The Internationalization of China's Legal Services Market

Hongming XIAO

Perspectives, Vol. 1, No. 6

1. Introduction

With the globalization of trade and the modern economy, the market for legal services, as both the facilitator and the beneficiary of economic development, has grown very quickly and been internationalized. The Uruguay Round of negotiations on the General Agreement on Trade and Tariffs and its successor the World Trade Organization (WTO) resulted in specific stipulations on the trade of legal services, which has been an important component of the international trade of services. At the same time, the development of legal services markets in different countries is uneven, with a considerable gap between the industrialized nations and the developing world. Consequently various governments take divergent approaches to the internationalization of the legal services market. Developed countries want to have a liberalized international market for legal services whereas developing nations are worried about the negative impact of opening up their legal services sector (such as stifling the growth of the legal profession).

Since the re-establishment of China's legal system in 1979, the Chinese bar has made remarkable progress in the quantity and caliber of lawyers, in the quality and number of areas of practice, and in professionalism. This progress is the result of China's economic and social development as well as its improvement in democracy and rule of law. However, China's legal profession is still in a rather primitive stage of development and has been left far behind by the developed countries, especially with regard to the internationalization of legal practice. On the one hand, the Chinese government hopes that the entry of foreign lawyers can help increase foreign investment and benefit the domestic economy; on the other hand, the government is worried, because of the lack of a good regulatory system, about a potentially chaotic legal services market after the massive influx of foreign lawyers. Among Chinese lawyers, some look forward to cooperating with foreign lawyers to expand business while others are worried about the loss of market share and talent.

Since the early 1980s, foreign lawyers have accompanied foreign capital to China and have set up businesses. In July 1992, in order to meet the demand of economic development and legal exchange, the Chinese government began to open up the legal services market to foreign law firms and to allow them to establish offices in China. By March 1999, China had granted permits to 103 foreign and Hong Kong law firms. At the same time, in negotiations over China's WTO entry, developed countries asked China to relax limitations on the scope of services and the number of offices and allowable regions for foreign law firms.

2. The Gradual Opening-Up of China's Legal services market

China officially opened up its legal services market on July 1, 1992, when the Ministry of Justice (MOJ) and the State Administration of Industry and Commerce (SAOIC) issued the Provisional Regulation of Establishment of Offices in China by Foreign Law Firms (Provisional Regulation). The Provisional Regulation provides that foreign law firms may set up offices and conduct business in prescribed areas in China after receiving permission from the MOJ and registering with the SAOIC.

China's open-door policy since 1978 ushered in foreign capital and goods from many multinationals that had tremendous demand for legal services. As a result, some foreign law firms wanted to follow their clients into the Chinese market. However, there were numerous barriers to entry. For example, legal services were regarded as a politically sensitive area as the domestic lawyers were still defined as "state legal workers." Without regulatory experiences and institutions, the Chinese government did not allow foreign law firms to open offices in China. To get around the prohibitions of the Chinese government, some foreign law firms changed their identities when entering into China. In 1979 Coudert Brothers, an American law firm, established a permanent presence in Beijing as in-house counsel to its clients but meanwhile provided legal services in its own name. In the early 1980s, the Ministry of Economy and Trade, the predecessor of today's Ministry of Foreign Trade and Economic Cooperation (MOFTEC), promulgated a regulation permitting the establishment of consulting firms to serve foreign trade. As a result, many foreign law firms, including the United States' Coudert Brothers, Baker & McKenzie, Paul Weiss, along with several British firms, incorporated consulting firms in their home countries or Hong Kong and then set up subsidiaries in Beijing or Shanghai to provide legal services. By early 1989 there were over twenty consulting companies in China that were actually established by foreign law firms.

