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It is only 45 years since the Revolution of 1911, but the face of China has completely changed. In another 45 years, that is, in the year 2001, or the beginning of the twenty-first century, China will have undergone an even greater change. �Mao Tse-Tung, November 1956. The chairman was correct — just not in the way he imagined — a point that was brought home one night last September at the old Jin Jiang Hotel in Shanghai. There, a crowd assembled in the very room where Richard Nixon signed the historic 1972 “Shanghai Communiqu�” that reestablished relations between China and the United States after a 23-year rift. Up on stage this night, leaders and diplomats were talking about how another historic agreement had just been approved that would cement U.S.-China relations. As their remarks were translated into English and Mandarin, polite murmurs of approval rippled through the Chinese and Americans in the crowd. Afterward, gifts were handed out to the honored guests, and toasts were offered for the bright future they were helping to create. This bit of diplomatic stagecraft was not the work of government officials, but of private lawyers Mitchell Dudek and Winston Zhao, who run the Shanghai office of Cleveland’s Jones, Day, Reavis & Pogue. At their suggestion, the 1,400-lawyer firm had sponsored the lavish gala to announce that it was awarding local law school scholarships to eight university students. Firm chairman Patrick McCartan and two other partners flew in from the States to attend, and U.S. consul general to Shanghai Henry Levine noted that just hours before, the U.S. Senate had given final passage to a bill approving Permanent Normalized Trade Relations (PNTR) with China. “I have not yet figured out how Jones Day has managed to arrange things so well,” Levine joked. Behind him, the partners beamed. The ceremony was part of a continuing effort by the firm to establish itself in China. With offices in Hong Kong and Taiwan, Jones Day was already a major player in the region. But with China poised to join the World Trade Organization (WTO), the firm felt that an office on the mainland was key for its long-term success. It moved aggressively, transferring Dudek, a 10-year China veteran, up from Hong Kong, and hiring Zhao away from the Shanghai office of Clifford Chance. Since opening in November 1999, the office has grown to 15 lawyers. The firm expects that number to double in the next two years, reaching 50 to 60 lawyers by 2005. Jones Day is hardly the only firm on a long march. Since China opened to the West in 1979, an estimated 113 foreign law firms have established offices within the country, and many more have applications pending. These efforts have taken on a new urgency during the last two years, as planning for post-WTO China has become a top priority for Fortune 500 companies. Even before joining the WTO, China has posted impressive growth. In the last decade, China’s gross domestic product (GDP) has grown more than 10 percent a year, on average, and will exceed a trillion dollars for the first time this year, according to the World Bank. Although China is known as a world leader in exports, its imports have almost tripled in the last 10 years, fueled by growing consumer spending. Although the economy cooled a bit during the Asian financial crisis, with the passage of PNTR and its admission to the WTO next year (assuming the process stays on the tracks), China may at last be poised to become an economic superpower. Like their Fortune 500 clients, Western law firms sense enormous potential for profit. As China’s state-owned economy moves toward a free market, the demand for sophisticated legal services has far exceeded the capacity of the country’s fledgling domestic bar, allowing Western lawyers to fill the gap. To date, much of the high-profile work has been centered in Hong Kong, where Western investment bankers and their usual retinue of New York and London law firms have helped many of China’s massive state-owned enterprises raise cash in the capital markets. Hong Kong-based partners of New York firms, like Matthew Bersani of Shearman & Sterling and Chun Wei of Sullivan & Cromwell, have been at the forefront of multibillion-dollar public offerings by giants like China Mobile (Hong Kong) Limited and PetroChina Limited Company. But for firms without cozy ties to investment banks, an increasing part of the China practice is based on the daunting task of building a presence directly on the mainland (Hong Kong remains a special administrative region, with its own laws and courts). The movement is driven by Western clients who are now demanding local expertise, says Sara Bosco, a partner in the Hong Kong office of Seattle’s Perkins Coie: “For them, us having an office on the mainland is key.” In years past, these clients were content to have firms handle their China work out of Tokyo, Singapore, or British-controlled Hong Kong, China’s traditional gateway to the West. “Not anymore,” says Winston Zee, co-head of Chicago’s Baker & McKenzie’s 200-lawyer Hong Kong office. Zee says that today, there are three “catchment” areas in China: Hong Kong, no longer British but still the dominant market for