Sexy East

At the beginning of 2004, China bestowed on Hong Kong a gift in the form of a landmark free trade agreement between the mainland and its capitalist enclave. As far as the legal community is concerned, the Closer Economic Partnership Arrangement (Cepa) will be welcomed as a small-but-steady step along a path towards liberalisation. It was intended to be a much-needed New Year’s pick-me-up to pep up Hong Kong’s battered economy after a steady downturn was prolonged by last year’s Sars outbreak.

“It’s significant not so much in what it may mean for the foreign law firms in Hong Kong or China, but insofar as it marks out where the Chinese are thinking of going,” reports Alison Hook, head of international at the Law Society, who earlier in the month met with government officials from the island.

So what does Cepa actually do? It offers World Trade Organization (WTO)-plus access opportunities to a number of services on the mainland, including the legal market. Any relaxation of the notoriously closed legal market will be greeted enthusiastically by City firms with Chinese aspirations. Foreign lawyers still cannot practise People’s Republic of China (PRC) law, nor can they go into partnership with domestic firms, and until two years ago, a ‘one firm, one office’ rule stymied further activity. But now, under Cepa, Hong Kong lawyers will be able to practise locally and firms will be able to form alliances with Chinese firms, albeit heavily circumscribed (see box).

Hook says the deal is a prelude to greater reforms.

The Law Society was invited along with representatives from the American Bar Association, as well the German, Japanese and French bars, to a conference hosted by the Chinese Ministry of Justice, all paid for courtesy of the World Bank. They were discussing reforms to the Chinese equivalent of the Solicitors Act, known as ‘the Lawyer’s Law’, which could mark another significant development in the profession. Discussions covered introducing basic human rights protections, as well as addressing procedural points of criminal justice. The Chinese authorities were also looking at creating an effective and competitive profession and, for example, raised the possibility of limited-liability partnerships (LLPs).

There is “a huge psychological difference” between the mindset of the Chinese authorities when it comes to their liberalisation agenda and that of any other jurisdiction, notes Alison Hook. “They’ve decided they’re going to be a power in legal services in the future, because apart from anything else they’re just so big,” she says. “And what they’re doing is preparing for a future by opening up in a way that suits them.” Or as one commentator bluntly puts it: “You tell us how we can beat you up, and then we go ahead and beat you up.”

Cepa’s significance is important insymbolic terms, rather than having any tangible effect for City firms, as it only helps native Hong Kong firms. As Gary Lock, managing partner of Herbert Smith’s Shanghai office, points out, it is not even going to deliver true partnerships to those firms. “They can’t hold themselves out as partners, they can’t operate as one entity, so while they can do joint marketing, the accounts are separate. [Similarly], staff are separate, even though they can share the same office, and bills will be issued separately,” he comments. “Each firm will have its own insurance and be liable for its own actions. So I don’t see this as a major breakthrough.”

While it is a tentative development, it has been well received by Hong Kong lawyers. “They’ve moved into one house but in different rooms, and we expect some day in the future the wall between the two rooms will be pulled down,” commented Ip Shing Hing, president of the Hong Kong Law Society. “We hope one day Hong Kong and mainland lawyers will be able to become partners of the same law firm.”

“So far there hasn’t really been any impact,” reports Owen Nee, managing partner of US firm Coudert Brothers’ Shanghai Office. “We haven’t seen any new Hong Kong firm coming into the Shanghai market, although they may well be doing so in future.” However, as Nee notes, Cepa has only been in effect for the best part of a month and the local bureau of the Ministry of Justice has already held a conference on how Chinese and Hong Kong firms could do business. “They look interesting because those arrangements don’t prevent the practise of local law,” he adds.

“It’s a big non-event as far as City firms are concerned, but the big factor they haven’t taken into account is what it means for China,” acknowledges Hook. According to Hook, the Ministry of Justice has already flagged up the possibility of foreign law firms employing Chinese lawyers and forming partnerships through “a limited experiment” to see what benefits a freer environment could deliver.

