In the News: PayPal Enters China; IP Theft Tops Risk Survey; and Arbitration Arrangement Takes Effect

According to Dutch bank ING, China has a competitive digital payment market marked by the many services on offer not limited to just payments, including online shopping and social media. For mobile payments, the ubiquitous WeChat Pay and Alipay dominate most of the market set to be worth $96.73 trillion in 2023 according to consulting firm Frost & Sullivan. The opportunity for foreign companies lie in cross-border payments as the market for outbound payments is less competitive than domestic payments, ING said in a client note. As demand for foreign goods increases, Chinese consumers might prefer using foreign payment platforms on foreign e-commerce sites. The State Administration of Foreign Exchange, China's regulator of cross-border money flows, requires payment platforms cap individual cross-border flows at $50,000 per year and to ensure that those funds are not used for overseas investments.

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Trade war, IP theft among top worries for companies in China

The China-U.S. trade war and intellectual property (IP) theft are significant concerns for both foreign and domestic companies in China, a new report says. Ninety-four percent of companies operating in China identified IP theft as their top risk priority while 48% said they have experienced IP theft in the last year, the highest percentage of respondents among the countries surveyed by the global corporate investigations and risk consultancy Kroll. More than three quarters of companies in China said they were affected by the ongoing trade war between the world's two largest economies, while more than half of companies surveyed globally said they have been affected by it.

The report surveyed 588 senior executives around the world responsible for risk management at their firms between March and April, with respondents from 10 industries and 92% of the surveyed organisations operating in more than one country. In addition to the trade war and IP theft, executives in China highlighted restrictions on foreign investment and changes in economic treaties as major risks that have affected their companies in the last year. Around 85% of Chinese companies have mitigating the negative effects of sanctions, tariffs and trade agreements as a priority – more than the enterprises of any other country, the report says. "We have not really seen companies coming up with very meaningful solutions on [the ongoing trade war]," Violet Ho, Kroll's head of Greater China, told the South China Morning Post. Meanwhile, a growing risk in China is adversarial social media activity, the report says. Thirty-nine percent of China executives said their companies have experienced it in the last year, much higher than the global percentage.

For foreign companies in China, the report's authors highlight the risk of "force majeure" – unforeseeable circumstances that prevent someone from fulfilling a contract. Specifically they discuss the limitations of due diligence if the Chinese government prohibits the fulfilling of a contract by a Chinese counterparty. The report finds that 28% of negative incidents in China are attributed to third parties such as business partners and suppliers, a larger percentage than anywhere else. Such risks may not be readily apparent to foreign observers and are exacerbated by the ongoing trade war, the report says. Both the U.S. and China have heightened their scrutiny of investments from the other country in recent months: the U.S. has strengthened its screening of Chinese investments in critical industries, most recently through reforms proposed by the Treasury, while China has proposed its own version of an "unreliable entity list" to counter U.S. blacklisting efforts and recently revamped its security review process for foreign investments. 

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Hong Kong-mainland interim relief arrangement takes effect

The new pact allowing mainland courts to support arbitral proceedings in Hong Kong took effect on Oct. 1, coinciding with the 70th anniversary of the founding of the People's Republic of China. The Supreme People's Court of China (SPC) and Hong Kong's Department of Justice signed the Arrangement in early April which allows mainland courts to order interim measures to parties in Hong Kong-seated arbitrations, making the special administrative region the only seat outside the mainland to benefit from such support.

Interim measures protect a party's rights pending the outcome of a dispute. For example a company might seek interim protection of assets or evidence to prevent their removal or destruction before a final decision is made. Previously, mainland courts did not grant interim measures in support of Hong Kong-seated arbitrations so parties had little recourse if counterparties, for example, dissipated their Chinese assets ahead of a decision. Six "qualified arbitral institutions" in Hong Kong have been permitted to enjoy the benefits of the new Arrangement, including the Hong Kong International Arbitration Centre. A memo released by the SPC a few days before the Arrangement took effect confirmed that it will apply to arbitral proceedings commenced prior to but not yet completed as of Oct. 1.

No such agreement existed for Chinese courts to grant interim measures in aid of a foreign arbitration prior to the Arrangement, making it a "game-changer", as Hong Kong's Secretary of Justice put it, especially for the city's credentials as an arbitration hub. Although the Arrangement provides for bilateral court assistance in Hong Kong and the mainland, the spotlight is rightly on support given by mainland courts for Hong Kong-seated arbitrations given the fact that Hong Kong courts already grant interim measures in aid of foreign arbitration including mainland-seated ones. As Hong Kong now enjoys special status as the only jurisdiction where arbitration will be supported by interim measures ordered by mainland courts, the city's popularity as an arbitral seat will grow, Hogan Lovells said in a client alert. Hong Kong's status as an international arbitration center is underpinned by its high-quality arbitration laws, independent judiciary and large pool of legal talent. The Hong Kong government has promoted the city as a potential arbitration hub for Belt and Road-related disputes, many of which will involve Chinese parties with assets in the mainland.

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