15 June, 2015
On 29 June 2003, the People’s Republic of China (“China” or “mainland” or “mainland China”) and Hong Kong entered into a free trade agreement called the Closer Economic Partnership Arrangement (“CEPA”) with the aim of strengthening regional trade links and promoting the common prosperity and development of the two region’s economies. CEPA covers trade in goods and services as well as in investment facilitation.
Following CEPA’s implementation, the procedures for mainland enterprises to establish companies in Hong Kong were simplified and demand from mainland enterprises for various professional services provided by Hong Kong law firms has continuously increased. However, the actual benefits of CEPA have been limited due to cultural and economic differences between the two regions and because of the high thresholds and complicated procedures for Hong Kong lawyers and law firms to gain access to the mainland legal market.
To promote further exchanges between the two regions, both sides have agreed to strengthen cooperation with respect to trade and investment facilitation, including improving the transparency of laws and regulations. Here we look at CEPA and liberalisation measures that recently became effective in Guangdong Province and examine their intended and actual effects.
Access To The Chinese Market
CEPA and its Supplements have made it easier for Hong Kong legal professionals to access the mainland Chinese market by reducing or waiving mainland residence time requirements; allowing Hong Kong permanent residents to take the National Judicial Examination (“Examination”) (which may not be taken by foreign lawyers), enabling Hong Kong residents to obtain a license to practice law in China; allowing Hong Kong lawyers to be employed by mainland law firms to engage in non-contentious matters; allowing mainland law firms to employ Hong Kong lawyers as legal advisors; and allowing law firms from the two regions to establish joint ventures.
Further, local authorities have made it more convenient for Hong Kong residents obtain mainland lawyer qualifications by setting up sites in Hong Kong and Shenzhen where Hong Kong residents can sit for the Examination. However, the number of Hong Kong residents who sit the Examination is still small. This trend could be due to differences between the judicial systems and professional environments in the two jurisdictions. It is also possible that Hong Kong residents have difficulty passing the Examination. According to statistics, some 100 residents from Hong Kong and Macau take the Examination every year in the Guangdong Province, but to date, only 75 residents from Hong Kong and Macau have become practicing lawyers in mainland China. To increase interest and positive results among residents, additional courses – either full-time or part-time programmes – could be offered to assist those who may need further support in preparing for the Examination.
Setting Up A Representative Office In The Mainland
A Hong Kong law firm may set up a representative office in mainland China if the firm has legally practised in Hong Kong; the representatives (i) are practising lawyers, (ii) are members of the Law Society of Hong Kong and (iii) have practiced outside the mainland for not less than two (2) years; the chief representative has practiced outside the mainland for not less than three (3) years; and the law firm has an actual need to set up the representative office to conduct legal business in the mainland. However, such representatives are not allowed to advise on mainland Chinese law. Rather, they are only allowed to:
- provide clients with consultation relating to Hong Kong laws or foreign laws for which the lawyer’s practice has been approved or to international treaties or conventions;
- accept engagement to handle the legal affairs in regions in which the lawyer’s practice has been approved;
- act on behalf of its Hong Kong clients to engage law firms in the mainland to handle mainland legal affairs;
- keep a long-term clientele with the law firms in the mainland through the conclusion of contracts to handle legal affairs; or
- provide information on the effects of the mainland legal environment.
This means that the representatives cannot practise PRC law, appear in Chinese courts or provide services related to PRC law. What’s more, Chinese nationals hired by foreign law firms must give up their PRC licence and forfeit their eligibility to advise on PRC law during their service term.
Another obstacle Hong Kong firms face in setting up a representative office involves the review and approval procedures. While the provisions on how to set up a representative office are clear and systematic, the review and approval processes for projects falling under CEPA require the sign off of central and provincial authorities. This review and approval process can often become complicated, as well as very long and costly – all of which may make entering the Chinese legal services market less appealing to Hong Kong legal service providers.
Trial Measures In Guangdong Province
Commencing from 1 September 2014, the Trial Measures for Implementation of Joint Ventures between Law Firms from Hong Kong and Macao Special Administrative Regions and Mainland Law Firms in Guangdong Province became effective. This has enabled Hong Kongand mainland law firms to form joint ventures in the Qianhai economic zone in Shenzhen, Nansha District in Guangzhou, and Hengqin New Area in Zhuhai, the three pilot areas within the Guangdong Province.
Joint venture law firms in these pilot areas can be established in the form of special general partnerships. So far, the Guangdong Province has allowed ten (10) partnerships and joint-venture law firms to be established in these areas. As the Chinese government continues to step up its efforts to promote economic development in these special economic zones, opportunities will continue to emerge for Hong Kong lawyers to play a pivotal role in satisfying the legal service needs of professionals of these areas and to support local development.
