Hong Kong is presently the world’s largest IPO center. However, latest reports from Ernst & Young and PricewaterhouseCoopers (PwC) predict that China is well on its way towards leading the IPO market.

From 2000 to June 2010, companies in China’s mainland raised $188 billion in 495 deals on the leading bourses such as New York Stock Exchange (NYSE), Nasdaq Stock Market, London Stock Exchange and Hong Kong Stock Exchange. Overall, there were 1,114 global deals raising $366 billion in the same period. Hong Kong Stock Exchange was ranked first with 409 deals raising $171.2 billion.

In the near future, PricewaterhouseCoopers (PwC) predicts that domestic PRC companies are expected to raise US$55.7 billion on the Shanghai Stock Exchange this year, while in Hong Kong the figure is expected to be US$47.7 billion.

It can be deduced that the Chinese companies are recovering from the worldwide economic slump and have not been adversely affected by the Europe debt crisis. In terms of fund raising, more Chinese companies choose domestic capital markets as they have become increasingly attractive compared with foreign markets. Domestic companies have raised RMB213bn from 176 IPOs in the first half of the year, more than the RMB187bn raised in the whole of 2009. And according to PwC’s predictions, the total number of new listings on the country’s two bourses in Shanghai and Shenzhen may reach 300 in 2010, compared to 99 last year. Unlike other countries, China has high investor confidence due to increasing listing value and the strict regulations of the China Securities Regulatory Commission (CSRC).

Companies in the BRIC (Brazil, Russia, India and China) countries constituted nearly 68 percent of the total funds raised in the past decade. London stock exchange, NYSE and NASDAQ were ranked second, third and fourth respectively in the report.

Trade analysts by and large have concluded that the European debt crisis would not have a significant impact in Asia. Refer to an earlier blog entry available at http://asialegalblog.com/?p=2562. This entry highlights some other legitimate concerns raised by experts and attempts to blend different views in order to ascertain the risk exposure that Asia faces.

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According to the United Nations Conference on Trade and Development (UNCTAD), global foreign investment dropped 39% to around $1 trillion in 2009, against a high of $1.97 trillion in 2007.  During this time, China had foreign exchange reserves amounting to $2.4 trillion, accounting for 30.7 percent of the world total.  Amidst this backdrop, Chinese companies increased their overseas direct investments (ODI’s) and many of these investments were backed by the Chinese Government.

A particularly prominent ODI was Aluminum Corporation of China’s (Chinalco) acquistion of 12% of Rio Tinto in February 2008.  This purchase was featured in international headlines but its termination in 2009 inspired China to consider a broad overhaul of its rules governing how Chinese companies invest abroad.

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Following the last two years of salary freezes and lowered bonus structures, ex-pat packages in China and Japan have become a hot topic among U.S. and U.K. attorneys looking to relocate from the U.S. and U.K. to Asia. The top firms have weathered the economic crisis just fine according to data gathered by ALB Legal News, and most firms continue to offer competitive packages in Asia in order to attract and retain top legal talent. This is especially true of firms that, as newcomers to a given market, are anxious to increase their ranks.

Firms remain committed to the region, investing resources into their foreign offices, hiring or promoting partners, and offering competitive remuneration packages to their strongest attorneys, especially bilingual ones. While ex-pat packages have for the most part remained stable at top firms, especially in more mature legal markets like Tokyo and Hong Kong, we have seen more variance than ever over the past year. Increasingly there is a willingness to negotiate and make offers on a case-by-case basis.

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Asian markets must have breathed a sigh of relief after coming out less affected than most countries from the global financial crisis but are now keeping their fingers crossed as the world watches the European debt crisis unfold.

Financial markets are skeptical of the bailout plan, which the EU and the IMF created last month when Greece teetered near default and Spain and Portugal’s financial stability slipped. However, a web poll conducted by the Wall Street Journal revealed trade experts’ positive belief about Asia’s sustainability through the debt crisis. This is supported by the revision of Standard & Poor credit worthiness ratings which have lowered for western countries but have increased for many Asian countries.

