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Law firms line-up as China prepares to take centre-stage

Law firms line-up as China prepares to take centre-stage

The People's Republic of China is set to take centre-stage as the world recovers from the global recession, and some of Australia's largest law firms have taken their seats for the curtain call…

The People's Republic of China is set to take centre-stage as the world recovers from the global recession, and some of Australia's largest law firms have taken their seats for the curtain call at China's unstoppable recovery, writes Michael Pollak.

It was none other than Napoleon who predicted that an awakening China would shake the world, and its dizzy economic surge over the past decade has indisputably been felt in lawyers' boardrooms.

China's burgeoning economy and Australia's recovery are inextricably linked, and Chinese influence on global restructuring will remain a potent factor despite problems and upheavals.

Such are the messages resonating in Australia's biggest legal firms which have expanded their links with the People's Republic of China (PRC) and see no end to a dynamic relationship.

The PRC is operating on a growth target of 8 per cent of GDP at a time when Western economies, including Australia's, are still floundering. The Australian Financial Review (AFR), quoting US-based researcher IHS Global Insight, reported in July that China was on target to become the world's largest manufacturer by 2015 (compared with its previous forecast of 2017), generating a hunger for Australian resources and services.

Last year, China was Australia's largest trading partner at $53 billion, with iron-ore exports accounting for $14 billion and the pace of investment into Australia by Chinese state-owned enterprises showing no signs of slowing.

Most of Australia's big legal firms have joined this legal goldrush, among them Mallesons Stephen Jaques, which expects an unstoppable ongoing involvement.

Mallesons managing partner, international, Nicola Wakefield Evans, says nobody in the firm has expressed any nervousness about China, which is seen as "an exciting country with opportunities for growth and development".

Wakefield Evans, based in Hong Kong, believes that in the short term the global financial crisis (GFC) is forcing firms to be "tactically rather than strategically" focused.

"Notwithstanding the challenges of the GFC, continuing activity in outbound and inbound direct foreign investment, and working with investment banks on new products and sources of other work, offer opportunities," she says.

"Our long-term strategy remains unchanged as we grow. After 20 years in the region, we are committed to China in the long term and continue to invest with internal transfers and secondments. We would expect China to return to its previous strong growth path, perhaps just not at the same extent as the double-digit growth of the past decade."

In setting its sights on the PRC at such a scale, Mallesons has assembled about 150 lawyers with relevant language skills - including 75 fluent Mandarin speakers based in Greater China (Beijing, Shanghai and Hong Kong).

Mallesons is currently working on several investment deals. These include advising steel company Hunan Valin, which is taking a 17.4 per cent stake in Australia's third-largest iron-ore producer, Fortescue Metals Group (FMG), in a deal worth $1.27 billion.

This transaction, completed in April, required simultaneous complex negotiations, including talks with Australia's Foreign Investment Review Board (FIRB). The deal also involved a $627 million share purchase from one of FMG's existing shareholders, the US-based hedge fund Harbinger Capital (represented by Blake Dawson).

It's a similar situation at Minter Ellison, which has had a presence in China since the 1980s and 10 years ago opened its Shanghai office, which offers expertise in corporate and commercial law.

The office is run by partner Wan Li, a specialist in M&A and oil-and-gas deals, whose activities include infrastructure and private equity. With several native Chinese speakers in his office, work can proceed in either English or one of the Chinese languages, as the transaction requires.

As an indicator of the growing importance of the Chinese connection, in July Minters appointed Winnie Ng as a consultant to head its Greater China employment practice. The role of Ng - fluent in English, Cantonese and Mandarin and expert in Hong Kong and Chinese employment laws - includes advising statutory bodies, financial institutions and multinational companies on employee benefits and compensation, data privacy and anti-discrimination laws.

Minter Ellison last year acted as a key adviser to Midwest Corp (a miner of iron ore in WA) in its $1.3 billion off-market takeover by Sinosteel Ocean Capital.

