China Law Insight : China Business and Intellectual Property Lawyers & Attorneys : King & Wood Law Firm : IP, Arbitration, Litigation, Securities, Foreign Investment

Given China's resilience to the financial crisis, it seemed a good place to meet redemptions and liquidity needs by selling positions. However, it was much easier to get money into China than to get it out.

Beijing has long been wary of foreign investors, imposing strict controls on FDI and offshore loans. Unable to resist GDP growth, renminbi appreciation and real estate expansion, investors wanted in – keen to avoid regulatory processes and wanting exit strategies. Offshore structuring appeared as a solution, but this was conceived against the bubbling real estate market – where much of the foreign money was headed.

I warned investors that 1 billion square feet of residential and commercial projects were underway in Beijing alone. But local banks and foreign funds provided cash; developers continued to build. The government tried to rein in a runaway market. The lending spigot at local banks ended, interest rates and down payment requirements increased and anti-speculation taxes were imposed. The bubble began to burst, with markets in south China suffering first. Developers, undeterred, bought more land and continued building. Their ambitions finally caught up with them last year.

China's listed real estate developers have seen their share prices fall by 80% from November 2007. Despite government efforts to revive the residential market, buyers are only responding to price cuts. Many of these developers are hemorrhaging cash, turning to non-banks and gray market lenders.

The unlisted firms have caused the most trouble. An IPO promised riches and so these developers expanded aggressively. They needed capital; foreign investors acquiesced. Investments were structured offshore and the money came onshore via preferred equities and convertible bonds issued by offshore companies with real estate holding companies in China.

Many large developers missed IPO deadlines, facing disgruntled investors. Alternative investment managers now face redemptions from investors and busted covenants and debt defaults from Chinese developers.

It seems, from the offer¬ing circulars, that few of the investors or developers knew what they were getting into. The developers gave guarantees, pledged unlisted shares, issued “no-IPO put options”. They agreed to pay punitive escalating internal rates of return, going from 30% to 70%, if the IPO was delayed by 18- 30 months.

The alternative investment managers who relied on “contractual” guarantees to protect their interests overlooked the clause in the circulars which states that offshore creditor rights are not enforceable in Chinese courts. Neither are judgments in foreign courts binding on Chinese corporations or citizens.

Many of the international law firms that developed these structures are now advising clients not to enter Chinese litigation. Yet they recognize that by the time the offshore judicial process concludes, Chinese developers would have transferred assets with any unencumbered value, or allowed onshore creditors to slap asset preservation orders on any remaining assets.
The international law firms are too pessimistic. Foreign investors can use the Chinese legal system to enforce their offshore creditor rights, seize collateral, freeze assets to keep them from disappearing, enforce guarantees and bring Chinese entrepreneurs to negotiate.

Most Chinese real estate developers sleep soundly yet foreigners remain engrossed in inconclusive meetings trying to answer their investors’ questions:
• What is the status of my investment in China and what is the condition of the Chinese partner?
• Is the original investment strategy still viable in the present climate?
• Should I continue to hold, sell or invest additional capital and if so is there a realistic business plan I can evaluate?
• If I continue to hold or invest is there a way to get closer to the company and its assets onshore to remedy some defects inherent in offshore structures?
• How do I limit my liability and is there a plan to get my capital out of China?
• Are my interests and those of the alternative investment manager still aligned?

My advice to foreign investors is: act now. Chinese business partners will inevitably satisfy local creditors first, unhesitatingly encumbering a foreign investor's secured assets. Investors must rectify the defects in their offshore structures so they can use local courts and rely on Chinese litigation to settle with local partners.

The end game is to develop a capital preservation and exit strategy, leading to an informed decision to invest, sell or stay the course.
 

