Cracks in the China

With UK and other foreign law firms now allowed to operate more than one office in China, it has never been a better time to do business there.

Yet while a presence on the mainland is considered essential, restrictions do remain, says Philip Hoult

Last month, the Chinese authorities finally awarded licences to UK and international firms that allowed them to operate more than one office in China.

Linklaters, Clifford Chance and Allen & Overy, which already had offices on the mainland, were among the successful applicants, while Norton Rose and DLA were granted licences to establish a presence for the first time.

Until the introduction of regulations in January this year, implemented as part of China's accession to the World Trade Organisation (WTO) last November, firms such as these had been forced to choose where to base their operations.

The decision - basically between Beijing and Shanghai - under the so-called 'one firm, one office' rule, was often a difficult one to make.

The absorption of Hong Kong, where all the top City firms were already established, made no difference as it is considered a special case.

Beijing is host to key regulatory authorities such as the Securities Commission and the Ministry of Foreign Trade and Economic Co-operation (Moftec) as well as the headquarters of many of the most important state-owned enterprises.

Shanghai, by contrast, has developed in the last ten years into a much larger commercial and financial centre, and the city and its surrounding provinces have been the recipients of a large amount of the record levels of foreign direct investment.

Huen Wong, managing partner of Simmons & Simmons' China practice, explains why they chose to enter Shanghai in 1995.

'At the time we opened our office, it was considered a more commercial city, which would offer us more opportunities to promote our strong corporate and commercial practice,' he says.

'We chose Shanghai on the basis that there were fewer foreign law firms and we had already established good relationships with local Beijing firms, which could offer any necessary assistance to our clients.'

Shanghai also became the favoured base of specialist shipping, transport and international trade firms such as Ince & Co, Holman Fenwick & Willan and Sinclair Roche & Temperley (recently merged with Stephenson Harwood).

Peter Murray, managing partner at Ince & Co's four-lawyer office in Shanghai, says the firm's presence shows clients that it is committed to the region.

'Shanghai is at the forefront of development in China and we are in the right place at the right time,' he says.

'It is an excellent area of practice for two main reasons.

First, trade has increased dramatically with China generally, which creates work for both the contentious and non-contentious side of the business.

'Second, China has developed in a short space of time an impressive maritime court and legal system.

The law that they are applying is very much up to date.'

The removal of the one-office restriction has come at an opportune time, reflecting in part the fact that several major firms in effect already had a presence in both Beijing and Shanghai by operating secondments to the office of a European ally in the other location.

For example, in Beijing, Linklaters used the offices of Dutch ally De Brauw Blackstone Westbroek and Clifford Chance worked out of the office of German merger partner Pnder Volhard Weber & Axster, while in Shanghai Allen & Overy used the associated office of Belgian firm Loeff Claeys Verbeke.

The opportunity for the major UK firms to establish a network of offices under their own brand name comes at a time when they are looking steadily to expand their presence on the mainland.

A combination of a positive economic outlook for China in the medium term - its gross domestic product growth for 2002 is predicted to be around 7%, according to the United Nations - together with WTO accession, has reinforced their desire to invest in the country.

This is particularly the case given that many other parts of their networks are currently facing relentlessly tough operating conditions.

Although accession to WTO is not thought likely to provide an immediate burst of growth, it is expected over a five to ten-year period and beyond to provide substantial opportunities for foreign companies looking to invest or sell products and services in China.

It should also mean greater opportunities to advise Chinese companies looking to trade overseas.

On the back of this, Jeremy Xiao, managing partner of Herbert Smith's Beijing office, expects the number of lawyers the UK firm has to double from its current complement of six in the capital and five in the Shanghai office of German ally Gleiss Lutz.

'I am quite optimistic about the economy,' says Mr Xiao, whose clients include petrochemical company Sinopak, which the firm advised on a US$4 billion triple listing in New York, London and Hong Kong.

The firm also advises the China Construction Bank and the Industrial Commercial Bank of China.

