Marked by the new Foreign Investment Law and the Belt & Road Initiative, China’s new wave of opening-up reforms holds many promises. To navigate the opportunities created by this changing legal landscape, Mr. Huang ‘Henry’ Ningning, Managing Partner at Grandall Law Firm, explains his company’s strategy, assesses China’s ease of doing business and lays out his plan for the creation of a legal platform that provides “interconnectivity between lawyers.”
Characterized by the major global changes brought on by technologies such as AI, robotics, and IoT, combined with a rapidly fluctuating economy, Globalization 4.0 —a term coined by the World Economic Forum to signal the coming shift in globalized structures—is upon us. As it promises to deliver a newly transformed world free, it must first tackle several major obstacles such as social inequality, labor disruption, and protectionist sentiments. What are the challenges and opportunities in this increasingly globalized structure?
For international firms like Grandall, the challenges caused by globalization create an opportunity to serve an ever increasing amount of clients. Under this new structure, large cross-border law firms must develop an extensive global service network that encompasses a multitude of markets and countries. Whether globalization 4.0 will be governed by multilateral institutions, such as the WTO, or by bilateral arrangements, is not the issue. The real issue is that as time goes by, the world is constantly evolving. This ever-changing environment requires lawyers to systematically adapt to the latest global market trends; and that is the key. Consequently, Grandall’s internationalization strategy is focused on the development of its service ability, which isn’t limited to our firm but also to our partners and our network.
How important is it to reform multilateral agencies, such as the WTO, to keep up with the disruptions emanating from Globalization 4.0?
From a legal standpoint, our view is fairly simple: if finding a consensus is time consuming and difficult to implement, then there must be a problem. If we observe the WTO structure, the issues encountered arise from the attitude of dominant economies, such as the US, the EU, Japan, and more recently China. These economies’ support and belief in the system will decide if successful reforms can or cannot occur. My personal opinion is that the majority of nations understand that the WTO must be reformed to better match current trends. But because large economies all act in their self-interests, and because these self-interests are subject to sudden change, an effective solution has yet to be found. This argument was exemplified by the quick evolution of the Trans-Pacific Partnership (TPP). After years of negotiations under the Obama administration, the first executive order signed by newly-elected President Donald J. Trump was to withdraw from the TPP. Similarly, China’s view of the TPP also evolved. If at first the PRC was worried about the agreement, it later became one of its supporters. Interestingly so, these twists happened over a mere 3-year frame, which goes to show that things change at alarming speed. With the American election in 2020, who is to know what will happen next?
China's rapid economic rise has astonished the world. It's reform and opening-up policies and its comprehensive long-term planning have resulted in decades of rapid economic growth that transformed its economy into the world’s second-largest. Yet, this process of economic liberalization and structural reforms is uniquely Chinese insofar as it has promoted a socialist-market economy. What are the main drivers that have enabled such a rapid rise, and what has been the role of both the private sector in this development?
China has a unique economic model called “socialist market economy with Chinese characteristics.”
A paramount driver of China’s economic rise has been its comprehensive, consistent and systematic planning in market reforms and opening-up policies. With the results achieved, it is obvious that the Government’s strategy was a frank success. Secondly, China’s national ethos played an important role. The Chinese workforce is characterized by its hard-working mentality and fast-learning ability. Furthermore, we were able to utilize already existing advanced technologies to leapfrog our development. Due to its delayed economic rise, China was able to leverage on the latecomer advantage of learning from others.
Another benefit brought by the Chinese mentality was that Chinese citizens are not avid spenders. In comparison to other populations, Chinese people enjoy a high saving rate, which equipped the whole system with enough capital to sustain financial uncertainties. Under today’s environment however, this mentality poses a challenge. Now that China’s growth has rationalized and that the international economy is in a constant state of fluctuation, one of the Government’s strategies is to stimulate the domestic market by encouraging consumption. This strategy will be tough to implement because to encourage citizens to spend more, you must transform their habits. While this new mentality has already been adopted in first- and second-tier cities, generalizing it to China at large will be a complicated, yet essential process. If we are not able to stimulate consumption, GDP growth may drop lower than 6%.
Over the last years, the Government has reiterated its commitment to reform and opening-up policies. In 2018, China jumped an astonishing 32 spots in the ‘ease of doing business ranking’ - approved a new Foreign Investment Law which promises to create a level playing field for foreign companies and protect intellectual property; and reduced its negative list especially for the financial and extracting sectors, amongst other initiatives. How comprehensive is the new investment law and what are your expectations in terms of impact?
