With the world’s economies returning to their grid positions, both the investment appetite of PRC businesses and demand for Chinese capital are on the rise. While there are good reasons for optimism, there are challenges to overcome before global Chinese investment re-enters the race, writes Mithun Varkey

In the past decade, Chinese businesses have focused on deriving growth from global investment. Starting with mega-infrastructure, mining and real estate projects, and then more high-tech and cultural investments of late, Chinese entrepreneurs have been among the most significant sources of foreign investment in both developing and developed economies.

The pandemic put the brakes on the Chinese investment spree worldwide, but the country has since become one of the first big economies to successfully push through the covid-19-induced malaise. With the worst of the pandemic hopefully behind us, there is renewed optimism as businesses seek to reopen investment pipelines, and to this end Chinese investment will be central in rebuilding the global economic model.

Geopolitical tensions, rising economic nationalism and tighter regulatory scrutiny may continue to choke international investment, but the general sentiment with Chinese investment remains positive, as our survey of China-focused lawyers worldwide shows.

Anthony McKenzie, the Singapore managing partner for offshore firm Carey Olsen, says China’s outbound investment activity has been subdued since 2016, due to domestic constraints on outbound capital flows and a tighter scrutiny of Chinese investment abroad. “The covid-19 pandemic and lingering trade and geopolitical tensions have accentuated the fall in outbound activity and remain hurdles to Chinese firms’ global investment activities, particularly in the US, Europe and Australia,” says McKenzie.

庞冉-Rita-Pang-Kinstellar律师事务所-中东欧中国业务组负责人-布拉格(捷克)-Head-of-China-desk,-Central-and-Eastern-Europe-Kinstellar-Prague,-Czech-Republic-Eng

“Despite this, and despite M&A continuing to have a domestic theme in China as a result of Beijing’s ‘Dual Circulation’ and industrial upgrade programmes and SOE [state-owned enterprise] reforms, we expect overall levels of outbound China investment via offshore jurisdictions in 2021/22 to increase slightly from 2020 levels, particularly in the Asia-Pacific.” (Dual circulation is a Chinese strategy that reorients its export-led economy by prioritising domestic consumption while staying open to international trade and investment.)

The outlook for Chinese investment in the immediate term is “in short, positive”, says Rita Pang, the Prague, Czech Republic-based head of China desk at Kinstellar Central and Eastern Europe (CEE).

“The Chinese Belt and Road Initiative [BRI] is still in motion, and every CEE country has signed up for it – BRI has been the main driver for Chinese interests in the infrastructure and energy sectors, with an increasing emphasis toward renewables,” she says. “There are some bumpy roads along the journey, especially given the current pandemic situation. Last year, we witnessed a slowdown of Chinese investments in CEE, however it bounced back from the middle of this year.”

“My outlook for Chinese businesses in Italy is very good,” says Angelo Bonissoni, a Milan, Italy-based partner at CBA. He says a large concentration of Chinese investment has been made in Italian companies, particularly in the energy and grid sectors. “The trend is therefore positive and should not be excessively affected by the covid-19 emergency,” says Bonissoni.

Konstantinos Adamantopoulos, a senior partner at KA Legal in Brussels, adds the outlook is positive for investment into the EU. “Chinese investment is generally welcome in Europe,” he says. “However, the EU and its member states have in the past two years or so raised concerns regarding the subsidisation of Chinese investment in Europe, as well as the need to maintain a level playing field in the EU market.”

Although the pandemic continues, Nils Krause, a partner and head of corporate and M&A for Germany at DLA Piper in Hamburg, says China’s economy has experienced a continued stable recovery in past months. “However, Chinese outbound investment has remained at a low level even as global M&A activity has recovered,” says Krause.

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“The number of deals, though with smaller values, has increased against the trend of declining investment in general,” he says. “Germany remains an attractive investment location for Chinese investors, being the largest recipient of Chinese investment in 2020.”

