The Legal 500

The effect of the global financial crisis on the People’s Republic of China (PRC) has dominated the legal market. The Chinese government’s stimulus package has managed to insulate the PRC from the worst of the crisis, encouraging Chinese banks (themselves wiser from the Asian financial crisis in 1997) to continue lending, and profiting, in a market where international banks have been almost cataleptic. Consequently, M&A activity in China has been relatively robust – though nonetheless experiencing drastic decline compared to the boom of 2006 and 2007. The hottest topic is Chinese outbound investment, with cash-rich or Chinese bank-financed companies taking the opportunity to acquire assets abroad at lower prices, with particular interest in energy and natural resources in Asia. However, the flagship deal of this trend, Chinalco’s proposed $19.5bn offer to merge with Rio Tinto, failed to complete.

At present foreign and local firms are relatively collaborative, with local firms advising on PRC law (which international firms are prohibited from practising), and foreign firms offering the benefit of a seamless strategic service across practice areas and jurisdictions that local firms cannot yet emulate. Indeed, many local firms are still organised much like barristers’ chambers, with a ‘keep what you kill’ policy that some clients complain leads to ‘variable quality’. However, most agree that the best Chinese firms offer an increasingly viable, and cost-effective, alternative to their international peers.

Both local and foreign law firms have been hit by the economic crisis, with some undergoing significant downsizing in the region. The massive drop in foreign direct investment has had its impact, and Chinese outbound work is very elusive. Nonetheless, the outlook is optimistic about the future, with many local firms opening offices in the ‘second tier cities’ in anticipation of future growth.

China’s continuing adaptation of its infrastructure provided both local and foreign firms with some mega-deals, most notable of which was the telecom industry restructuring – China Unicom’s $15.8bn CDMA business sale to China Telecom and its subsequent $23.8bn merger with China Netcom engaged Commerce & Finance Law Office, Freshfields Bruckhaus Deringer, Jingtian & Gongcheng, Sullivan & Cromwell LLP and Linklaters.

The financial crisis has meant that capital markets were slow, with the Chinese government closing the Shanghai Stock Exchange for months to protect values. The Hong Kong index has been more robust than many around the world, but most deals have struggled to complete amidst unpredictable share prices. The best international law firms can offer a consolidated service with Hong Kong, US and UK-qualified lawyers capable of taking a Chinese company public on any major stock market. One major move was Latham & Watkins LLP’s hire of seven partners from Allen & Overy; this may change the face of the market once business picks up.

Litigation and arbitration have significantly increased in volume as the financial crisis continues to play out. The shipping industry has suffered from the crash of freight rates and fluctuating materials prices, and chains of defaults have given rise to chains of potential disputes. On the other hand, with tight legal budgets, many parties are cautious of pursuing matters to court. Foreign lawyers do not have rights of audience in China, so this is an area where international and local firms must work together closely.

Technology remains a sector of great importance. However, now the PRC is up-to-speed with Western technology, foreign companies applying for High and New Technology Enterprise status (which confers a 15% rather than 25% tax rate) must show that they offer something novel or special. Many Western companies develop technology jointly with Chinese companies, which has led to an increasingly complex IP environment. IP is now a concern not only of foreign investors, but also of Chinese companies developing their own IP. In 2008, applications received by the Chinese patent office from foreign companies decreased by 10%, but patents from domestic applicants saw a 20% increase. Trademark applications are burgeoning – foreign firms such as Bird & Bird, Lovells LLP and MMLC Group have opened IP agencies to take advantage of this trend. With IP litigation also on the rise, Bird & Bird has taken the step of allying with local Xiang Kun Law Firm – former Bird & Bird partner James Luo will lead the firm’s contentious work from Xiang Kun.

While there is much encouragement for foreign investors, there are also counterbalancing forces. China has updated its tax and transfer pricing regimes, and the Labor Contract Law brought in at the beginning of 2008 is even more supportive of employees than previous regulation. Another big development is the far-reaching antimonopoly law, which hit the headlines when Coca-Cola’s $2.5bn offer for Huiyuan Juice was blocked in a surprising ruling. Tax, employment, anti-monopoly and competition laws will all be areas of increasing significance for companies that wish to invest in China, and the lawyers who act for them.

China thus continues to attract foreign business – but remains cautious of getting too involved. The law firms best placed to succeed offer cultural understanding and local connections wedded to international business savvy and legal expertise; they are identified herein.