The new Foreign Investment Law will further stimulate foreign investment. Today, the three structural types of foreign invested enterprises (FIE) encounter a series of issues. The key difference between current FIE Law and Chinese Company Law is the corporate structure. In a domestic firm, the shareholders’ meeting is the highest authority. In a joint-venture (JV) enterprise however, the board is the sole decider and there is no shareholders’ meeting in the setup.
The first equity joint-venture law was enacted in 1979, over 40 years ago. The reasoning behind the 1979 law was to prioritize “people” over “shareholders.” In a normal corporate structure, the majority shareholder will play a much stronger role than the minority shareholder. Under the JV structure however, Chinese shareholders tended to be in a minority position, hence, the legal logic when the Law was drafted and made was to prioritize “people.”
When the opening-up reforms were first enacted, the list of sectors restricted to foreign investment was extensive, before gradually shrinking. Today, China realizes it is time to treat FIEs and domestic firms with as much equality as possible.
Under the new Foreign Investment Law, two major policies stand out. First is “pre-establishment national treatment.” Second is the negative lists. When analyzing this subject, it is important to bear in mind that the Foreign Investment Law was enacted on the backdrop of the US-China trade dispute, or US-China trade war, depending how one chooses to label it.
If we compare the current law to its forerunner, which was published in 2015 by the Ministry of Commerce (MOFCOM) under the name “Foreign Countries Investment Law,” we observe that the former document was a more extensive and complicated draft. Compared to the 170 articles of the 2015 draft, the current Foreign Investment Law is composed of 42 articles only. Furthermore, the Chinese Government has tackled certain sensitive topics, such as the framework for Variable Interest Entity (VIE) structures. Back in 2015, MOFCOM’s draft was not in favor of the VIE model and it spent years debating over the issue. In comparison, it took only 4 month for the National People’s Congress to agree upon the new Foreign Investment Law.
Critics have put in doubt the implementation capacity of the new Foreign Investment Law. How implementable do you believe it will be?
When it comes to implementing a new law, there are always doubts. But regardless of how implementable it will be, the new law will bring improvements and is yet another step in the right direction.
That being said, it is important to consider that the new document only labels 42 new provisions, therefore has big room for elaboration. For example, the new Foreign Investment Law does not clearly explain the mechanism for IP protection. While it is not in the actual document, The Ministry of Justice released the draft for these IP protection mechanisms just a month ago. In that document, the Ministry laid out the punitive system for IP infringement, which will eventually be a strong mechanism.
In the past, IP disputes were addressed on a strictly financial basis where the infringer had to pay reparations to the infringed. In the future however, punishment fines will double or triple the sum of these reparations, and that represents a truly revolutionary change.
To navigate China’s legal environment, one must understand that China is an extremely large country. Officials from small-cities and inner-land regions may not be aware of legal mechanisms. Although they know that a new law is in place, they are not aware of how to efficiently implement the new law . From a legal standpoint, we must continue to communicate with different levels of the governments on the new law. Nevertheless, it is clear that China has the desire to change for the best.
China joined the ranks of the world’s most improved economies in the World Bank’s Ease of Doing Business ranking for the second year in a row thanks to a robust reform agenda. By removing bureaucratic burden, digitalizing business registry and integrating licenses, codes and certificates into a single document known as the ‘Five-In-One’ system, the PRC has streamlined the corporate entry process. The country also carried out a record eight business reforms during the 12 months to May 1. How conducive is the business environment today? And how does it compare to other leading economies?
China’s ranking has improved because of two core factors. Firstly, I believe that the original ranking system did not reflect true facts. I was a member of the team asked to fill-in the World Bank’s “Ease of Doing Business” questionnaire. Said questionnaire was, by all means, a complicated one. This document is composed of 10 sections with several questions on each section, and one’s answers are under a yes-or-no format. If one answers no, he doesn’t need to justify oneself with the relevant law provisions. If one says yes however, he is required to prove his answer and make references to the relevant law provisions; a real legal piece of work! The entities required to answer these questionnaires are both lawyers and market players, such as enterprises.