Chinese investors have been early investors in Portugal, too, says António Jaime Martins, founding partner at ATMJ Law in Lisbon. “Chinese companies took advantage of the start of privatisations in Portugal in 2011 to invest in sectors such as energy, banking, insurance, industry, agriculture and livestock, with the country serving as a gateway to Europe and Portuguese-speaking countries,” says Martins.

The real estate sector has also been an investment area for China, says Martins, with the Chinese being the leading nationality for Portugal’s “golden” visas. A golden visa is an EU residency permit programme for non-EU nationals, leading to citizenship or permanent residence in return for investment.

“In six years since the residence permit for investment activity (ARI) programme was launched, from October 2012 to November 2018, 3,981 golden visas have been issued to Chinese citizens,” he says.

While more developed markets in Europe remain positive, emerging economies, especially in Latin America, Africa, and South and Southeast Asia, are actively seeking Chinese capital to meet their massive infrastructure and financing needs.

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Thiago Vallandro Flores, a partner at Dias Carneiro Advogados in the Brazilian capital of Sao Paulo, says China has long been a primary business partner of Brazil and a strategic foreign investor. “The high amounts of foreign direct investment (FDI) and the complementarity of Brazil’s and China’s economies puts China as one of the most relevant allies for Brazil’s development and economy in the following years,” he says.

“Brazil is well known for its natural resources, which makes it second to none when it comes to its capacity to produce and export certain commodities, and develop novel agribusiness initiatives, whereas China has undebatable experience in infrastructure projects.”

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Baudelio Hernández, a partner at Baudelio & Co in Mexico City, says investment from China in connection with business involving his country’s government is increasing. “In Mexico, China has already had a great impact on commerce – trade in electronics, clothing, shoes, hose implements, etc., is very big,” says Hernández. “In my opinion, China will continue working in these areas, but I think that realty is one of the greatest areas of interest, as well as tourism.”

Meanwhile, in Nigeria, Adedolapo Akinrele, a partner at FO Akinrele & Co in Lagos, says his firm’s outlook regarding Chinese investment is very positive. “Nigeria offers Chinese companies a diverse range of lucrative commercial and trade opportunities, regardless of the size,” says Akinrele.

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“Like other developing countries, Nigeria has welcomed Chinese business. The economy is a top destination for Chinese FDI on the continent, second only to South Africa,” he says. “Its attractions are clear – vast energy reserves and a large domestic market of 150 million inhabitants with growing disposable incomes.

“For Nigeria, incentives lie in China’s own successful economic transformation, its capacity to deliver large-scale infrastructure projects and, more importantly, its ability to finance them.” Akinrele says the major practice areas that have seen the most interest from Chinese companies are construction and infrastructure, and he points out that his country has become one of the biggest overseas customers of Chinese construction companies.

China’s BRI continues to be a significant theme, at least in Asia.Laos-based Aristotle David, the managing partner of ZICO Law Laos in Vientiane, says major Chinese investments related to energy and infrastructure are ongoing and expected to increase, particularly with relation to BRI projects, and the need for resources. “We see continuing work in practice areas related to mergers and acquisitions, banking & finance, and various legal compliance matters,” says David.

Ho Wei Lih, a partner at Rahmat Lim & Partners in Kuala Lumpur, says although Malaysia is still struggling with thousands of positive cases daily, she predicts a gradual increase in the momentum of cross-border deal activity from China in the third quarter of 2021, especially in energy, manufacturing and logistics.

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“Malaysia generally welcomes FDI, especially those from China,” says Ho. “This is evident from the efforts of the Ministry of International Trade and Industry of Malaysia setting up various teams and initiatives focusing on China, including the China Special Channel, to accelerate FDI from China and to attract and fast-track high-value, high-tech and high-impact investment from Chinese companies.”

Crystal Wong, a partner at Lee Hishammuddin Allen & Gledhill in Kuala Lumpur, agrees. “In the past three years we have seen a surge in demand for representation in BRI-related disputes, especially in the construction and energy sectors,” says Wong.

