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In 2017 and the first half of 2018, the Chinese government’s tightening of checks on overseas investments and imposition of controls on renminbi capital outflows had a significant cooling effect on China outbound transactions. Chinese outbound M&A into the US slowed in particular; although this is partly due to the aforementioned regulatory issues in China, it is also a consequence of the Committee on Foreign Investment into the United States (CFIUS) taking a more stringent approach to reviewing transactions for national security risks. Further, there are proposals currently in place to further expand the powers of CFIUS to investigate and block foreign transactions.

These US developments have coincided with Chinese investors increasingly shifting their investment strategies elsewhere, particularly to Europe. What is striking, however, is that Germany is stepping up efforts to protect key companies from Chinese investors – it tightened controls on foreign investments in 2017 following a series of Chinese takeovers. Similarly, the UK government recently published a White Paper setting out a proposed screening regime in relation to foreign investments into companies, where those transactions may have potential national security implications.

M&A activity in Hong Kong in 2017 was particularly notable in sectors such as real estate and insurance. A major driver of deal activity involved mainland insurance companies investing in Hong Kong companies, and insurers expanding overseas. Two notable real estate sector transactions included the spin-off and Hong Kong Main Board listing of Wharf Real Estate Investment, and also the $5.15bn acquisition of The Centre tower by a consortium of Hong Kong and PRC investors.

On the capital markets front, in April 2018 a hugely significant development saw the Hong Kong Stock Exchange amend its Main Board listing rules in order to enable biotech companies to list before they become profitable, and also to attract listings applications from high-growth (tech sector) issuers with weighted voting rights structures. It is hoped that the regulatory changes will make Hong Kong a credible challenger to exchanges such as NASDAQ. Education has been a particularly hot area for IPO listings in Hong Kong, with a number of China-based private education operators coming to market. It is worth noting, however, that the PRC government announced in August 2018 that it was going to clamp down on the sector over issues concerning financial reporting and certification. It remains to be seen whether regulatory oversight of this fast-growing industry will have an impact on the strong run of education sector IPOs involving China-based entities.

In the asset finance space, aviation finance work continues apace for Hong Kong law firms; this has largely been fuelled by the vibrant Chinese lessor market, which has seen new entrants establishing operations and encouraging competition among these companies which are increasingly a pivotal source of funding for the financing of aircraft. The Chinese lessors and banks are now also the prominent providers of capital within the shipping industry as the traditional funding providers, the European banks, have retrenched – burnt by overcapacity, non-performing loans and dwindling returns in the sector.

The Competition Ordinance, Hong Kong's nascent competition law, continues to generate a significant amount of work for law firms, both in relation to ongoing compliance measures and the growing number of investigations undertaken by the Competition Commission.

Elsewhere, China’s hugely ambitious Belt and Road Initiative is seen as a major avenue of opportunity for mandates across a broad cross-section of disciplines, including banking and finance, corporate work, dispute resolution and projects. The market is also keeping a keen eye on the proposed Greater Bay Area initiative, a groundbreaking project that is intended to link Hong Kong, Macau and nine cities in Guangdong province, forming a hub of economic activity in areas such as trade and logistics, financial services, advanced manufacturing and new technologies and innovation.

Although the Hong Kong legal market is primarily dominated by international law firms, there are several highly active domestic players with a first-rate reputation. Deacons is a standout name among the independent Hong Kong firms. In a notable development in the market, US firm Troutman Sanders closed its Hong Kong office (along with its Beijing and Shanghai offices) in May 2018.

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