LegalMay 14, 2020

A lawyers life in china during the covid-19 outbreak

China was poised in December 2019 to overtake the USA as the country with the world’s largest GDP. Whereas in 1980 there had been virtually no foreign investment into China, now the value of foreign investment into China was around US $170 billion. Companies from all over the world were flocking to China to build their manufacturing operations, to engage in trade and to sell their services. And then, at the start of 2020 the world shifted on its axis as a new coronavirus emerged from the wet markets of Wuhan in China. Everything changed, and changed utterly. Read how the government of China and companies deal with the outbreak according to lawyer Maarten Roos.
Nobody in China believes this is the end of the Chinese economic miracle.
Maarten Roos, Director R&P China Lawyers
It already seems so long ago. Only four decades after China’s late leader Deng Xiaoping masterminded the policy of “reform and opening up” to the outside world, China had successfully evolved into an economic superpower whose phenomenal growth was sustaining the prosperity of a Western world still in the shadow cast by the financial crisis of 2007-2009. Already the most populous country in the world, as well as the world’s biggest exporter, China was poised in December 2019 to overtake the USA as the country with the world’s largest GDP.

Notwithstanding tit-for-tat ramping up of tariff barriers with the USA in 2019, China had continued to grow at a much faster rate than the developed world and had cemented its position as a mature and powerful member of the international trading community. Whereas in 1980 there had been virtually no foreign investment into China, now the value of foreign investment into China was around US $170 billion. Companies from all over the world were flocking to China to build their manufacturing operations, to engage in trade and to sell their services – a trend initially started by large multinationals, but hordes of small- to medium-sized businesses had followed in their wake. And then, at the start of 2020 the world shifted on its axis as a new coronavirus (COVID-19) emerged from the wet markets of Wuhan in China. Everything changed, and changed utterly.

The performance of the Chinese government

For Maarten Roos, a Dutch lawyer and fluent Mandarin speaker, who ventured out to China in 1999 and who founded a new firm (R&P China Lawyers) in 2010, it has been “the best of times and the worst of times”. Maarten represents many European and American multinationals with business interests in China, mainly advising on investment projects, mergers & acquisitions (M&A), corporate restructuring and other commercial transactions, as well as intellectual property protection and dispute resolution. He frequently represents foreign clients in negotiations with Chinese business partners and government officials, and acts as an arbitrator specializing in disputes on foreign investment, joint ventures, corporate law and contract law. While many Chinese businesses have been hit very hard, Maarten considers that thanks to the government’s aggressive policies, the situation in most of the country (Hubei excepted) never really got out of hand medically. In a city like Shanghai, most restrictions have now been lifted. International commerce has depended on China for decades now, so it is ironic that precisely when China’s manufacturing capacity is ready to roar back to full production there should be a serious reduction in demand from the rest of the developed world. Cancelled orders from many of the sectors that China has traditionally served mean that many Chinese suppliers are struggling with excess stock and are in some cases having to dispose of their raw materials. However, as Maarten points out, the Chinese government is encouraging consumption at home, and slowly but surely people are taking up this message.

How (foreign) companies deal with the outbreak in China

By contrast with many other jurisdictions around the world, support from the Chinese government for struggling businesses has been limited. There has been relief of some social insurance contributions, and landlords are encouraged to offer some rent relief (though many private landlords are refusing). R&P China Lawyers are actively supporting many of their retail clients to negotiate for rent-relief. For larger clients in particular, this is an important way to make savings. While rent-relief for offices is apparently difficult to obtain, for retail outlets that have been closed for several months due to government policies, this is much more achievable. For example the firm was recently successful in assisting a large sportswear retailer to negotiate rent relief for its 20+ stores. But these modest reliefs are insufficient for many Chinese companies – especially those that rely on custom from Europe or the United States. Those markets, as Maarten says, were completely flattened. As a result, some of his clients have been forced to terminate employees or to close altogether. Obviously the immediate future remains highly uncertain, and R&P China Lawyers have been advising their clients to look hard at whatever they need to do to survive. If this means cutting employees, then now is the right moment to do so. Maarten notes with interest that many employees are proving more understanding than they used to be, and are satisfied with lower packages – better to receive something than nothing, if the employing company goes bankrupt.

Other clients are acting opportunistically to position themselves for the years ahead by buying out their competitors. For example Maarten is currently assisting a client in computer repair services, to take over the Chinese operations of a large European competitor. The target business has great potential but the European competitor simply lacks the resources at present to manage it. Maarten’s client is not paying anything for the business and is able to cherry pick only those people that it wants. Meanwhile it has got rid of its biggest competitor in the Shanghai market.

One particular challenge for some foreign-owned businesses is that travel restrictions introduced at the end of March mean that foreign executives are banned from coming to China. New quarantine policies applied across China’s provinces and cities are affecting domestic business travellers as well. These restrictions, although temporary, may yet remain in place for some time as China works to avoid the possibility of a second wave of the outbreak. This means that for the time being operations must be managed from abroad, with the support of local advisers. Maarten notes that this last happened during the SARS outbreak (in 2003) as well, and that on both occasions this has led to a material increase of business for his firm.

China remains a stable country for foreign investment

Just before the virus struck Maarten had completed, in tandem with fellow Dutchman Rogier van Bijnen, an important contribution on the foreign investment and M&A scene in China for Kluwer’s multi-jurisdictional ‘Corporate Acquisitions and Mergers’ under the editorship of Peter Begg. As Maarten points out in his excellent monograph, foreign investment had in fact been one of the major engines of China’s economic miracle, with the government successfully using economic policy to attract and guide foreign investment into those sectors – primarily manufacturing – that it deemed important for its continued development. Since nemesis arrived, some foreign investment projects have of course been postponed or deferred. However in Maarten’s view China will always remain a strong destination for Foreign Direct Investment (FDI) because of its combination of a stable economic environment, extensive manufacturing capacity, high quality telecommunications and other infrastructure, access to inexpensive labour and other key resources, and its vast home demand base. As Maarten Roos succinctly puts it: “Nobody in China believes this is the end of the Chinese economic miracle”.

Happily for investors and their advisers, waiting for the engines of growth in China to resume, much of Maarten and Rogier’s know-how on FDI in China (M&As, JVs and greenfield investment), including a great deal of recent regulatory development, is captured in writing for subscribers to Corporate Acquisitions and Mergers. As Maarten points out, regulators have done much to improve the regulatory framework for cross-border M&A activity, and acquisitions by foreign investors are consequently becoming more straightforward and practical to initiate and implement. Similarly, improvements in corporate governance are leading to greater transparency in local companies, and a better understanding of Chinese business culture. The widespread adoption of international management practices has made the integration of domestic Chinese companies into a global group less daunting.

Long-term continued success of the Chinese economy

R&P China Lawyers, which brings together lawyers qualified in China, the United States and the Netherlands, is one of the few Chinese law firms that operates under foreign management. It combines a license to practice Chinese law with the DNA of an international law firm. It has a unique focus on inbound China work. As an independent Chinese law firm, it can also act as a local correspondent to international law firms with no office in China. Where additional support is needed, R&P are able to call on long-standing relationships with trusted local firms and agents across the country. The trade war with the USA is not yet finished, and nor are the global economic uncertainties introduced by COVID-19. However, Maarten and Rogier remain determined to help clients to resolve those challenges and believe wholeheartedly in the long-term continued success of the Chinese economy.
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