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“Malaysia is rated as a ‘high opportunity, low risk’ core BRI country, and has always been regarded as an attractive BRI destination with a competitive economy,” she says. “Although many BRI projects are being delayed, put on hold or renegotiated as a result of various pandemic-related disruptions, most major projects in Malaysia have not been cancelled.”

Chen Xi, a partner (foreign lawyer) at Rajah & Tann Singapore, notes a report published by the Australia National University, titled Chinese Investment in Southeast Asia from 2005 to 2019, lists Indonesia, Malaysia and Singapore as the top three destinations for Chinese outbound investment, together accounting for 57% of total Chinese investments in Southeast Asia.

“Regional investment into Asean countries is expected to continue to increase,” says Chen. “Chinese companies’ investments are increasingly oriented towards TMT, fund management, digital payment licence, consumer, wealth management and asset planning, as well as the pharmaceutical, medical and biotech sectors,” she adds.

OUTSTANDING OPPORTUNITIES

Amid the economic gloom and rising nationalism, there are opportunities for investors, and several policy and regulatory changes are likely to benefit foreign investors, including ones from China.

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Thomas Weidlich, a partner at Luther Law Firm in Cologne, Germany, says the pandemic will result in distressed M&A deals increasing significantly. “For Chinese investors, this can offer a good opportunity to acquire an interesting company at a low purchase price, and thus gain access to the German or European market, as well as to technologies ‘Made in Germany’,” says Weidlich.

“However, Chinese investors need to be well organised and able to react quickly, especially when it comes to distressed M&A transactions, because insolvency proceedings in Germany run within a tight timeframe,” he adds. “In addition, investing in financially distressed companies can bring not only economic but also legal risks with it. These legal risks differ depending on the time of the company acquisition.”

ZICO Law Laos’ David also notes: “The pandemic travel restrictions and uncertainties have caused investors to delay or have a slow process for investing. Heavily affected sectors such as hospitality, tourism and other service sectors have been devastated and may also be an opportunity for bargain hunting investors, in anticipation for when there is recovery.”

Regulatory changes in Kenya such as the Public-Private Partnerships (PPP) Bill, 2021, which is pending parliamentary approval, seek to increase private sector investment in large infrastructure projects by reducing the number of oversight approvals needed to implement a PPP. “These amendments are likely to attract more Chinese companies to invest in large infrastructure projects,” says Desmond Odhiambo, a Nairobi-based partner at Cliffe Dekker Hofmeyr.

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Odhiambo notes the Business Laws Amendment Act of 2020 will allow shareholders to hold virtual and hybrid meetings, meaning that Chinese investors can attend shareholder meetings without travelling back to Kenya. “The act also amended the Laws of Contracts Act Cap 23 Laws of Kenya, and the Land Registration Act of 2012, to allow the execution of documents using advanced electronic signatures,” he says. “This will enable execution of a company’s documents from anywhere in the world, which improves the ease of doing business.”

In Pakistan, Maheen Faruqui, a Karachi-based partner at Kabraji & Talibuddin, says his and China’s governments have executed the China-Pakistan Economic Corridor Energy Project Co-operation Agreement, which prioritises projects to be initiated as part of consolidating the strategic co-operative partnership between the two countries.

“Several projects have already been completed and are operational, while certain others are in the development phase,” says Faruqui. “China’s initiation of work in Pakistan and its unwavering commitment may be attributed to its long-term goal of reducing its dependence on the Straits of Malacca (through which much of its oil is transported) and providing an alternative trade route,” she says.

In Hong Kong and Macau, too, there are plenty of opportunities for Chinese investors. Rossana Chu, of Hong Kong-based LC Lawyers, says collaboration within the Greater Bay Area (GBA) is definitely a core area of interest to mainland law firms and companies.

