An employee of China Mobile Communications Group installs a 5G base station equipment on a building in Zunyi, Guizhou Province of China
Signalling demand: China Mobile’s shares are up by about 10 per cent since its Shanghai listing © Qu Honglun/China News Service/ Getty

China’s biggest stock market listing in a decade — China Mobile — has, in some ways, been an unexpected success story. Its public share offering, in January, was significant not only for the amount of cash raised, but also for accelerating investment flows between China and the rest of the world.

However, in raising Rmb48.7bn ($7.5bn) on the Shanghai stock exchange, the world’s biggest telecoms operator by subscribers was making something of a comeback — having been kicked out of New York markets, under US government sanctions targeting companies with alleged military links.

Since that homecoming listing, China Mobile’s share price has risen by about 10 per cent — a rare feat in a falling market. And it is more impressive still given China Mobile’s offer price, of Rmb57.58, had been at a 40 per cent premium to the closing price of its Hong Kong-listed shares.

Such a variance in valuation is not uncommon for secondary listings in mainland China, because of the relatively closed nature of the market. Still, the unusually wide gap signals continuing demand for shares in Chinese companies that were once off limits to mainland investors.

China Mobile’s Shanghai listing has done more than deliver fat returns, though. “It has opened the path for other Hong Kong-incorporated companies to at least say, ‘Hey, it’s do-able’ . . . and have a playbook,” says Kay Ian Ng, managing partner of Sullivan & Cromwell’s Hong Kong office. It has acted for China Mobile on deals and compliance matters since it listed on the Hong Kong exchange in 1997.

The firm had to navigate several regulatory challenges arising from both mainland China and Hong Kong and conduct extensive legal due diligence, with few precedents to help.

“A number of matters required operational thinking,” says Ng, recalling the deal. For example, stamp duty would normally be due on all transfers, but the lawyers were able to achieve a waiver.

“Stamp duty is a lot of money, given the amount of trading on the stock exchange. [This is one of a] number of quirky things lawyers worry more about than business­people,” he adds.

Cnooc (China National Offshore Oil Corporation) — the country’s biggest offshore oil and gas producer — is another example of a successful homecoming listing. It raised Rmb28bn as its shares surged on their debut in April. Like China Mobile, the company had been expelled from the New York Stock Exchange last year and labelled by the US as a security threat.

But such labels mean little in the Chinese stock market, where retail investors have more clout. “Mom-and-Pop” shareholders hold around 80 per cent of all locally listed stocks and account for nearly 90 per cent of daily trading volumes.

As a result, shares in China Mobile — a household name with a 60 per cent domestic market share — were in exceptionally high demand. Until now, mainland Chinese investors had large­ly been unable to access the shares of Chinese companies listed in the US. “The attraction is to align your customer base with your shareholder base,” observes Ng. That part­ly explains the higher valuation Chinese companies enjoy when making a homecoming listing. China Mobile now has a market capitalisation of more than $140bn; in New York, it had been valued at $110bn in 2020.

Listings of this size by leading Chinese companies were initially concentrated in the global hubs of Hong Kong and New York, until political factors in the latter market — including the blacklisting of Chinese companies and the imposition of more stringent audit requirements — began to encourage homecoming listings. Now, global investors, seeking strong returns and dividend yields — more than 7 per cent in the case of China Mobile — are following them.

That is helping Beijing to achieve its longstanding goal of attracting more investment flows to the mainland.

In 2014, it launched the Stock Connect scheme, allowing investors in Hong Kong to buy mainland Chinese shares, and vice versa, more freely — partly opening up trading between the two markets. A further Shanghai-London Stock Connect scheme was set up in 2019, to attract London-listed European companies and funds to the mainland markets, and expand offshore links to the mainland. Only a few Chinese companies have joined, however, and foreign companies have remained wary.

So, this year, Chinese regulators are expanding the scheme’s scope and scale into Europe, revising regulations to allow companies in Germany and Switzerland to sell new shares and raise funds from investors in mainland China.

Broader geopolitical challenges for lawyers

Lawyers enabling these investments must anticipate broader geopolitical challenges, though.

Following Russia’s invasion of Ukraine, China potentially faces US sanctions if it supports Russia, which could expose businesses to secondary sanctions. Separately, the threat of US delistings for Chinese companies because of a clash over audit laws remains.

It is already leading to a steep discount for Chinese stocks listed in the US, as Beijing’s bans on foreign access to audits have prevented compliance with US regulatory demands — although there may be flexibility on this soon.