The MOJ then started to pay attention to this influx of foreign "consulting firms." The Ministry sent delegations to Hong Kong, Singapore and Europe and evaluated the feasibility of, institutions for, and methods of regulating foreign law firms. In 1989 the MOJ was authorized to permit, on an experimental basis, the establishment of Chinese offices by foreign law firms, but the experiment was disrupted by the 1989 Tiananmen Square Incident, which led to the exit of many foreign law firms along with foreign investment. On July 1, 1992, China's State Council again gave a green light to the MOJ to permit, on an experimental basis, the establishment of foreign law offices in China. By now, there are over eighty foreign law firms from more than ten countries, together with twenty three Hong Kong law firms, which have set up offices in Beijing, Shanghai, Guangzhou, Shenzhen, Haikou, Tianjin and Qingdao after receiving permission from the MOJ and registering with the SAOIC. These law offices help the expansion of China's foreign trade and set role models for Chinese law firms in legal practice and business management.

The policy goal of opening up China's legal services market is to facilitate China's foreign trade and business as well as help the development of China's legal profession. Under this guideline, Chinese lawyers are encouraged to cooperate with foreign counterparts to learn foreign legal skills and law firm management. At the same time, Chinese lawyers are safeguarded against a massive influx of foreign lawyers.

3. Laws and Rules Regulating Foreign Lawyers

According to the 1992 Provisional Regulation, only a foreign law firm, rather than foreign lawyers, can apply for a permit to set up an office in China, which can only be a branch office of the foreign firm. In order to guarantee the quality of foreign lawyers and also indirectly to limit their number, the Provisional Regulation provides that the China representatives of a foreign law firm must be foreign lawyers with practice experience of more than three years. A foreign law office in China may practice the law of the jurisdiction where the foreign law firm has been licensed to provide legal services, but legal issues relating to Chinese laws must be referred to Chinese law firms. This is because foreign lawyers are prohibited from interpreting or practicing Chinese law. As such, a foreign law office and its lawyers can neither represent its clients in a Chinese court nor provide an opinion letter based on Chinese law. Moreover, a foreign law office in China cannot hire Chinese lawyers as such. In Beijing and other places, a Chinese lawyer has to suspend her lawyer's license if she wants to join a foreign law firm.

Specifically, the Provisional Regulation contains the following three kinds of restrictions on foreign lawyers.

(1) Limitation on trial cities At the beginning of the reform experiment, China opened five cities to foreign law firms: Beijing, Shanghai, Guangzhou, Shenzhen and Haikou. In 1995, ten additional cities were added to the list: Dalian, Tianjin, Qingdao, Yantai, Suzhou, Hangzhou, Ningbo, Fuzhou, Xiamen and Zhuhai. So far, the trial cities are still limited to these fifteen.

(2) Limitation on the number of offices At the beginning, China limited the number of foreign law offices to forty. In 1995, the number was increased to eighty. By 1998, the number had reached ninety-three. So far, over one hundred and ten firms have been granted permit to practice. However, the official limitation remains in place.

(3) Limitation on the qualifications of the foreign attorneys The chief representative or representatives of foreign firms in China must be foreign lawyers with more than three years of practice experience and no discipline record. Such a restriction is to ensure the caliber of foreign lawyers, to limit the number of foreign lawyers, and in particular, to exclude foreign lawyers who receive their license right away. The latter restriction is not officially promulgated but is followed in practice.

By laying down the general legal structure, Article 51 of the Lawyer's Law of the People's Republic of China, effective starting January 1, 1997, states that the State Council has the authority to promulgate regulations on the establishment and conduct of business by foreign law firms in China.

4. WTO and the Opening-Up of China's Legal services market

In the bilateral negotiations for China's entry into the WTO, both the United States and the European Union pressed China to open the legal services market. Their major demands included:

(1) Permitting foreigners to take China's Lawyer's Qualification Exam and be licensed to practice Chinese law;

(2) Permitting foreign law offices in China to hire Chinese lawyers;

(3) Eliminating limitations on the number and location of foreign law offices in China;

(4) Permitting foreign law firms to open offices in more than one Chinese city.