Go east
Not all UK firms are dismissive of the changes, however. Hammonds has the unique distinction of being the only foreign practice to start a Chinese law firm (Li Brandt & Co, which constitutes its Hong Kong office) ‘from scratch’. As a result, the firm can avail itself of the treaty.

David Jones, head of construction, engineering and projects at Hammonds, believes that the wider benefits of a trade agreement will also give Hong Kong a much-needed boost. “Since 1997, Hong Kong has had a bit of an identity crisis and didn’t know what it wanted to be while, for example, Shanghai grew tremendously,” he says. “What Cepa has done is open the gates for local Hong Kong firms to develop into China. And by opening the gates, it’s giving Hong Kong an identity.”
Jones is hoping that his firm’s Hong Kong status will help it win licences for offices in Shanghai and Beijing.

As far as City firms are concerned, China’s image has long been one of unparalleled and irresistible opportunity – but also one that poses a number of headaches. Not least, there is the ban on practising PRC law, which foreign lawyers had hoped would be scrapped when it joined the WTO in December 2001.
However, they were disappointed, but not altogether surprised, when the Chinese responded to protectionist concerns of their own profession.

It is not just that the multinational firms are prevented from carrying out conveyancing and probate, they are also prevented from dealing with regulators and government departments. “What we’re trying to do is offer a one-stop shop, and if you can’t practise local law, that’s a severe limitation,” comments Marc Bartel, director of international projects at Lovells. “At the end of the day, we’re trying to serve our clients, who are making investments and running their activities in a given market. In the large transactions, increasingly UK and US law is driving the documentation – nevertheless, a lot of the legal framework is local.”

“It’s our biggest impediment,” agrees Tom Jones, head of Freshfields Bruckhaus Deringer’s China practice group. “It prevents us from fully expanding our practices but it also has the effect of restricting Chinese law firms from obtaining the benefits which could be achieved from full cooperation with foreign firms.” While the ban is clear, many foreign firms skate fairly close to the wind by employing local lawyers without practising certificates, much to the annoyance of local firms and the authorities.

“The problem always with the mainland is getting good local people who are reliable and can identify with the perspective of Western corpor-ate clients,” comments Andrew Halper, a partner at Denton Wilde Sapte (DWS), who also serves on the governing body of the China-Britain Business Council. There are “a couple of Chinese law firms of outstanding quality”, notes one Shanghai- based lawyer, where “you could be walking into the foyer of a Wall Street or London firm”. But that, he adds, is about it.

Expansion on the agenda
Life on the ground can be uncertain for lawyers. For example, there was considerable consternation among the expat legal community in May 2002 when Shanghai’s local government set an upper limit of £255 per hour. It was never clear whether the notice applied to foreign firms and the fuss soon passed, but it served as a warning that nothing in China can be taken for granted. “There’s still very much a black box at the centre, both at the Ministry of Justice and the local bureau of justice, where you don’t know exactly what will happen,” acknowledges Hook.

Aside from the ban on advising on local law, until recently the other major hurdle was the ‘one firm, one office’ rule. That has made for some tough choices. In particular, the ban on second offices has meant firms choosing between Beijing and Shanghai. “People often think it’s either Beijing or Shanghai,” comments Halper, who has worked in Beijing for seven years and serves on the governing body of the China Britain business council. “Many people view Beijing as just the seat of government and Shanghai as the commercial heart of China. The reality is that huge volumes of commercial business are transacted in both cities.
China is going to be a bit like the US or Germany, where if it’s media, Munich predominates, if it’s shipping it’s Hamburg and if it’s banking then it’s Frankfurt. China, too, has room for more than one important business city.”

“It’s essential to be based in Beijing in order to be close to most of the bureaucracy or administration, because you’ll have to go through the red tape to get work done beyond the pure legal aspect of the deal,” comments Bartel. Lovells was one of the first foreign firms to be licensed to practise law in Beijing in 1992, and established its Shanghai office last year. The rate of com-mercial growth in Shanghai means that a presence on the ground there is vital as well. “Ten years ago there were 10 skyscrapers – now there are 50 or 60,” says Bartell. He reckons that in the next three to five years there will be as many lawyers on the mainland as there are in the firm’s 40-strong Hong Kong office.

