Caixin
Oct 24, 2018 09:20 AM
DOING BUSINESS IN CHINA

Dying M&As Haunt China-Based Foreign Lawyers, But ‘Belt and Road’ Offers Hope

Beijing giveth, and Beijing taketh away. Or to use another cliché, when Beijing closes one door, it occasionally opens another. Those are two of the latest themes coming from the small but vibrant sector of foreign law firms trying to do business here in China. I use the word “trying” because the legal profession appears to be one suffering most heavily from a persecution complex among the many different types of foreigners working here, at least based on a couple of recent surveys.

Let’s face it — lawyers don’t exactly have the best reputation in the West, which might make it hard for some to feel much sympathy for this group. But even I felt some sympathetic pangs as I read through two of the latest surveys of American and European businesses in China, where legal-services providers were repeatedly among the gloomiest of major sectors covered.

One of the biggest reasons for their gloom is stagnating or even falling revenues. A major culprit there appears to be the rapidly shriveling Chinese appetite for overseas mergers and acquisitions (M&As), which is a big generator for things like legal consulting services on issues related to doing business in overseas markets. Like many things in China, that trend is coming straight from the top, hence my early assertion that this is a case of where “Beijing giveth, and Beijing taketh away.”

In this case, after encouraging companies to go out for years, Beijing has recently had a change of heart and is instructing them to stay at home to lower debt risk and shore up the nation’s own sputtering economy. As with many things in China, real market conditions have very little to do with this abrupt reversal, which is really just another example of how both domestic and foreign businesses are highly susceptible to shifting policy winds from Beijing.

At the same time, as Beijing closes the door on one of the few areas where foreign law firms were finding work, it does appear to be opening another door with its more recent Belt and Road Initiative, or BRI as some like to call it. For anyone who has been living under a rock, BRI is Beijing’s pet project of the moment, calling on big Chinese companies to export their infrastructure-building expertise to other parts of the world, especially developing markets.

That campaign has created demand for law firms with expertise outside of China — something Chinese companies desperately need as they venture outside their home turf. According to the latest sentiment survey by the European Union Chamber of Commerce in China, a whopping 78% of its members in legal services said they see opportunities in BRI projects. Thanks, Beijing, at least until someone decides BRI has run its course and it’s time to shift to something else.

Who Needs Laws?

Before we go any further, I wanted to take one of my periodic trips down memory lane to give my take on China’s legal landscape and the lawyers who populate it, and how that has evolved over the last three decades. Lawyers were a very minor profession in the China I first encountered in the 1980s, probably because the legal system was also in its infancy back then.

Judges I met during that time were often inexperienced and tasked with a wide variety of cases. Add to that mix the many conflicts they regularly encountered, including the temptation to take bribes, and you can see why litigation wasn’t a very attractive profession. At the same time, the fact that most companies were state-owned meant things like business disputes were less common since nobody really cared, and Western-style contracts were also in their infancy.

One of my earliest impressions of lawyers in China actually comes from the 1997 Hollywood thriller “Red Corner,” starring Richard Gere, who plays a businessman falsely accused of murder while on a trip in China. The movie’s courtroom scenes were somewhat laughable, including a memorable one where the heavily accented English-speaking judge stands up and sternly says, “You are in contempt!” after an outburst by Gere and his small legal team.

Fast-forward to the present, where lawyers here still aren’t exactly the most respected profession, though they are gaining ground as China tries to bolster Western-style contracts and dispute resolution both inside and out of court. Most of the law firms I’ve encountered in today’s China are usually loose affiliations of lawyers working together in a single office. Many work independently for the most part and lack the strong partnerships seen in the West, though they do come together to share resources and help each other on individual cases.

All that brings us back to the situation for foreign law firms, which are largely locked out of many of the most basic legal functions in a system that largely favors these local litigator shops. One of my contacts, longtime Beijing lawyer Les Ross, told me foreign lawyers are largely relegated to providing services like representing Chinese companies in their overseas business, as well as international arbitration and representing foreign companies doing business in China.

Foreign firms aren’t allowed to hire practicing Chinese lawyers or do any litigating in Chinese courts, apparently to protect the fledgling local industry. The nation seems to be experimenting with painstakingly slow reform by allowing foreign law firms in Shanghai’s 5-year-old free trade zone to formally partner with local firms and, for example, to share revenue under formal collaboration agreements. But even there, not many companies have taken the bait due to the high costs and bureaucracy involved in setting up new offices.

With all those constraints, it’s not hard to see why 50% of foreign legal firms in China reported they were struggling to make a profit, according to the latest sentiment survey from the American Chamber of Commerce in Shanghai. Only 40% of legal services companies surveyed reported revenue growth, with a whopping 90% citing local competition as one of their biggest threats.

The prognosis certainly isn’t rosy for this mostly unsung group of legal troopers here in China, and I would probably advise any China-minded young Western professionals from avoiding the legal profession for now. What’s more, things don’t look set to improve anytime soon due to a lack of pressure from major governments or trade groups, according to Ross.

Doug Young has lived in Greater China for two decades, including a 10-year stint at Reuters, where he led China corporate news coverage. Send your questions or comments to DougYoung@caixin.com


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