China is booming and top UK law firms are fuelling the international interest. Yet it is still a tough market to crack, discovers Grania Langdon-Down

China is arguably the most exciting of the developing markets and is attracting enormous interest among UK law firms right across the spectrum. But could the China dream prove illusory for some firms?


The number of foreign law firms in China has grown to more than 140, and includes many of the leading UK players. Just this month, Norton Rose and Clyde & Co announced that they would be opening offices in Shanghai.


But while China has changed significantly since the dark days of Tiananmen Square, the market for foreign firms is still restrictive. A foreign firm opening an office in the country may not open another one for three years, and it must pass an economic needs test. Foreign firms cannot practise Chinese law, and if a firm employs Chinese lawyers, they have to give up their local practising certificates. Chinese legal opinions can only be given by local law firms.


But the huge growth in foreign investment into China, and the growing volume of outward investment by Chinese companies, means the expertise offered by international firms is valued. They are advising on most aspects of the increasingly complex merger and acquisitions (M&A) deals being done on the mainland.


Alison Hook, head of international at the Law Society, says that China, along with India, is the ‘overwhelmingly dominating interest’ among law firms at every level of activity, including those which are not seeking to open offices on the mainland but want to develop a China practice here. ‘We held a seminar in Guangzhou in early November and the speakers included solicitors from Veale Wasbrough in Bristol and Mills & Reeve in Cambridge, which are both interested in developing niche practices in China,’ she says.


‘China is just sucking in everything at the moment. But I have this feeling that it is like a dot-com bubble.


‘Also, if firms haven’t opened an office in China yet, I think they should wait because there is probably an oversupply of intern-ational law firms at the moment. The number of Chinese law firms they can work with is also limited. The key will be if the domestic legal market opens up, which will open a whole range of possibilities.’


The Law Society, which is organising a visit to China after Easter with the All China Lawyers Association, is focusing on improving practising rights. ‘It is not going to change overnight but, unlike many other markets, they talk about this happening, although they are cagey about when. They very much want to develop the capacity to compete before they allow it.’


Corporate partner Andrew Halper, who leads Eversheds’ China business group in London, also warns against the danger of ‘overhyping and under-analysing’ the Chinese market. ‘I am a huge believer in doing business with China and there are fantastic opportunities for UK business.


‘But people can be [overawed] by the pure population figures, when they should be looking at the actual market for products. The market is sometimes under-analysed because there are a lot of transportation and communication issues, although they are improving very rapidly.


‘When it comes to law firms, a lot won’t be there in five years. It is a great place to do business and, at risk of sounding trite, you can really add value. But it is not a forgiving environment, and both clients and lawyers should approach it with caution. You can blow your brains out in China.’


Marcus Vass, resident partner of IP/IT-specialist firm Bird & Bird’s 14-month-old Beijing office, says the days of generalist firms going in from London, Washington and Frankfurt are over. ‘Companies want increasingly specialised advice, which is why we have gone in now and not five or ten years ago.’



The firm’s move to Beijing after a decade of servicing the area from Hong Kong came about because of ‘enormous client pressure’, he explains. ‘There was a volume of work, particularly intellectual property and patent litigation work, that required our presence in Beijing to the extent that our people were on the ground so much, we thought, “let’s open an office”. It was a no-brainer. The office, which has seven lawyers, has been profitable and flat out extremely quickly, and there is a general feeling that it is a very good thing to have done – and an extremely dangerous thing not to have done.


‘The eyes of the world are on China as an incredible dynamo motor for the global economy. Its relative novelty to westerners also makes it uniquely exciting.’


Freshfields Bruckhaus Deringer has had offices in China for about a decade. Robert Ashworth, head of the firm’s corporate group in Asia, says it sees great scope for growth in the mainland. But he warns: ‘Make sure you follow your clients rather than going and opening up shop first and hoping clients will come. China is a tremendous market but you are constrained in your ability to do domestic deals, so you are reliant on cross-border transactions.’


Freshfields has particular expertise in helping clients take stakes in banks, or set up insurance or securities joint ventures with Chinese counterparts. It is also targeting Chinese clients, particularly for outbound investment. Mr Ashworth, who is based in Hong Kong, says: ‘We represent large Chinese corporates who come to list in Hong Kong. We advised the underwriters in the recent initial public offering (IPO) of China Construction Bank – which, at $9.2 billion, was the largest IPO in the world in the last four-and-a-half years.’


He thinks the Chinese market is ‘less bureaucratic’ than India. ‘There is a great deal of regulation, and it is not always the clearest, so there is a need to seek interpretation, which can be difficult to obtain. But, generally, things move.’


Frenchman Jean-Marc Deschandol has been a practising foreign lawyer in China for 20 years. He is now Norton Rose’s international managing partner in China, joining the firm four years ago to set up its China practice. In addition to Hong Kong, Norton Rose has had an office in Beijing since 2002 and will now add Shanghai to its offering.



Describing the market as still ‘very bureaucratic’, he explains: ‘Since China started to regulate lawyers in 1992, things have remained essentially the same. It is very difficult, sitting in London, to appreciate the difference one may find between the letter of the regulation and how it is practised. One should keep in mind that, in China, it is relatively commonplace to have extremely strict regulations but lax implementation with many loopholes which are used by the players in the different industries – otherwise our life would be simply impossible, and this is not what China wants to happen.’


From Mr Halper’s experience, market access has become more transparent and user friendly. He says Eversheds has ambitious plans for China. It amicably ended its strategic alliance with leading Singaporean law firm Khattar Wong last November, which also ended its participation in Khattar Wong’s Shanghai office. The firm hopes to have approval to open its own office in Shanghai within a few months.


