2024: Spheres of influence

With China slowing, India and the Middle East factor heavily in legal experts’ predictions of key trends that will shape 2024. George W. Russell reports

While geopolitical tensions continue to make global headlines – the Russian invasion of Ukraine has entered its third year, and there seems to be no quick resolution to the Israel-Hamas conflict – Asia is likely to be focused on economic issues in 2024. From China’s relatively struggling economy, to Indonesia’s path under a new president and India’s forthcoming general election, Asia’s outlook is headline news across the world.

This year is pivotal politically. Already there have been important elections in Taiwan, where another victory by the nationalist Democratic Progressive Party in January upset Beijing. That same month a controversial Bangladeshi general election saw long-time prime minister Sheikh Hasina returned to power.

In February, Prabowo Subianto, a former general accused of human rights violations, was forecast to have easily won an election and will become the new president. April will see a legislative election in South Korea, followed by a Mongolian parliamentary election in June. Sri Lanka votes for its next president in September and October.

But the economic focus this year remains China. On February 18, Chinese Premier Li Qiang called for “pragmatic and forceful” action to boost economic confidence, noting that the government was concerned about a sluggish recovery and plunging stock markets. “China’s economy has progressively slowed lately, with mounting imbalances and associated vulnerabilities,” says Taimur Baig, chief economist at Singapore-based regional bank DBS.

Alicia García-Herrero, chief Asia-Pacific economist at French bank Natixis CIB, says high real interest rates and China’s crackdowns on several sectors have hurt those in need of funding. On the structural front: “Chinese authorities stubbornly pile up additional investment through different industrial policy plans”. She says the result, given stagnant domestic investment and a more reluctant external demand, “is increasing overcapacity”.

China’s gloomy sentiment

Meanwhile, China’s deeply indebted property sector remains troublesome. On 20 February, the People’s Bank of China lowered the five-year loan prime rate (LPR), which commercial banks use as a benchmark to adjust their mortgage rates, to 3.95% from 4.2% – the largest cut since 2019. “This LPR cut will likely help stabilise property market sentiment,” said Tao Wang, head of Asia economics and chief China economist at UBS.

Also last month, the State Administration of Foreign Exchange reported that new international investment into China at the end of 2023 was 82% lower than the previous year’s level and the lowest overall since 1993. “For the worst to be over, consumption and business sentiment need substantial support,” says Baig.

These low levels of sentiment – across businesses as well as consumers – worry lawyers. “I’ve been in China 10 years and others have been here all their lives,” says Kanyi Lui, a partner and head of China at Pinsent Masons in Beijing. “This is the first time they have seen China slowing down. 2023 was the first year China emerged from the covid-19 pandemic, and people expected pent-up demand from lockdowns to be released, which didn’t really happen.”

However, firms say Chinese companies are already making contingency plans as the domestic economy adjusts to lower growth. State-owned enterprises, for example, are “redoubling their efforts” to expand overseas. “One red hot market is the Middle East, especially Saudi Arabia,” says Lui. Southeast Asia is also a region to watch, he adds, noting: “The Philippines is a major beneficiary of infrastructure investment with many projects done by China.”

Disputes and resolutions

The infrastructure boom, according to several Asia-focused firms, is likely to be accompanied by a boost in construction dispute work. Lui also expects a dynamic year for restructuring.

Withers, for example, recently boosted its Asian dispute resolution team by hiring special counsel Gary Leung and promoting Alex Ye to special counsel. Sherlin Tung, a partner in Withers’ litigation and arbitration team in Hong Kong, says the appointments “reinforced our commitment to Hong Kong as a leading seat for resolving commercial disputes”, adding that the dispute resolution practice caseload has more than doubled since 2020.

One factor is Chinese courts strengthening protections for foreign firms. Arbitration clients are much more reassured because of mutual enforcement of awards, Tung adds, citing a case in which a court recently froze USD20 million in assets in China.

Leung says the general China economic downturn is causing a lot of internal disputes among companies. “There is a lot of offshore debt restructuring,” he says, citing property developers such as Country Garden, which has been putting up major projects in London for sale as part of its restructuring.

Geopolitical tensions, meanwhile, have exacerbated the potential for disputes. “The logistics sector has battled the impact of covid-19, the blockage of the Suez Canal, and now, the unexpected need for extra security when navigating through the Red Sea,” says Tung, adding that shipping companies have raised charges, attempting to invoke force majeure. “Our clients – their customers – have been faced with sudden increases in fees.”

India as alternative destination

China’s economic difficulties – as well as a search for diversification among suppliers – has boosted the fortunes of other regional economies, particularly in South Asia and Southeast Asia. “The difference today is the sheer scale of investment interest focusing on India, particularly as companies hedge their bets against an over-reliance on China,” says Roddy Martin, co-head of the India practice at Herbert Smith Freehills in London.

“The seeds of growth are already in place,” he adds of the world’s most populous country. “India’s education sector has long generated – and exported – expertise and innovation, and global tech and manufacturing companies have now established facilities in India to start to capture the best of that talent.”

The task for international law firms, which in 2023 became officially able to open offices after more than a decade of talks over restrictions, is to help ensure a “well-documented, robust regime regarding matters such as funding milestones to reassure investors that the factory will be built and receive its permits and, critically, addressing the technology transfer and the ownership and use of developments and improvements,” according to Martin.

Indian firms say the moves to allow foreign firms will provide healthy competition. “We foresee several opportunities for collaborative growth,” says Haigreve Khaitan, senior partner at Khaitan & Co in Mumbai. “This is an opportune time for such a step, with the Indian legal space ushering in a new era of legal tech-based innovation.”