“Before identifying the various roles that Hong Kong and Hong Kong people can play in the development of the GBA, one immediate function Hong Kong may perform is to provide funding channels for companies operating in mainland China,” says Chu. “In terms of industries, technologies and innovative businesses will continue to attract attention, while enterprises engaging in sustainable development such as renewable energy and carbon emission reduction may become more popular.”

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Jorge Neto Valente, the founder of JNV Legal in Macau, says the jurisdiction is still for the most part regarded as an entertainment hub, therefore Chinese companies tend to invest in areas related to tourism, such as integrated resorts, hotels and retail. “There is also a noticeable uptick of interest in technology ventures and the financial services sector – especially since the inception of the Macau SAR’s bond market in late 2018,” says Valente. “Traditional sectors are still sought after by Chinese companies, such as real estate and construction, including for entertainment-related projects.”

CHALLENGES AND PITFALLS

While Chinese investment is keenly sought, there remain challenges and pitfalls in these varied locations. Investing in foreign countries comes with caveats, and overcoming these is where companies need competent local legal counsel. A tightening regulatory environment and challenges in dispute resolution are among the most common challenges Chinese investors face in these jurisdictions.

“In our experience, the main regulatory challenges so far have related to the requirement to obtain merger control/antitrust approval from relevant competition authorities in the EU and worldwide, particularly where Chinese investors enjoy an appreciable position in the relevant geographic and product/service markets,” says Adamantopoulos at KA Legal.

“Compliance with European FDI screening rules has also become increasingly important for Chinese investors, in particular since the EU FDI Screening Regulation has become applicable, from October 2020. The EU FDI regulation provides for an EU-wide consultation mechanism among those authorities of EU member states that are responsible for FDI screening.”

Adamantopoulos says the consultation takes place on national security and public order considerations. “It affects, in particular, investment in critical infrastructure in the EU, such as telecoms, AI [artificial intelligence], high-tech, security, media, transport infrastructure and the like,” he says. “The ultimate approval lies with the EU member state where the investment takes place, unless a project of pan-European interest is involved. In the latter case, the role of the European Commission is decisive.”

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Michael Burian, a partner and co-head of the Asia desk at Gleiss Lutz in Stuttgart, says the foreign investment control regime in Germany is an obstacle for Chinese investors from a regulatory point of view. “The application of the regime has been extended to cover multiple attractive business sectors, and the review standard has been tightened in past years,” he says. “Especially Chinese investors are regarded critically by the reviewing authority. In substance, it is still very likely for a Chinese investor to ultimately obtain foreign investment approval, even though it may take some time.”

Weidlich at Luther Law Firm says a key challenge faced by Chinese investors is the continuous tightening of Germany’s rules on foreign investment, which is in part due to the EU FDI Screening Regulation, which sets out minimum standards for member states regarding strengthening their foreign investment regimes.

“In 2020, the German government amended laws and regulations related to foreign investment screening three times, due to the epidemic and changes in the international political and economic situation,” says Weidlich.

Back in Asia, Nasirud Doulah, of Doulah & Doulah at Dhaka, says the major challenges in Bangladesh lie not in the investment phase, but in dispute resolution. “The reason is two-fold,” says Doulah. “In most of the cases, no lawyer is involved at the investment phase and, as such, in most cases there is no access to dispute resolution tribunals such as arbitration, and the only option is to go to the local courts. In the courts, dispute resolution takes a much longer time, as the process is slow, and in some cases judges may not be capable enough to understand technical issues.

“The Bangladesh government is considering introducing a mandatory mediation process for any dispute which, if implemented, shall be extremely helpful to dispute resolution,” he adds.

Bahieldin Elibrachy, managing partner at Ibrachy & Dermarkar in Cairo, sees a similar problem in Egypt. “The dispute resolution mechanism and the enforcement of judgments remains a problem,” he says. “Egypt, as with many countries fighting for a larger share of foreign direct investment, is constantly attempting to streamline its regulations to bring about a more investor-friendly environment.”

