The world’s second-largest economy offers boundless potential. But restrictions on the work of foreign firms are among many obstacles to sharing in China’s success.

As Chinese businesses expand investment overseas, UK-based international law firms have been turning in ever greater numbers to the Land of the Dragon. An anti-corruption drive by authorities in the People’s Republic of China (PRC) is creating new business opportunities for lawyers, foreign and local, too. But in this huge and still fast-growing economy, pressure on fees and bureaucracy mean it is a challenge to turn a profit.

For western lawyers and other businesses, the sheer size of the world’s second-largest economy, worth $8.2tn, and its rate of expansion, are enticement enough. Growth may be slowing, but this year China is still forecast to grow at 7.8%, more than four times faster than the US, and compared to a mild contraction in the eurozone economy, according to estimates from the Organisation for Economic Co-operation and Development.

Macfarlanes partner Paul Davies, who has been leading an expansion of the firm’s business in the PRC, says: ‘You cannot turn your back on China, you have to work out how you can develop the opportunities that this market can offer.’

Until recently, the focus of international law firms’ work was foreign direct investment (FDI) into China, but that is changing. Matthew Townsend, a founding member of the China Britain Law Institute, says: ‘One major source of interest among our members is that China investment flows have reversed in recent years and there is now a substantial market for foreign legal services assisting Chinese companies in their foreign investments.’

While FDI into China fell in 2012 for the first time since 2009, outbound Chinese direct investment grew 28.6% to $77.2bn, according to China’s Ministry of Commerce. This is mainly the result of Chinese investors seeking global mergers and  acquisitions opportunities using Chinese government funds.

David Dali Liu, managing partner of Beijing-based Jun He, one of China’s leading law firms along with Zhong Lun and Fangda, predicts that this export of Chinese capital for M&As in Europe, South America, Australia and countries like Russia and Uzbekistan, among others, will underpin in the ‘short to medium term’ strong domestic consumption in a country of 1.3 billion people. ‘We are moving from “made in China” to “made for China”,’ he says.

As the focus shifts from serving international clients investing in the country to advising Chinese banks and corporates, few firms can remain at arm’s length from the Chinese market. Townsend says: ‘Chinese business works in different ways, and having people on the ground enables law firms to be close to their clients and meet them face to face.’

While larger firms, including Clyde & Co, Eversheds and Berwin Leighton Paisner (BLP), have been opening offices in either Beijing or Shanghai, or both, independent legal outfits are busy building referral networks with local Chinese law firms.

Barriers to access

Success in the Chinese market involves clearing various hurdles.

Access to the legal market of mainland China (this excludes the two special administrative regions of Hong Kong and Macau, which have separate legal systems) remains restricted. Foreign law firms cannot practise PRC law and PRC-qualified lawyers employed by foreign law firms have their practising licences suspended for the duration of their employment, and so are not permitted to give formal advice on local law issues. Foreign law firms can advise on home and international law and turn to domestic law firms for local law matters. Mergers or joint ventures with Chinese outfits – entailing the sharing of costs or profits – are not permitted either.

With China’s accession to the World Trade Organisation in 2001, foreign law firms were allowed to open more than one office in mainland China, but need to wait three years between opening offices – this is known as the ‘three-year rule’.

Lawyers interviewed for this feature do not expect the legal market of mainland China to open up further any time soon. However, the combination last year of Chinese law firm King & Wood with Australia’s Mallesons Stephen Jaques is seen as a possible step in the direction of further market liberalisation.

The merger has been structured as a Swiss Verein with no sharing of revenues or sharing of profits. King & Wood Mallesons (KWM) is now busy expanding globally, recently unveiling a union with British law firm SJ Berwin in a deal that will create a firm with a combined turnover of $1bn. A Chinese lawyer who preferred not to be identified says: ‘The merger, if successful, will show to the Chinese government and the Ministry of Justice that Chinese law firms are ready for international competition both inside and outside mainland China, and the domestic legal market might be further opened up.’

