Navigating China

In 1970, in a small town bordering the southeastern provinces of Fujian and Zhejiang, China, 14-year-old Chen Xiaomin, the son of farmers, spent long hours every day working in the rice fields. It was the middle of the Cultural Revolution: universities were closed, intellectuals re-educated (or killed), and anything foreign, particularly Western, was vilified or destroyed. “I never dreamed that one day you could go to college or one day you could go to a foreign country, a foreign school,” Chen says. “When we were in the countryside, when you plant your rice in the rice field, [such thoughts are] basically in your dreams, not in reality.”

Six years later, with the death of Mao Zedong and the fall of the Gang of Four, the Cultural Revolution ended. The following year, Chinese leader Deng Xiaoping announced that colleges and law schools would open again, and Chen joined others in taking the first national college test. “That opened up to a totally new and different world,” he says. Today, Chen is a partner at DeHeng Chen, an international law firm of 1,600 attorneys headquartered in Beijing, with offices in Paris, the Hague, Dubai, Brussels and New York, where he practices business and corporate law.

He’s come a long way. So has Chinese law. “In 30 years,” Chen says, “it went through almost a 200- to 300-year development.”

“It’s an increasingly sophisticated system of law,” says Christopher Sullivan, a business litigator at Herrick Feinstein, who works with international companies and individuals. “It’s not at all what you might think given the rapid development.”

“Earlier on, the German and the Japan systems had a big influence on the Chinese system,” says Meng Ru, a corporate finance attorney with Akin Gump Strauss Hauer & Feld. “We were all statutory-based. Now, in the commercial sector, securities law, those things, I think the U.S. and U.K. system have a significant influence on the Chinese system.”

Charles J. Conroy, an M&A and international attorney with Milbank, Tweed, Hadley & McCloy, was part of that influence. In the late ’70s and early ’80s, he says, “When I lived in China and Hong Kong, foreign lawyers, we were heavily involved with everything from drafting the tax law to helping draft the joint venture law, drafting technology-transfer laws and regulations, working with foreign-exchange laws and regulations, dealing with lending laws and regulations, and dealing with what I would call the framework of laws that supported and encouraged direct investment into China by foreign parties.”

The irony is that these same foreign lawyers cannot practice law in China. Neither can Ru. She was born in China, graduated from Fudan University Law School in 2000, and passed the Chinese bar; but then she got a job at the Shanghai branch of O’Melveny & Myers. “Foreign law firms cannot give Chinese legal opinion,” she says. “So therefore, as a fresh graduate back then, I was not eligible to receive a Chinese lawyer’s license. For practicing Chinese lawyers, they have to give up their license to join a non-Chinese law firm.”

And Chen? He’s now a U.S. citizen. “And according to Chinese law,” he says, “once you become a foreign citizen, automatically you lose your [Chinese] license. But really, my firm doesn’t need me to practice Chinese law because basically we have 1,500 Chinese lawyers in China. They only need me when our clients need U.S. legal advice regarding U.S. law.

“Of course, because I studied Chinese law for so many years, in certain areas I am an expert. But I cannot claim I’m a Chinese lawyer anymore.”

YO MEIYO GUANXI?

For much of China’s history there wasn’t exactly rule of law—and certainly not equality under the law—as the West understands it.

Under Confucianism, the dominant philosophy during the imperial period (roughly 221 BC to 1911 AD), societal order was encouraged through moral example. Individuals didn’t have rights so much as duties, which were based upon one’s place in the strict hierarchy: son was subservient to father, wife to husband, and everyone was below the Emperor. That’s how stability was maintained. “Lead the people with orders, keep them in line with penal laws, and they will avoid punishment but they will develop no sense of shame,” Confucius wrote. “Lead them with virtue, keep them in line with propriety and they will not only have a sense of shame but will govern themselves.”

None of this has exactly gone away.

