Among international law firms in China, 'outbound' work – representing Chinese companies looking abroad for investments and acquisitions as opposed to multinationals entering the Chinese market – has long been hailed as the next big thing. But the rejection this week of the largest such outbound China deal yet highlights continuing challenges to growth in the practice.

Anglo-Australian mining giant Rio Tinto on Thursday (4 June) pulled out of a deal with the state-owned Aluminum Corporation of China (Chinalco), which had offered to pay $19.5bn (£12.2bn) for an 18% interest in Rio and stakes in copper, aluminum and iron mines. Other major Rio shareholders had criticised the transaction as a sweetheart deal for Chinalco, while it also become a lightning rod for political opposition concerned about allowing the Chinese Government such a major role in Australia's mining sector. 

Christopher Stephens, Asia managing partner for Orrick Herrington & Sutcliffe, says the collapse of the deal, which was announced in February, is "kind of a shock". 

"The Chinese have been very careful in the wake of the Unocal debacle," he says, referring to the failed bid by the China National Offshore Oil Company (CNOOC) to buy US oil company Unocal for $18.5bn (£11.5bn) in 2005, which also faced significant political opposition. "It really looked like they got this done."

Stephens thinks the deal's failure, particularly its political overtones, could dampen Chinese companies' enthusiasm for overseas investments and acquisitions, at least in the short term. "There is a risk it will slow down some of the bigger outbound M&A activity that is going on," he says. 

International law firms with China offices have long hoped for the opposite. Whereas they face state-imposed practice restrictions as well as rising competition from cheaper local firms when handling inbound China work, outbound work allows them to work within their comfort zones – US or UK law – and also charge accordingly. Many international firms with smaller China offices are primarily hoping to funnel outbound work to their home markets. 

Chinalco was represented by a group of firms led by Clifford Chance, while Linklaters led Rio's legal team.

Robert Chu, the head of Sullivan & Cromwell's Beijing office, says Chinese companies will probably be more cautious following the Rio deal. "The question Chinese parties might raise in connection with any kind of deal is whether they are is being taken for a ride or being used as a stalking horse."

Indeed, a number of Chinese companies' attempts at outbound acquisitions have seen other bidders conveniently swoop in. At the same time it announced it was scrapping its deal with Chinalco, Rio Tinto entered into a joint venture with competitor BHP Billiton. Likewise, Unocal was swiftly purchased by Chevron after CNOOC walked away from that deal. US appliance maker Whirlpool scooped up rival Maytag after China's Haier bowed out of a 2005 bid. 

But Chu also thinks any one deal's failure is unlikely to deter Chinese interest in overseas acquisitions. "The fact that Chinalco's proposed investment in Rio is not being pursued further should not be cast as a bad omen for outbound transactions from China," argues Chu. "Indeed, it is a development that contributes to the maturation of Chinese enterprises as sophisticated players to be reckoned with on the global M&A scene."

Antony Dapiran (pictured), a partner in the Shanghai arm of Freshfields Bruckhaus Deringer, is also optimistic that outbound Chinese transactions will grow, though probably outside politically charged sectors like energy and natural resources. "Those have always been particularly sensitive areas," he says. 

Indeed, the economic downturn in the US and Europe means Chinese investments or acquisitions abroad should generally be far more welcome than in the past, says Stephens, noting the US Government's blessing this week of a preliminary plan for a Chinese company to buy General Motors' Hummer line of sport-utility vehicles. 

"People want capital, they have capital," says Stephens.

By Anthony Lin in Hong Kong.