Chinese and western law firms indicated that they have no plans for similar tie-ups. John Bennett, BLP international business partner, says: ‘The way we and other international law firms deal with [current rules on foreign lawyers] is by providing our clients with good commercial advice from people who are dual-qualified. But where one needs local law advice, a formal law opinion, or a court appearance, obviously we work with Chinese law firms.’

Earning trust

Aside from regulatory issues, there is a very different business culture to contend with, particularly the pressure on fees. Wragge & Co partner Gordon Harris says: ‘Chinese clients don’t expect to pay anything like what western companies expect to pay for legal services, so it’s a real challenge getting good sensible commercial rates agreed.’

Bennett concurs: ‘China is a very difficult market to make money in, and a very difficult market to operate in.’ But he argues that it is a question of earning trust, and this takes time.

‘Chinese clients are relatively new to globalisation and also to working with international law firms, so in a sense it is understanding the value that international law firms can bring, what they do, and how they charge. Until one earns their loyalty, their assessment of different law firms will be more heavily focused on cost differences, and therefore it takes a bit of time to build up a profitable business.’

The peculiarities of the Chinese market are stretching lawyers beyond their roles as legal advisers. Laytons partner Esther Gunaratnam spends a significant part of her job helping Chinese organisations find investment opportunities in the UK. She says: ‘Generally speaking, Chinese investors are not as experienced as investors from other parts of the world. We spend a lot of time educating and introducing them to relevant contacts. We often find that when Chinese clients find investment opportunities, the legal work will flow from that.’

However, building such relationships is not always easy, particularly as English is not widely spoken in mainland China and there is an increasing expectation of conducting business in Mandarin.

Hui Zheng, co-ordinator of Allen & Overy’s China Group in London, notes that in the past 10 years more transactions, whether in or outside China, have been carried out, completely or at least partially, in Mandarin Chinese. This is because of the growing number of Chinese professionals working in China for big local or foreign accountancy firms and investment banks. ‘There are more Chinese speakers who are capable of executing international transactions, so our clients require Chinese language support from their lawyers as well,’ he says.

This has led to a fresh challenge: attracting and keeping experienced dual-qualified lawyers. Hong Kong-born Gunaratnam says that linguistic skills play a big role in the choice of legal adviser. ‘Often a Chinese client would go for somebody who speaks the language rather than somebody who might be technically brilliant, but who they can’t understand.’

The Qualified Lawyers Transfer Scheme, introduced by the Solicitors Regulation Authority in September 2010, is seen by international law firms as a positive move to tackle this problem. The Law Society, which promotes the scheme, says that many Chinese lawyers are now interested in re-qualifying as English solicitors under the QLTS.

If it is a competitive market in China, international law firms also face competition from their Chinese counterparts on their home turf. Following their clients’ global expansion, Chinese law firms Yingke and Zhong Lun recently opened offices in London.

Beijing-based Zhong Lun launched in the City of London in May 2012, and also has offices in New York, Tokyo and Hong Kong. The London team, which advises on corporate, real estate and intellectual property, among other areas, not only serves Chinese clients investing in the UK, but also British, North American and European clients investing in China.

Partner Linna Li says: ‘In overall terms, under a continuing challenging economic climate, the London office has grown both by number of staff and revenue. We have taken on a series of exciting and challenging projects across a relatively wide spectrum of industrial sectors.’ Recently, the firm advised a Shanghai-based multinational power generation and electrical equipment manufacturer on a $10m leasing transaction in the UK.

The office now has 20 staff, including five partners. Li says Zhong Lun is ‘still only in the early stages of exposure to the international market’. In April this year, the firm hired Tom Fairley, who previously worked in the China offices of Norton Rose and Linklaters, as its first non-Chinese partner in London. ‘Fairley brings more than 10 years of international law firm experience to Zhong Lun London office,’ she says.

Best friends

Whether in London or Beijing, Chinese and international firms will need to cooperate while they are finding their feet.

Gunaratnam can see opportunities for UK law firms to work with the UK branches of the Chinese firms. ‘It’s still early days because many of these law firms are still focused on the Chinese side, but there will be complementary services that we could offer to either their clients or cross-refer our own clients to them.’ UK firms should not fear the arrival of the Chinese, she suggests: ‘The cake is big enough for everyone.’

