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As new laws in China make it easier for investors to compete in a market dominated by the likes of Wal-Mart and Coca-Cola, American law firms — despite recent starts and stumbles — appear determined to reap the rewards from the country’s flourishing economy. Much business law in China remains unsettled while it continues to gain prominence in a global market. But recent changes toward a more open economy will most likely equate to more work for law firms willing to ride out any economic hitches. An estimated 40 American law firms are busy in China with a variety of matters, including preparing companies for initial public offerings, privatizing companies previously owned by the Communist Party and representing American corporations eager to break into the market. But the good times have followed some struggles. White & Case, for example, received approval last month from officials of the People’s Republic of China to open an office in Beijing, the firm’s third location in China following Shanghai and Hong Kong. Citing better access to government decision-makers and large corporations, the firm has put six lawyers in its Beijing office with plans to double that number. White & Case concedes that its China offices have hit some rough patches since 2002 — as have other firms, including Pillsbury Winthrop and New York-based Cravath, Swaine & Moore and Dewey Ballantine, which had to close their China operations. But John Kuzmik, head of White & Case’s China practice, points to “staying power” as its reason for expansion. “We’ve had some difficulty in the last two years,” he said. “But we can play that through.” FUELING THE CHINA DRIVE Part of what is fueling that staying power for some firms is a law, effective earlier this month, that opens retail opportunities to foreign investors. Expected to lead to quicker growth in China’s already strong economy, the law does away with many restrictions on foreign investment. The changes — crafted as part of China’s entrance into the World Trade Organization in 2001 but implemented only this month — will enable wholly owned foreign retailers, wholesalers and distributors to operate with far fewer encumbrances from the Chinese government. “It’s going to open distribution to companies that have been hesitant,” said Allan Marson, head of Baker & McKenzie’s China practice. Retailers, large and small, now will look to buy out their China partners and function largely unfettered under their own business plans, he said. The new law further propels what Bryan Cave partner Fred Bartelsmeyer calls “a huge trend toward direct distribution.” With offices in Hong Kong and Shanghai, Bryan Cave represents large- and medium-size manufacturers, retailers and commercial companies. Doing business in China, without the necessity of setting up joint ventures with Chinese partners, will become much easier because of the changes, he said. The greatest opportunity right now is in mainland China, said Barry Levin, chairman of Heller Ehrman White & McAuliffe. The firm this year added 25 attorneys to its Hong Kong office, with plans to represent both Chinese and American companies looking to expand. “Whether it’s cars or buildings or telecommunications or hotels, it is simply by far the largest developing market in the world,” Levin said. A smattering of American law firms have maintained a presence in China for decades, but China’s entry into the World Trade Organization marks the last time law firms demonstrated widespread interest in devoting manpower and overhead to the region. Bolstered by enthusiasm from their clients eager to push into China’s market, the country’s newly acquired status as a WTO member three years ago had many eyeing it as very fertile ground for new business. However, the impact of the Sept. 11 attacks on the world’s economy, plus the realization that many of China’s governmental restrictions continued to entangle foreign business after its WTO debut, squelched some of the initial fervor, Kuzmik said. Limitations on law firms themselves added to the letdown. Those restrictions include the requirement that foreign lawyers have at least three years’ total experience to be registered in China. In addition, foreign lawyers are forbidden from taking the Chinese bar exam or giving opinions on Chinese law. COMPETITION FOR FEES But perhaps the most significant factor that quelled interest among law firms has been the fierce competition for fees, which typically are far lower than those earned in the United States and the United Kingdom. Fees for associates in Chinese firms can start at about $110 per hour, while the going rate for similar work among American firms starts at around $150 per hour. “There will continue to be huge pressure on discounted fees,” said Robert Joffe, a partner at Cravath, Swaine & Moore. His firm closed its Hong Kong office last year after nearly a decade of operations. “We were willing to take the time to see what happened. As it turned out, the business didn’t develop the way we hoped,” Joffe said. Kuzmik, who has practiced in China since 1988 and with White & Case since 1994, said that firms started “coming out of nowhere” a few years ago. They were motivated, he said, out of concern that they would lose mainstay clients doing business in China by other firms offering relatively cheap services there. The bottom line, however, apparently failed to justify a China presence for some, Kuzmik explained. “It was a question of relative profitability,” he said. “They just weren’t making as much.” But the situation appears to be changing. White & Case is expecting “deal flow” to increase with the relaxed restrictions, which should help China’s economy stay strong. “As long as no one starts bombing Taiwan, things are going to be good for firms,” Kuzmik said. In addition to the new retail ownership laws, other changes also are generating renewed interest. China reportedly is close to finalizing a telecommunications law that could mean more business for foreign companies. The law would loosen the hold that China’s government continues to exert over the telecommunications industry, which was once entirely controlled by the People’s Republic of China. Furthermore, it is aimed at clarifying regulations and spurring competition. Observers expect that a livelier telecommunications market will spawn business in related areas, including wireless, broadband and video communications. And still more opportunities are there, it seems. Foreign-backed purchases of government-owned assets, particularly those held by banks, continue to expand. Those assets include, for example, real property, pharmaceutical manufacturers and electronics makers, Kuzmik said. His practice also is focused on the large amount of outsourced work coming into China from foreign-owned companies, which involves not only manufacturing, but also consumer support and payroll services. Other opportunities relate to “cross-venturing,” in which Chinese investors are looking to move into foreign markets, he said. Work in the areas of intellectual property, capital markets and investment management also are ripe for law firm business. CLOSER SEATS The uptick in opportunities is prompting more U.S. attorneys, who formerly handled China legal matters in the United States, to relocate to get closer to the action, said Ying White, chair of the American Bar Association’s China Law Committee. “There used to be so many on this side,” she said, referring to the 200-member constituency of the committee. “Every time I call someone, it seems they’ve gone over.” Many firms are eager to enter the competition, she said, but they face significant hurdles in terms of language, startup expenses and familiarity with China’s continually evolving laws. A way to minimize those difficulties is to form associations with established China practices, she said. Foley & Lardner, for example, does not have its own office in Hong Kong or mainland China but collaborates with “six or so” Chinese law firms to service its clients, said Grace Fremlin, chairwoman of the firm’s Asian practice. Under that arrangement, the firm can go where the work is, she said. “Our clients need legal services in China in different locations depending on where they are. We can’t service our entire client base out of one office,” she said. But the news from China could be too good. After a 9.7 percent growth in China’s economy during the first quarter of 2003, officials began looking for ways to gear down what they feared could be a runaway economy. Heavy investments in steel, aluminum and cement were large contributors to the soaring numbers, and recent government measures that cracked down on some types of loans has slowed that growth, which is a good thing if done prudently, economists say. Other worries involve billions of dollars in bad loans that China’s commercial banks are shouldering, which has foreign investors on edge about pending initial public offerings of Chinese companies. Still, Denis McCusker, a partner in Bryan Cave’s St. Louis office, remains upbeat. “We hear the news about the Chinese government’s measures to prevent the economy from overheating. For the U.S. industrial companies drawn to China because of the cost advantage, it really doesn’t slow that down,” he said. Editor’s note: For more on business trends among U.S. law firms, see a related Recorder story, “Heller ‘Advertorials’ Push Boundaries.”

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