Dispute resolution remains a challenge in more developed jurisdictions, too. “When it comes to legal disputes, German judgments can rarely be enforced in China, and vice versa,” says Weidlich, “therefore, arbitration remains the preferable mode of dispute resolution.”

There are other challenges, such as labour laws and taxation, and it is vital that Chinese investors be familiar with the intricacies of the local markets.

For instance, even in jurisdictions such as Macau, there are differences that Chinese investors have to be mindful of. “The Macau SAR’s legal system being different, sometimes the challenges come from understanding Chinese companies’ unique expectations regarding how their matters should be handled, as well as how their goals should be met, and providing practical and efficient solutions,” says Valente, adding vast experience and a deep knowledge of the local market, laws and regulations are essential to guiding Chinese companies locally.

“It is very important for Chinese companies doing business in the Macau SAR to understand that the local legal system is unique – according to the ‘One Country, Two Systems’ constitutional principle – and therefore they require appropriate local counsel to guide them to meet their goals and expectations,” he says.

Weidlich says Chinese companies and investors are often puzzled by the high number of individual and collective employee protection provisions prevailing in Germany. “In Germany, a works council (of employee representatives) can be established in a business with at least five employees, and can contest decisions on overtime, hiring and other issues at the firm,” he says.

Bonissoni at CBA says that, from a tax perspective, “the major challenges faced by Chinese companies in Italy concern the transfer pricing, the permanent establishment and the application of withholding taxes. These issues are generally scrutinised during a tax audit and challenged by the Italian tax authorities, with possible criminal ramifications if certain thresholds of tax due are exceeded.”

Nancy Tsui Chung, counsel and China desk head at Sao Paulo-based Pinheiro Neto, says a friendlier tax and labour environment with clearer rules and less bureaucracy would attract more Chinese investment to Brazil.

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“Besides the usual challenges faced by foreign investors when allocating resources in other jurisdictions … most difficulties confronted by Chinese investors in Brazil are related to: (1) the different legal systems; (2) the complexity of the Brazilian tax environment (with higher rates, a different set of rules, many ancillary obligations, and an aggressive approach by tax authorities when applying tax law and overwhelming bureaucracy); and (3) a large number of labour claims and complex rules in that area,” says Tsui.

This year, foreign investors are facing political and economic instability in Brazil because of the pandemic and the presidential election next year. “The expectation is that there will be a gradual increase in foreign investment from the second semester of 2022,” she says.

Chu, of LC Lawyers in Hong Kong, says the central government is enhancing regulations on certain business sectors. “Such a move will put the industries back on the right track, but may make it necessary for the market players to adjust their business models and operations,” she says. “Such adjustments may also have implications on other stakeholders such as their financiers, business partners in the supply chains, and employees. It is important for mainland Chinese companies to find the right path to comply with the new regulatory environment, and remain sustainable.”

Chu says that, in terms of dispute resolution, Qianhai, in the GBA, is developing the International Commercial Dispute Resolution Centre. “Hong Kong is equipped with the experience, professionals and track record in dealing with disputes concerning international commercial affairs, and therefore can play an active and important role in this regard,” she adds.

Wong, of Lee Hishamuddin, notes the difference in contracting in common law and civil law jurisdictions as an important issue that parties should be mindful of in Malaysia. “The general perception is that contracts drafted in common law jurisdictions such as Malaysia are longer and more exhaustive when compared with contracts made in civil law jurisdictions, such as China,” says Wong. “This is primarily attributable to the fundamental differences between common law and civil law legal systems, with civil law systems tending to be more prescriptive and allowing contracting parties to rely on underlying codified rules.

“This fundamental distinction frequently results in a mismatch of expectations for civil law contracting parties entering into legally binding relationships for the purpose of their business ventures in common law countries. For instance, parties may agree to simple contracts that omit terms believed to ‘go without saying’, only to realise when disputes arise that various rights and obligations have not been (impliedly) incorporated into the contracts.”