Another big player is Freehills which, owing to restrictions on practising in China, has forged an alliance agreement with TransAsia Lawyers, with which it works towards what international managing partner John Curtis describes as "a seamless provision of services".

TransAsia's Beijing-based managing partner is Jesse Chang, a graduate of the Australian National University as well as the Columbia School of Law in the US, who has more than 25 years' experience in advising clients on direct investments in China.

Chang specialises in facilitating market entry, joint ventures and M&A, each of which allows Freehills to, as Curtis puts it, "wire into all the government bodies" in China.

The PRC entities with which Freehills has dealt include the China Investment Corp in connection with a $500 million contribution, via exchangeable preference securities, to the Goodman Group's equity raising of 1.8 billion.

Curtis sees such deals as emblematic of a continuing business surge, noting that "China will remain the dominant international market power for some time", and broaden its investment drives into green technologies.

The Chinese economy as an engine which will continue to generate vast investments opportunities into and out of Australia is also envisaged by Baker & McKenzie, whose partner, John Mollard, states: "China's growth will assist in leading us out of the recession."

Mollard, a longstanding Asia hand who attended university in Nanjing and speaks Mandarin, sees China as a "significant economy with diverse needs" and expects Australian legal work to remain unaffected by turbulent events such as the current diplomatic wrangle over the jailing of Rio Tinto executive Stern Hu and Uighur unrest.

He joined Baker & McKenzie in February and is a partner in the corporate and securities practice in Melbourne, where he has been involved in major deals between Australian companies and Chinese private companies and SOEs worth a total of $1.2 billion. Among the recent deals Mollard has advised Chinese clients on are PanAust, a Brisbane-based miner with copper and gold assets in Laos and a presence in Thailand, and Lynas Corp, a WA rare-earth group.

The PanAust deal involves Guangdong Rising Assets Management (GRAM) seeking a 19.9 per cent stake worth about $215 million. This arrangement, which has shareholder acceptance, has been approved by GRAM and the FIRB and awaits only final regulatory approval from China.

Mollard's work in relation to the investment in Lynas centres on a heads of agreement with China Nonferrous Metal Mining Corp to acquire 51.6 per cent for about $252 million, plus an agreement to supply bank guarantees to support Lynas for a further $US184 million. It awaits FIRB and Chinese Government regulatory approval.

Baker & McKenzie has maintained a presence in China since the late 1970s and regards itself as one of the pioneers in the area of Sino-foreign legal relations.

In July, the firm added five new partners to be based in Beijing, Shanghai and Hong Kong, bringing the total number of partners in the Hong Kong, People's Republic and Vietnam offices to 72.

Despite the extremely promising prognosis for China links, Australian lawyers need to take on board the note of caution expressed in a speech in July by Reserve Bank governor Glenn Stevens: "If we are more integrated into China's expansion, we will be similarly more exposed to the consequences of whatever might go wrong in that country. So our understanding of how the Chinese economy works - and of what risks may be accumulating there - will need continual work."

Lawyers also need to be aware of comments in July by Macquarie Bank's head of China economics, Paul Cavey, who told the AFR's Colleen Ryan in Shanghai: "China's impressive headline GDP rate masks an important fundamental shift. Its growth is now fuelled by cheap debt rather than corporate profits and retained earnings, and this shift in the medium term threatens to undermine China's economic decoupling from the global slump."

Some other pitfalls, as listed by Mallesons' Wakefield Evans, include restrictions on foreign investment and foreign exchange and the different attitudes to compliance and sometimes risk (what Wakefield Evans calls "the role of law versus the rule of law").

Wakefield Evans also cites the fact that Chinese corporate governance can be non-transparent by Western standards, while approvals by provincial regulators are often required as well as central regulatory approval and that difficulties around the protection of intellectual property for companies wanting to operate in China are particularly problematic.

Despite such qualifications and challenges, and what Ryan describes as a "ticking time bomb" of uncertainty, the China connection is where most of Australia's international action is.

The buzz around the legal traps says it's extremely unlikely that China will return to slumber any time soon.

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