For some firms, collaboration means thinking carefully before establishing an office in the country.

Gunaratnam says: ‘If we were to set up our own office in China, we would risk alienating the friends that we already have locally, and that could cause friction and negatively impact on the cross-referrals that we have with them.’ Laytons’ friends include Vivien Chan & Co and Ella Cheong in Hong Kong, US firm Benesch in Shanghai, and Guangda Law Firm in Guangzhou.

Macfarlanes is taking a similar approach. Bureaucracy and the ‘significant amount of regulatory approval’ required in doing business in China mean you need friends locally, says Davies. ‘It’s far more difficult for foreign law firms to navigate through the regulatory approval process than it is for Chinese law firms. Doing business in China lends itself very well to the independent law firm model where you work alongside local firms.’

BLP does have a representative office in Beijing (since May), but currently only has a staff of three, including partner Peter Robinson, who leads the office. ‘We keep our Beijing office quite small because we don’t want to compete with Chinese law firms, but work together with them to provide Chinese legal services to our clients,’ says BLP director of China business Michelle Chen. Furthermore, Chinese law firms can provide coverage of regions of China that foreign law firms – most of which are based in Beijing and Shanghai – do not reach.

Loose forms of co-operation are, for now, the most advantageous. Harris argues: ‘We work with a lot of Chinese firms. We shop around to keep our options open. It keeps them sharp on price and on service levels.’ He adds: ‘Many of the Chinese law firms have offices all over China, but they are more like franchises than offices of a single firm, so a particular firm might have quite a good office with some people you like in Shenzhen, but have a very poor office in another city.’ He adds: ‘I will only use the people who are good in each jurisdiction.’

Notwithstanding the KWM tie-up – the first of its kind involving a Chinese firm – it is a similar story on the Chinese side. Most firms prefer smaller scale, non-exclusive alliances. Liu says: ‘We are building up our international platform through our network with different best friend firms in different jurisdictions,’ Liu says. Slaughter and May is one of Jun He’s ‘best friend’ firms.

So what have law firms been busy with in China? Allen & Overy has been in Hong Kong since 1988. It was one of the first international law firms to open a second office in mainland China, in Shanghai in 2002 – the first opening in Beijing in 1993.  

Zheng says that over the past 25 years Allen & Overy has been advising both international and Chinese clients, including Chinese institutional investors and corporations, on initial public offerings (IPOs) on the Hong Kong Stock Exchange. These include Agricultural Bank of China, China Life Insurance, Bank of China, and Sinopec Engineering (a subsidiary of China’s state-owned oil giant Sinopec Group), which raised $2bn in a Hong Kong IPO in May 2013. ‘Hong Kong is an increasingly important international market for IPOs,’ Zheng says.

However, Zheng adds: ‘In recent times, we have been helping more Chinese companies, including state-owned and privately owned enterprises, to do M&As and other transactions outside China.’ Allen & Overy recently advised affiliates of China Vanke, the largest residential real estate developer in the PRC, on its first investment in north America with a deal value of $620m.

With the globalisation of Chinese business, Zheng says A&O is increasingly serving its Chinese clients out of other offices in the firm’s network, including New York, London and eastern Europe. The firm acted for Wanhua Industrial Group, majority-owned by the Yantai Municipal government of the PRC, on its acquisition of Hungarian chemicals company BorsodChem.

For its part, BLP sees big opportunities in aviation. China is one of the world’s fastest-growing aviation markets. Out of its Hong Kong office, which opened in 2011 and now has over 10 lawyers including four partners, the firm has advised privately owned Shanghai Spring Airlines and ICBC Financial Leasing, a subsidiary of Industrial and Commercial Bank of China Ltd (ICBC) on aircraft financing. Bennett says: ‘The demand for aircraft financing techniques is mirroring what has happened elsewhere, for example, in Japan and historically in the UK.’

In real estate, BLP hopes to capitalise on investments by Chinese insurers, who were given the regulatory green light in late 2012 to buy foreign property assets. ‘This is one strand of our strategy and plays to one of the firm’s strengths,’ Bennett says. The firm’s Hong Kong team has advised clients, including property group HongKong Land, on urban development projects in the former British colony. While China overseas direct investment has traditionally focused on natural resources, in the past year the emphasis has shifted to residential and commercial real estate, including hotels, says Liu.