Conversely, Chinese laws that can hold executives of public corporations personally liable for their company’s actions may add to wariness over listing on Chinese exchanges.

Opening up, however, remains a key policy for Beijing. One of the government’s goals is for the renminbi to become a global currency. Relaxing regulations and removing limits on foreign investors and companies are both crucial for this to happen.

In the short term, the biggest potential for a boost in investment may lie in the Wealth Management Connect scheme, which allows mainland investors to buy Hong Kong and Macau bank products. This “makes it a lot easier for fund houses to offer products, and for investors to buy”, says Alwyn Li, a partner at law firm Deacons. “It is going to have a big impact because of the low regulatory approvals required, which will save time and costs.”

But its effects will become clear only once travel restrictions in the region recede. Until then, successful large listings, such as China Mobile’s, will still play a critical role in keeping the mainland market attractive to companies and investors.


Case studies:

  • Digital finance

  • Advancing markets

Digital finance

Case studies in best practice. Researched and compiled by RSGI. “Winner” indicates the organisation won an FT Innovative Lawyers 2022 award; other organisations are listed alphabetically

WINNER: DLA Piper
The firm structured legal documentation into smart contracts for fixed income asset tokens — managed on its blockchain platform Toko, and stored by digital asset custodian HexTrust — in order to finance early-stage start-up Calcite’s planned purchase of a calcium carbonate quarry in Europe. The use of blockchain tokens streamlines asset management services and represents a new way to raise capital for fixed-income assets.

Allen & Overy
Thai energy company PTTEP issued Asia’s first fully digitised corporate bond last November, available through a digital wallet. Allen & Overy devised the structure and negotiated with the Securities Exchange Commission in Bangkok to fit this offering within existing regulations, such as a requirement to make it functional alongside the paper-based system. This will make bonds more accessible to Thai retail investors.

Herbert Smith Freehills

Purple grapes on the vine
© John Sinal

A specialist team in the technology, media and telecoms digital group advised Australian wine company Treasury Wine Estates on a non-fungible token for wine. Initially, one NFT represents a single barrel, which will then be converted to 300 single- bottle NFTs when the wine is decanted this October. Once the bottles are released next year, the NFTs will be available to trade on the luxury wine marketplace BlockBar, or to be used to redeem a physical bottle at a BlockBar store in Singapore. The firm’s legal framework has enabled the client to access a broader range of consumers.

LNT & Partners
The firm advised Kredivo, an Indonesian credit platform owned by Singapore fintech company FinAccel, on a joint venture with investment company Phoenix Holdings to launch a buy-now-pay-later lending business in Vietnam. The legal structure enables the venture, which worked in partnership with credit card company Vietcredit, to compete with established lenders. It is designed to be flexible so that it maintains compliance as regulations evolve.

Yulchon

Bronze medallist South Korea’s Lee Seung-hoon pose on the podium during the men’s speed skating mass start victory ceremony of the Beijing 2022 Winter Olympic Games
© Wang Zho/AFP/Getty

The firm worked with the Korean Sport and Olympic Committee to mint and sell images of athletes competing at the 2022 Beijing Winter Olympics as NFTs, providing a new revenue stream for athletes and other stakeholders. The lawyers navigated intellectual property and publicity rights, as well as the regulation of virtual assets in South Korea.

Advancing markets

Case studies in best practice. Researched and compiled by RSGI. “Winner” indicates the organisation won an FT Innovative Lawyers 2022 award; other organisations are listed alphabetically

WINNER: Cyril Amarchand Mangaldas

People wait outside a PMC (Punjab and Maharashtra Co-operative) Bank branch to withdraw their money in Mumbai
© Francis Mascarenhas/Reuters

The firm advised Centrum, an Indian financial services group, and BharatPe, an Indian fintech company, on their formation of the digital Unity Small Finance Bank. USFB took over Punjab & Maharashtra Cooperative (PMC) Bank, which had been in administration since September 2019. New banking licences are rarely granted in India — especially to a fintech business as part-owner — and the law firm’s advice was central to the application’s success. The repayment of PMC’s depositors has begun, as part of the licence arrangement.

