China Mistakes Foreign Law Firms for Party Poopers

Agenda-Setting Financial Insight.
Aug. 13 2012 12:07 PM

China Mistakes Foreign Law Firms for Party Poopers

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There are already plenty of foreign lawyers in China: They just aren’t allowed to practice Chinese law.

Photo by Kim Hong-Ji/AFP/Getty Images

China seems to be mistaking foreign lawyers for Party poopers. They’re dealmakers, not threats to communist rule. Yet wary leaders refuse to license non-Chinese law firms. That’s no way to lure overseas investment. Any policy change must wait until a tense murder case and political transition are over. But economic preeminence won’t come without the help of global lawyers.

There are already plenty of foreign lawyers in China. More than 200 big firms, like Paul Hastings and Clifford Chance, have offices in the country. They just aren’t allowed to practice Chinese law. That leaves court appearances, advice on local rules and other essential services to attorneys approved by the People’s Republic.

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Though many are highly skilled, foreign clients often hesitate to hire them. About a third of Chinese lawyers are Communist Party members, and all must swear allegiance to Party leaders. None is officially bound by the attorney-client privilege, meaning client secrets could theoretically leak to the Politburo. And since relatively few Chinese lawyers are international-transaction experts, demand for overseas legal help is high.

To some extent, that demand is being met. Foreign lawyers with decades of experience in China informally advise on the nation’s law, and government officials look the other way. That’s how big mergers, joint ventures and financings involving global banks and corporations get done.

The danger is the so-called cobra in the chandelier: the Ministry of Justice official who could strike without warning. In 2006, for instance, the Shanghai Lawyers Association publicly condemned foreign firms for illegally hiring Chinese lawyers. Though no official action followed, Chinese attorneys showed the government and the Party had their back.

PRC legal eagles may no longer need this sort of protection. Some have thousands of lawyers and outposts in New York, London and Paris. Beijing-based King & Wood merged in March with Australian heavyweight Mallesons Stephen Jaques to create a global force. International lawyers understandably worry about Chinese competition. At the very least, they want reciprocity, with China loosening its rules before its firms can expand in their home markets.

And Beijing might have listened but for the murder case against former Politburo member Bo Xilai’s wife and the once-a-decade leadership change scheduled for the fall. With events like these going on, the party is in no mood to reform its legal system. But that time will come. 

Read more at Reuters Breakingviews.

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