Interview with Owen Nee, one of our expert authors from The New China Law Library
Q: You are the author or co-author of two China Law Library titles, with a third title pending. You have also been one of the initial creators of the concept of the China Law Library. What inspired you to begin this project?
A: Chinese commercial law is an important subject for Western trained lawyers. Obviously, the fact that China's economy is now the second or third largest in the world makes its commercial law significant in international trade and foreign investment. In a deeper sense, however, Chinese commercial law is the mirror image of what common law lawyers study and practice. Chinese law is interesting because it evolved from a Communist, state-planned economic system that in a period of just thirty (30) years managed to convert itself from a backward, technologically deficient, and resource-distribution inefficient third-world albatross into a powerhouse of trade and investment. While America's regulated, market economy developed from a totally unregulated environment of laissez faire into one in which the law moderates the forces of capitalism and mercantilism, China is heading toward the same destination from the very opposite starting point.
Q: You were the founder of the China practice at Coudert Brothers, which was the first foreign law firm to establish offices in Beijing and Hong Kong after China began opening up in the 1970s. What prompted you to make this move? What did you find most challenging, most rewarding? How many other lawyers came with you, and how many other firms undertook similar moves?
A: Professor Jerome Cohen, who was of counsel to Coudert at the time, led the firm in its foray first into Hong Kong in 1973 and then into China in 1979. I had lived in Hong Kong in the 60s as a teacher at the Chinese University, where I first studied Chinese while teaching English, before going to law school. The opening of China - which was a complete reversal of the policies I had glimpsed when the Red Guards spilled over into Hong Kong in 1967 - was so profoundly revolutionary that curiosity compelled me to take whatever opportunities presented themselves. In other words, I went along for the ride. At the time, most law firms other than Coudert saw it as a millennium of effort for a miserly return.
Q: In brief, how would you describe the legal and commercial environment in China following Deng Xiaoping's assumption of power? What was the atmosphere? And has this environment changed, to the better, to the worse?
A: China was in a horrible shape and Deng Xiaoping knew it. In 1979 China invaded Vietnam in order to "teach it a lesson" for its invasion of Cambodia. China's nose was bloodied badly, but the benefit was that the military strongly endorsed Deng's policy that China must modernize or be left behind. At the time, the walls of Tiananmen Square were plastered with hand-written accounts of the horrors of the Cultural Revolution. Yet the most amazing facet of the new openness was the willingness of Chinese intellectuals - many of whom had been sent to the countryside for years - to come to the aid of their country in its announced desire to modernize China. Somehow all the bitterness accumulated during Mao's last years of insanity was set aside for the good of the people.
Q: Focusing on the Mergers and Acquisitions in China title for a moment, what would you say are the two, three most important points readers should take away in order to be in a position to ask the right questions before embarking on their own transactions?
A: It is important for anyone acquiring a business in China to consider first whether one's own business model will work in China, second whether the target company's model works, and what are the differences. For example, if the target company survives in the market place because of low-cost labor and disregard of product safety, a high-tech competitor from Europe or the United States will have to completely change the company after the acquisition. It is not purchasing a going concern, but instead a business that needs to be remade. Or, if the target company routinely engages in corrupt activities to promote its business, an American company should look elsewhere or start off on its own with a Greenfield plant. Such issues are always discovered in the due diligence process, but too often executives have already decided that "if it works for them, it will work for us."
Q: With the recent wave of product liability concerns centering on products manufactured in China, and the resulting public attention, do you have any specific recommendations for businesses and their lawyers who are currently involved in mergers, or otherwise already do business in China?
A: In most of the cases of product liability failures arising in China, the problem originates in the supply chain to the final product manufacturer. When the emphasis is only on the cost of the supply, then unregulated bandit manufacturers will find a way to put melamine in the milk or lead in the paint. In an acquisition, a buyer should study the procurement department's methods and see what sort of testing is required of a company's suppliers.
Q: You also wrote Shareholder Agreements and Joint Ventures in China. As a reader, what should I remember most before making determinations in my client's case, where my client requests my firm's handling of a pending joint venture transaction in China?
