China Law&Practice: Charting China's Legislation for 20 Years

However, enforcement remains a key concern for many lawyers. "Critical weaknesses still exist in terms of the regulatory enforcement side and the judicial enforcement side. Many regulations look good on paper but the regulator is not active or has inadequate remedies available to it," says Robert Lewis, the managing partner of the Beijing office of the UK-headquartered Lovells, which was one of the first foreign law firms to open an office in China.

Another area of concern is the structuring of companies in China. While the legislation is in place for this, many foreign parties prefer to form companies through offshore vehicles to take advantage of more developed and clearly defined company laws. "In China, in terms of actual practice, there's not been a developed track record of being able to utilize all of the different structures and techniques in a Chinese limited liability company as you would be able to do in an offshore company," says Lewis.

In addition, while the Chinese government approval process for routine matters has generally become much simpler and faster, in some areas it seems to have become more complicated. "For anything to do with the sale or transfer of state-owned assets, they've actually added additional layers of process which does not seem to have improved the level of control but has added to the difficulty in completing deals involving sale of assets," says Lewis. "So on the regulatory approvals and the standard government approvals side of common transactions, there have been some improvements in some areas and almost a step backwards in some other areas."

China's Legal Milestones

China has passed hundreds of pieces of legislation to open its markets to foreign competition as part of its WTO membership obligations and also to bring its legal system in line with international standards. Of these, several stand out for their groundbreaking impact on foreign and domestic businesses in China.

The bible on foreign investment, the Foreign Investment Industrial Guidance Catalogue and the accompanying Guiding the Direction of Foreign Investment Provisions, was significantly revised from April 1 2002 to expand the number of industries in which foreign investment is encouraged. The catalogue was subsequently revised with minor changes, effective from January 1 2005.

Another landmark piece of legislation is the Measures for Foreign Investment in the Commercial Sector. The Measures, which came into effect on June 1 2004, overhauled the regulatory regime for foreign investment in the commercial sector.

Foreign investors also received a boost from the PRC Regulations of the Administration of Foreign-invested Financial Institutions, which came into effect on February 1 2002. These were replaced with the PRC Regulations for the Administration of Foreign-invested Banks (New Regulations) and their implementing rules exactly five years after China's WTO accession, to further open the commercial banking sector to foreign competition.

Apart from the legislation which has been created and/or revised to bring China's markets in line with its WTO commitments, several important laws have been passed in recent years to improve the conditions for domestic and foreign businesses in China. This includes the substantially revised PRC Company Law (Amended), which came into effect on January 1 2006, and the accompanying Provisions on Several Issues Concerning the Application of the (1), which became effective on May 9 2006.

Also of significance and effective as of January 1 2006 is the PRC Securities Law (Amended), which amended over 100 articles of the previous law. This was passed in 1999 and slightly revised in 2004. The 2006 law introduced big changes as part of China's efforts to develop its capital markets, including an expansion of the types of securities under regulation, new separate regulations for each type of financial sector and increased investor protection.

Foreign investors were recently given added opportunities in China with the passage of the Measures for the Administration of Strategic Investment in Listed Companies by Foreign Investors, which became effective on January 30 2006. This followed the Circular on Matters Relevant to the Administration of Foreign Capital Involved in the Reform of the Division of Equity Interests of Listed Companies, which came into effect on October 26 2005. Circular 565 was equally important in giving foreign investors permission to acquire tradable A-shares in Chinese listed companies which have reformed their share capital structures.

Also of importance to foreign investors are the revised Measures for the Administration of the Takeover of Listed Companies, which became effective on September 1 2006 and replaced the same-named legislation which came into effect on December 1 2002. The 2006 Measures, which remove the obligation in the 2002 legislation for investors to acquire all outstanding shares of target listed companies and also give acquirers greater options and reduced takeover costs, are expected to result in more takeovers in the equity market.

Just a week after the revised Measures came into effect, the Provisions on Acquisitions of Domestic Enterprises by Foreign Investors became effective. The provisions were passed to ensure the proper oversight of acquisitions of Chinese assets by foreign investors, as well as to prevent Chinese assets from being moved offshore below value and then returned to China as foreign assets, which had been often done to take advantage of foreign investment incentives.

Of key importance to companies in China is the PRC Enterprise Bankruptcy Law, which comes into effect from June 1 2007 after 12 years of debate and substantially revises the PRC State Enterprise Insolvency Law (Trial Implementation) of December 2 1986, bringing investor protection more in line with international practices.

Also of note is China's efforts to introduce fair competition in its markets through the enactment of the PRC Pricing Law (effective December 29 1997) and the PRC Anti-unfair Competition Law (effective December 1 1993), for which it recently promulgated the Supreme People's Court, Interpretation of Several Issues Concerning the Application of the Law in the Trial of Civil Unfair Competition Cases (effective February 1 2007). China has also been working on a draft anti-monopoly law for about 15 years which, when finally passed, is expected to be China's first integrated law on anti-competitive behaviour.

The Rise of Chinese Law Firms

China's legal market has undergone substantial change since the reform period began in 1979, at which time there were about 200 lawyers nationwide. By 1987, the year of China Law & Practice's launch, there were about 450 lawyers in China. There are currently about 120,000 practising lawyers in the country and about 11,000 Chinese law firms, the majority of which handle domestic affairs.

The PRC legal market was restricted to state-owned law firms until the passage of the Cooperative Law Firms Pilot Scheme on June 3 1988, which the Ministry of Justice subsequently replaced with the Measures for the Administration of Cooperative Law Firms on November 25 1996. Under the Measures, cooperative law firms can be formed with limited liability and all assets jointly owned by the cooperative parties.

Exactly a month earlier, the Ministry of Justice promulgated the Measures for the Administration of Partnership Law Firms, which allows for all assets of a partnership law firm to be owned by the partners, who undertake unlimited joint and several liability for the firm's debts. Both the partnership law firm measures and the new cooperative law firm measures came into effect on January 1 1997.

Foreign investment work in China has traditionally been handled by international law firms. However, the dynamics have dramatically changed since China acceded to the WTO and the government began encouraging domestic law firms to advise international companies on their China-related investments.

Local law firms have also benefited from the government's drive for domestic companies to expand and raise funds abroad. Noteworthy recent deals by Chinese companies include TCL's acquisition of the mobile phone business of Alcatel and the television operations of Thomson, Lenovo's acquisition of the personal computer business of IBM, Nanjing Automotive's acquisition of MG Rover and China National Petroleum Corporation's acquisition of PetroKazakhstan. In addition, three of the big four Chinese banks