Cracking the Chinese market

At the UN Security Council, Britain and China publicly disagreed on policy towards Syria. But elsewhere the Year of the Dragon has brought a distinct thaw in Britain and China’s once cool relationship. Chancellor George Osborne returned triumphant from his recent visit to Asia, having secured an agreement that the City of London will become the offshore centre for Renminbi (RMB or yuan) dealing, as soon as the Chinese authorities extend trading of their currency beyond Hong Kong.

This is a deal of huge potential for London’s financial sector, and the associated opportunities for lawyers will be substantial. In return, Osborne promised Chinese business that the UK would become ‘one of the easiest places to invest, to raise capital, to start a business, to expand and to export from’.

Hard on the heels of the yuan deal came the announcement that China Investment Corporation, China’s sovereign wealth fund, had just bought a 9% stake in Thames Water. While eurozone economies continue to flag, ‘communist’ China retains its position as the unlikely saviour of western capitalism. China produces the goods we consume and, in return, consumes the luxury goods we still produce. It buys our currencies, our debt and our companies. It invests in our infrastructure.

Increasing amounts of Chinese money are flowing through the UK, whether from state or privately owned business - and from individuals. China is home to a million millionaires, many of whom send their children to British schools and universities.

London is the preferred nexus for deals in Europe and the US. Wealthy Chinese buy British branded luxury goods - and the companies that produce them - and they snap up high-end residential properties in the capital.

And to stress the underlying strength of the relationship, the UK has became the latest beneficiary of ‘panda diplomacy’. Since early December, Tian Tian and Yang Guang (Sweetie and Sunshine respectively), have been residing in bamboo-strewn splendour at Edinburgh Zoo - the first pandas for 17 years to make their home in these islands. So, in this atmosphere of commercial and zoological entente, across the key areas of corporate, immigration and property law, what are the experiences of solicitors acting for Chinese clients?

In respect of inward investment to the UK alone, there are opportunities to gain significant new work. Nick Rollason, head of business immigration at Kingsley Napley, explains: ‘With private clients, for example, what may be an initial query on a visa question may turn into a much wider question with regard to buying a property in the UK, finding schools for the children and tax planning.’

With China’s impressive economic growth and expanding legal services sector, China is a priority market for the Law Society and its members. There has been an explosion of foreign law firms in China, and law firms of all sizes in the UK are keen to initiate and develop links with the Chinese market. John Wotton, president of the Law Society, is in no doubt about the opportunities for UK lawyers working with Chinese clients: ‘In addition to UK firms establishing in China, we are very pleased that in the last year several Chinese firms have opened offices in London, which only supports our reputation as a centre for global legal services and helps further forge links between UK and Chinese law firms.’

‘Several Chinese firms have opened offices in London, which only supports our reputation as a centre for global legal services and helps further forge links between UK and Chinese law firms’

Cultural differences

One concern privately raised by some lawyers is that UK due diligence and anti-money laundering requirements cause particular difficulties when working with Chinese clients. Sitting alongside broader cultural differences, there are fears that some firms may hold back from finding opportunities to act for Chinese clients.

According to Lord Tim Clement-Jones, London managing partner of DLA Piper, who heads the firm’s international business relations initiatives, such concerns are something of a myth. ‘It’s all about sophistication really,’ he says. ‘I mean, you know it’s not as if all our companies here, our small and medium-sized companies, are very sophisticated. But our big corporates are. And the same is true of China.’

Rollason believes that concerns about due diligence are outdated. ‘We have found that high-net-worth private clients are generally quite happy for due diligence reports to be prepared on them,’ Rollason says. Enhanced due diligence is ‘commonplace’ for businesses working in China, he advises, and ‘lawyers need to engage fully with this’.

Language, though, is a bigger barrier to business. While many Chinese businesses employ English speakers to set up UK operations, Rollason notes, ‘it is often the case that decision-makers will not be English speaking’. Having language capability is therefore a key factor in getting a message across to decision-makers.

Clement-Jones also highlights language and communication as key areas: ‘Unless you do have Mandarin speakers in the firm, dedicated to working with Chinese clients, it is quite tricky.’ One cannot expect to treat Chinese clients in exactly the same way as everybody else, he adds: ‘Chinese culture has a number of particularities that some other cultures don’t. It’s partly the language barrier but there are quite a lot of cultural issues as well.’

One such issue, Rollason says, is English fee structures. ‘Chinese clients like to know exactly what they are getting, why they need it and how much they are going to pay. Trying to convince them that a broad estimate of fees based on hourly rates of overpaid lawyers is a sensible way forward on cost is extremely difficult.’ Fixed fees are therefore ‘king’ in the Chinese market.
The strict hierarchy of Chinese culture is another point that Western lawyers need to understand to be effective in a business context.

