The Interlawyer

Guangzhou is a city that never sleeps. In pocket parks scattered throughout the district, practiced dancers move to the ritual of T’ai Chi Ch’uan, serene children stroll hand in hand with doting grandparents (See Photo), and boisterous neighbors share the camaraderie of a rousing outdoor game of Mah Jong while drinking Tsingtao from recycled jelly jars. The business buzz --that unmistakable pulse of commerce-- is palpable. Everyone and everything is on the move; showing wares, making deals, packing up, moving on. Air is thick--heavy from humidity and pollution-- permeated with a scent of burnt petroleum. Rivers churn brown with industrial waste. Noise is rampant. Traffic—both foot and wheel—is controlled chaos.

Strategically orchestrated in a massive venue adjacent to the Interlaw 2004 Annual Global Meeting hotel, the 96th exhibition of the Canton Fair, (formally registered as the Chinese Export Commodities Fair) (See Photo) punctuates the message of an economy on a trajectory of explosive growth. For two two-week periods each year, 5,000 vendors exhibit samples and demonstrate products to some 100,000 buyers from 170 countries and regions, boasting a turnover of some U.S. $5 billion of goods destined for export stamped “Made in China”. Then, overnight, the Fair is over and with frenetic efficiency, the show is dismantled. Merchandise, banners, and boxes are cleared, making way for a new wave of exhibitors to begin again.

The Pearl River Delta hosts the fastest growing economy in the world—even the massive population of China can not keep up with labor demands of factories in the region. The province’s gross domestic product grew an astounding 14.9% in the first three quarters of 2004, outdone only by other regions within the Mainland of the People’s Republic of China. Last month the PRC signed a Free Trade Agreement with the ten nations of the Association of Southeast Asian Nations (Asean) that will, by 2010, create the world’s most expansive free-trade zone, covering some two billion people. Guangzhou is a key economic development region and has sped forward with improvements to infrastructure in preparation for the demands of increased trade and commerce. The impressive U.S. $2.39 billion Baiyun international airport opened this past summer, and the Chinese train system is being streamlined to more efficiently connect Guangzhou to Hong Kong and the Mainland. The nearby port in Shenzhen is now, behind Ports of Hong Kong, Singapore and Shanghai, the biggest throughway on Earth. Yesterday’s rickety bicycles are being replaced by transport trucks, and both modest and surprisingly distinguished European and Japanese model automobiles jam the highways.

Construction is booming. Civil projects race to complete upgrades of new superhighways and water systems to ease the strain. Privately financed building projects encompass hotels, golf courses, sports stadiums, golf courses, luxury resort accommodations and—did I mention golf courses?-- targeted to attract tourists and business people in time for the 2008 Beijing Olympics.

It takes no time at all to appreciate that this is a culture that has mastered-- through centuries of experience-- the art and the business of modern trade. The historical context is important, as Angus Forsyth, managing partner of Stevenson Wong & Co. (Hong Kong and Guangzhou) host of the 2004 Annual Global Meeting pointed out in his opening remarks. An ancient city, Guangzhou/Canton’s roots date back before the third century BC. Thanks to its strategic location and convenient nearby port, it has, for more than 2,000 years, attracted trade among fellow Asian countries as well as Hindu, Arab, and later European and American traders.

Stevenson, Wong & Co. selected the Guangzhou meeting venue for several reasons. A charter Interlaw member, the firm, under the direction of Angus Forsyth, wanted to “share the wealth” of knowledge and the firm’s capabilities in the Pearl River Delta. The firm, under the leadership of HK partner Lai Lam, organized a comprehensive program that balanced historical context with immediate opportunities.

Mr. Forsyth noted benchmarks of civilization that occurred in and around—or because of—this key area. His address was followed by a ceremonial and lively mask dance accompanied by Shi Xian Shi Mei, a traditional Chinese musical performance. The following day Valery M. Garrett, honorary research fellow at the Centre of Asian Studies, the University of Hong Kong, and a historical documentraian that has focused on Canton/Guangzhou for over thirty years, presented on the cross- pollination of art and culture that international trade brought to the region. Reaching back to the Tang Dynasty, she described how Arab merchants traded spices and ivory for precious Chinese silk and porcelain, and showed examples of architecture and artifacts left behind. Ms. Garrett later guided delegates on a tour of old Guangzhou, including Nan Yue Wang Mu Museum and a drive by Shamian Island. As a parting gift, each delegate was given a copy of her book, Heaven is High, the Emperor is Far Away.

