中国人民银行上月宣布，决定进一步推进人民币汇率形成机制改革，增强汇率弹性。国内外律师事务所合伙人对二次汇改将给跨境法律服务业带来的影响表示相对乐观。

The People's Bank of China's decision in June to proceed  further with the reform of the RMB exchange rate regime and to increase the exchange rate flexibility has been welcomed by the global markets, and country leaders such as US President Barack Obama. To the world, a more flexible RMB exchange rate is a constructive step that can help safeguard the economic recovery and contribute to the rebalancing of the global economy. Within the country, however, the new mechanism has led to some debate over its effect on the domestic economy and certain industries such as export and manufacturing.

Greater currency flexibility will also correspondingly affect the legal services sector. But most market participants anticipate positive changes and have responded enthusiastically to the new arrangements. "Though the appreciation of the RMB is not expected to cause a profound short-term impact, it does represent a significant step towards China's export economy turning inward," said John Huang, the managing partner of Shanghai-based MWE China. "In the long run, I also believe that with the revaluation process, RMB will move a step closer to becoming a preferred settlement currency in Asia."

A gradual rise
Unlike the large scale, one-off RMB appreciation in July 2005, the majority of the legal fraternity - echoing bankers and economists - expect the currency to appreciate gradually in coming years. The market is widely foreseeing a 2-3% rise in RMB value against the US dollar over the next 12 months, and a further 5-7% in 2011.

If the rate rises do come gradually their impact on the legal services market will be subtle and continual. "There isn't a big correlation between the amount of legal work and the exchange rate. But wild fluctuations in the exchange rate definitely would be no good to any industries, as it introduces too much uncertainty in the economy," said Alan Wang, a partner with Freshfields in Shanghai.  "With the anticipation of the exchange rate going up in a gradual fashion and people planning their transactions based on that expectation, we may see slightly less inbound investment in the manufacturing sector, but that should be offset by more transactional work in terms of outbound investment by Chinese companies," he added.

When the value of the RMB against the US dollar goes up, doing business and making investments in China will be more expensive. However, in no way does this suggest the total amount of foreign investment will decrease. "In the short term, we may see 'hot money' trying to enter China to capitalise on currency appreciation. But ultimately people come to China to take advantage of the vast domestic market" said Wang. "With RMB becoming stronger, the transition to a more consumption-driven economy will be hastened. Consequently, China could be a more profitable market [when measured in US or Euro terms] for a lot of foreign investors and companies."

On the outbound side a stronger RMB will boost China's purchasing power and should have a positive impact on the overseas M&A activity of domestic companies. "No company would make acquisition decisions based on price alone. So for companies that have no intention to expand or invest overseas, the influence of a higher exchange rate is negligible," said Wan Li, a partner of DLA Piper in Shanghai. "But for companies that are venturing out and making acquisitions in other countries, the RMB appreciation is likely to encourage them to shop more aggressively. The price of foreign target companies, assets or commodities will become relatively less expensive."

Wan has extensive experience representing Chinese companies - many of whom are state-owned enterprises - in overseas M&A transactions, particularly in the natural resources and energy sectors. He sees the government's approach to allow greater flexibility of the RMB exchange rate offering long-term benefits for his Chinese clients, and his firm's outbound investment practice.  

Please pay in RMB!
In 2005 when the RMB appreciation process first started, many domestic law firms that mainly represent foreign clients switched from the US dollar to RMB for quoting and charging legal fees. Fangda, whose clientele consists largely of foreign clients, adopted this policy four years ago, to avoid potential losses imposed by the RMB exchange rate rise. The firm still bills certain clients in US dollars, however, as agreed.

"If the value of the RMB continues to rise, which is quite likely the case, it would mean foreign clients have to pay more in USD or euros for the same legal service quoted in RMB," said Victor Yu, a partner in Fangda's Shenzhen office. "That's an undesirable outcome from the clients' perspective, but it's a fact that foreign investors will need to accept - and it's a cost that can be offset by the earnings generated in the domestic market and returns from their investments." Yu also ruled out the possibility that top-tier PRC firms would reduce their RMB billing rates due to the currency appreciation in the foreseeable future.

Compared to local firms, those international firms with China offices have more reasons to look into how RMB appreciation can affect their business and profitability. "In international firms, euro, US dollar or British pounds are the usual accounting currencies. Due to a stronger RMB, the cost base of the China offices which is in RMB will go up a little bit in base currency terms," said Wang.

Even though the cost base is on the rise, Wang doesn't anticipate international firms to adjust their charge-out rates in line with currency appreciations, especially when the increase is not very significant. "If the RMB appreciates by 5%-10%, then some international firms may try to reflect that increase in the charge-out rates. But if the increase is less than that, it won't have a material impact. Fundamentally, a firm's charge-out rates are determined by supply and demand and market competition, and not by exchange rate movements," Wang said.

Nevertheless, under the more flexible new exchange rate arrangement, the value of RMB can move both up and down. International firms will increasingly need to alleviate their risks of currency fluctuations. "The best strategy to counter exchange rate moves is to quote rates in RMB and collect invoices in RMB. [It] is now increasingly used as our billing currency, not only when we work with Chinese clients but also with international clients who have operations in China," Wang said. ALB

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