Khaitan expects 2024 to see deals gather steam. “The technology, financial services and infrastructure spaces are in focus from a mergers and acquisitions (M&A) standpoint as India ramps up efforts to build a robust ecosystem,” he says. “Some exciting initial public offerings seem to be in the pipeline as well.”

Stable Japan lures investment

Japan is gripped by a weakening yen, an ageing population, increasing tensions with China and a severe labour shortage. The economy shrank in the past two quarters and household consumption remains weak.

Yet the Nikkei 225 set a 34-year record on 22 February, and has risen 17% since 1 January, making it the world’s best-performing major index, and Japanese law firms are optimistic about 2024. “Japan is a safe destination for investment in terms of the geopolitical environment,” observes Nozomi Oda, an M&A and capital markets-focused partner at Morrison & Foerster in Tokyo.

Tech is booming and Japan’s political stability, modern infrastructure and earthquake-proof buildings make it a popular destination for data centre investment. “Artificial intelligence (AI) has attracted many investors in Japan, as it has become part of such institutions as the National Health Insurance system, while life sciences and healthcare are centres of attention,” says Masahiko Ishida, DLA Piper’s country managing partner in Tokyo.

“ChatGPT is rolling out,” he adds, referring to the large AI language model increasingly used in commercial, educational and professional settings.

Ishida expects corporate governance to maintain its high profile this year. “Corporate governance in Japan is way better than before,” he says. “Activist investors exert positive pressure impact on the mentality of managers and directors, while the Tokyo stock exchange gives good guidance. Japanese companies are going in the right direction thanks to pressure from activism and markets.”

Japanese companies are expected to be heavily invested in Southeast Asia in 2024, according to Justin Ee, a partner at Nagashima Ohno & Tsunematsu in Singapore. “I have seen many infrastructure projects in Indonesia,” he says. “Southeast Asia investors see a lot of potential with cheap funds, cheap labour, huge populations and a huge market.” Ee says the trend is so significant that the firm recently opened a Jakarta office. “Vietnam is also big,” he adds.

Southeast Asia rising

Lui, at Pinsent Masons, agrees that Vietnam can expect a banner year, especially in sectors concerning supply chains, offshoring and infrastructure. “What I do see in 2024 is continuing trends of offshoring. Vietnam has been a darling because of its membership in both the Comprehensive and Progressive Agreement for Trans-Pacific Partnership and the Regional Comprehensive Economic Partnership.”

However, he warns that while Vietnam’s population is relatively young, the country is running out of key assets, including people – “Unemployment numbers are half those of everybody else” – and energy. “When I was in Hanoi they had brownouts – they are running out of power.” He adds that Laos is a significant beneficiary of the overflow from China and Vietnam, while the Philippines and Indonesia will also see growth.

Global investors are keeping close watch on government modernisation efforts and policy liberalisation developments in Southeast Asian countries such as Vietnam and the Philippines, says Theodore Heng, principal at Baker McKenzie Wong & Leow’s M&A practice in Singapore.

Heng says there have been signs of a revival of M&A activity in Southeast Asia. “It’s driven by strong interest in sectors such as healthcare, digital infrastructure and renewables, as well as the US-China trade rivalry and China economic slowdown, attracting capital which otherwise would have been deployed elsewhere,” he says.

Tung, at Withers, notes that economic development in Southeast Asia, in particular in the commodities, construction, and manufacturing industries, has also prompted rising disputes. “Arbitration is the ideal mechanism for resolving disputes,” she says, noting that the firm’s Singapore dispute resolution team has seen more cases involving Indonesian, Vietnamese, Malaysian and Thai companies.

Moving money across borders

With geopolitical tensions on the rise, several jurisdictions are ringfencing certain sectors from foreign control, or putting curbs on cross-border investment. An executive order issued by US President Joe Biden in August 2023 restricted outbound investment to China, Hong Kong and Macau in areas deemed critical to national security, mainly advanced computing chips and microelectronics, quantum technology and AI.

But the Asian giants are also imposing curbs on foreign investment. China’s increased scrutiny on sectors from technology, consultancies and brokerages to education and even weather apps is damping enthusiasm, and has led many to question current investment potential in the nation.

That view is not universally held, of course. “China is the world’s second-largest economy, a significant player in the global supply chain and a leader in critical areas such as renewable energy technologies, electric vehicle batteries and mature chip production,” says Kunjal Gala, London-based head of global emerging markets at US asset manager Federated Hermes. “We do not share the view that many hold in the market that China is largely uninvestable, and we see a favourable risk-reward situation.”

Meanwhile, India continues to maintain heightened scrutiny of Chinese investments four years since a border clash cooled bilateral relations, although in January, India’s top industrial policy bureaucrat said at the annual World Economic Forum meeting in Davos that continued peace could see a relaxation of the investment curbs.

Southeast Asia has also seen tighter foreign investment rules. On 9 January, Singapore’s parliament approved the Significant Investments Review Bill to regulate foreign holdings in entities critical to national security. But Indonesia has steadily expanded sectors open to foreign investors, while “there are minimal restrictions on foreign investment participation in Malaysia”, according to a recent review by Oliver Borgers and Dominic Thérien, of Canadian firm McCarthy Tétrault.

“While the rise of national security laws and the introduction of sanctions globally could hinder M&A activity across the Asia region, within Asia itself we are seeing policy shifts geared towards attracting foreign investment,” says Heng, at Baker McKenzie.