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Wensheng Peng, head of China research at Barclays Capital, recently spoke to FinanceAsia about economic measures China should consider before making substantial changes to its exchange rate policy. Peng’s suggestions include the further liberalization of capital controls in China, and for the renminbi to play an increasing role as an international currency.

Although China is a world economic power, there is a great disparity between that reality and China’s limited integration into global financial markets. Already the world’s largest exporter, and likely to become the largest importer soon, China has many restrictions on cross-boarder capital movements, particularly with regard to portfolio and banking flows. Since a large part of China’s capital outflows have been through the official sector, the official reserves are mostly invested in fixed income assets, leading to an imbalance in the risk-return profile of China’s external assets. Also, because the government controls those external assets, China’s wealth in foreign exchange reserves, estimated at around $2.45 trillion, overstates the strength of the country’s external capital. As a result, the Chinese government must continue to diversify its external capital position by promoting direct investments and lending by the corporate sector.

China must also push the renminbi as an international currency. Owing to China’s importance in world economics, it makes little sense that the renminbi plays such a limited role in the global monetary system. The explanation lies with the Chinese government’s restrictive policies on the renminbi’s convertability. By actively preventing its proliferation in worldwide transactions, the Chinese government has stifled its potential. However, the Chinese government has recently taken serious steps to “internationalize” its currency. In 2004, it extended renminbi services to Hong Kong. In 2009, the government decided to allow cross-border trades to be settled in renminbi. Finally, in 2010, the government undertook measures specifically designed to develop an offshore renminbi market.

Although these measures will become increasingly significant with time, the pace of growth is still restricted by the remaining government controls on renminbi convertibility. Indeed, without full convertibility, it is difficult for the renminbi to play a significant role in the global monetary system. Yet, in the near future, as the renminbi becomes more convertible and China’s economic clout grows, Peng expects to see the renminbi become a significant international currency.

Until recently, China’s private equity market had been dominated by foreign currency offshore funds run by international investors. This changed drastically when the Chinese central government and several municipal governments introduced new regulations to encourage and facilitate the formation and operation of Chinese renminbi (RMB) funds, ultimately enabling RMB funds to become the private equity fund of choice. In 2009, RMB funds for the first time dominated in terms of the amount of new capital raised and number of deals. According to specialist Chinese market researcher Zero2IPO Group, 105 RMB funds raised $12.3 bn in 2009, in contrast to foreign currencies’ 19 new funds, amounting to $6.52 bn.

As a result, numerous international private equity fund managers have shown increasing interest in RMB funds. “Now, more and more deals are being done with local funds,” said Wang Chaoyong, chairman of China Equity, a large private equity firm based in Beijing. “Even internationally invested companies are switching to local currency.”

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The Chinese government is prepared to announce soon that it will let the yuan, also known as the renminbi, strengthen and allow its value to move more freely in the market. The yuan is pegged at a nearly fixed rate to the dollar, which has helped keep China’s exports at a cheap price. The move comes as a response to the Obama administration’s tensions about the United States’ huge trade deficit with China.

However, if China only allows a small shift in the value of the yuan, the US trade deficit would most likely only decrease by a small amount because of decreasing transportation and communication costs due to the large investment in infrastructure.

People knowledgeable about the move say that it is being made as an inflation-fighting tool, instead of a response to the American pressure. The same people also stated that China’s central bank has successfully argued its claim that a stronger yet more flexible currency would be beneficial for the country.

A stronger yuan does not necessarily mean good news for the US, though. If China decides to sharply decrease its Treasuries purchases, then the Obama administration would find it harder to finance budget deficits.

On the other hand, the booming Chinese economy could mean that a small move in the yuan could leave the central bank besieged with trade surpluses and speculative investment into China. That could force the central bank into buying Treasuries with the surplus dollars.

