Will Britain's China Push Benefit Its Law Firms?
Over 200 years ago, Lord Macartney set sail to China in the hopes of opening more of the Middle Kingdom up to trade with England. The mission was a failure, as the Emperor Qianlong declared his celestial dynasty needed nothing the faraway island could produce.
George Osborne, the British chancellor of the exchequer, and Boris Johnson, the mayor of London, invited obvious comparisons with the 18th-century mission when they both journeyed to China this month with the explicit aim of boosting their nation’s trade with Asia’s rising economic giant. U.K. law firms are betting that they will meet with greater success than Macartney did.
In an Oct. 14 speech at Peking University, Osborne told the audience: “There is no country in the West more open to investment—especially from China.”
So far, though, the United Kingdom lags behind other Western nations in business with China. According to data collected by Mergermarket, China outbound investment in the U.K. was valued at $4.2 billion in 2012. Meanwhile, Australia saw $4.5 billion in Chinese investment, despite being a much smaller economy; the U.S. had $11.9 billion. In 2011, according to China’s National Statistic Bureau, British exports to China totaled $14.5 billion. That compared to France’s $22 billion, Germany’s $92.7 billion, and America’s $122 billion.
The recent push by the British government is aimed at changing that.
“It’s definitely a good thing for British firms,” says Lynia Lau, a Hong Kong partner at British firm Clyde & Co. She expects more Chinese investments and acquisitions in the U.K., especially in infrastructure and construction.
That sector has indeed recently seen some major deals out of China. Freshfields Bruckhaus Deringer advised Dalian Wanda Group on its recently announced $1.1 billion project to build London’s tallest residential skyscraper. Shanghai-based Zhongrong Holdings Group will invest $807 million in the reconstruction of the Victorian era’s Crystal Palace, which burned down in 1936. Beijing’s Advanced Business Park plans to build a $1.6 billion office complex at London’s Royal Albert Dock.
Osborne’s trip promised more to come. He revealed that China’s Beijing Construction Engineering Group would take a 20 percent stake in a $1.3 billion project for the creation of business district around Manchester’s airport, which was advised by Eversheds. During a visit to a nuclear power plant in China’s Guangdong province, the British treasury chief announced that two Chinese state-owned companies, China National Nuclear Corp. and China General Nuclear Power Corp., were taking a 40 percent stake in a project to build Britain’s first new nuclear power station in almost two decades.
Alan Wang, a Beijing partner at Freshfields Bruckhaus Deringer, says Chinese investors, put off by the troubled Eurozone, have been encouraged by Britain’s open markets, mature legal system and London's status as a world financial center. British officials have also tried to depict the U.K. as a friendlier destination for Chinese investment, with fewer national security hang-ups than, say, the United States.
The chancellor pointed to a $2 billion investment in the U.K. by Shenzhen-based networking giant Huawei Technologies Co. Ltd., including a $200 million research and development facility. Huawei has seen a number of U.S. deals blocked due to concerns about founder Ren Zhengfei’s ties to the Chinese military. Australia also prevented Huawei from bidding on a national broadband project over cybersecurity concerns. Osborne alluded to these actions while he was in China.
“There are some Western governments that have blocked Huawei from making investments, [but] not Britain,” he said.
It is probably the financial sector where the U.K. is hoping to see the biggest boost. Finance is Britain’s top industry, and the government wants to ensure that London benefits from China’s rise along with rival financial centers Hong Kong and New York. Toward that end, the City of London has launched an intiative to turn itself into a major offshore center for the trading of renminbi and renminbi-denominated products.
Those ambitions got a boost when the Chinese government announced during Osborne’s visit that it will allow London-based renminbi-denominated funds to invest up to $13 billion in Chinese securities markets, a privilege previously only accorded to Hong Kong, Singapore and Taiwan. The chancellor also encouraged Chinese banks to expand in the U.K., stating that they would be allowed to operate in the wholesale market through branches instead of subsidiaries subject to stricter capital requirements. After facing criticism that the rules were being bent for China, the government clarified that it was relaxing rules for all non-European banks, not just Chinese ones.
Wang says he thinks efforts by the British government will pay off for London’s financial sector and the law firms that service it.
“There is a good chance that this will come together in the near future,” he says. “It will make it easier for Chinese banks to conduct wholesale banking in the London market and bring funding to U.K. infrastructure and other projects. Lawyers would certainly play a key role in helping Chinese banks set up in London and assist with their lending and trading businesses there.”
Wang also thinks that, in the longer term, Chinese financial institutions will expand their presence in the U.K. by taking meaningful stakes in British financial services firms.
But Jamie Barr, a Hong Kong partner at Hogan Lovells, is more skeptical that China will prove a big boost to the City anytime soon. For one thing, the renminbi is not freely convertible, and it’s unclear when it will become so. As long as the Chinese currency remains relatively illiquid, its trading volume will be far below that of the dollar or euro.
“The U.K. excels in financial service and China will be a part of this if the renminbi becomes a reserve currency, which I believe will happen longer term,” he says, “but I think it’s premature to call [London] a financial center [for China] in the foreseeable future.”
Moreover, Barr says the major Chinese banks, which are all state-owned, are still heavily focused on domestic lending and supporting outbound investment and projects involving other state-owned companies. So far, they have made few moves toward expanding their lending to non-Chinese companies.
“They are sure testing the market, but I don’t think they will do anything more than dipping their toes into it,” he says.
Whether or not their government’s push pays off, the major British law firms are hardly dependent on Sino–U.K. deals alone. Over the past two decades, they have become top firms in most of the other major European Union jurisdictions and are well-positioned to capture the full range of business between China and Europe. The large amount of business between China and Australia was also the major impetus for launches Down Under by Clifford Chance and Allen & Overy, as well as the combinations that created Ashurst, Herbert Smith Freehills and Norton Rose Fulbright.
Earlier this year, Sino-Australian tie-up King & Wood Mallesons placed a vote of confidence in the British legal profession by adding SJ Berwin to its Swiss verein. Zhang Yi, a Hong Kong partner at the firm, stresses that it’s not just about the U.K.
“It’s not just because SJ Berwin is a British firm,” he says. “They have offices in Paris, Milan, Brussels, Berlin and Luxembourg, and that covers the whole southern and western Europe. With China’s ‘go-out’ policy, Europe will continue to be an attractive target.”