LAST WEEK’S announcement that Lloyd’s of London would be given a licence to set up for business in the People’s Republic — timed to coincide with President Hu’s state visit — opened a new era in the economic relationship between the United Kingdom and China. It all feels a long way from the days of the Opium Wars when Britain (along with other Western nations) inflicted unfair trading conditions on the Chinese.

Yet maybe there are folk memories of those humiliating experiences that still motivate Chinese authorities. They want to normalise business relations with the West — but they are not going to be a pushover. They will do it on their terms.

As Stuart Valentine, of Clifford Chances’ China practice, explained, the UK Government and one of the City of London’s greatest institutions were made to work hard to secure what should have been an automatic right of entry. After all, when China became part of the World Trade Organisation it agreed to allow in re-insurers with no restrictions on numbers or origin. Initially, three licences were issued to foreign businesses. Then the brakes were applied sharply and what should have been a right has been made to look like a concession.

As it is, continues Valentine, the unique syndicate structure of Lloyd’s does not comply with Chinese law. So, by granting this licence, all the Chinese authorities have actually done is give a green light to the start of a process in which lawyers will try to formulate a structure that matches Chinese requirements. So although China is progressively opening up, change comes very gradually while the Government keeps a pretty tight grip on the process.

The result is a mixed picture. Steve Robinson, of Hogan & Hartson, observes that his Western clients are often surprised “at how modern the law is in China”.

Yet it is also patchy. “Sometimes clients are also frustrated at the lack of clarity or because fairly straightforward things, by Western standards, cannot be done.”

Keeping up with all the twists and turns of Chinese government law and policy is critical. Yet what the law says is often not the key issue. “You need to be up to date with the politics as well,” Robinson explains. “Because that may give you a better idea of what is and is not permissible.”

Or, as Andreas Lauffs, of Baker & McKenzie, put it: “There is a danger in making any presumptions about the way the law works in China. It is a freewheeling, highly competitive economy, but you might find that what is normal elsewhere does not apply here.”

As it happens, a new Companies Law has just been issued and, once again, the trend is towards greater sophistication. There are changes in corporate governance, to the types of legal entity, on limited liability and on joint stock companies. Equally important, there is to be the introduction of more flexibility on how profits are distributed.

“Previously, the rules were very prescriptive, whereas now it will be more like the West,” says Emma Davies, of Clifford Chance.

Mind you, true to form, these changes apply only to domestic entities. Those that have a foreign ownership will still be tightly controlled.

In fact, within a broad context of progressive movement, you could say that foreign investors still get the short straw. On the one hand they are subject to more controls, while on the other they suffer from the lack of transparency that tends to characterise Chinese business.

“When a Western investor gets into a joint venture with a Chinese company it is not unusual for them to discover, subsequent to the deal, that there are tax liabilities that they had not expected,” Davies says. “They could also find that there are two sets of books and that there are a host of unforeseen labour issues. All of this may prove expensive to regularise if Chinese business is to be brought into line with conventional Western management methods. Hence a deal costing $100 million (£57 million) could entail liabilities at two or three times that level. What is entirely natural in a Chinese context just does not fit with what goes on in Europe or the United States.”

Yet you also have to have some sympathy for the Chinese in this situation. As Robinson points out: “The Chinese are just as mystified at our way of doing things as we are with theirs.”

Ideally, greater mutual understanding will develop as Chinese businesses pursue their own expansionist policies in the wider world. Herbert Smith, for example, has acted for many of the largest Chinese corporations as they buy up or invest in energy and IT companies around the world. Meanwhile, the firm also acted, earlier this month, for China Construction Bank on the record-breaking Initial Public Offering, which raised $8 billion. This made it the largest IPO in the world for the past four years.

Once China starts setting records such as that, you can tell that the Great Wall of China is getting ready for genuine two-way traffic.

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