Shanghai pioneers in liberalising China’s legal market

Shanghai’s ground-breaking Pilot Free Trade Zone could mark the beginning of the long-awaited liberalisation of China’s legal services sector.

Shanghai is China’s largest city by population with over 20 million people in it. It is also the country’s most cosmopolitan city. Its government is also reputed for being international business savvy and open-minded.

Last September, the city’s government launched a new type of free-trade zone, aiming to test-run an opening up of its financial system, easing restrictions in foreign and private investment and loosening controls on its currency.

The Shanghai Pilot Free Trade Zone (FTZ) outlined 18 different services sectors to be opened up to foreign investment. To the city’s lawyers this new scheme means more investment activity will generate more demand for legal services. More interestingly though, the FTZ has for the first time promised to explore cooperative mechanism between Chinese and foreign law firms.

Last month, in a very encouraging sign, the FTZ opening up proposals for the legal services sector received the go-ahead from China’s Ministry of Justice. At the same time, the Shanghai Bureau of Justice has been entrusted the task of drafting the regulations and measures governing the opening up procedures.

In spirit, the policy will allow deeper collaborations between Chinese and foreign firms in two main ways.

First, if a foreign firm has a representative office in the FTZ, it is allowed to enter into an agreement with a Chinese firm to second lawyers to each other’s offices. The PRC lawyers working in the foreign firms’ FTZ representative office can provide PRC legal advice while the foreign counsel working in Chinese firms can provide legal advice on foreign law.

Second, within the FTZ, foreign firms and Chinese firms are allowed to enter into an association on a contractual basis. In this way, the two firms remain financially independent and separate entities, but can join force to provide legal services to clients. The PRC legal advice can only be provided by the Chinese firm in the association.

The second model is similar to Singapore’s joint law venture, which the island state introduced in 2000 (19 February 2001). Although it is a cautious step, it is significant for China, as it is the first time the country has officially loosened its grip on close cooperation between local and foreign firms.

Local and international fraternities in the city are both eagerly waiting for more details on the implementation of the new policy.

“It’s encouraging news,” says Dechert’s China managing partner Tao Jingzhou. “Many other countries in Asia have already opened their doors to international firms, such as Japan, Korea and Singapore. The timing is right for China to show that it has an open-minded leadership in the legal professional field.”

Allowing Sino-foreign joint ventures can only be beneficial for both Chinese and foreign law firms, as well as for the users of sophisticated legal services in China, Tao adds. In Tao’s view, the opening up measure is long overdue.

“For many years there is hardly a clear distinction between Chinese and international firms. The local and international legal communities have mingled and mixed so much. Many Chinese firms have become really international and I can’t see why we can’t have a mixture of operations with Chinese and foreign lawyers working in the same partnership,” he says.

Tao and his firm vows to actively exploring the opportunities in the FTZ. “This is an inevitable trend. We’re willing to be in the first group of firms to test the new scheme.”

The enthusiasm is equally shared by many local firms.

“Internationalisation of Chinese firms is a strong desire of the domestic legal profession. It is also what the Chinese government wants to see,” says Frank Chen, managing partner of Shanghai-based Chen & Co.

In order to build up his firm’s international business and offer clients global services, Chen & Co has recently joined Ernst & Young’s global legal services network, EY Law, as a Chinese member (20 February 2014).

“Many Shanghai firms have started studying the new policy and contemplating the possibility of an association with foreign firms,” he observes.

“In order to attract more lawyers with international experience, domestic firms need to have a global network and better platform. That’s another reason we’ve decided to join EY Law’s global network,” Chen adds.

However, there are also lawyers with a more sceptical view. “There are still some grey areas and practical details need to be clarified by the regulators. For example, can the associated firms in FTZ undertake work outside of the special zone? If no, there’s little point of entering into such arrangement,” says a partner of another Shanghai-based firm. “We shouldn’t be over excited for now.”

