility study report was a document that was very much modelled on a precedent.  This is changing to some extent, especially as the policies of the Chinese government have also changed in the last 2-3 years and are favouring certain sectors and technologies (e.g. renewable energy) as well as homegrown innovation and developing export markets.  As a result of these changes to policy, a little more creativity is required in preparing FSRs to show how deals will satisfy these new policies.

8.  The government has a seat at the table:  This can be a little traumatic for some foreign clients to deal with.  Once you have completed negotiations with the Chinese counterparty, the government approving authority can request (or require, it depends on how you look at it) that particular changes be made to the contracts.  It can seem that, suddenly, the government is trying to renegotiate the deal that has already been agreed between the parties, after long months of bilateral negotiations.  At this point, it’s important not to panic.  So long as the parties have rational answers to the authority’s questions and you can present those responses, you should be OK.  There have been rare examples where approval was never received (like the Carlyle-Xugong deal).  In most cases, there will be some give and take, but you will be assisted if you have a Chinese counterparty and that counterparty gives you support.  Tthe person at the government end is just trying to do their job.  In my experience, they will accept reasonable answers to their queries.

9. Buffers: If you are establishing a wholly foreign owned enterprise in China, you will need to employ a State-appointed agency to liaise with the government  on your behalf, when it comes to securing approvals.  If you are negotiating a joint venture, your Chinese partner will be the liaising party.  As a foreign investor, it can be frustrating not to be able to deal with the authorities yourself.  As far as you can, you should ensure therefore that you have within your circle a Chinese national who will be able to visit with the authorities, along with the agency or the Chinese counterparty. That person should ideally get along with your Chinese agency or partner and they should be closely involved in the process.  Only then will you be able to understand and really help resolve what issues might surface within the approving authority.  So it is important to appreciate that, as a foreign investor, if you just go along with the process without trying to proactively contribute to it, buffers will exist between you and the government authorities.  (I apologise for using this expression but I just can’t help but think of the scene in Godfather II, where the goon informs the Senate hearing that the Corleone family had “a lot of  buffers” when it came to giving directions.  I’m not saying the Chinese government is like a Mafia family but the expression appealed to me.  I hope you get the picture.  What you need to do is reduce the buffers between you and the government so you get a clear appreciation of what is going on.)

10. Foreign exchange regulations: The foreign currency exchange angle can be neglected in the excitement of getting a deal signed and approved, but it is sometimes the last and trickiest obstacle to completing an investment.  The basic approach is that currency exchanges on current account (i.e. trade payment flows) don’t require approval from the State Administration for Foreign Exchange (SAFE) but  trades on capital account (i.e. investment payment flows) do.  SAFE approval is, generally speaking, therefore required for foreign investments.  It is best to try and sort out the requirements as early as possible.  You also need to be prepared for particular requests to come from the bureau you are dealing with.   SAFE requirements can differ from province to province and city to city in the actual paperwork required.  Don’t forget this.  If you get SAFE approval for the relevant currency transfer on your M&A deal, then, and only then, has the fat lady sung.

If you have some different things you have come across that I haven’t added, let me know.  This is a subjective list, so I make no claims to having covered everything important.  Besides, I love hearing from others with experiences to share.

By Geraldine Johns-Putra | Posted in Foreign Investment, Legal | Tagged , | Comments (0)

Ten things about doing deals in China that are different from the West – Part 1

3 March 2010 – 9:14 pm

I’ve been looking back at the deals I’ve assisted with over the years in Australia, the UK and of course China, and collected some observations on the things I have found about doing an M&A deal in China that are very different  from others. 

Some don’t seem so different anymore but really struck me at the time as being bizarre.   And some do stand out as having universal merit, while others are annoyances peculiar to China. 