“Traditional philosophy and Legalism [which favored strict laws and strong punishment] never disappeared,” says Locke Lord’s Jie Xiu, who was born in China and now works in the U.S., specializing in mergers and acquisitions. “You can still see the influence of old traditions. … If there is a Chinese high-ranking government official, they expect the same level of U.S. equivalence to meet with him.”

Once, Xiu remembers, a big Chinese client visited a law firm, and rather than a full meal and tea for lunch, he was given a cold-cut sandwich; it didn’t go over well. “Chinese people expect proper etiquette,” she says; “just a gesture to show they’re well respected.”

Chen says that, in China, Confucian hierarchical concepts still predominate over Western concepts of equality. In the U.S., he says, “we call it the people’s law and everybody’s equal. But in China, because of this [hierarchical] background, it’s a divide. That’s why in China, personal relationships are so important. They’re also the root of the corruption. People don’t focus on the rule of the law; they focus on the relationship.”

Anyone who’s spent time in China knows that relationships, or guanxi, are of paramount importance in the culture.

“This isn’t original, but Americans are transaction-oriented while the Chinese are more relationship-oriented,” says Sullivan. “In America, it’s all about doing the deal, building the building, and completing it and developing a relationship with the people you did business with. It’s sort of the reverse in China. … You need to establish the relationship before you proceed or complete any specific transaction or project.”

But this emphasis can lead to legal issues, as when the relationship is perceived to trump, say, a written contract.

“[Some Chinese people] aren’t good with performing agreements; they think they can change their minds,” says Ruth Jin, the founder of Jin Law Group, who practices business/corporate law.

“If you have a relationship with the people with whom you’re doing business, it’s expected you understand where the other guy is coming from,” says Sullivan. “You’re essentially business partners. And it isn’t [considered] at all inappropriate to go back and renegotiate the terms for something that isn’t working for your side of the deal. As opposed to America where, ‘You made a bad deal, you made a bad deal.’”

“In China, contracts tend to be plain and simple,” Xiu adds. “Three to five pages may cover the entire acquisition, with good faith and customary interpretation imbedded and assumed in many places. In contrast, U.S. contracts tend to be much longer and more detailed, based on decades of well-established precedents.”

“I’ll give you an example,” says Jin. “Say both parties are Chinese and the buyer wants to buy 10,000 shoes at $10 per pair, and the agreement is signed. But when the delivery occurs, the shoe price plummeted and the market price for shoes is now $1. In that case, the buyer will say, ‘No, I don’t want to buy it.’ That’s not going to happen here. People here will say, ‘OK, I miscalculated the market and am taking a loss on this contract.’ That’s not the case in China.”

DISCOVERING DISCOVERY

What else isn’t the case in China? Discovery.

“China doesn’t have a discovery procedure, which really impacts your litigation strategy,” says Stacy Wu, an American-born attorney specializing in intellectual property in the international department of Fross Zelnick. “In China, you get to review the other side’s evidence, but there’s no mechanism where you can ‘discover’ the other side.”

Issues of disclosure can also be tricky.

“Most Chinese clients do not understand the consequences of withholding particular documents at the beginning of litigation,” says Catherine Pan-Giordano, a business-corporate attorney with Dorsey & Whitney.

“We have been experiencing some difficulty explaining to our Chinese clients—who are U.S. public companies—that it’s very important that they explain what happened in the company, and what the plans of the company are, clearly and accurately in their U.S. disclosures,” says Anna Jinhua Wang, a corporate finance and securities associate at Hunter Taubman Fischer, who was born in China. “But it’s not a concept that has been well accepted in the Chinese business world.”

In 2005, Sullivan flew to Beijing to meet with a group of senior officials who were intent on recovering Chinese antiquities. It’s a niche practice in Sullivan’s firm: the recovering of antiquities on behalf of foreign governments, museums and private collectors. “We made a presentation where we said, ‘It’s not always appropriate to go to auctions and pay millions of dollars to get your own property back. If you hire us, we’ll consider taking legal action to recover it.’ We corresponded for about a year and they ultimately were reluctant to get involved in the American discovery system. It was just too alien—the concept that you can force someone to answer questions under oath.”