To a busy lawyer, taking more than one hour to answer these questions makes him impatient. But to provide a quality answer, the questionnaire requires three to four hours of work. Subconsciously, I believe that many individuals answered “no” to a multitude of questions in order to shorten the time spent on the questionnaire. Consequently, this mechanism creates biased answers and does not reflect true facts.
Secondly, China has been able to identify the legal parameters where updating was necessary. To a large extent, a business environment assessment is, by essence, an assessment of the legal environment. As the Government began improving laws and legal processes, we began to win points in areas where we previously lost them. While China still underscores in certain areas, we must be careful in our reform agenda. It would be unfair to pass a series of policies to satisfy foreign investors at the detriment of other stakeholders’ benefits.
For example, one parameter of “doing business” reviews considers the protection of minority shareholders. In said section, we lose quite a few points, one because of the limited responsibility of the directors in case of malpractice, and the other one in the minimized protection that minority shareholders can pursue through legal proceedings.
If we wanted to increase our ranking, we could easily alter the responsibilities and liabilities of those directors. However, doing so would multiply the amount of complains and is not necessarily appropriate to current enterprise structure.
Comparing China to countries ahead of us, such as New Zealand, is to some extent pointless for it does not take into account each country’s unique characteristics. While we can benchmark the highest global standards, translating every standard into practice is undoable.
What are the competitive advantages of Grandall Law Firm?
Grandall counts on a multitude of industry-leading experts like myself. From a personal perspective, I’ve been assisting foreign companies enter the Chinese market for over 20 years. The list of US companies I have helped is both long and prestigious. Furthermore, I had the pleasure to work for the American International Group and AIA Insurance Co. for an extensive amount of time, which shows my experience and best-practice.
China recently launched the much-anticipated Science and Technology Innovation board (STAR market). This new STAR Market is expected to be a key fundraising avenue for tech companies from an array of stages, given its criteria are less stringent than other domestic boards. What will be the impact of this board on the tech ecosystem, and on Grandall?
Grandall has the largest market share for IPOs on the STAR market. For the first batch of IPOs, we were able to secure around 15 to 20% of the market share.
During last year’s China International Import Expo, President Xi Jinping declared that we needed to have a board dedicated to Science and Technology. Shortly after, the board was made! The real beauty of this board is that it will propel our companies to embrace a clear registration system. In the future, listed firms will be able to tell their stories and disclose to the public who they are and what they are truly worth. Instead of having a regulatory agency reviewing each firm individually to decide whether it qualifes for an IPO, companies will be encouraged to be transparent and conduct self reviews with the help of intermediate entities.
Grandall Law firm is heavily invested in the development of the Pearl River Greater Bay Area. Can you tell us more about your involvement in this Mega City Cluster?
The Government is currently investing into three world-class Mega City Clusters. The first is the Beijing-Tianjin-Hebei region, also know as Jing-Jin-Ji. The second is the Yangtze River Delta (YRD) and the third is the Pearl River Delta Greater Bay Area (PRD). It was recently announced that Shanghai would be heading the Yangtze River Delta, which includes three regions, namely, Anhui, Jiangsu and Zhejiang, and one city, namely, Shanghai. In the South, the Pearl River Delta will include Shenzhen, Hong-Kong, Macao and Guangdong province.
Grandall’s roles in each of these three Mega City Clusters is to assist its clients in optimizing the evolving legal environments of each cluster. We conduct an extensive amount of research to find new opportunities and to analyze the validity of business models per specific region. Together with our clients, our aim is to adapt to this new and ever-evolving environment.
In October 2019, Premier Li Keqiang announced that China will remove business restrictions on foreign banks, brokerages and fund management firms. The Government also announced that restrictions would be lifted ahead of schedule. What is your assessment of these announcements?
China’s financial performance is already strong. As such, I believe that lifting these restrictions will not significantly boost our financial performance. However, this self-voluntary attitude sends a clear message to the world: we are committed to further opening-up our economy.
2013 marked the start of the Belt & Road Initiative (BRI), a paramount infrastructure project aiming to integrate 3 continents, over 60 countries and more than 65% of the World's population through enhanced physical and digital connectivity. Grandall Law firm created an entire business unit dedicated to researching the BRI. What services do you offer to organizations involved in the BRI?
Our research efforts began simultaneously to the BRI’s launch, in 2013. In 2015, we established a Belt and Road legal research and service center.