Wong says the importance of prudent contract drafting in common law jurisdictions cannot be overstated. “As the legally binding document that governs parties’ respective rights and obligations, a contract is the cardinal instrument scrutinised by courts or tribunals when resolving disputes between the parties,” she says.

Beyond these broader challenges, there are specific regulatory developments in some regions that may affect Chinese investors. Odhiambo, of Cliffe Dekker Hofmeyr, says the Central Bank of Kenya (Amendment) Bill of 2021 seeks to give the Central Bank of Kenya (CBK) a mandate to regulate fintech in the country. “The bill confers power on the CBK to ‘license, supervise, suspend or revoke a licence and approve digital channels and business models for digital credit lending businesses’,” he says.

“It is likely to affect Chinese investors engaging in digital lending businesses in Kenya. Those who do not meet the new requirements might be forced to close their businesses. The income from digital lending businesses might also go down due to controlled interest rates.”

This is true in Singapore, too, according to Chia Lee Fong, chief representative at Rajah & Tann Singapore’s Shanghai representative office. “In January 2020, the Monetary Authority of Singapore announced the commencement of the Payment Services Act, which enhances the regulatory framework for payment services in Singapore, strengthens consumer protection and promotes confidence in the use of e-payments,” says Chia. “Chinese investors who are involved in the e-payments sector in Singapore are required to comply with the Payment Services Act.”

Ho, at Rahmat Lim & Partners says the Malaysia Competition Commission (MyCC) has initiated the process of amending the Competition Act 2010 of Malaysia to introduce merger control regulations. “The MyCC has stated that the merger control regime in Malaysia is likely to be a mandatory pre-merger notification regime, hence, once in force, M&A that exceed certain thresholds will need to be reviewed and approved by the MyCC,” she says.

“This will greatly impact the timing, feasibility and structuring of transactions in Malaysia, although, in view of the spike in covid-19 cases, I think the tabling of such legislative amendments will likely be delayed until 2022.”

In Brazil, Flores of Dias Carneiro says a major change being considered is the taxation of dividends, which are currently tax-free. “If such a change is eventually approved, it may negatively impact the return over investment and reduce the attractiveness to certain less profitable enterprises, even though the reform may, on the other hand, reduce the taxation at the company level.”

THE CULTURAL GAP

Cultural differences are another major hurdle for Chinese companies. While language and differences in cultures are issues for investors seeking to go international, the processes and styles of business can also create hurdles when making investment decisions.

“The major challenge for Chinese companies could be difference in culture overall, and business culture in particular, says Alisher Hoshimov, a partner at Centil Law Firm in Dushanbe, Tajikistan.

Krause, of DLA Piper, has a more granular take. “Two aspects are often challenging when we work with Chinese clients: First, in comparison with Germany, or European investors, who are used to working based on a commonly established timeline with a detailed plan on a transaction, a large number of Chinese clients pursue a more flexible and less foreseeable approach,” he says.

“Second, instead of addressing problematic issues in a direct way, Chinese clients usually take an indirect approach in negotiations; especially in confronting business situations, they are cautious not to damage the face of the other party with aggressive behaviour. This adds difficulty to the negotiations, not only for the counterparty but also for us as advisers, as we have to be aware of what is behind the lines and what is the true intention.”

Burian, of Gleiss Lutz, says: “It can be difficult to build trust, especially when the pandemic does not allow meetings in person. If the Chinese law firm and the client do not have sufficient trust, they tend to disclose less information. This can make it more difficult to provide tailor-made and useful advice. It is therefore important to try and build trust between the parties early on, and video-conferences, but also quality advice, have been helping us to do so.”

Ho, of Rahmat Lim, however, has some handy advice for Chinese investors and law firms. “Chinese counsel should perhaps try to give more context or background to a matter or project when seeking local counsel’s advice,” she says. “They should consider involving local counsel at an earlier stage in a transaction, and more regularly, so that local counsel can give more tailored and meaningful advice to the client.”