Here’s my list, in order of where I think they appear in the negotiation process.  (I’m doing this in two parts by the way…)

  1. The Sino-foreign joint venture.  A foreign investor starts trying to structure a deal in China, and finds he or she will need the on-going assistance of a Chinese party, to provide materials, land, funds, guanxi, whatever.  The “Sino-foreign joint venture” rears its head right then, and it is such an old and well-worn model of foreign direct investment in China, that many people get stuck into the process of negotiating it, without even thinking about what they are getting into.  In many jurisdictions, it is not unusual to have a privately held company with more than one shareholder.  But the Sino-foreign joint venture is an unusual beast.  If you think about it and return to first principles, negotiating an arrangement with a fellow potential shareholder calls for a good, well-drafted shareholders’ agreement to govern the respective interests of the main parties.  With everybody being rational and acting like grown-ups, there’s no reason why you shouldn’t get there.  But Sino-foreign JV contracts have an additional overlay of laws and regulations.  These should be familiar to those of you experienced in China (to name a couple: with board appointments, the chairman and the deputy chairman can’t be appointed by the same party and board distribution should be roughly in proportion to the respective equity holdings or investment).   The result is that the negotiation ends  up more adversarial than it should because it feels like two parties are trying to carve out their individual niches and protect their own turfs.  It can be easy to forget that the point of the exercise is to provide the basis for the ongoing management and governance (and success) of the jointly-held company.
  2. Rigid capital and profit distribution structures.  Along the way, a foreigner discovers that certain issues are pretty rigid in China, especially when it comes to the Sino-foreign joint venture model.  One of them is the capital structure and how much one can derive from the investment relative to one’s investment.   Indeed, one obstacle that private equity firms found investing in China is that the Sino-foreign Equity Joint Venture structure requires that profits be distributed in accordance with the proportion of equity holdings.  If you own 50% of the company, you get 50% of the profits.  Since the raison d’etre for PE is that firms seek a greater return than they would get on public listed companies, preferred stock is a mainstay of most models, i.e. giving the investor a priority to dividends.  PE firms have got around this to an extent by using the Cooperative Joint Venture (CJV) model, which permits one shareholder a greater share of the dividends relative to its interest.  But this CJV model was intended for different purposes.  Its initial aim was to allow foreign investors who had invested heavily into energy and resources projects the ability to recoup profits early.  Applying the model to PE is a bit like fitting a square peg into a round hole.  You can imagine that the legal drafting starts to get more complicated once you enter into the realms of different priorities in preferences with different rounds of financing and “converting”  back to “ordinary stock” etc.   Plus, every such amendment to the joint venture contract and articles of association requires government approval… 
  3. Reciprocity in negotiations.  I confess I used to find this one amusing.  I think it is less and less an issue, as Chinese counter-parties become more sophisticated and are less demanding of complete reciprocity in a contract.  Some years ago, however, it was not unusual that a Chinese counter-party, when asked to provide a certain undertaking, would insist on a reciprocal undertaking by the foreign investor to ensure “fairness”.  At times, the request didn’t make sense, e.g. when the foreign investor requested that the Chinese enterprise provide warranties regarding its assets because it was buying them from the Chinese.   Why should the buyer then provide a warranty on its assets??  Often, however, reciprocal undertakings are easy to give away, since they have no real meaning anyway.  (And from a philosophical viewpoint, in a negotiation, should you really be asking for something you would not give anyway?) 
  4. Demands based on fear  of the other.  I put into this category demands about governing law and the dispute resolution forum.  Many foreign clients I have known had a fear of submitting to Chinese law and agreeing to dispute resolution in China.  Many Chinese parties seemed to feel exactly the same way about foreign laws and foreign arbitration and courts.  There is more to this than I can go into here, but essentially agreeing to arbitration or even the jurisdiction of a court in China is not such a bad idea, since (i) arbitration at the China-based China International Economic Trade and Arbitration Commission (CIETAC) is easier to enforce than a foreign arbitration award which can be simply ineffectual in China (just ask Danone) and (ii) foreign court judgments mean nothing if the Chinese party does not have assets in that jurisdiction.  Governing language clauses also fall into this category.  If a foreign investor is willing to submit to the jurisdiction of a Chinese court, then it follows that the Chinese language version should govern, since the court will not read anything else.  For many years, I used to automatically provide for both English and Chinese language versions to prevail, but I am no longer convinced this is workable.  You can find much more on this issue over at the China Law Blog, and I am indebted to them for making such good sense about these issues so many times that it convinced me they were right. 
  5. Agreeing to agree.  Another personal favourite of mine, like the reciprocity requirement, chiefly because this had some lessons for me.  Many China-related contracts I’ve drafted contain a clause that there are outstanding issues that the parties haven’t yet entirely resolved and would agree on in time.  Often, the clause — or at least the princple — is handy when there is just some little detail the parties can’t quite agree on but feel like they’ve had enough and need to move on and sign the thing.  In the English system of law, clauses that don’t pin down an obligation on a party are called “agreements to agree”, and they are generally seen as worthless.  Yet, I have drafted many contracts with “agreeing to agree” clauses like that, that never needed to be readdressed.  The main thing is the deal got done and everyone moved on.  Plus, I’ve drafted “amendment agreements” so many times, that I know that even if parties have agreed something, they can change their minds or need to clarify things after the  fact.  It is just human nature.  So maybe the Chinese are onto something when they recognise it upfront and don’t try and dot every “i” and cross every “t”.