Supplementary Agreements To CEPA
Between 2004 to 2013, ten (10) Supplementary Agreements to CEPA were signed and have further liberalised and enhanced the access of Hong Kong’s legal sector to the mainland market. For instance, Hong Kong residents who pass the Examination can now represent parties in certain cases that relate to Hong Kong. In addition, Hong Kongqualified lawyers or legal professionals that hold a mainland law license can also practice in a branch office established by a mainland law firm in Hong Kong in accordance with the relevant regulations.
However, these measures, in practice, have not proven to be as enticing as they were hoped to be. While there may be many reasons underlying this trend, two that are frequently cited include salaries paid to mainland lawyers and client service charges, both of which are considerably lower in the mainland than in Hong Kong. The governments of both regions should study the issue in greater depth and formulate a scheme that makes entering the mainland legal market more commercially appealing to Hong Kong and foreign firms.
The Agreement between the Mainland and Hong Kong on Achieving Basic Liberalization of Trade in Services in Guangdong (“Guangdong Agreement”) was signed in December 2014 and became effective in March 2015. The Guangdong Agreement adopts a hybrid approach of introducing negative-list reserved restrictions for Hong Kong service suppliers in the Guangdong Province on top of positivelist liberalisations under the CEPA Supplements. This basically puts Hong Kong service suppliers on equal footing with their mainland counterparts, except for the reserved restrictions.
On the whole, the liberalisation measures under the Guangdong Agreement are touted as far exceeding the measures of previous CEPA Supplements. However, the Guangdong Agreement has been designated as a subsidiary agreement rather than a supplement, reflecting the new hybrid approach as well as the focused market access for Hong Kong service suppliers in Guangdong.
While Hong Kong legal service providers in the mainland are still barred from engaging in any business related to practising mainland law, as are other foreign law firms and practitioners, Supplement X of CEPA, which came into effect in 2014, introduced a pilot measure in Guangdong which allows mainland practising lawyers to be seconded to mainland representative offices of Hong Kong law firms set up this Province. This is regarded as a ground-breaking provision, as it allows seconded lawyers to act as consultants on mainland law. This commitment was essentially reiterated under the Guangdong Agreement, which became effective in March 2015.
The Guangdong Agreement also allows Hong Kong lawyers employed by Hong Kong service suppliers to be seconded to mainland law firms as consultants on Hong Kong law or cross-border laws.
Additionally, mainland law firms and representative offices set up by Hong Kong service providers in Guangdong are allowed to co-operate in accordance with their mutually beneficial agreements. They can also commence business cooperations by dividing the work according to their respective scopes of practice and authority. The Guangdong Agreement also allows partnerships to be formed in Qianhai, Nansha and Hengqin, in line with specific provisions approved by the judicial administrative authority.
The latest initiatives under the Guangdong Agreement are consistent with the CEPA commitments laid out in Supplement VIII of CEPA, which seek to foster closer co-operation and association between the mainland and Hong Kong legal sectors. These liberalisations support the Guangdong pilot measures adopted under Supplement X of CEPA in 2014. They also greatly enhance the ability of Guangdong and Hong Kong law firms to co-operate, especially the measure which permits Hong Kong lawyers to be seconded to counterpart offices in Guangdong and practice in their own area of specialty.
Currently, Hong Kong law firms operate about 110 representative offices on the mainland – more than 20 of these firms have such offices in Guangdong. As of the end of February 2015, 22 applications submitted by Hong Kong legal service providers were approved, with 14 Hong Kong firms having association arrangements with mainland counterparts. These firms can now advise on both mainland and international law as a result.
The Guangdong Agreement liberalisation measures also establish that Hong Kong legal service providers that hold mainland lawyer qualifications are allowed to act as agents in civil litigation cases relating to Hong Kong residents and juridical persons, according to the specific scope of permitted business provided for under the Notice of the Ministry of Justice of the People’s Republic of China (No. 136). This means that they can handle matrimonial and succession cases, as well as disputes with regard to contracts and intellectual property rights, civil disputes relating to companies, securities and insurance, and cases which require applications for the recognition and enforcement of civil judgements and arbitral awards.
It appears quite likely that measures to widen the business scope of Hong Kong legal service providers in the mainland will be extended to Beijing, Shanghai and other first-tier cities next year. The Central government is expected to announce new CEPA liberalisation measures by the end of 2015, in line with its pledge to allow free services trade between Hong Kong and the mainland. As trade exchanges between Hong Kong and mainland China become more mature and stable, lawyers from both regions should continue seeking out opportunities and exploring new ways to more closely cooperate.
For further information, please contact:
Gordon Tsang Ho Yin, Partner, Zhonghao Law Firm
Daniel Leung Lok Hang, Zhonghao Law Firm