A stronger currency helps slow down inflation by making imports cheaper. It also gives China’s central bank more room to raise interest rates and slow down economic growth while decreasing the risk of drawing more speculative investments into the country.

We shall what happens when the yuan is officially allowed to float around more.

An amazing sidebar to the state of the economy is that some people have been forestalling divorce because it is just too expensive.  For UBS, there is no better time to seek a divorce from the Bank of China.

UBS recently sold its entire 1.33% stake in Bank of China in a private placement to institutional investors.  The sale came a day after the three-year lockup period for its holding expired.  It is rumored that UBS received $808 million.  The price was a 12% discount to the Bank of China’s closing price, but is a hefty increase from the original price of $491 million in September 2005.

The share sale is the first exit by a foreign strategic investor in a Chinese bank.  UBS has been seeking additional capital despite a recent $59.2 billion injection by the Swiss government.  There has been speculation that foreign banks will continue to sell down their China holdings to raise capital.

Bank of China is publicly taking the sale in stride.  A BoC spokesman stated, “It’s a normal action.”   But the sale of Chinese bank stakes for which the banking industry (and foreign governments) fought so hard may discourage the Chinese banking sector from further liberalization.

In early December Bank of America was rumored to be seeking to exit its $3.1 billion investment in China Construction Bank.  The deal was later canceled after a reported objection from Beijing, which thought it wasn’t the right time for a sale.
The lockup period for Royal Bank of Scotland’s 8.25% stake in Bank of China also recently expired. The UK government is another of the banks which was bailed out in the current financial crisis.  RBS has stated that it would provide a one-month notice prior to selling the shares, which the Bank of China states has not been received.

Law firms have invested substantial dollars and yuan building a China presence in recent years.  Some were following existing clients who were investing into China.  Others felt that they needed to be in China to prevent losing existing clients.  But once they are in China, firms need to be as aggressive marketing themselves as if they were in their home market.  That means appropriating work from clients of other firms, or targeting the elusive Chinese client.

Seeking out Chinese clients has always been a bit of a dance for foreign firms.  Many Chinese clients are notoriously…conservative with their expenditures.  You might be tempted to give a haircut on your fees to develop your client base with the hope that more work at market rates will be promised in the future.  But then another firm comes along with cheaper rates, less-jaded partners and perhaps a better knack for entertaining, and that firm is willing to make the same mistake.

Some firms are big enough that they have entrenched themselves with Chinese state-owned enterprises or government agencies.  Sidley Austin has generated substantial revenue representing Chinese ministries on securities offerings and competition litigation.  Some of the project finance heavyweights, like Allen & Overy, have been known to pal around with the state-owned oil companies.

Other firms are coming in through the back door.  A few of the US reverse merger specialists seem to feed off of the deal sponsors that are doing the heavy lifting in China.  We would imagine there are several US firms who are also quietly gaining from their relationships with investment banks.

For those firms without institutional relationships to build off of, the path of least resistance seems to be hiring well-connected Chinese lawyers.  Heller Erhman hired a former General Counsel at the China Securities Regulatory Commission as counsel before their dissolution, hoping to generate business that way.  Another firm we know of considered hiring the son of a former head of state, until he and the father was accused of bribery and had a change of heart.

And pounding the pavement never hurts.  Attorneys we know have had decent experiences in New York and DC at the China Institute, Asia Society and occasional Euromoney and US-China Business Council events.  US attorneys in Hong Kong have been known to spend significant sums on memberships at the American Club if only to pal around with the sorts of people that make hiring decisions.

One thing is for sure (if a bit self evident): if you are going to do business in China, you are going to need a Chinese client two.

So what works for you? If as a US attorney you have had any luck attracting Chinese clients, or a Chinese client who has been wooed (sucessfully or otherwise) by US attorneys, please share your experiences with us below.