China Experts Handicap a Complex Market

The latest round of changes in China’s financial regulations have left a lot of potential investors — and their lawyers — confused about how they affect the chance to play in one of the world’s hottest markets.

Lawyers from O’Melveny & Myers’ China practice joined other experts in San Francisco on Wednesday to discuss how the emerging nation’s economic opportunities will shape up.

While the panelists were generally optimistic about China in the longer term, they said the next few years might be harder to predict.

The program, held at San Francisco’s Four Seasons Hotel, follows a series of financial changes coming from China in recent months. Panelists agreed that China’s economy must modernize if it’s going to continue extraordinary growth, then weighed the nation’s latest efforts.

In September, government regulators announced an overhaul in mergers and acquisition rules. The rules require central government approval for M&A activity in China, even if the Chinese company is incorporated overseas.

The panels addressed the effect of the recent G share reforms on China’s domestic capital markets. That change permits government-owned shares to trade, resulting in more domestic initial public offerings.

Howard Chao, the partner in charge of O’Melveny’s Asia practice, said there are still largely two financial worlds in China: the foreign and the Chinese domestic. Those worlds still don’t often intersect, he said.

When giving advice to foreign clients interested in investing in Chinese companies, Chao said he advises them to closely research the sector in which they’re investing. For example, pharmaceuticals are still heavily state-owned and regulated, making them a problematic choice.

“Be careful, and do your diligence within the sector,” he said.

The panel also discussed the challenges facing the modernization of the country’s domestic financial systems.

“The issue is how to change the edifice without having it fall down,” said Clare Hammond, a special adviser on China for HSBC Holdings. “It’s a very delicate balancing act.”

Timothy Dattels, a managing director for TPG Newbridge, sounded an optimistic note on the future of the Chinese financial systems. Corruption is on the decline and it’s not endemic, he said.

“The leadership is amazing — it’s so good and focused,” he said. “They can withstand shocks and will develop a more meaningful domestic capital market.”

As for the domestic workforce that will be involved in those markets, the universities are churning out well-qualified individuals, said panelist Stefanie Starna, a partner at Deloitte Touche Tohmatsu. But the challenge is retaining them amid all of the opportunities in the market. There’s little loyalty to motivate young financiers to stay at one place.

“They’re not staying long enough to learn all they can before moving onto the next step,” she said.

A similar event focusing on China’s financial markets, which is also co-sponsored by O’Melveny & Myers, will take place in New York City on Thursday. That conference is in its fifth year, though the San Francisco “sister conference” was added just this year after the firm noticed great interest on the West Coast.

Kellie Schmitt

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