Mr Halper explains: ‘There is this lovely Chinese expression, tong chuan yi meng, meaning “same bed, different dreams”. We wanted to grow in numbers and directions in which Khattar Wong didn’t want to go, which is fair enough, so we are going to go and do our own thing.’


He says the Chinese Ministry of Commerce is keen on increasing Chinese trade with the outside world and investment into China ‘and they know foreign investors are more comfortable knowing they can get legal advice on the ground from a combination of Chinese and western lawyers’. While there are strong protectionist elements within the legal profession, he says there are also more forward-thinking members who understand that foreign firms do a good job, not least in training local lawyers who will go on to form their own firms in time.


Mr Ashworth also notes significant developments in the Chinese legal profession, but says there is still a mentality among those buying legal services that what they are paying for are effectively documentation skills and a scribe to record agreements. ‘The fee rates are commensurate, so Chinese parties may expect to have to pay a relatively small amount to their lawyers for negotiating an agreement.’


Lovells has had an office in Beijing since 1987. Australian Douglas Clark is local managing partner of the Shanghai office, which he set up in 2003. The office has 11 other lawyers, all ethnic Chinese, and ten support staff. Mr Clark, who read Chinese and Chinese law at Shanghai University in the 1980s, specialises in intellectual property, while the corporate group does both capital markets, focusing on IPOs in Hong Kong and the UK, and general corporate/commercial, M&A and foreign direct investment work.


One cultural difference that has caught out foreign investors in the past is that contracts in China tend to be regarded as the starting point of a relationship, and not the final arrangement. Mr Clark says Chinese companies are now taking contracts seriously and the courts are upholding them. ‘Five years ago, I wouldn’t be advising clients to go to court to sue people but now I do. In another five years, there will be a much more effective legal system.


‘There are issues about how independent the judiciary will be allowed to be, but within those constraints, I see things getting better.’


Mr Ashworth says investors are increasingly accepting that a lot of contracts need to be governed by Chinese law. ‘If we do that, we nonetheless stipulate a Hong Kong or overseas arbitration provision. However, there have been some high-profile disputes where foreign investors have succeeded.’


While the big players are beefing up their China practices, smaller firms are also determined not to miss out. Eight-lawyer Chancery Lane-based firm Zaiwalla & Co, which specialises in maritime law and international arbitration, signed a strategic agreement in October with the Tang Law Group in China.


Senior partner Sarosh Zaiwalla, a member of the International Court of Arbitration for 12 years, says it will lead to having their own office in co-operation with the Tang Law Group in six months to a year. About 15 to 20% of the firm’s client-base is Chinese, and it has hired Chinese lawyer June Qun Xie as part of the project.


While China is seen as the market to be in, differences in culture and business etiquette can catch out the inexperienced. Mr Deschandol says there is never a straight route to the objective in China and nothing is simply as it looks, which makes it a difficult market in which to do business.


‘There are many potential danger zones for the unwary transactional lawyer. Confidentiality has been at the heart of many problems, because it is not necessarily of value in China. Also, in your practice you may regularly come across serious issues such as fraud or tax evasion when you work on a transaction, but there is no obligation on lawyers to report such things to the Chinese authorities.’


However, when it comes to faux pas, he says the Chinese are pretty tolerant. ‘As foreigners, you are allowed to make mistakes. However, when it comes to anything touching directly or indirectly on a political matter, it requires highly skilled handling.’


Mr Halper, a Canadian who studied Chinese at university, was in Beijing from 1991 to 1994 as deputy head of the Canadian Embassy’s political section before ‘jumping ship’ to become resident partner of a major Canadian law firm’s Beijing office.


‘I arrived in China in 1991 with the major handicap that I spoke Chinese fluently but I didn’t understand the culture, and that can get you into a world of trouble,’ he says. ‘In the West, people get down to business quickly. They don’t like that in China. They want to take the measure of the people they do business with.


‘Foreign companies often don’t build enough time into their trips. They also send over very bright 32-year-old business development people who don’t command sufficient respect because the Chinese don’t consider them senior enough. It is no longer the case that grey hair is automatically dominant, but they are much more hierarchical and status-conscious than we are.


‘You also need to know how to read negative comments in negotiations. If the Chinese party is saying “we have to consider that”, there is a really good chance this means it is completely unacceptable. There is a disinclination to deliver bad news directly because it is considered inelegant.’


Mr Zaiwalla, who has been to China more than 30 times, says the approach in China is ‘slowly, slowly, where “yes” is “maybe”.’


Mr Ashworth says there is a style that needs to be understood. ‘Quite a lot is made of “face” issues and guanxi, the term the Chinese use for having good connections and being well known for favours. But in reality, the Chinese are as hard-headed as businessmen anywhere in the world, and I don’t think it is a requirement of lawyers to have door openers to go round greasing palms.’


The key requirements for legal advisers are to be adaptable and speak the language – ‘that is essential’, says Mr Halper.


What comes across clearly from all those working with China is a deep fascination with the country. There are signs that citizens’ rights are starting to be recognised, although one lawyer noted Chinese clients can still find it difficult to get an exit visa to go to Hong Kong or other jurisdictions to negotiate deals, which then have to be done in China. Chinese corporates that appear to be autonomous legal entities are often still embedded in state structures.


The media is starting to report environmental disasters more openly, which is important given the stresses created by the country’s rapid growth. China is not only having a huge impact on the rest of the world in terms of prices, jobs and company takeovers, but also in global warming and pollution.


But, as Mr Halper says: ‘China has had a tumultuous history. It hasn’t finished digesting Tiananmen Square yet – memories are long in China. I don’t mince my words about what has happened there, but I think they are doing pretty well considering where they started from.’


Grania Langdon-Down is a freelance journalist