'China is doing well regionally - forecasts by the Asia Development Bank are pretty positive over the next five years.

The opportunities are huge and it is one of the priority areas in terms of growth for Herbert Smith worldwide.'

According to CMS Cameron McKenna's Beijing managing partner, Luke Filei, another reason for the firms' expansionist outlook is that it has more scope to act for Chinese companies.

'The workload is still mainly advising foreign companies who are coming in or who are already established,' he says.

'But there are definitely more opportunities to act for local companies because the size and complexity of the transactions they are involved in is increasing.'

Barlow Lyde & Gilbert resident partner Tom Lenon, who has headed up the firm's Shanghai office since it was granted a licence in 2000, agrees that the clients' profile is changing, with more medium-sized businesses operating in China.

'The demands of clients are changing over time,' he says.

'This is particularly true of the ones that have been established here for some time - they are expanding their businesses, by doing more deals and by more general growth.'

It is opportunities like these that explain why the likes of Norton Rose and DLA have sought to get their first licence.

Last October, Norton Rose hired two partners from French firm Vovan & Associes - Jean-Marc Deschandol and Virginie Deslandres - to set up an office in Beijing once its licence application was accepted, while DLA has targeted Shanghai.

Their desire to establish a base on the mainland reflects the belief that it is essential to have a presence on the ground in mainland China, and that running a practice by flying teams of lawyers out of Hong Kong is no longer enough.

Mr Lenon argues that Hong Kong is increasingly being bypassed.

'Clients are coming direct from Europe and you can no longer rely on them coming through Hong Kong on the way,' he says.

It is a view shared by Cameron's Mr Filei.

'The most important issue is the question of how people based in Hong Kong can continue to cover the market,' he says.

'The advice given by non-PRC [People's Republic of China] nationals in Hong Kong is often quite generic and the question is how long clients will accept advice out of Hong Kong.'

Mr Filei suggests that although the likes of UK clients often have a good understanding of Asia and the fact that mainland China is a different legal system, those from the US do not.

'Hong Kong is where a lot of the work has been done in the past but that is going to change,' he says.

'You get better quality advice in the relevant city.'

Mr Filei also expects more firms to open up in China, although he is cautious about their prospects for success.

'The market is good at the moment but I do not see a strong business case for a lot of other firms to come to the market unless they have got something specialist to offer,' he says.

The axing of the one-office rule means that most major commercial firms will look to build their offices in Beijing, Shanghai and Hong Kong, which is particularly convenient for serving south China.

However, there are few other locations beyond these three cities where UK firms will be looking to establish a presence.

Only Stephenson Harwood & Lo and Masons have set up elsewhere, in Guangzhou, the largest city in south China.

Simmons & Simmons' Huen Wong says the firm is following developments in western China, particularly in Chongqing and Chengdu.

'We think there will be a lot of commercial activities in the western region in the years to come,' he says, but says any move will depend on client needs.

Another city that is mentioned is Wuhan but the consensus is that the best way forward in these business centres is to develop relationships, even perhaps a formal joint venture or alliance, with local firms.

Instead, UK firms will be more interested in efforts to persuade the Chinese authorities to relax some of the remaining restrictions on their activities.

The biggest obstacle is the ban on practising PRC law, a rule that was not affected by the WTO accession agreements.

At the moment, locally qualified lawyers hired by UK firms are required to surrender their practice licences when they join.

Helen Potts, the Law Society's international policy executive for the region, says that while it is still lobbying for UK firms to be allowed to practise PRC law, any change in the short term is unlikely with the new round of GATS negotiations not expected to finish until 2005.

Shipping and trade specialist Holman Fenwick & Willan is one firm that would like to advise on local law.

'We would very much like to have the opportunity to practise PRC law,' says resident partner Chris Lockwood.

'Having the opportunity to advise on PRC law and also appear in court would be ideal.'

For now this breakthrough appears to be a long way off - but with the removal of recent restrictions, the hope must be that, one day, it will happen.

Philip Hoult is a freelance journalist