Anti-trust work has also been a fast-growing area for Jun He. Driving this are mergers and acquisitions that have been subject to the approval of the anti-monopoly bureau of the Ministry of Commerce, and litigation relating to investigations by anti-trust watchdogs into alleged price-fixing. The firm would not reveal details of its work in this area, but the pricing practices of several baby formula producers triggered one recent investigation in China.

Jun He is also representing ‘several multinationals in the pharmaceutical sector’ in relation to anti-bribery investigations by Chinese authorities that have hit the international press in recent months. Some of these probes involve ‘very serious criminal offences’, Liu adds. Jun He has reportedly been representing UK-based GlaxoSmithKline, which faces allegations of bribery and tax-related crimes by its senior management in China, although Liu declined to comment on this. GSK has said of the allegations that it had found no evidence of bribery or corruption in China, it was reported.

Liu predicts that compliance and anti-bribery  work– in a country that ranks 80 out of 176 in the 2012 Transparency International corruption index – are areas that will continue to grow in the near future. The scope and scale of the bribery investigations will depend on whether they expand beyond the pharmaceutical sector, he argues.

Local media have suggested that the anti-corruption drive of the Xi Jinping government could lead to probes under the US Foreign Corrupt Practices Act and Britain’s Bribery Act. This may be a headache for US and UK companies, but it is good news for their international legal advisers. Townsend argues that China offers ‘a massive opportunity’ to assist clients with compliance and regulatory matters. ‘Holding China to US or UK standards involves a huge amount of work and potential revenues for foreign firms, who are familiar with those standards,’ he says.

International and Chinese firms also report an increase in litigation and arbitration work in China.

Although Chinese parties would still prefer to solve their disputes through negotiation, arbitration – owing in part to its confidentiality – is becoming more popular both in mainland China for purely domestic transactions, and in Hong Kong and Singapore for cross-border contentious matters.

Meanwhile, the traditional focus of outbound investment – natural resources – continues to be a big pull for UK law firms which, as Davies point out, have an advantage because of the ‘strategic importance’ of English law in this sector, particularly in Africa. ‘We can use English law and our skill-set in natural resources to try and develop better links with China,’ he says.

Davies specialises in the environmental aspects of corporate transactions, in the UK and overseas, another promising area in China: ‘Environmental law is still in its infancy in China and very few, if any, Chinese law firms currently have established environmental law practices. By focusing on it, we have been able to accelerate our entry into the Chinese market.’ Macfarlanes recently advised a global specialty chemicals and performance materials company on industrial environmental regulations in China.

In China patents, trademarks and other intellectual property rights are regularly infringed by Chinese companies or individuals, and Wragge & Co has been very busy helping British clients, including Dyson, Aston Martin, Birmingham City University and University College London to protect and enforce their IP rights. Last year, the UK-based international firm successfully represented Dyson against a Chinese company that had infringed its design patent for a bladeless fan.

Unlike most other international firms, Wragge & Co’s office in mainland China is Guangzhou. Harris, who is responsible for China matters in the UK, says: ‘There was a feeling that Shanghai and Beijing were saturated with lawyers and by going to Guangzhou we would stand out.’ Guangzhou has the added advantage of being in the industrial Guandong province, which is ‘the route of all evil when it comes to copying’, Harris says. The firm’s Guangzhou office has nine fee-earners and is led by IP director Tom Carver, whose brief is also to attract Chinese clients into the UK.

Laytons’ main focus is on inward Chinese investment in Britain and Europe, including the biotechnology sector. Chinese clients are buying technologies developed by foreign universities, and Laytons’ advice to them can range from IP licensing to shareholder agreements. Gunaratnam says: ‘Work is trickling through more and more, but it’s not like a massive landing because a lot of the Chinese investors are still finding their feet.’

As they do, canny firms are holding their hands and finding this a necessary addition to the role of international lawyer.

Marialuisa Taddia is a freelance journalist