Two distinguished consultants, Juergen Kracht, managing director of Fiducia Management Consultants, and Thaddeus Beczak, senior advisor for Nomura International (Hong Kong) Limited explained to delegates the current and future relevance of China’s evolving economic forces and concluded that lawyers—and the rule of law-- will have significant impact on the continued success of the global economy powered by the Chinese consumers and producers. “By the end of March 2004, the balance of China's foreign exchange reserves was USD $316 billion, ranking the country second in the world,” said Mr. Kracht. “China has the biggest trade surplus, whereas the U.S. faces the highest trade deficit; China has a high savings rate, whereas the U.S. relies on credit.” Mr. Kracht shared a flurry of astounding facts from Fiducia Management to illustrate his profile of the current economics:

“China produces 29 billion pens and pencils a year, accounting for 80% of total world production.
Germany increased its exports to China by 35% during the first half year of 2004 and its imports grew by 42%.
By 2007 Philips expects total sales of Chinese-made products to be U.S.D. $12 billion, which is close to a third of total expected global revenues.
Infineon’s China sales were Euro 570 million in 2003 (9% of worldwide sales). During the first six months of 2004, sales grew by 30%
Intel generated U.S.D. $3.7 billion in sales in China last year, or 12% of the company’s total. According to Fortune magazine, Intel’s China business is very profitable. The Asia Pacific Region is Intel’s biggest sales area, with Taiwan generating USD 4.4 billion in sales in 2003. Intel currently operates manufacturing facilities in Beijing, Shenzhen and Shanghai. It is also constructing a new USD 375 million facility in Chengdu, western China, that is to be dedicated to assembling, testing and packaging microprocessors.
On a global scale, IKEA expects to source approximately 23% of its worldwide purchasing from China this year – an ideal combination of Scandinavian design and low manufacturing costs.
China’s share of world clothing exports is expected to reach 50% after the global quota system expires at the end of this year.”

There are many entry points for lawyers, solicitors, and mediators in China, both native and outside the borders. Like everything in the PRC, rules, regulations and black letter law seem to be a moving target (See Executive Director’s Docket “going with the flow”). Banking deregulation, flexible rulings on WOFEs (wholly owned foreign entities), and environmental standards are in flux.

Employment and labor issues are complex. Professionals from the West are retained at huge sums to provide counsel in many sectors, while workers from the provinces immigrate to the cities to be paid wages hovering at about USD 1.00 per day. Light factory conditions sometimes resemble a Leon Uris description of nineteenth century Belfast. Labor issues loom large in China, tied closely with environmental concerns (not to mention food supply) as farm workers leave for the city and rich farm land is “city-fied” with concrete block houses and light and heavy manufacturing plants.

Counterfeit goods are sold openly in China; over 90% of the software is pirated, corruption is not unheard of, and Fiducia offers a glimpse of the current Courts of the PRC. Says Mr. Kracht: “A Japanese car manufacturer lost a lawsuit against a Chinese car maker for copying its logo. The court ruled that the Japanese logo was not well known in China, thus the manufacturer had committed no infringement.” Interlawyers’ expertise in trademark protection, financing, tax, trade, M&A, debt restructuring, and mediation and arbitration will be valuable to clients doing business in the PRC.

The range of industries that require legal counsel are many. Beyond manufacturing, it is tourism, according to both speakers, that will see dynamic growth in the coming years—even beyond the upcoming Olympics. Mr. Kracht points out, “The German charter carrier LTU now has weekly flights from Düsseldorf to Beijing and from Düsseldorf to Shanghai. The price of a one-way trip is about Euro 350.” Hong Kong tourism from the Mainland and globally is rising steadily and Chinese tour groups to Europe launched in force in September 2004.

Thaddeus Beczak, from Nomura International, reminded the delegates that for investment purposes, China must never be “lumped” together as one entity. The “one country two systems” for Hong Kong and China, is just the starting point for understanding that the vast geography, regional connections, extended family relationships, and subtleties of implied and “earned” trust rooted in cultural mores dating back generations, affect the ways the business –including the leisure industry--will develop from province to province. Mr. Beczak pointed out the necessity of retaining knowledgeable, experienced local expertise even when coming to China with extensive background in negotiating or representing enterprises in the hotel, entertainment, transportation, health care, luxury or leisure industries. Mr. Beczak urged lawyers not to be intimidated by the hurdles of culture, corruption, security, pollution, or incomplete infrastructure. Rather, he showed the opportunities that present themselves in investing in China’s power generation, water treatment, bridges and road building. Mr. Beczak calculated that there are 400 four-star, 100 five-star, several six-star hotels and incalculable numbers of golf courses planned for the region. Pearl River Delta developments of luxury homes offer Sino and Western-style resort living directly on manicured golf courses for 1/10 the cost of living in Hong Kong. Even, says Mr. Beczak, “Fed Ex will build a base here”, presumably for the telecommuters who will call Pearl River Delta “home” but will maintain business interests worldwide.

Stevenson, Wong & Co. attorneys Hollis Chen, Alice Ho, Gloria Chow, Leo Kwan, and Neville Watkins ably charted a legal course through the foreign investment protocols, Free Trade Agreement, CEPA (Closer Economic Partnership Arrangement), tax preferences, and tariffs, due diligence, arbitration and mediation. Hunt & Hunt Melbourne partner (and chair of the Interlaw Customs, Trade & Transport Special Business Team) Andrew Hudson gave practical advice about keeping clients out of trouble in the area of trade, while Hunt & Hunt (Sydney) partner and Interlaw Chair Jim Harrowell, who is a registered mediator for the courts of the PRC, addressed complex issues when doing business in the jurisdiction.

Many thanks to the efforts of Angus Forsyth, Lai Lam, and all our friends and colleagues at Stevenson, Wong & Co. for a most hospitable and insightful course on charting the commercial waters of the Pearl River Delta.