A: The first rule is that a China joint venture is different. It is not like a joint venture in any other foreign country. Outside of China, one considers a joint venture when two parties each have a particular strength that should be combined in order to overcome their several weaknesses. Joint ventures in China, however, are required in industries where the Chinese government wants technology, but not complete foreign control. Thus, today an investor does a joint venture in China when the investor wants access, but the Chinese government insists on participation directly or indirectly.
Q: Besides mergers and acquisitions and joint ventures, what additional key topics would you see as primary opportunities for publishers and authors in the wide field of Chinese law and commerce? What primary fields of development do you see for practitioners?
A: The new areas of legal practice are already emerging, like antitrust law, bankruptcy law, sophisticated financing, and commercial litigation. For publishers, besides works in these fields explaining the new laws, a modern form book of Chinese legal forms in Chinese and English would be a bestseller.
Q: Thinking back to the early days of your China law practice, would you think you would then have been surprised at the level of Chinese progress in economic and commercial matters, and legal development in the early 21st century, if someone had given you a crystal ball in the late 1970s?
A: In the late 1970s, I had serious doubts that China would make any progress at all. This all changed in the mid-1980s when the Chinese discovered the conference table. Commercial negotiations in China were conducted in the 70s in the same manner that Chinese leaders greet foreign delegations today. The leader sat in a big, wing-backed, stuffed chair facing the door, and the Chinese team sat in descending order of importance and the reverse order of subject matter knowledge, and the foreign business delegation was seated in the same fashion on the opposite side of the semi-circle. Negotiating a contract was a matter of reading and writing on one's lap, while translating phrases back and forth. It was only when China first introduced conference tables to meeting rooms that anyone ever got anything done.
Q: In the western media, China - and doing business in China - tends to give rise to concerns about China's record of human and political rights: the detention of Chinese dissidents, the 1989 Tiananmen movement and resulting government reaction, or the handling of disagreements with members of the Falun Gong, questions of Tibetan and Uyghur autonomy, Taiwan's status, to name some of the perhaps most prominent headlines. In your practice, have any of these topics proved challenging to your objectives? Do clients raise concerns about any of these matters?
A: What most Americans do not realize is that Tiananmen Square, for all of its unfortunate consequences, led to the rise of China as a nation. The 400 million pulled out of poverty have largely the students of Tiananmen Square to thank for it. The reason for this is simple: at the conclusion of the slaying of students in the Square, the Army told the Communist Party that it would never turn on the people again, and - if the Party wanted to remain in power - then it would have to think of a way to make itself popular enough with the people to do so. From that point on, the Party new that it needed to make the people wealthier no matter what and to accomplish that goal, the Party adopted the capitalist system. That is why the surge of growth takes place after 1989 throughout the 1990s and into this decade.
The question is whether the Party can keep it up during a worldwide recession. And I don't know the answer to that question.
Q: What has been the most challenging aspect of your legal career? Most inspiring?
A: Because the government wants to maintain control of economic affairs, but not appear to do so, it prohibits foreign law firms from hiring locally qualified attorneys. This prevents foreign firms from appearing in court and, when the government wishes to cloth its actions in secrecy, from dealing with certain governmental departments. Thus, practicing law in China "illegally" for over 30 years has been the greatest challenge.It is not impossible, however, since China welcomes foreign investment and the foreign lawyers that facilitate that investment by drafting the contracts. The most inspiring part of the practice has always been that after long contract negotiations, in a year or two, a new hotel, office building, factory, automobile plant or service enterprise is up and running and the practicing lawyer can claim to have brought that to China. Unlike dealing in collaterized debt obligations, where the only product is paper and more paper if there is a default, I have always enjoyed seeing my contracts come to life as new businesses.
Q: You divide your time between your offices in New York City and in Shanghai. Do you find this arrangement challenging, or mostly rewarding? And in a time where many lawyers discuss the balance of work and personal life, how do you fare?
A: For most of my career, I lived in Asia and worked in Asia. That is the way it should be done in most cases. While I now go back and forth because of family obligations and teaching at Columbia Law School, we still have a house in Shanghai and normally stay for a month at a time. Therefore, the travel is not as bad as for those who must live with perpetual jet lag.
Q: The public demise of Coudert Brothers, your old firm, was a much-watched event throughout the legal world. Where were you when this happened, and how did you react?