So, now our foreign investor has encountered and dealt with these little issues, he or she has signed the contract and thinks they’re home free. 

 Next post: getting into the approval process, and the things that are really different there…

By Geraldine Johns-Putra | Posted in Foreign Investment, Legal | Tagged , | Comments (2)

Chinese Yuan to move soon?

26 February 2010 – 10:01 pm

I don’t normally post tracks to another post with very little commentary.  But in this case I will.   There is something going on here and all I will say is that if I were a to put a wager on it, the Chinese Yuan will revalue soon.

By Geraldine Johns-Putra | Posted in Uncategorized | Comments (5)

Shanghai is not Dubai

25 February 2010 – 11:25 pm

I had a brief and interesting chat with a couple of folks tonight at the London Business School.  

LBS is a superb place for having discussions with people who have enthusiastic and provocative ideas, not to mention the seemingly boundless energy to execute them. 

Anyway, midway through our conversation, a new acquaintance asked me: “Are there still opportunities for people  like me in China?”  What he meant was, could he, with more than 10 years of expertise in his field, with an Executive MBA from a well-recognised business school, but without previous China experience, still make it in one of the most solid emerging markets left around?   

I won’t bore you with my actual answer but the thrust of my response was assuring – after all, why shouldn’t someone with more than a decade of sound experience, know-how and ability do well in a growing market like China?  

But I had to wonder if he had listened to James Chanos recently and the accompanying “China is a bubble” stories.  

It seems that people are contining to take sides and  a few more commentators are challenging Chanos’s “Dubai times a thousand” rhetoric. 

If you boil it down though, the conventional wisdom seems relatively united on the outcome, from both the Chanos and anti-Chanos sides.  There is general agreement that, while there is clearly a property bubble appearing on the horizon, it will not tear at the fabric of the Chinese economy.  

I have argued before, that I see this as the likely outcome.  A bubble is coming but it will not derail the Chinese economy, because the engines of growth right now in China are neither real estate nor the stock market. 

And, actually, though I perhaps haven’t said this in my previous posts , I think that the drivers of growth are government spending in large infrastructural projects and continuing high export demand (yes, notwithstanding some of the desultory 2009 figures that came through, China’s exports do continue to surge). 

I will go further now to say that I believe there is enough time yet for government spending to be balanced by consumer spending, and that China’s competitive advantage in exports has not even fully begun to be realised.   

This is why I don’t see China as about to implode.

And why I do still believe that individuals with no prior knowledge of China but with acumen and drive (and above all experience) should find themselves able to do well there.

By Geraldine Johns-Putra | Posted in Economy | Tagged | Comments (7)

Neuromarketing, the Chinese approach and global brand expansion

19 February 2010 – 8:04 pm

A recent WSJ Asia story on neuromarketing (full article on subscription-only basis) had me thinking about Chinese advertising and how it differs from Western advertising, but how it needn’t necessarily be so.

The article describes how Campbell Soup discovered the new world of neuromarketing.  Neuromarketing is a relatively new field of advertising where researchers study physiological responses of consumers (e.g. heart rate, brain waves, changes in skin moisture) to various marketing stimuli.  They then tally the results to determine marketing direction. What Campbells paid a lot of money to realise is that they can get more from their advertising dollar if they appeal to the minds of their target consumer. So they took the soup spoons out of the photos on their cans (since they added nothing) and included more steam emanating from their soup. 

That’s being a little facetious. I’m sorry. I will concede that employing sophisticated biometrics means that we are no longer in Kansas, or the TV world of Sterling Cooper, when it comes to advertising.

This had me wondering how the Chinese consumer neuromarketing response would differ from the  ”Western” consumer response.  