banking, corporate finance, and cross-border mergers and acquisitions work; Beijing, the seat of government and the center for high-tech, principally because of its strong universities; and Shanghai, China’s industrial center and biggest consumer market. Zee says that he’s particularly bullish on Shanghai: “Hong Kong is still the Dragon’s Head, but the government clearly wants Shanghai to play that role in the future.” If the capitalist quake shaking China has an epicenter, it is Shanghai. Located on China’s east coast near the Yangtze River delta, Shanghai is roughly equidistant from Hong Kong and Beijing. Its 13 million citizens enjoy the highest standard of living in China, and the city, plus the three surrounding provinces, generates roughly 25 percent of the country’s GDP. In the years before World War II, Shanghai was the commercial center of Asia, but it was cut off after the 1949 Communist takeover. Since China’s reopening in 1979, Shanghai’s growth has been astounding. Twenty years ago the tallest building in town was the 20-story Park Hotel. Today hundreds of skyscrapers tower over it, some reaching more than 80 stories. To a visitor, it’s as if Manhattan had been built in a two-decade sprint. No one can appreciate such changes better than lawyer and Shanghai native Yingxi Fu-Tomlinson. Today, Fu-Tomlinson, 40, is the head of New York’s Kaye, Scholer, Fierman, Hays & Handler’s Shanghai office. But in 1980 the Communist Party had her working as a shop girl, earning $4 a month selling sewing kits in a local department store. “I wasn’t even very good at it,” she says, laughing. At the time, it was considered a plum job. Her brother had been shipped to the countryside for reeducation. “They said he had been sacrificed for me so that I could stay in the city with my parents,” she recalls. When Fu-Tomlinson told her parents she had been admitted to the local law school, her mother wept, not out of joy, but out of fear for her daughter’s life. During the Cultural Revolution that had only recently ended, lawyers had been labeled counterrevolutionary and targeted for persecution. The courts and the law schools had been shuttered, and many lawyers were rounded up and, like Fu-Tomlinson’s brother, sent to the countryside for reeducation via manual labor. That began to change in 1978, when Mao’s successor, Deng Xiaoping, reinstated the legal profession and reopened the law schools as part of an overall plan to reform China and open it to the West. Despite those reforms, anti-intellectual sentiment was still widespread, and Fu-Tomlinson’s parents begged her to reconsider. Indeed, Fu-Tomlinson’s fellow workers at the department store denounced her as arrogant when they learned of her plans. “The attitude was very much, ‘It is glorious to be a worker; it is glorious to be a farmer; who do you think you are?’ ” she recalls. Her supervisor, who had veto authority over things like whether she could attend college or get married, reluctantly agreed to let her go. Fu-Tomlinson’s legal education eventually carried her to America, where she got a J.D. from Washington University in St. Louis and worked a six-year stint in corporate finance in the Seattle office of Portland’s Stoel Rives. She married Richard Tomlinson, an engineer at The Boeing Company, and in 1997 they moved to Shanghai, where she would open Kaye Scholer’s office. And her parents’ concerns about her legal career? “Now they say they are happy about it,” she says, laughing with gusto. The year before Fu-Tomlinson entered law school in Shanghai, Jerome Cohen arrived in Beijing. The Harvard law professor had long taught a course on Chinese law, but says that for many years, “it was a bit like studying the moon: You could see it, but you couldn’t get there.” In 1979 Cohen finally wangled an invitation from the Beijing municipal government (no one else wanted to risk inviting him) to teach law to party officials. When he arrived in the city, Cohen says that he found very few fellow law professors, and those he did meet “had a pretty deep tan” from their days working the fields as part of the Cultural Revolution’s “reeducation” programs. After his teaching stint, the Beijing government allowed him to stay on and set up an office for New York’s Coudert Brothers, which became the first foreign firm to open in mainland China since the Communist takeover. Other firms soon followed, including Baker, New York’s Paul, Weiss, Rifkind, Wharton & Garrison (which Cohen jumped to in 1981), and Shearman & Sterling. For most of the 1980s, Western lawyers operated in limbo: Their presence was tolerated, perhaps even welcomed, but they weren’t officially licensed by the government to practice inside China. Working conditions were often unorthodox. Since they weren’t officially sanctioned, many lawyers ran their practices from clients’ offices or hotel rooms. Although the atmosphere was highly irregular, the number of Western practitioners grew steadily through the 1980s. Then came Tiananmen Square. The repercussions from the massacre of Chinese student protesters on June 4, 1989 — a date many lawyers working in China can still recite from memory — were swift. “Business just dried up overnight,” recalls Cohen. The political