The Blog

Doing Business in China: Unlocking the Rewards

While GSK's recent difficulties in China have once again put the focus on some of the problems associated with doing business in the world's second largest economy, the UK Government is urging British companies to look beyond the perceived barriers and focus instead on the very real opportunities.

While GSK's recent difficulties in China have once again put the focus on some of the problems associated with doing business in the world's second largest economy, the UK Government is urging British companies to look beyond the perceived barriers and focus instead on the very real opportunities.

For those considering whether trading in China is too complex to be worthwhile, the reality is that China's progress in opening markets to foreign investments has been remarkably rapid and increasingly extensive.

The recently launched Shanghai Free Trade Zone (FTZ) illustrates the nature and scope of such change. Benefits on offer include the removal of foreign exchange restrictions on capital accounts within the zone, outside foreign investment being effectively liberalised and granted "national treatment" and the opening up of key markets inside the FTZ, including medical services, information services and construction.

While the jury might still be out on the impact of the FTZ, it without doubt underlines the determination that exists within China to continue to restructure its economy and press ahead with market liberalisation.

China's attractions are easy to see. Growth rates may have slipped from the spectacular increases of past years but the economy's performance continues to put more developed countries in the shade. Foreign investment increased by more than six per cent in the first eight months of this year, drawn by the opportunities this growth provides and the needs of a fast-increasing consumer class.

And, of course, the flow of funds goes both ways. Chinese external investment hit a record high in 2012, surpassed only by the US and Japan. Europe, which takes one in three dollars China invests, continues to be the most favoured destination. As for the UK, over 60% of RMB payments outside of China and Hong Kong take place in London. As Mark Carney, the Governor of the Bank of England, recently observed "London acts as Europe's window to global capital; is a centre of emerging finance; and can play an important role in the financial opening of China".

Clearly China represents a very distinctive market with its own local characteristics. Those seeking to do business there will require local help to navigate the pitfalls as well as to take advantage of the many opportunities. But the fact that significant barriers exist should not be seen either as surprising or as unique.

It was not so long ago that significant discriminations, barriers to trade and investment and threats to competition were endemic in our own back yard, in what is now the European Union. And while there are of course significant institutional and constitutional differences between the single market project and the process now taking place in China, useful comparisons can be drawn between how China is progressing in its own programme of liberalisation of trade and services and historic developments within the EU.

Legal services are a case in point. It is only 15 years ago that extensive restrictions existed on the freedom of establishment and provisions of services for lawyers in the EU. In the UK, for example, perhaps the most international of legal markets, it was not so long ago that law firms were limited to 20 partners. In Germany it was not until 1989 that law firms were permitted even to practice outside their own state borders.

However, as a result of liberalisation measures in Germany and across the EU, innovative partnerships soon created national champions which in turn merged with major UK firms, culminating in the creation of some of the leading multinational law firms in the world today. Freshfields' dual mergers with Bruckhaus and Deringer in August 2000 in particular helped to reshape the sector and represented, in the words of the Financial Times, "probably the most significant Pan-European merger to date in the restructuring of Europe's legal services".

Compare this to what is happening in China today where - although the formal practice of Chinese law is still reserved for local firms - foreign law firms are permitted to establish themselves, to advise on international law, and provide general transactional and other advice to their clients.

A striking example of the internationalisation of Chinese legal practice came last year with the combination the international law firm King & Wood Mallesons, which brought together the leading Chinese law firm King & Wood and the magic circle Australian practice of Mallesons Stephens Jaques creating the first Asia Centric international law firm of King & Wood Mallesons.

This has recently been reinforced with King & Wood Mallesons announcing a combination on 1 November with the leading London City law firm of SJ Berwin, creating not just one of the largest global firms but also the first to be headquartered in Asia.

So what lessons can be drawn from what happened in Europe for the future of law and professional services in China and the opportunities?

There are perhaps three.

First, an acceleration in consolidation is likely. As opportunities grow, so will the expectations. Clients, whether from outside China or within, want depth and capability and they will look to one stop providers of services to respond to their increasingly global needs.

Secondly, as clients look for genuine cross-border expertise, innovative organisations will emerge. And as in the legal sector, where regulations still prevent formal mergers with Chinese law firms, new solutions will be found.

Thirdly, while no one can predict how quickly existing rules will be softened, experience shows that liberalisation, when started, is difficult to halt. The determination which has resulted in high-profile initiatives such as the Shanghai FTZ, illustrate the renewed commitment by the central government to open up its market further to the huge benefit of global economy.

This is the real story from China.