If I were to do a very amateurish outline of what appeals to the Chinese consumer, based solely on my observations of Chinese advertising, it would include the following:

  • appealing quite directly to the aspirational trigger (e.g. a recent Lipton Tea ad for China, which seems to suggest that good-looking affluent  young people in smartly-furnished apartments drink Lipton Tea, so ergo, if you drink Lipton Tea…).
  • appealing to sexual triggers, quite a lot of beautiful women in skimpy clothes involved, even if the ad is not one for cosmetic surgery. There seems to be a field of commentary out there about it.
  • the louder the better, so much so, that if you happen to be in the back of a taxi or an elevator where a Blade Runner type flat-screen TV is playing ads at ear-splitting levels, you are apt to swear never to buy the offending product.
  • utilising quite a lot of slapstick,  especially involving well-known Chinese actors. This might be purely cultural. I have no idea.

Anyway, I wonder how much neuromarketing responses from Chinese test consumers would differ from those of other cultures if faced with an array of Chinese ads and non-Chinese, specifically Western, ads. The only area where I would unscientifically suggest there would be a difference is in the humour aspect, since I think humour can differ from culture to culture.  And then, perhaps, Chinese consumers may be more responsive to an imposing and well-known international brand like Hummer.  But the responses to aspirational and sexual stimuli I would not have thought that different on a biometric level. 

The conclusion for me is that most Chinese companies might be catching up in the pure expenditure stakes but not yet so in the sophistication stakes.  The aspirational and sexual stuff they are getting onto the market seems too direct right now. I mean, does drinking a Western tea brand really mean you’re well on the path to owning a swish apartment and having stylish friends? Does chewing gum mean you will get more nookie?  Does anyone really believe that, Chinese or not?

The learning curve to get Chinese communications, brand and media professionals onto the path of recognising that their consumers have more sophistication than might previously have been assumed, and tapping into that sophistication, does not need to be a steep one.  But it will be a necessary one, if they wish to translate their knowledge of the consumer into an understanding of the broader global market.  All this is just one piece in trying to figure out the jigsaw puzzle of achieving a “global Chinese brand”.

And finally I would love to hear from anyone with a marketing background on this.

By Geraldine Johns-Putra | Posted in Brand | Tagged | Comments (7)

Indigenous innovation: I’m over it already

15 February 2010 – 8:37 pm

Here’s a trivia question: what was Qian Xuesen famous for?

Qian was the father of China’s space program.  A brilliant Caltech- and MIT- educated aeronautical engineer, he left the US to return to China, disillusioned with growing American anti-communist feeling.  He is said to have eventually become committed to Chinese nationalistic causes, in some measure out of revenge against the US. 

In my opinion, he is an example why nationalism should be taken out of the innovation equation.

I am all for encouraging expenditure by Chinese firms on R&D and innovation. I wholeheartedly endorse China’s recent drive to increase local innovation, because for one thing that should translate into the more strenuous enforcement of China’s IP laws.

But I am beginning to find real fault with this term “indigenous innovation”.  Specifically, I object to it being employed as the basis for a nationalistic tool, especially since this seems to be happening at the expense of technological and commercial sense. 

At the China Law Blog, Dan Harris identified a trend he has spotted, namely a regulatory shift in China when it comes to approving overseas investment.  Official subscription to the idea of “indigenous innovation” seems to be playing a part in this shift by discouraging foreign technology transfer, in the belief that the technology should not be paid for and should instead be developed entirely locally.

This is a short-sighted approach and, from an economic standpoint, highly inefficient.  Confusing broader economic interest with patriotic interests benefits no-one. 

I enjoy new buzzwords as much as the next geek, but there are several reasons why I am against “indigenous innovation” as a sledgehammer approach in China’s foreign investment policy:

