Report from 2002 TMA Spring Meeting

Attorneys Richard Wageman and Blaine Turnacliff of Lehman, Lee & Xu attended the 2002 Turnaround Management Association Spring Meeting in Tucson, Arizona from March 20 - 23. Richard is based out of the firm's headquarters in Beijing while Blaine is based out of the Shanghai office.

There are currently only three Chinese members in TMA, Richard, Blaine, and Edward Lehman of our Beijing office. This was the first TMA Conference at which China members participated. Richard and Blaine would like to thank everyone for making their participation in the Conference an enjoyable and worthwhile experience.

The turnaround industry is counter-cyclical to the business cycle. As the economy worsens, the demand for turnaround services increases. Although relatively speaking, the Chinese economy has been somewhat shielded by the recent downturn in global trade with the GDP predicted to grow at around 7% in 2002, this is still a decrease from previous years and the full repercussions of the turndown and fallout from 9/11 are still not fully known. With the increased integration of the Chinese economy to the outside world, the Chinese economy cannot help but be affected by what happens globally.

Furthermore, the power brokers in Beijing want Chinese companies and industries to become more competitive with foreign investors. They are no longer necessarily willing to subsidize unprofitable State Owned Companies (SOEs) and prefer to let them stand on their own two feet. If the SOEs cannot operate profitably, then Beijing is willing to allow these companies to go bankrupt or be taken over by other companies or purchased outright. It is not known what the cumulative total of liabilities for companies in default would be, but the total is likely to be in the hundreds of billions and likely will exceed the U.S. level.

Add to this mix the trend towards privatization in China that will see the largest sell-off of SOEs ever in the world. China is well on its way to becoming a market based economy governed by the rules of free enterprise. Anyone who has visited any of the big Eastern Chinese cities in recent years can attest to this fact. China has begun its long march down the road towards capitalism and there is no turning back. Mergers and acquisitions are on the rise as are venture capitalist buyouts and industry specific buyouts. What this means for the turnaround industry is a massive amount of opportunities to become involved at all levels, from tranche B lenders, turnaround professionals and venture capitalists or investors.

The turnaround industry in China is at its very earliest stages. There are very few local turnaround specialists to speak of in China. As the turnaround industry is most developed in the US, they are in a position to reap the most benefit from the changes taking place in China, but there are opportunities for experts from anywhere to become involved. The Chinese government has stated that they are eager to learn from overseas professionals and welcome the participation of overseas partners or professionals. Lehman Lee & Xu can assist TMA members to find these opportunities and to make their involvement as smooth as possible.

First Auction of Wholly Foreign Owned Firm Fails

China's first ever bankruptcy auction for a wholly foreign owned firm, Shanghai Coline Cocoa Products Co., ended in less than six minutes without a successful result on March 7.

Although seven enterprises visited Coline's factory and over 50 firms sent representatives to the auction as observers, not one bid was made on the RMB 116 million floor price for the target company. Reasons for the failure, explained the Shanghai Auction Corp (SAC) who hosted the event, included "insufficient preparation time." A second public auction is planned for the second half of this coming April.

Having entered the Chinese Market in 1993 as a joint venture involving investment from Malaysia and a local Chinese company, Coline Cocoa Products Co. was acquired by Hong Kong-based Eureca Corp. in 1999 and continued to produce and market chocolate products until encountering financial difficulties last year. The company currently has debts worth more than RMB 400 million (US$ 48.4 million).

The auction of Coline is regarded by industry analysts as an indicator of the increasingly fair and open market environment taking shape in China for both foreign and domestic firms after its accession to the WTO last December. "It signals a national standard for both foreign-invested and domestic companies after China's WTO entry, and the market rule of 'survival of the fittest' will work well for them," said one analyst. In the meantime, China's new Enterprise Bankruptcy Law will be released soon, which will be enlarged to cover all enterprises including private firms and foreign companies.

More Industries Open To Foreign Investment in China

The latest version of China's Foreign Investment Guidelines and the Guidance Catalogue, which was recently approved by the State Council, will take effect on April 1, 2002. According to a spokesman from the State Council, this Catalogue is characterized by including telecommunications and city gas and water supply into the industries where foreign investment is permitted. Previously, overseas investors were prohibited from investing in both these business sectors.

Furthermore, according to the most recent Catalogue, all foreign investment or projects in the following industries can be exempt from the imported equipment tariffs and value added tax for imported goods:

1. Traditional Chinese agriculture;

2. Traffic, energy, raw materials and other infrastructure construction;

3. Telecommunication, biological engineering, aviation and other high-tech research and development centers;

4. Advanced applied technology for the reform of traditional Chinese machinery and textile industries;

5. Environmental protection, utilization of renewable resources and municipal works;

6. Investment into western China;

7. Foreign-exchange-producing industries.

New Financing Opportunities For FIEs

Although China's regulatory bodies have posed major obstacles for Foreign Invested Enterprises (FIEs) wishing to achieve public listing in the past, recent developments show that China is more open to the possibility of allowing the listing of FIEs. Many FIEs, including HSBC, Unilever, Bank of East Asia and Kodak, are now planning listings.

The Ministry of Foreign Trade and Economic Co-operation (MOFTEC) and the China Securities Regulatory Commission (CSRC) jointly issued the Notice Setting out Certain Opinions on the Relevant Issues of Listed Companies with Foreign Investment (the Listing Opinions) on 8 October 2001.

According to the Listing Opinions, the ability of an FIE to list locally or overseas depends on satisfying the following conditions:

• Compliance with the PRC industrial policy for foreign investment and requirements for listing and issuing shares;
• Compliance with the PRC company law and relevant CSRC regulations (i.e., completion of a one year "training period" with a PRC sponsor);
• Compliance with the "joint annual inspection" for three years prior to application;
• Business scope must be in accordance with the Foreign Investment Guidelines and the Guidance Catalogue;
• Post-listing, Chinese investor shareholding proportions must be preserved at its pre-listing proportions and maintain control, as required;
• Foreign shareholding, post-listing, must be at least 10 per cent (25 per cent to maintain FIE status).

Possible Turnaround or Transfer Projects

State-Owned Travel Agency in Beijing

Biochemical plant in Gansu Province

Joint venture (JV) LLC in Jiangxi Province Seeking Investment

Share Transfer of State-Owned Pharmaceutical Manufacturer

Bio-pharmaceutical Products Joint Venture (JV)

Agricultural R & D Base seeking investment

If you are interested in any of these potential projects, please contact the following individuals for more information:

Lehman Lee & Xu

China Lawyers, Notaries, Patent, Copyright and Trademark Agents

http://www.chinalaw.cc/

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The China Corporate Renewal Update is intended to be used for news purposes only. It should not be taken as comprehensive legal advice, and Lehman, Lee & Xu will not be held responsible for any such reliance on its contents.