On Tuesday, February 10th, breakfast took a legal dimension thanks to Winston & Strawn’s conference: “Doing Business in China in a Down Economy". Michael Phillips, partner at the firm’s new Hong Kong office explained the effects of China’s “Perfect Storm” - the introduction of regulatory measures preceding the global financial crisis, which were designed to cool down its economy.

The world’s third largest economy is dramatically slowing down. It slumped to “only” 9% for 2008, breaking a 7 year record of double-digit growth.

According to KPMG, “regulatory issues remain one of the top hurdles in the investment cycle” in China. As doing business in China requires many approvals, and laws are often vague or open to diverse interpretation, Michael Phillips’ motto - “Forewarned is forearmed” - should not be judged lightly.

Getting up to speed with laws can be difficult, and bureaucracy dominates. The Chinese government directs foreign investments through the Foreign Investment Catalog, by making approval more or less difficult to obtain depending the type of industry. Approval for “encouraged investments", such as High-tech, can be easy to obtain; while approval for “restricted investments” (real estate, credit rating and ranking) is both time consuming and difficult to get.

The PRC has also strengthened measures regulating mergers and acquisitions. It notably has responded to previous loopholes that allowed entrepreneurs to bypass and minimize government approvals and tax obligations through affiliations with offshore companies. Furthermore, the Ministry of Commerce has tightened approval requirements for M&As initiated by foreign investors - i.e. creating an anti-monopoly review. and restricting share swaps.

In terms of income tax, a new tax review was instituted in January 2008. Both domestic and foreign investment enterprises now fall under the same rules and incentives. Another major legal evolution is undoubtedly the Labor Contract Law, which encourages longer term employment and stops major labor abuses. In addition, employers face financial penalties if no written contract is signed after one month, and must pay compensation in case of severance. Consequently, both Chinese labor costs as well as the influence of trade unions have increased ; no wonder such systemic changes have motivated some foreign companies to move to other Asian countries such as Vietnam.

Still, China offers significant opportunities for investors. “Will China save the world from the financial crisis?” Perhaps not. However, it still offers tremendous opportunities for investors. The PRC continues to receive many foreign investments and its 1.8 billion population is an envied asset in terms of potential consumption. But, as Michael Phillips is used to say, “don’t check your brain at the border": be aware, stay vigilant and chose trustful partners.

A great thank you to Michael Philips for this concrete morning presentation, as well as Winston & Strawn San Francisco office for such a warm welcome. If you have questions about investing in China or want to learn more on Winston & Strawn, visit their Hong Kong office website.