A: Coudert was a great firm with many great lawyers. It was the first truly international law firm, which provided a lot of interesting work, but less compensation than that of firms that specialized in securities and litigation. Because the markets in London and New York were extremely strong for finance lawyers in 2004 and 2005, the younger partners in London left to join Orrick and the New York partners decided that they could all do better at other firms. Essentially, the younger partners voted to liquidate.
I was in New York at the time, having just returned that year from Shanghai intending to pass on my clients and retire to a more academic life-style. So I felt very badly when the younger partners were not willing to stay with the firm during a brief downturn in 2005; given today's crisis among the financial firms that most of them joined, I seriously doubt that they are now as well off as if they had kept Coudert going with our traditional foreign client base.
Q: Where do you see similarities between the legal systems of China and the United States, especially regarding commercial interests, and where do both systems diverge the most?
A: The two systems, one of which started from complete state planning and the other from a point of no regulation, are coming closer together at an alarming speed. China continues to liberalize its economy and the United States is about to enter a new period of regulatory growth. Both countries practice regulated capitalism in their financial systems and market mechanics in their domestic trade - with China holding somewhat greater legal powers to intervene in the process than the United States government, but less able to immediately enforce its will upon market participants because of rule of law issues.
The only clear difference remaining is that the United States is a two party system and China is a one party system. So to the extent that the Democrats and Republicans are different from each other, then maybe China and the United States are different.
Q: Many people are concerned about the enforcement of judicial or arbitration awards in certain foreign countries, China not being an exception. Is China giving us the sort of legal certainty and judicial/dispute resolution platform American lawyers and their clients might wish to see?
A: No. Clearly, courts in China are way behind the level of independence and even-handed justice that American courts offer. Courts are not independent by the constitution and the legislature retains the right to finally decide and say what a particular statute means - not the courts.
Corruption of the judiciary by the local bar is so bad in fact that it is now one of the chief complaints of foreign investors.
Q: A topic very much on everyone's mind is the current economic situation here in the U.S. and abroad. Would you share your thoughts on the situation, both in the U.S. and in China, and how the developments might affect doing business in China?
A: Setting aside the causes of the current economic slump, both the Communist Party of China and the Democrats in America need to solve the problem to remain in power. The difference between the countries is that the United States has a system where a change of government is not only peaceful, but routine. China does not.
This makes it more likely that China will solve the problem first, since the stakes matter more to the decision-makers who currently govern. The Democrats - even if they lost in 2012 - know their turn will come again; not the Communist Party of China.
But while the incentives to solve the problem may be greater, the problem is tougher. Over 40% of China's GDP comes from exports. Between protectionism and drop in demand, revitalizing this sector or replacing it with domestic demand is hard to do. For example, China's bank loans in January amounted to 1.62 trillion Yuan (237.19 billion U.S. dollars), an increase of 814.1 billion Yuan, or 103.6 percent, from 2008's same month, the People's Bank of China, the central bank, said Thursday. This increase in lending is due to government, which owns or controls all of the banks, ordering them to start lending. Although the Federal Reserve has injected trillions of US Dollars and the Treasury has liberally spread the TARP among American banks, they are still not lending because even though they take the government's money, they don't take the government's orders.
I think we may learn a very interesting economic lesson from this situation. If government action can solve a recession, then China will come out of the recession first and within a relatively short period replace the United States as the world's dominant economic power. But if government action cannot solve a recession, and only human ingenuity, new ideas and new products can do so, then the United States will come out of the recession slightly ahead of China and will maintain its position for some considerable period.
Q: If asked to sum up in a few words, where do you see China in five, ten, maybe even 20 years, in terms of its economy, its status among global powers, and its overall development?
A: In 20 years, China will have become a liberal democracy with many political parties, many of which may be regionally based. Its economy will be equal to or have surpassed that of the United States, but growth rates in both economies will be about the same, so that the relative positions - notwithstanding China's large population advantage - will continue for some time to come.
What I am not sure of is the next five to 10 years and whether China's transformation to a liberal democracy will be slow and steady or pockmarked by periods of violence and revolution.
One would tend to bet on slow and steady, since the Chinese are a very practical people with good judgment. It is difficult, however, to think of an example of when a king or single party gave up power to liberal, democratic reformers willingly.
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