PIZZA HUH

While it obviously helps to know Chinese culture to do business in China, how important is it to know the Chinese language?

Very important, says Pan-Giordano. She notes that clients will often bring her to meetings to act as a bridge between the two parties, and to help them read between the lines so that what is being said isn’t lost in translation. “Oftentimes,” she says, “the client may have a different understanding than what’s been agreed upon by the non-Chinese party.”

At the same time, says Sullivan, speaking Chinese by itself isn’t going to win over your Chinese clients.

“For someone like me who’s studied Mandarin for many years,” he says, “it’s completely irrelevant other than for social niceties. It’s about having a team in place—again, arising out of the relationships—that can deal with the legal issues, tax issues, assessing risks, the accounting side of it, the practical side of getting things done.”

For Wu, who works with U.S. and international businesses in China in trademark protection, language is key, since knockoffs in China are rampant. Infamous English examples include “Pizza Huh” and “Abidas,” while Chinese-language knockoffs need to be policed as well—particularly since any English word can have numerous Chinese translations or transliterations. The soft drink “Sprite,” for example, is officially called “Xue bi” (literally: “snow jade”), but there is also a common knockoff, “Yun bi” (“cloud jade”)—used because the character for “cloud” looks similar to the character for “snow.” Only the bottom half of the first character differentiates the knockoff from the corporate product.

“There are so many options, depending upon the meaning of the character,” Wu says. “Having knowledge of the Chinese language certainly helps to assess the risks and better understand the client’s trademarks.”

But both Wu and Chen see good things coming out of Chinese IP law. “The Chinese trademark system is only a couple of decades old—I think their trademark law passed in 1983—and they keep establishing new authorities. They have new intellectual property courts that opened up in late 2014,” Wu says. “The law is still developing, and it’s a positive thing for U.S. and international brand owners.”

MOVING FORWARD, LOOKING BACK

It’s all so new. China’s current constitution was only enacted in 1982, while the economy’s private sector wasn’t officially recognized and protected until a 1988 amendment. The country is still run by the communist party, while its long-held philosophy tends to discount written laws for moral example.

Yet this nascent legal system currently undergirds the world’s second-largest economy. Is this a cause for concern?

Economic fluctuations in China this summer certainly caused panic around the world. Then there’s the recent detainment of more than 200 rights lawyers in China, which Sullivan calls “a stark reminder” of the authoritarian nature of the government.

“Authoritarian states greatly fear political instability and social unrest,” he says, “which is why improvements  in the rule of law tend to be more marked in the economic and commercial arenas than in human rights and freedoms. This kind of restraint on rights lawyers obviously impedes the development of an independent court system and a free legal profession. … [But] I would think that as China moves increasingly toward a consumer-driven economy—as opposed to, say, an investment-driven economy—and social media makes it impossible to suppress the flow of information, we will slowly begin to see systemic reforms to the criminal justice system, and these types of restraints on lawyers will become less common.”

Chen says many in China continue to wonder. “People there are still arguing the question, ‘Which is greater: power or law?’” he says.

Several times a year, Chen returns to China for business, and each time he tries to make it back to Wenzhou, where he was born, and where his mother and two brothers still live. He’s invariably surprised by all the changes: new buildings and roads, a train and bus station, an airport. He’s glad reforms have helped many get out of poverty, but he feels something unique has been lost in the process.

“I miss the originality of the old city and countryside,” he says, “with its vivid pictures of rice fields and Chinese buffalo.”

The rice fields where Chen worked are also gone—replaced by high-rise apartment buildings and factories. As a teenager, the reality of those fields all but obliterated Chen’s dreams; now it’s the rice fields themselves that seem the dream.

“The scale of the change of the landscape makes you wonder if you are from there,” he says, “so different from the old days.”