In the News: COVID-19 Legal Advice; First Foreign Bad Loan Manager; and Economy Boosting Measures

One of the areas hit hard by the COVID-19 outbreak has been China's M&A and joint-ventures (JV) transactions. Hogan Lovells published a comprehensive client alert on Feb. 17 about the impact in these areas. Under a share purchase agreement (SPA) or joint venture agreement (JVC), the outbreak and the resultant government actions may trigger a "material adverse change" clause that allows the buyer in a SPA to terminate the purchase, or a party to dissolve or liquidate a JV. The lawyers also highlight the challenges posed by the outbreak to the closing of M&A and JV transactions. If closing is delayed because of the outbreak, past the "long-stop date" provided for in the SPA or JVC, the parties may be entitled to terminate the contract.

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China approves first fully foreign-owned bad loan manager

China has approved the first wholly foreign-owned asset management company to begin operations. According to a statement from Beijing's financial regulatory department issued on Feb. 17, Oaktree Capital, a U.S. distressed debt manager, completed registration to obtain a license for carrying out asset management activities through its wholly-owned entity, Oaktree (Beijing) Investment Management Co.

With over $120 billion globally in assets under management, Oaktree Capital is a seasoned player in the global asset management space and has experience operating in China. In 2007, it opened offices in Beijing, Shanghai and Hong Kong, before becoming one of six global financial firms to participate in the Qualified Domestic Limited Partner scheme, which allows participants to raise money in China for offshore investment. Its new Beijing-based unit has registered capital of $4.55 million and will conduct investment management, consultancy and asset management activities.

China committed to allowing U.S. financial firms to apply for licenses that would permit them to acquire non-performing loans directly from Chinese banks as part of the phase one trade deal signed by the two nations in January. Previously, foreign firms could only buy these loans through local middlemen companies. As part of the trade agreement, China pledged to treat U.S. financial firms the same as Chinese firms in the application process. Foreign investors have been targeting China's burgeoning distressed debt market due to the Chinese economy's many years of credit-fueled growth. The Chinese government estimates the bad loan market to be worth $345 billion, or 1.86% of outstanding debt, at the end of 2019. According to PricewaterhouseCoopers, China's four state-owned asset management companies resolved around $70 billion of non-performing loans in 2019.

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More COVID-19 measures introduced to soften economic blow

The Chinese authorities have introduced more measures to support businesses struggling under the COVID-19 outbreak as the country continues to tackle the dual-challenge of containing the epidemic while kickstarting a faltering economy. On Feb. 20, an official at the social security ministry announced temporary exemptions for companies' social insurance contributions with an expected total value to top 500 billion yuan ($71.4 billion). On the same day, China's central bank lowered benchmark borrowing costs for new corporate and household loans, consistent with rate cuts made earlier in February on short-term funds and one-year loans to commercial lenders.

Local authorities have followed the direction set by national authorities by relaxing travel and work restrictions put in place to contain spread of the virus. In Jiangxi province, companies no longer need individual approval to resume operations, while employees returning to work in Jiangxi no longer need to have doctors' certificates. Hangzhou, capital of Zhejiang and home to Alibaba, also made similar changes. Companies there no longer need individual approval to resume operations, apart from many businesses primarily in the services sector. However, in Hubei province, the center of the outbreak, companies have been told not to resume business before Mar. 10.

China is set to postpone the upcoming meetings of the National People's Congress (NPC), China's legislature, and the Chinese People's Political Consultative Conference ("Two Sessions") because of the COVID-19 outbreak. Originally scheduled to convene in early March, the Two Sessions are key events in China's legislative calendar that see legislation passed and economic targets announced. The postponement, unprecedented since the current schedule was adopted in 1995, raises questions about what impact the delay will have on China's economic policy. For example, the delayed NPC meeting will mean a delayed approval for the national budget. There are worries that an extended delay might negatively affect budget arrangements and fiscal policy implementation. However, the NPC's Rules of Procedure (全国人民代表大会议事规则) dictates that the rescheduled NPC session must still happen in March, sometime during Mar. 24 to Mar. 31, the NPC Observer website points out.  

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