‘You have to deal with a Chinese company at the very highest level to begin with and then other things cascade down,’ Clement-Jones advises. There is ‘absolutely no point’ in dealing with a Chinese manager ‘several rungs down’ because ‘you’re not going to get consent half the time’. Once one has an established client then, as with any client, there will be relationships at different levels. But the initiation of a relationship, he insists, really has to be ‘at the top’.

Of course, it is important to caution against generalising too far when talking about ‘Chinese clients’, a point made by Merlene Toh Emerson. She was born in Singapore, to overseas-born Chinese parents. She worked for several years in corporate banking law, both in Singapore and in London, where she now lives. She is an accredited commercial mediator and a director of the Chinese Welfare Trust.

‘Chinese clients are not one monolithic block,’ Toh Emerson chides. ‘There are ethnic Chinese from former colonies like Singapore and Malaysia and Hong Kong who all feel very comfortable with English law.’ In mainland China alone, where the population actually comprises 56 different ethnic groups, the label can be an oversimplification. ‘I was on holiday in Yunnan province recently,’ she relates, ‘and there are 24 ethnic groups living there’.

And some ‘cultural differences’ stem simply from the fact that the legal profession is still very young in China. As Clement-Jones notes, the very presence of lawyers in China is a sign that the country is moving towards ways of doing business that are more familiar to law firms here. ‘The first lawyers qualified in 1981… I’m sure there were lawyers before the war but in the modern era, post-war, lawyers were regarded as bourgeois and therefore weren’t permitted.’

UK firms that seek to win more instructions from Chinese clients will also find that a growing number of Chinese law firms are looking to build bridges, and are opening offices of various sizes in other jurisdictions. The alliance between two of Australia and China’s leading law firms, to form King & Wood Mallesons, is a case in point. And four of the larger Chinese law firms are reported to be in the process of opening offices abroad.

Smoothing the paths between Chinese and UK firms is a focus of Law Society activity in this area. As Wotton explains: ‘We organise regular inward missions of Chinese law firms - in 2011 we hosted over 25 of China’s top law firms and plan to do the same in 2012 - and these are one of the many networking events that are part of our programme of activities designed to maximise opportunities for our members.’

Certainly, there is potential here. Philip Li, founder of DKLM, a medium-sized firm that specialises in commercial and residential purchases, sales and lettings, says that smaller and medium-sized firms have yet to maximise the opportunities for working with overseas Chinese. Although to date ‘only the larger international firms are the ones able to develop this relationship’, he adds: ‘There is huge potential for developing relationships with Chinese law firms. They will be able to recommend clients who require expertise in M&A work, corporate finance and cross-border work.’

To that end, his own firm is working on plans to develop its connections overseas, particularly with mainland China.

Owning the relationship

As Chinese law firms reach out, they will provide opportunities for UK firms that, unlike larger international firms, have no plans to open offices in China. So whereas to date firms such as DLA Piper, with offices in Hong Kong, Shanghai and Beijing, have made the running, they will not retain a monopoly.

Clement-Jones explains: ‘What is interesting is that they’re trying to do what Japanese and Korean firms do, which is basically own the relationship and then refer out.’ So these firms will not aim to practise English law in London, say. Instead, they aim to contract out technical services but manage the client on a long-term basis.

For international firms, that may be a challenge. ‘What we’re intent on doing is really having Chinese clients everywhere in the world directly, not through the mediation of Chinese law firms,’ Clement-Jones notes. For firms with no ambitions to perform the intermediary role, the arrival of Chinese law firms will be an opportunity. Opportunities here, though, are recognised as time-limited - individual firms, and the UK as a jurisdiction, need to act to secure a role. If London does not maximise the market opportunities afforded by its geographic location and its historic links with former colony Hong Kong, countries like Germany will not be so shy.

‘As long as London remains a financial services and professional services centre, then we’re in good shape. But they’re very pragmatic, the Chinese - they’ll set up in Germany, in places like Düsseldorf… I think we have to keep working,’ Clement-Jones concludes.

And whether it is large international firms, or smaller firms that are looking to secure more work from Chinese clients, those who deal with these clients are unanimous in one piece of advice - connections, ‘Guanxi’, are key. As Li puts it: ‘In a new market, most overseas clients will rely on existing contacts for recommendations and will tend to rely on familiarity with a particular law firm whether or not that firm may be suitable for the particular transaction.’

And as Clement-Jones points out, it is wrong to be too bamboozled by cultural differences. The viability of a deal, and the real power of the people a firm fields, are key factors. ‘You stand or fall on your commerciality with the Chinese and also your links,’ he cautions. ‘Guanxi is very important - it is almost whether you can do the deals, whether you have the links necessary. Can you help them get the finance? Or the access? That sort of thing.’

He concludes that City lawyers are ‘much more commercial than they used to be’, which is crucial. ‘They’re not just black letter people who write contracts to order. They negotiate, they bring deals to the table and I think that’s a very important factor for the Chinese.’

Catherine Bowman is a freelance writer