Halper says that the granting of licences had developed “a political coloration” over the years. “There was an unspoken quota system going on based on country of origin, and sometimes things change as the political flavour of the month changes,” he says. However, it looks as if that quota system has become a thing of the past, and at any rate UK firms have done reasonably well out of the licensing regime of late. Has DWS any plans to add to its Beijing office and open up in Shanghai? It is “on the agenda”, says Halper. “Most law firms conducting serious business in China over the next few years will probably end up in both cities, and in any event all such firms will have to consider this carefully,” he adds.

The old view was that it was enough for Western firms to have Hong Kong offices and then parachute their lawyers in for client meetings in the PRC. Most of the City firms have their two mainland offices now, sometimes through indirect means: Clifford Chance opened its first office in Shanghai, but gained another through the Pünder merger, for example, while Freshfields opened in Beijing, but the Bruckhaus Westrick Heller Löber part of the operation brought a Shanghai office to the merger.

Herbert Smith is a relative latecomer into Shanghai, having won its licence at the beginning of last year. Why was it important to acquire the second office? “China is a very important market for the firm as a whole,” says Lock. “We always had a very substantial presence in Asia, and in China we mainly did the work out of the Hong Kong office until the Beijing office opened up four years ago. To complete our network, it was necessary for us to have an office in Shanghai.” The firm already has 22 people based on the mainland. However, Lock is concerned that the legal markets in Beijing and Shanghai have quickly become crowded. He believes that many of the new arrivals are “overoptimistic” and are driving fees down. “Since the WTO, a lot of people think that the market is going to happen in a big way,” he says. “But foreign investors, being foreign investors, are new and feel very cautious about how they approach the market. Things aren’t yet happening.”

2003 was a tough year for many practices in Hong Kong. A number of firms, predominantly US, either abandoned or significantly scaled back their operations. CMS Cameron McKenna downsized into an insurance boutique (as well as ditching Beijing), while US firm Dewey Ballantine shut the doors on its Hong Kong operation, as did Cravath Swaine & Moore.
However, talk of its demise as a legal centre is overstated. “If you look at major financing jobs done by the Chinese banks, it’s still the Hong Kong branch that’s doing the financing,” comments Marc Bartel. “For the obvious reason that the market is more liberal and there’s a greater possibility to do things.”

For Coudert, the first firm to go into mainland China in 1979, a rebalancing of staffing levels has taken place between its three offices: numbers in Hong Kong have dropped by around 15 per cent, whereas Beijing has increased by the same proportion and Shanghai has gone from zero to 16 lawyers in three years. “It has nothing to do with the regulatory environment in either Hong Kong or China, but the business in China has been strong and life in Hong Kong over the last few years has been difficult,” reflects Nee.

For Hammonds, which has yet to arrive on the mainland, David Jones acknowledges that the firm’s Chinese business is “a minnow” (“but an important one”) compared with the rest of the business, but he believes the potential is huge. “Doing business in China isn’t easy – it’s slow, there’s bureaucracy, it’s driven by who you know – but the market potential for law firms is very substantial if you hold your nerve,” he comments.

Cepa in short
  • The minimum residency requirement for all Hong Kong representatives in the mainland representative offices of Hong Kong law firms is two months each year (four months shorter than China’s World Trade Organization commitments).
  • Hong Kong practitioners are permitted to work for the mainland’s law firms.
  • Hong Kong permanent residents of Chinese nationality are permitted to sit the legal qualifying examination in the mainland and, once qualified, are permitted to engage in non-litigation legal work in the mainland’s law firms.
  • Hong Kong law firms with representative offices on the mainland can run business jointly with mainland law firms, except in the form of partnerships (but Hong Kong lawyers on the mainland cannot engage in practising Chinese law).