firestorm scorched not only the nascent practice inside China but also the market in neighboring Hong Kong, which was just starting to contemplate its pending reunification with China. “It was terrible here after Tiananmen, just horrible,” recalls Baker’s Winston Zee of Hong Kong. Franklin Chu, who heads Kaye Scholer’s Hong Kong office, became pessimistic about China’s future — until he took a trip to Moscow for a client and observed its woes. “It restored my faith in China,” he says. But others weren’t so sanguine. With business lagging and a worldwide recession beginning in 1990, many firms closed down their China and Hong Kong offices for a time, including early pioneers Paul Weiss and Shearman. Things didn’t begin to rebound until 1992, when Deng instituted new reforms aimed at luring Western business back to China. Eight years later, those efforts are paying major dividends, as foreign investment in China now exceeds $40 billion a year. But for lawyers wanting to take advantage of China’s growing market, significant barriers remain. To begin with, firms must apply for a license from China’s Ministry of Justice (MOJ) — an often perplexing process that can last years. The criteria for approval are unstated, and the ministry is tight-lipped about the chances for success. In the absence of guidelines, most firms gently lobby, emphasizing what they bring to the table for China. For example, in its pending application for a Beijing office, Perkins Coie touts its close affiliation with America’s high-tech industry and how its clients can help bolster China’s tech sector — a top priority for Beijing. When Jones Day applied for its Shanghai office, it talked about its philanthropic plans and noted that the firm represents 250 of the Fortune 500. Its application was approved in a (comparatively short) 15 months. By contrast, New York’s White & Case applied for an office license in late 1994 and got approval only this year. Why the difference? “There was no real reason given,” says White & Case partner John Kuzmik, who is based in the firm’s Hong Kong office. “Every time we checked, MOJ said everything was okay and moving forward. Who knows? It should take 30 days.” Kuzmik adds that an application by London’s Freshfields Bruckhaus Deringer for a Beijing office took almost as long. Once on the mainland, firms are limited to one office — although this rule is often flouted through the use of “consulting offices,” a practice that sometimes gives rise to bitter disputes. In one celebrated incident five years ago, Clifford Chance allegedly used its influence with the MOJ to have Baker’s “consulting office” in Shanghai shut down (Clifford Chance is licensed to be in Shanghai; Baker isn’t). Attorney Victor Ho was managing Baker’s office at the time and remembers getting a call from the Hong Kong office telling him he should probably get out of town for a while. “It was like, ‘You’ve got 48 hours,’ ” he recalls today with a laugh. Ho now manages White & Case’s Shanghai office. John East, the managing partner of Clifford Chance’s Asia practice, says the story is way overblown. “We’d have conversations with MOJ from time to time about violations, but that’s about all,” he says. Ironically, after its merger with Germany’s P�nder Volhard Weber & Axster, which has an office in Beijing, Clifford Chance itself is technically in violation of the one-office rule. East said the firm alerted MOJ to the merger, but it never received a response. This summer the government said that it planned to drop the one-office limit when China joins the WTO, but many lawyers remain skeptical. Even if China drops the rule, firms face a more daunting problem: “It’s fine to say you’re going to expand to Shanghai or somewhere else. But what I want to know is where you are going to get the people,” says Howard Chao, head of the 10-lawyer Shanghai office of Los Angeles-based O’Melveny & Myers. It’s a common lament among Western lawyers in Shanghai, Hong Kong, and Beijing. The reasons are many. First there is the language barrier. Baker’s Zee says that Chinese is like golf — not that difficult to learn, but hard to master: “You can break a hundred pretty quick, but after that it is very tough.” To practice in China, however, you need about a 10 handicap. Unlike most European countries and Japan, China has yet to adopt English as the default language for business dealings. Negotiations are generally conducted in Chinese, and all correspondence, contracts, filings, and other documents must be prepared in both English and Mandarin — no small matter, given the increasing size and complexity of commercial matters. “Imagine doing a standard due diligence investigation for a billion-dollar deal — only entirely in Chinese,” says Thomas Jones, head of the Hong Kong office of London’s Freshfields. Understandably, most firms require that their lawyers be able at least to read and write Mandarin, although some stop short of requiring their hires to be able to draft agreements. An additional difficulty is finding lawyers willing to accept a China posting given the booming legal markets in America and Europe. The Chinese government exacerbates the shortage by prohibiting foreign lawyers with less than three years’ experience