One of Grandall’s corporate philosophies is to follow new developments from a legal standing. This commitment to novelty allows us to remain market experts and to answer to modern time’s ever-changing trends. In 2017, we invited over 50 law firms from international countries to a summit that we hosted. At the end of said summit, 34 law firms, including Grandall, signed a series of articles that laid out the creation of a trans-border platform called the “Belt and Road Legal Services Cooperation Platform.” By collaborating with other firms, our objective is to provide our clients with the expertise they require to navigate the complex legal environment of the BRI.
Signing of the Belt and Road Legal Services Cooperation Platform (photocredit: Grandall Law Firm)
There is a theory that any two strangers are connected by six-levels of acquaintances. Throughout my career, I was often asked by my clients if I knew lawyers in a given city. If I didn’t, I was able to introduce them to someone who did know. Similarly, my personal dream would be to establish a legal platform that provides total interconnectivity between lawyers. This imaginary platform would allow any organization, regardless of its sector, to research any information, regardless of its legal topic, in any city in the world and seamlessly get in contact with a relevant expert on the ground.
As the BRI spawns over 60 nations, how challenging is it to navigate the various legal landscapes of BRI countries?
Varying legal landscapes are not much of a difficulty. Under Grandall’s BRI platform, the legal diversity of BRI countries ensures that each platform member has room to grow. For example, mergers and acquisition usually involve more than two jurisdictions. If an American company seeks to acquire a Sino firm, both US and Chinese jurisdictions must be analyzed. As such, Grandall is accustomed to dealing with multi-jurisdictional scenarios. Here again, our extensive partner network comes as an advantage.
Can you run us through the history of Grandall and the role that you play in the Chinese legal ecosystem?
Grandall was created in 1998 as a result of a merger between three different law firms. One was based in Shanghai, which is the predecessor of Grandall Shanghai office, and the other two were based in Beijing and Shenzhen. We quickly developed an expertise for IPOs and the securities market. As time went by, we continued to strengthen our foothold in these two segments.
As the world grew increasingly globalized, it was important for large law firms to expand to different jurisdictions. Consequently, we established an office in Hong Kong before deploying our physical presence to different locations. Along the years, we invested in peculiar locations, such as Paris, Madrid, and Stockholm, which are usually not first choice European cities. We chose these places because we had the right projects, the right clients, and the right people located in the area.
As China and America grew further interlinked, our footprint in the USA became increasingly important. We first opened an office in Silicon Valley before establishing our New York office.
The second layer of Grandall’s internationalization effort was built through our partners network. While the first such network was created by Grandall, we are also present in 3 other networks, namely, ALFA International, Interlex, and APG. Each of these networks have different focuses. For example, APG concentrates on South-Eastern Asian counties and allows us to have great coverage over the region.
How is the current US-China situation impacting your clients and services in America?
The US market has yielded positive results for many years. On the one hand, the trade-war has caused investments in the US to slow down rapidly. On the other hand, cases revolving around economic trade remedy are booming. Strictly from a legal perspective, the amount of China-US related projects have not dropped, they have simply changed.
Many observers have claimed that part of the US-China decoupling could occur on the financial market, where Chinese companies list on American board. What benefits can American investors gain from purchasing shares in US-listed Chinese firms?
If you look at the stock growth of China’s large enterprises, they often look like win-win scenarios for both US investors and Chinese firms. Most of the Chinese companies that list on US stock markets are high-quality, high-standard enterprises.
However, it is important to note that both in China and the US, experts have diverging opinions on the topic. The fact that Alibaba listed back to the Hong Kong market exemplifies how the trade dispute will affect future capital flows.
Personally, I am optimistic that the US will not inflict restrictions on Chinese firms. I recently read that an American Think Tank argued there should be stronger control over VIE-entities listed in the US, including more information disclosure and ownership control. However, I believe this claim to be an eye-catching declaration and not something that will actually be implemented.
If we were to come back in 10 years and have this interview again, what successes would you like to share with us?
In 10 years’ time, I would not be taking your interview because someone else will have replaced me! As time goes by, Grandall will continue to advance and evolve. I’ve already occupied this position for 10 years and I know that in the not-so-distant future, stronger and younger lawyers will be taking this interview on behalf of Grandall.
*A VIE structure refers to a structure whereby an entity established in China which is fully or partially foreign owned has control over an operating company which holds the necessary license(s) to operate in a FDI restricted/prohibited sector.