I. Overview of the Legal Obstacles to Repatriation of Looted Cultural Property

Several obstacles exist to the repatriation of such items through purely legal channels. These include:
 

(i) The lack of retroactive effect of relevant international conventions. At the time the 1860 looting took place, there were no written international conventions specifically prohibiting such looting campaigns. The conventions currently in force which now relate to this issue (set out below) are not retroactive, meaning that they only apply to actions which take place after the date on which the conventions became effective. Therefore, there is frequently no appropriate treaty framework upon which China can rely in its efforts to retrieve objects which may have been removed from its jurisdiction before certain periods in its history.
 

(ii) The limited binding force of relevant international conventions. The States Parties to the above-mentioned conventions are, for the most part, countries which supply, export, or are otherwise the source of cultural property. However, the countries against which China can legitimately claim for the repatriation of cultural property are relatively few in number, and the conventions have little or no binding force on certain countries in whose jurisdiction a great number of looted cultural properties now remain, such as the United Kingdom.
 

(iii) Difficulties in the proof of evidence. Since the circumstances in relation to looted cultural properties are usually both complicated and obscure, relevant specific evidence, such as the exact time the properties were looted and who committed the looting, will become more difficult to collect with the further lapse of time.
 

(iv) Provisions concerning holders in good faith. The longer looted or stolen cultural properties have been lost abroad, the more likely the present holders of those items will be deemed by the domestic law of that State as holders in good faith. In many countries, laws protect the holders in good faith rather than the original owners, despite the fact that the items may originally have been looted or stolen.
 

(v) Statutes of limitation. In the present case, time limitation provisions of the Civil Code and Civil Procedural Law of France prevent any further claims for the original ownership of the relics being heard. This is also likely to pose an insuperable obstacle in many domestic jurisdictions.

II. Relevant International Conventions on Protection of Looted Cultural Property

Nevertheless, the Chinese Government has entered into a series of international conventions with respect to the protection of cultural property. These include:
 

(i) The Convention for the Protection of Cultural Property in the Event of Armed Conflict (Hague 1954) and its protocols. Hague 1954 sought to prevent the destruction, theft, pillage and vandalism of cultural properties during periods of armed conflict and military occupation. Although its provisions were relatively general, it initiated the formation of international regimes regarding protection of cultural properties, and was broadly accepted as reflective of customary international law.

(ii) The Convention on the Means of Prohibiting and Preventing the Illicit, Import, Export, and Transfer of Ownership of Cultural Property (UNESCO 1970), which has been ratified and entered into by 102 States Parties thus far. UNESCO 1970 deals exclusively with the restitution of cultural objects, and is silent on the criminal punishment of offenders. While UNESCO 1970 has made strides in combating the lucrative black market for smuggled antiquities, it is non-retroactive and inapplicable to objects illegally exported before its “entry into force . . . in the States concerned.” UNESCO 1970 is considered to be the most important international convention regarding the prevention of illegal removal of cultural property.
 

(iii) The Convention on Stolen or Illegally Exported Cultural Objects (UNIDROIT 1995), which has been ratified by 32 States Parties thus far. UNIDROIT 1995 was drafted to in an attempt to induce more nations, such as the United Kingdom and other non-signatories to UNESCO 1970, to participate in the repatriation of looted cultural properties. UNIDROIT 1995 attempts to compel purchasers of stolen goods to return them to their "rightful" owner, even if the purchase was in good faith, and it requires “compensation for bona fide possessors who can establish due diligence.” Compared to the two former conventions, UNIDROIT 1995 has more operational flexibility.
 

In addition, China has signed a number of bilateral treaties with other countries in relation to the prevention of theft, and illegal import and export of cultural properties.

IV. Further Comments
 

The Chinese Government opposes public auctions of any illegally looted Chinese cultural property and insists on the repatriation of such property through international cooperation, making use of both legal and diplomatic channels in accordance with relevant international legal regimes and principles.

International practice would appear to indicate that diplomatic channels are a more effective means of retrieving looted cultural property. China has successfully retrieved thousands of looted cultural properties through international cooperation. However, the fact remains that under the current legal environment on the world stage, there is little practical help from international law available for countries like China to retrieve looted cultural properties from abroad, no matter how much leverage the relevant conventions may lend to any such diplomatic requests.