in their home jurisdictions from working in the country. This is an annoyance to the firms, which would like to be able send young lawyers out to China to be trained — especially the growing number of Chinese nationals who graduate from American law schools each year. Finding senior associates, not to mention partners, willing to uproot themselves and their families to go to China is difficult. The problem is not helped by the perception that foreign-based associates are often orphans when it comes time for partnership consideration. “It can be a tough sell,” admits Lee Edwards, who runs the Beijing office of Shearman & Sterling and is himself a senior associate up for partnership this year. The lack of experienced lawyers from home has led to active poaching among firms in China. Sara Bosco jumped to Perkins Coie from Baker’s Hong Kong office, along with two other partners and an associate. San Francisco’s Morrison & Foerster got partner Steven Toronto from Coudert’s Hong Kong branch to lead the firm’s beefed-up Beijing office. In addition to grabbing Zhao from Clifford Chance, Jones, Day picked off Stephane Luo, the head of the Shanghai office of Paris-based Thieffry et Associes. The Chinese proscriptions on foreign lawyers might seem aimed at getting firms to hire locally, but Beijing makes that difficult as well. Because Western lawyers are prohibited from practicing domestic Chinese law, the government mandates that local lawyers hired by foreign firms also forfeit their right to practice. (In China, licenses to practice law are technically granted to law firms, not individual lawyers.) This leaves domestic lawyers with a quandary: join a foreign firm as a “legal consultant” or “paralegal” and lose their license — or practice with a Chinese firm and forgo the training and salary that they’d get from the out-of-towners. Additionally, unlike Japan and Singapore, China does not allow joint ventures or other profit-sharing combinations between foreign and domestic law firms. While these restrictions may seem arbitrary, Stephen Harder, a partner in the Hong Kong office of London’s Clifford Chance, says they’re actually consistent with China’s policy of incremental reform in key areas. He contrasts China’s strategy with the massive privatizations he worked on in Eastern Europe 10 years ago while in the Warsaw office of White & Case: “There, they wanted the government out of the economy right away, but in China all the big IPOs [of state-owned industries] have been limited to minority stakes.” Harder says China’s strategy has allowed it to raise needed capital while retaining control over the “heights of the economy.” And Baker’s Winston Zee explains that Chinese ideology jibes with that strategy: “The law is within the interest of the state, and it is critical for the state to keep lawyers under the thumb of the government.” Others feel that the government is just doing the bidding of powerful local law firms. “Partners at these firms are worried about the competition from Western firms, but that’s very shortsighted,” says one head of a foreign firm. “It makes it difficult for young lawyers to get training, and most Chinese firms do not have the international skills to do it themselves.” Given current economic realities, however, those concerns may be well founded. Although partners at top Chinese firms can make $300,000 or more — in a country where the average annual income has yet to reach $1,000 — first-year associates typically start at the equivalent of $150 a month. Predictably, many of the best local graduates choose to forgo their licenses for the money and training offered by the Western firms. Last year Western lawyers hoped that the restrictions on them might be eased during China’s negotiations with the United States and Europe on entering the WTO. No such luck. Beijing has agreed to consider allowing some joint ventures or other profit-sharing arrangements between local and foreign firms, but even that concession seems remote. “We could see that maybe in five or 10 years,” says White & Case’s Kuzmik. Athough professional service providers, such as law firms and accountants, came away with little from the WTO negotiations, their clients in banking, telecommunications and consumer products did well. If China lives up to its commitments, it will drop many of the restrictions, tariffs, and taxes that have impeded Western companies’ operations in the country. But experienced China lawyers caution that the WTO admission won’t mean an explosion of business. As a country in transition to a market economy, China will be allowed to phase in many changes over time. Several lawyers pointed out that the bilateral agreements negotiated with the United States and Europe leave plenty of wiggle room for China. “Have you read it?” asks Paul Weiss’s Nicholas Howson of the bilateral agreement with America. “Bullet points; notes scribbled in the margin. It wasn’t even translated into Mandarin.” Howson also notes that, despite press accounts of China’s enthusiasm for the WTO, he is picking up a great deal of anxiety in China over what will happen after the WTO admission. Many Western lawyers consider these anxieties justified. After decades of protectionism and