Allen & Overy
The firm advised the 19 underwriters of the world’s first sustainability “relinked” bond, offered by the Bank of China, on its design and issuance. Bonds linked to sustainability have been around for several years, but a relinked bond is linked to the sustainability performance of the underlying loans — for example, a loan with an interest rate that adjusts depending on the borrower keeping carbon emissions below a certain level. This product enables bond investors to tap into a wider pool of sustainability investment opportunities. It also incorporates sustainability principles agreed by the International Capital Market Association and the Loan Market Association.

Corrs Chambers Westgarth
The firm advised the Association of Litigation Funders of Australia, after adaptations by Australian regulators to class action lawsuits posed problems for litigation funders. This work included negotiating an exemption from the laborious money-laundering compliance process and a relaxation of the requirement to disclose details of a lawsuit’s legal budget. Corrs’ lawyers also created new standard legal documents for the industry to reduce complexity and legal costs for litigation funds.

Deacons
The firm helped BEA Union Investment, a Hong Kong-based asset manager, to restructure five of its sub-funds. These longstanding sub-funds had been set up as unit trusts, which require a trustee to hold assets. Deacons assisted in the transfer of the five unit trusts to corresponding open-ended fund companies (OFCs). This was the first such restructuring since Hong Kong’s OFC corporate structure was created in 2018, allowing investment funds to be set up in company form.

Eversheds Sutherland
The firm advised a consortium of 13 leading banks on a collaboration with the Hong Kong Monetary Authority, the Chinese territory’s de facto central bank. The banks had wanted to integrate eTradeConnect — a platform that uses blockchain to digitise the trade finance market — with the People’s Bank of China’s own trade finance platform. So the lawyers developed a governance procedure to avoid monopolistic advantages and liaised with the stakeholders on a risk-mitigation strategy. If successful, the new platform could expand internationally and widen access to trade finance.

Gilbert + Tobin

Portrait of man listening music with cordless headphones
© Getty Images/Westend61

Founders of software company Blockchain Music asked the firm’s payments, blockchain and fintech team to help them create a decentralised autonomous organisation (DAO) — a community with a central purpose that uses crypto assets in its governance structure to develop projects and build consensus. The aim was to decentralise the production, sale and distribution of music, instead of having a production company oversee it. The lawyers formed Moda Foundation, a public company limited by guarantee, to be a member of the DAO, which also acts as the community’s agent — meaning that it can enter into binding corporate and commercial arrangements. The Australian government is considering legal reforms to recognise DAOs as legal entities but, in the meantime, this structure allows the creation of and interaction with DAOs.

King & Wood Mallesons

People are seen walking pass a logo of the Hong Kong Stock Exchange in Hong Kong
© Vernon Yuen/Picture Alliance/ NurPhoto

The firm advised the China Foreign Exchange Trade System (CFETS), a division of the People’s Bank of China, on its 2021 launch of Southbound Bond Connect — a collaboration between CFETS and the Hong Kong stock market. The scheme allows mainland Chinese investors to invest in Hong Kong’s bond market, and follows a Northbound version that launched in 2017 to facilitate foreign investment in the Chinese bond market.

Mayer Brown
The firm advised the Hong Kong Insurance Authority on the creation of insurance-linked securities, using a model from the US adapted for Hong Kong. The Chinese bond market can now offload natural catastrophe risk to capital markets, at a time when more high-value infrastructure assets are being built in the Greater Bay Area of China, leading to an increased risk of insurance losses from extreme weather events. The firm advised on the first issuance of a $30mn catastrophe bond under the new regime last October.

Orrick

An offshore wind turbine stands in the East China Sea off the coast of Goto in Nagasaki Prefecture, southwestern Japan
© Kyodo News Stills via Getty Images

Serving as lenders’ counsel to 20 Taiwanese commercial and state-owned entities, the firm advised on the $1.6bn financing of Zhong Neng, an offshore wind farm project in Taiwan. This is the first project of its kind to be financed predominantly by Taiwanese banks — an important step for Taiwan towards its target of reaching 20.5 gigawatts of offshore wind capacity by 2035. The legal team from Orrick helped secure a comfortable level of risk for the local lenders, including an investment from the partially state-owned China Steel Corporation.

Pinsent Masons
The firm advised on a joint venture between Chinese electric vehicle battery-swapping specialist Aulton and international energy company BP to create a pilot scheme for a battery-swapping network in Guangzhou. This scheme allows drivers to exchange a depleted battery for a fully charged one quickly. The firm navigated complex land ownership rights and adapted the deal to the Personal Information Protection Law, which imposed additional data collection restrictions and came into force in November 2021. The joint venture is looking to expand into other Chinese cities.

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