In an interview with local press the FTZ Post earlier this week, senior official of Shanghai Bureau of Justice Ma Yi provided some promising interpretation of the new policy and its approval by the MoJ.

Ma indicated that the ultimate goal of the initial FTZ pilot scheme is to allow joint venture of foreign and domestic firms, where they can work in the same firm and provide one-stop international and local legal services under one brand.

“We’ve studied the opening up measures taken by countries such as Singapore, Japan and South Korea. They all had the same approach which is to liberalise the market gradually and step by step,” Ma told the local press. “If we open the market all at once, it will have adverse impact on the domestic legal industry, which is only 30 years old.”

He also added that firms have to set up offices in the FTZ before they are eligible to benefit from the new policy, and associate firms can share the same office premises inside the FTZ.

In terms of the scope of businesses for the associate firms, Ma noted that generally, associate firms won’t be able to advise on administration law or criminal law, but should be able to advise on commercial, corporate and disputes resolution matters, including matters that occurred outside of the FTZ.

He also confirmed that there is more interest from local firms, who have contacted the bureau for more information and expressed their interest in setting up offices in the special zone.

If Ma is correct, the FTZ zone will become an important and positive experiment for the future of the legal industry in China. It is a typical Chinese approach to use contained pilot programmes as the launching pad for more widespread reform. If the latest FTZ’s experiment in financial and legal services reform succeeds, then it will be replicated quickly in other parts of China.

Driven by the needs of businesses operating in China and the desire of fast growing domestic firms, China has enough good reasons and confidence to open up its legal services market. When it does so, what can be more fitting than letting Shanghai, its most international facing, innovative and entrepreneurial city, to lead the way.

Background: Shanghai’s pioneers

Law firms based in the city, although are not quite as large as their peers in Beijing, have been known for their outward-looking approaches and entrepreneurial spirit. Although the Chinese law prohibits Chinese firms from merging and sharing profits or setting up joint ventures with foreign outfits, several Shanghai-based firms have found creative ways to build connections with those from overseas.

MWE China, also known as Yuan Da in Chinese, is a pioneer in establishing a strategic alliance with an international firm. The firm was founded in 2007 by two preeminent Shanghai lawyers, John Huang and Kevin Qian, who were previously senior partners of Shanghai’s largest firm AllBright. Upon its establishment, it linked up to US firm McDermott Will & Emery through an exclusive strategic alliance (30 January 2007).  

The structure allows MWE China to remain a financially independent Chinese law firm and to have access MWE’s overseas network and know-how. MWE also provides the Chinese ally with its IT and practice management infrastructure and back-office support functions, such as marketing. MWE China’s two senior partners also attend MWE’s partner meetings in the US.

It was a groundbreaking deal at the time and five years earlier than King & Wood’s tie-up with Australia’s Mallesons Stephen Jaques in 2012 (15 December 2011).

Last year, Shanghai firm Ryser & Associates has also taken the plunge to enter into a Swiss Verein structure with UK firm Field Fisher Waterhouse (8 July 2013). The three-partner Shanghai firm was founded in 2004 by former Baker & McKenzie IP lawyer Zoe Zhan.

Most recently, 75-lawyer firm Chen & Co has taken a bold move join Ernst & Young’s global network, as it has joined as the China member of EY’s legal services branch EY Law (20 February 2014).

Chen & Co’s decision to join force with a global accountancy firm comes a year after Deloitte opened its own law firm in Shanghai, branded as Qin Li, by hiring a team of lawyers from several Shanghai firms, including local tax partner Clare Lu from Llinks. Deloitte’s China legal services unit is overseen by Vivian Jiang, the accountancy firm’s greater China managing partner for tax, business and legal services.

The Shanghai Bar Assocation is also a leader in engaging the international legal community in Shanghai. In 2012, it admitted the first group of foreign lawyers to its membership under a new initiative (18 September 2012), becoming the first domestic bar association to do so.