economic planning aimed at full employment, not efficiency, many of China’s key industries are ill-prepared for foreign competition. China’s banks are carrying non-performing loans equal to about 20 percent of the country’s GDP due to years of subsidizing failing state-owned enterprises. The government has begun moving that debt out of the banking system and on to the balance sheets of other state enterprises, but the process will take years. The World Bank, China’s largest lender, also estimates that the country has 140 million surplus workers. Tens of millions of them are already being laid off as state industries slash costs in preparation for competition in post-WTO China. In a country where many people have memories of widespread famine, the potential for unrest is real. O’Melveny’s Chao, for one, professes not to be too worried. “This is a big office, so we placed our bet on WTO a long time ago,” he says. But he cautions that even with WTO oversight, China will remain a tricky place to do business, and lawyers will continue to be valuable guides. “You can’t just read the law and know regulations — you need to live here, know who the players are, know how things have been done and negotiated before. The learning curve is steep. I’d say 50 percent of the value I add comes in the first day of meetings with clients.” Victor Ho at White & Case agrees that lawyers will still be key advisers for companies entering the market. Although he feels that the role of guangxi — the system of connections and influence that has long regulated commercial dealings in China — is sometimes overstated, he concedes that it remains an important part of doing business. “Things will still sometimes go back to the 50 families who were with Mao on the Long March, [or someone who] saved someone’s cousin’s life in the war with Chiang Kai-Shek. There are a lot of open accounts, and it’s hard to know how the network works,” Ho says. Ho says that when doing deals in China, a lot of time can be spent haggling over inconsequential matters because issues of prestige become involved: “You might have some local counsel who doesn’t know what he’s talking about, but can’t stand to lose face in front of his client. So he just keeps hammering on things.” Chao says that on one deal he spent two days arguing over an “act of God” clause in a simple power supply contract — boilerplate language that protects providers from liability in case service is cut by a natural disaster. “They wanted to say it was ‘an act of God’ only if a party official said that it was, which kind of defeats the purpose,” recalls Chao. Such problems discourage some international firms from locating in China. “We’ll expand the Hong Kong office, and in Singapore and Tokyo, but this is not the time to go to China for us. We’ll sit on the sidelines and watch for a while,” says Robert Dell, chairman of Los Angeles’s Latham & Watkins. Peter Karasz, managing partner of New York’s Cleary, Gottlieb, Steen & Hamilton, a firm with expanding global reach, says that he has 25 lawyers based in Hong Kong and Tokyo, but no plans for the mainland. “For some firms it may make all the sense in the world, but it’s just not at a level where we would go in,” says Karasz. “We don’t have a ‘trade relations’ type practice. WTO is important long-term to integrate China into the rest of the world, but, short-term, not much will change.” The potential for disruptive international incidents continues: “If something happens in the Taiwan Straits, all bets over here are off,” says Kaye Scholer’s Franklin Chu. Lawyers working in China got a quick reminder last year of just how quickly Tiananmen-type unrest can arise when American jets mistakenly bombed the Chinese embassy in Belgrade. Overnight, rioters, bused in by the government, surrounded and stoned the American embassy in Beijing and burned the American flag. For Kaye Scholer’s Yingxi Fu-Tomlinson, the bombing brought back old memories, especially when the government began dishing out dated anti-American propaganda. “They showed these old movies on state television set in the Korean War where one Chinese soldier mows down dozens of Americans,” she says, her head shaking in amusement. “But still so much has changed since back then,” she says, recalling the days when her father, an engineer who lives in Shanghai, was persecuted during the Cultural Revolution. He recently signed a consulting contract that paid him a 10,000 Renminbi (RMB) signing bonus (about $1,250). A “10,000-RMB man!” — the mark of wealth in Mao’s China and more money than he made in any year under the chairman. To celebrate, Fu-Tomlinson took her parents to the Club Cloud 9 on the eighty-seventh floor of the towering Grand Hyatt Hotel in Pudong, the city’s new financial district located across the river from old Shanghai. Right now Pudong is half-empty, a gleaming temple of capitalism in a still-Communist country. At night it shimmers in silence by the banks of Huangpu River, waiting for the old China to die and the new one to be born. How long it will wait, no one can tell. But in China they say that if you wait by a river long enough, the body of your enemy will come floating past.

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