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China’s entry into the World Trade Organization, approved earlier this month, has many U.S. companies rubbing their hands in anticipation over the business opportunities they expect to be created by the sweeping reforms of the country’s legal and regulatory systems. U.S. law firms, however, are more circumspect. They see that, in contrast to the riches the WTO agreement bestows upon foreign businesses, foreign law firms get very little, and in fact have some things taken away from them. “In terms of the restrictions we operate under, it’s not a win-win for lawyers,” said Nicholas C. Howson, the partner in charge of the Beijing office of New York-based Paul, Weiss, Rifkind, Wharton & Garrison. RAFT OF RESTRICTIONS China subjects foreign law firms to a raft of restrictions, only one of which is to be lifted under the agreement, Howson explained. Where law firms were previously permitted only one office on the Chinese mainland, they now will be able to establish many. China’s Ministry of Justice had indicated that the restriction would be loosened immediately, he said, but he cautioned that law firms must still undergo an arduous licensing process that in the past has taken years. Howson also said that the WTO agreement actually brought back some “difficult and cumbersome” restrictions, such as requirements that the head of the Chinese office be a partner, and that foreign lawyers have at least three years of experience to be registered in China. And other long-standing conditions remain intact, he explained. China, for instance, forbids foreign lawyers from taking the Chinese bar exam or giving opinions on Chinese law, hiring Chinese-qualified lawyers or entering into joint ventures with Chinese firms. FURTHER LIBERALIZATION OF LAWS But lawyers held out hope that, eventually, China will further liberalize the rules governing foreign law firms. “Traditionally, China has permitted foreign services only to the extent it deemed such service critical to the transition toward a market economy,” said Edmund C. Duffy, the partner in charge of the China practice at New York-based Skadden, Arps, Slate, Meagher & Flom. “WTO membership will speed the transition,” he said. “It will lead to a need for more sophisticated legal services, and in turn an expansion of the legal market.” Most lawyers and others who monitor foreign investment in China agreed that China’s WTO membership will result in a wave of corporate activity in the country, spurred by the liberalization of the Chinese economy. The agreement, for instance, cuts industrial and agricultural tariffs, allows banks to conduct business in local currency and grants foreign businesses distribution and trading rights. Such changes signify “the most significant development for foreign investment in China in a great many years,” said John Foarde, vice president of the U.S.-China Business Council, a Washington, D.C.-based trade association representing 250 companies and law firms. “It is really going to open up the economy in a way that will inure to everyone’s benefit.” Lawyers say the wave has already begun. “In anticipation of China’s gradual removal of trade barriers, multinational corporations are accelerating their entry into China or relocating their regional headquarters there,” said Mitchell D. Dudek, who heads the Shanghai office of Cleveland-based Jones Day Reavis & Pogue. More business activity means more work for foreign lawyers, especially because much of the promised-for liberalization will arise from legal changes. “The joy for lawyers is that so much of the reform is based in law and regulation,” Paul Weiss’ Howson said. CHANGES IN LAW According to statements from Chinese government officials, about 1,300 national and local laws will need to be changed. Among the challenges are the standardization of taxation, intellectual property, insurance, liability and bankruptcy rules, and the elimination of laws that favor one company over another. Lawyers in China warned, however, that business opportunity does not necessarily translate into a successful branch office. Skadden’s Duffy cautioned law firms looking to set up shop in China to “proceed with extreme caution.” “It is a difficult market to do business profitably,” he said. Many foreign law firms have had both official and unofficial operations in China for decades, and there are now more than 130 foreign law firms licensed to set up an office in China. But the ground is also littered with casualties, law firms who, tempted by the world’s largest market, jumped in too hastily or underprepared for the myriad challenges of a China branch office. LINGUISTIC REQUIREMENT The first requirement is linguistic. Lawyers doing business in China should be fluent in both Mandarin Chinese and English, said Huanting Timothy Li, a partner at the Hong Kong office of Sidley Austin Brown & Wood who worked in the legal department of China’s foreign ministry for six years before joining the firm. Lawyers also need a strong substantive knowledge of both the U.S. and Chinese legal system. “Many foreign clients do not feel comfortable using separate local counsel either for reasons of confidentiality or for lack of confidence,” Li said. A third challenge for lawyers and business people alike is understanding both the U.S. and Chinese business cultures and political environments. Although the Chinese in financial centers such as Shanghai, Beijing and Guangzhou are generally quite sophisticated about U.S. business practices, elsewhere there are profound differences in business culture that have been the spoil of many a venture in China, said Jones Day’s Dudek. Li gave two examples. For capital market transactions, he said, “the concept of proper disclosure is always less understood than you would anticipate, even after rounds of explanation.” He added that corporate governance is another tough area: “Although joint venture contracts and bylaws contain specific provisions, they are often ignored until issues arise or the other side raises an objection.” In sum, even with WTO membership, China’s tough business environment should give pause to law firms contemplating an office there. “Unless you have or definitely will have clients in China, existence of an office in China is not worthwhile,” Li said.

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