The demands of the United States and the European Union reflected the pressure from their law firms, which desire to expand their businesses in China. China's current limitations on the number and location of foreign law offices, together with the one-firm-one-office policy, makes it difficult for foreign law firms to develop a China practice. Some foreign law firms have to lose their clients to competitors. They are also forced to seek help from Chinese law firms on issues relating to Chinese law. Moreover, some foreign lawyers speak fluent Chinese and have begun to study Chinese law. As such, they want to take the Chinese bar exam and practice Chinese law. The landmark trade agreement between China and the United States reached last November covers the opening-up of China's legal services market with the following provisions:

(1) Restrictive Provisions A. The representatives of foreign law firms in China must be foreign attorneys in good standing and with more than three years of practice experience; B. The chief representative must be a partner in her law firm; C. The representatives must stay in China for more than 180 days each year; D. Foreign law offices in China cannot hire Chinese lawyers.

(2) Opening-Up Provisions A. China will eliminate the restrictions on the number and location of foreign law offices by January 1, 2001 B. Foreign law offices may develop their businesses in China within a certain scope.

The above provisions are the result of careful deliberation and negotiations. From the Chinese side, there are mainly five considerations that influenced the WTO-related negotiations that could open up China's legal market.

(1) Promote trade, economic and legal exchanges By setting up offices and providing legal services, foreign law firms can promote trade and economic activities of foreign companies. In order to improve the investment environment and attract foreign investment, the Chinese government officially permitted the establishment of foreign law offices in 1992. The experiments in the early 1990s attested to the contributions of establishing foreign law offices to supporting foreign business and promoting capital raising by Chinese companies in the international market. Moreover, the increasing legal exchange between the Chinese and the international legal communities has brought in western management models as well as practice experience to Chinese lawyers.

(2) Facilitate the opening-up of the legal services sector In the beginning of the reform experiment, the limitation on the number of foreign offices prevented some foreign law firms from entering China's market though they had real business incentives. This restriction limited competition between foreign law firms in both provision of service and pricing. The limitation on trial cities resulted from the original misjudgment by the Chinese government that China should open coastal cities before inland regions. Nevertheless, in practice, foreign law firms generally focused on China's political or economic centers such as Beijing and Shanghai. Removal of both the number-of-office and trial-city restrictions should help increase competition and facilitate foreign trade and investment. In addition, lifting the one-firm-one-office restriction was to accommodate the demand for business development by some foreign law firms. However, some specific restrictions will still be put in place. For example, a foreign firm can apply for its second office only after it has established a good track record of the first one over several years.

(3) Open up while maintaining certain limitations In the experimental period, the lack of clear-defined regulation on establishing foreign offices led to arbitrary government decisions. In the future, some particular standards will be set up to restrict the influx of foreign lawyers: A. Foreign lawyers must have more than three years of practice experience, and the chief representative should be a partner. For the time being, the pool of available lawyers for China practice is not large for a number of reasons. Most foreign lawyers who are willing to go to such a developing country as China are young practitioners who just receive their licenses. A lawyer with more than three years of practice experience is more reluctant to go to China out of concerns over quality of life and living expenses. Hence, this requirement can effectively limit the number of lawyers who may join the China practice. B. Foreign law offices are required to have permanent resident lawyers, who must stay in China for more than one hundred and eighty days each year so that they will be covered by China's tax jurisdiction.

(4) Protect the development of China's legal profession Foreign law firms will be prohibited from hiring Chinese lawyers and practicing Chinese law. Even though China has developed some law firms specializing in the international practices, they still lag behind the foreign firms in number, quality and management. In the experimental period, some foreign firms used various means to get involved in practicing Chinese law. If they were permitted to hire Chinese lawyers, foreign firms would deal with Chinese law through their own attorneys and the result would be the loss of an important channel for Chinese firms to engage in international practice. Moreover, foreign firms would compete with Chinese firms by poaching talented lawyers with offers of high salaries, resulting in a brain drain. Thus, the Chinese government does not allow foreign firms to hire Chinese lawyers. However, in the near future, with the rapid improvement and expansion of Chinese lawyers in international practice, it is very likely that Chinese and foreign partners will set up law firms in China.