  1. China still stands to gain much from the adoption of foreign technology.  This is a phase in the maturation of the market that has not been fully played out.   Acknowledging and embracing competitive advantage between trading partners ultimately leads to greater productivity all round (Trade Economics 101 here).  There should not be any national shame associated with the idea that foreign technology is, in some cases, superior.  No one country can be the most efficient in all areas. 
  2. Duplicating efforts in developing a technology from scratch is usually not cost-effective.  I am in no way advocating a lax attitude to IPR, but the Chinese party usually needs to spend only enough to gain a right to use the fundamental technology, and then utilise its advantages in labour costs, production scale, local distribution networks, knowledge of the local market etc.  to develop it.
  3. Trying to develop a local version can result in an inferior product and costly delays.  In the telecommunications field, China developed its own 3G mobile telecommunication standard TD-SCDMA to compete with W-CDMA. The various problems with the new standard delayed the award of China’s 3G licences to Chinese mobile carriers and resulted in a diversion of significant funds to a cause that was not strictly necessary, except from the perspective of shoring up nationalistic interests.  It also hasn”t exactly been a boon to China Mobile who has the TD-SCDMA licence. 
  4. A far more efficient and enriching policy is that of internationalisation and localisation, or glocalisation, which involves taking a particular product or technology and adapting it for the local market.   It can sometimes result in the glocalised product itself contributing to wider know-how.
  5. Really fine, truly novel innovations grow in a culture that encourages the highly original, one that say stokes the imagination of a übermensch type, like a Steve Jobs or Richard Branson. This is not currently China’s great strength in terms of innovation development. China’s advantages include a labour force growing in ability, sophistication and higher education and the ability to commit capital and labour resources to R&D facilities.

There is no reason why China should avoid nurturing homegrown innovation, since this is a long-term goal that will be of immense benefit to it. But it needs to do so without overlooking suitable opportunities to import technology, i.e. the ones that would turn out cheaper and more useful in the end to, simply, buy.

As for Qian Xuesen, a patriot might argue that it was nationalistic feeling that led to Qian’s remarkable contribution to China; therefore nationalism is a useful tool.  I’d remark that the technology he initially applied was fundamentally American.

As an additional footnote, today, the Americans are suspending their space program because they can no longer afford it.  It’s just too expensive and there are greater demands on the government purse.  Any practical future developments in this area will therefore be in the hands of the Chinese and the Indians, who are still able to devote resources to this endeavour.

By Geraldine Johns-Putra | Posted in Economy, Innovation | Tagged , | Comments (12)

Johns-Putra Limited update: Seminar on China M&A and the impact of China’s Ascendancy

12 February 2010 – 10:24 pm

I would like to say thank you to Matthew McKee over at China Tax Insights for organising this.

I posted this today at Johns-Putra Limited, my legal consultancy website.

Geraldine Johns-Putra, Managing Director of Johns-Putra Limited, will be speaking at an upcoming seminar in Beijing, headlined “Mergers and Acquisitions: the Impact of China’s Growing Ascendancy”.

The seminar will be held on 16 March 2010 at the Sofitel Wanda, Beijing and is presented by Austcham Beijing, Britcham and China tax specialists Hwuason Laywers. 

Topics covered will include:

  • A basic overview of China’s new M&A rules
  • Discussion of trends in inbound M&A in China, including analysis of the impact of laws introduced in recent years, increased scrutiny into new deals and the consequences of high-profile events impacting Sino-foreign commercial relations in the past year.
  • Outline of the tax issues commonly found in China M&A deals, including an explanation of Circular 698, issued by the State Administration of Taxation in December 2009, which seeks to impose Chinese tax on off-shore equity transactions.

The Austcham website here has more information, including regarding registration.

Whether it is to access the China markets, form alliances, invest into or acquire China companies/technologies, this seminar will provide you with an overview of the M&A landscape and information on the opportunities and risks in China in 2010.

 Matthew, who writes an amazingly detailed and knowledgeable China tax law blog (and is a fellow Aussie!) at China Tax Insights, will also be speaking at the seminar.  The third speaker will be Alex Clar from Grandall Legal Group who is a specialist in M&A, corporate finance and securities.

By Geraldine Johns-Putra | Posted in Uncategorized | Comments (2)

Mine to lose, so I’ll fight all the harder

12 February 2010 – 2:08 am

This fascinating insight was buried in my overdue reading pile from the last few weeks.  It’s a snippet from The Economist about different kinds of  rewards and their effect on employee behaviour. 

It’s a story that has lessons for every manager trying hard to motivate staff, as it shows how people react more vigorously if  they believe they will lose something they are already entitled to if they slack off (think perhaps: equity participation rights) vs. something extra that they might gain if they work harder (say, bonuses).

For me, there was a China connection in it straight away.  Right.  OK, so the original study was done on a Chinese electronics factory.  But, actually, that’s not the connection I see.  My connection has to do with a larger “group-sense” or “nation-sense” of self-belief and entitlement.  I see this as potentially applying on a macro-level.

Allllrrright, so taking this from a microeconomic to a macroeconomic level:

Question: Which nation right now feels most entitled to a superiority over other nations, that it does not wish to surrender?  Which economy actually considers that it will forfeit something if it takes its foot off the pedal? 