(5) Keep the politically sensitive areas closed China will also continue to exclude foreign citizens from the Lawyer's Qualification Exam out of concern over the political nature of some Chinese laws. The current passing rate for China's bar exam is only ten percent, and it would thus be very difficult for foreign citizens to beat the Chinese to get licenses. However, the major concern is that some litigation in China inevitably involves political issues. It is for this reason that the Chinese government has taken a conservative approach and maintains this exclusionary policy.

5. The prospect of China's opening of legal services market

The development of legal services market is determined by the level of economic development. The advanced legal services industry in the United States and the European Union countries results from their long histories of developed legal professions and globalized economies. As a developing country, China is still on the learning curve of know-how and management, and has a long way to go before it is integrated into the world economy. Because of their traditional connections and language skills, foreign lawyers will continue to play an important role in foreign investment in China. For a period of time, Chinese lawyers will remain at a disadvantage.

(1) Chinese lawyers are inexperienced in international practice. Good legal service depends on experience through long-time practice in transactions under certain regulatory regime. For Chinese lawyers, many practices such as finance and securities have only recently come into China as a result of the open-door policy and economic reform, while many international transactions are totally new to them.

(2) Management of law firms needs to be improved. In the past twenty years, Chinese law firms have evolved from the absolute dominance of state-sponsored firms to the current state of a mixture of partnerships, cooperatives and state-supported firms. As a well-accepted institution, partnership has contributed a great deal to the Chinese legal profession's development. However, many problems in internal operation and management remain unresolved. It remains a challenge for Chinese legal profession to build, on a contractual basis, professionalism-oriented law firms on a larger scale.

(3) The Chinese regulation of foreign law firms relies on the administrative system. In other words, judicial and administrative agencies exercise the authority to license and regulate. This situation has entangled these agencies in routine matters and made them short on policy-oriented research. By contrast, the internationally accepted regulatory practice is for the legal profession to be self-governed by its professional association.

Mindful of these concerns, I think that China's opening of legal services market should move in the following directions:

(1) Issuing new regulations to improve transparency and regulatory techniques. The new regulations should follow China's promises in the WTO negotiations and learn from experience in the experimental period so that China's opening of the legal services market will be based on rule of law after China's entry into the WTO.

(2) Specifying principles of protecting and developing China's legal profession. To open China's legal services market will promote the exchange and cooperation between Chinese lawyers and their foreign counterparts, and help Chinese law firms in management and legal practice. Meanwhile, the restriction on hiring Chinese lawyers and practicing the Chinese law by foreign law firms will allow a grace period for Chinese lawyers to develop in quality so that a talent pool will be formed over time. After a certain period of time, those restrictive policies should be reviewed to determine whether foreign firms could have more access to the Chinese legal services market.

(3) Regulating through cooperation between the MOJ and the bar association. On the one hand, the MOJ should promulgate regulations and policies in opening the legal services market, and exercise authority in licensing and revocation. On the other hand, the bar association should exercise power to administer and discipline. Foreign law firms and lawyers must register with China's national and local bar associations to be members in order to practice law in China. The bar associations may discipline their members according to their bylaws or refer them to the judicial agency for revocation in cases of severe misconduct.

(4) Enforcing the regulatory rules in a serious manner. On the one hand, foreign law firms must follow Chinese laws and regulations in providing legal services and contributing to China's economic development. On the other hand, China's judicial and administrative agencies should protect the rights of foreign law firms and lawyers while guarding against any illegal or fraud activities.

(Mr. XIAO is currently a visiting scholar at New York University Law School. Before that, he was a division chief in the Legal Practitioner's Department in the Ministry of Justice of China. This essay is translated from Chinese by Zhimin WEN.)