Your answer would probably be the US. 

But, interestingly, it might even be China.

I think both answers are right.  The US, over the last half-decade century or more, has been the country “to beat” and, naturally, sees itself as so.  It is an indisputable superpower. Why should it give ground to any other nation in terms of economic let alone political (or even cultural) superiority.  However, over time, the US has lost its competitive advantage in labour costs (among other things) to other parts of the world, especially the Chinese.  

Now to the other side.  These days, the Chinese no longer have a sense of being an underdog.   They have a sense of entitlement. 

Previously, the Chinese might have seen themselves as pursuing an American level of achievement (an unfortunate echo here of the Great Leap Forward’s disastrous “catch up with America” slogan).

Post the Global Financial Crisis, the chips have fallen somewhat differently.  The Chinese seem bent on seizing their moment in history to become equals or better to the Americans. 

Let’s not have any illusions about the Chinese economy; for all its growth, it is still a lot smaller than the American economy (about 55% its size, based on 2009 GDP figures).  

Still, applying this compelling little study to the real world: Is it conceivable that the Chinese will fight all the harder to maintain what they see as a new “status quo”, than previously when they saw economic might as something they were working towards? 

A century ago, the Chinese, with much promise, successfully overthrew a feudal dynasty yet still collapsed into infighting, a destructive civil war and revolution, with a devastating aftermath.  Is the sense of entitlement this century around stronger?  Sufficiently stronger??

Hmm.

Maybe I am being too simplistic in distilling a neat little observation from a couple of economists into an ingredient to becoming an economic superpower? 

I’d be happy to be argued out of it.

By Geraldine Johns-Putra | Posted in Economy, Superpower | Tagged , | Comments (5)

Why are global law firms eyeing Australia? It’s [still] China, stupid

9 February 2010 – 11:42 pm

For a slight change of tack, this is not strictly China-related, but it’s one of those things that really got my interest in the last couple of days. 

Allen  & Overy, a global UK-based law firm of significant stature in the legal sector, is opening two offices in Australia.  Such is its reputation, that it is known as one of the “Magic Circle” elite of British law firms.  Allen & Overy has completed a bit of a coup by recruiting a team of 14 partners  from Clayton Utz, a national Australian firm (and, I should say, a firm I worked for between 1999-2005).   The legal media seems agog at this development, including the American Lawyer marvelling at the “surprise move“. 

Is it so surprising?  The apparent reason for the astonishment is that international law firms have, by and large, shied away from setting up in Australia, whether through opening new offices or merging with existing players.  There have been some toes dipped in the water here and there, but the conventional wisdom was that Australia was just too competitive an arena and too congested a market, with not enough of the spoils to share at the profitability levels that the global firms are used to.

What has changed?  Why would a legal giant “suddenly” decide to step foot into this crowded marketplace? And do so by poaching  some top partners from a local firm?

I worked 9 years in Australia.  In the last year, I have been back to visit twice.  When it came to shop-talk, all I heard about from lawyer friends was the work coming out of China into Australia and what they could do to secure more of it.  The recession was taking hold (though not as badly in Australia as in other places) and the obvious profitable work left (as everything else was drying up) was the Chinese investment into resource-rich Australia. 

That’s the work that A&O are looking at.  That is why they have poached selected talent from Clayton Utz, its rival law firm Freehills and banker JP Morgan to do so.  They did not take over an existing law office, with all its bits and pieces.  They cherry-picked, instead.

They are not looking to build a full-service outfit for, in my opinion, they are looking to build a China-service outfit.   Why else would Allen & Overy open a second office in Perth, Australia’s fourth largest city situated way over on the Western coast five hours’ flight from Sydney?  Perth is Australia’s mining centre.  Coincidentally, A&O recruited some of Australia’s best known energy and resources lawyers in their swoop.

Yes, the Aussie legal market is small, if you consider its population of 22 million or so.  But Australia is still a “Great Southern Land” with a lot of promise for resource-hungry China. 

When I worked in China during the foreign investment rush for a piece of the market, I often thought of us lawyers as the ones who supplied the shovels to those who searched for gold.  And the basic laws of supply and demand favour shovel-suppliers – so long as there is gold to be dug for.

By Geraldine Johns-Putra | Posted in Legal | Tagged | Comments (2)