David Liu, one of the most acclaimed financial lawyers in China, is a passionate advocate of the country’s opening-up and a rare optimist in these trying times. He has played a key role in many important transactions that helped shape China’s legal market and its banking and finance industry. The co-chair of the International Bar Association China Working Group and partner at Jun He shares his career stories and some of the artistry of being a top lawyer

[Video] Liu tells the story behind the China Merchants Bank credit card center deal

When China Merchants Bank decided to terminate its contract with credit card provider American Express, Liu counselled the Chinese bank to reconsider its decision. From a seemingly upsetting request that would break the relationship between the two companies, Liu managed to turn the table around for both parties. Liu says the very essence of a business lawyer’s job is to be an advisor for the overall business rather than just completing the task at hand.

China Business Law Journal: What do you need most to be a successful legal professional (both lawyers and in-house counsel)?

David Liu: I think lawyers have to have a deep understanding of clients’ needs and they have to look deeper, beyond the surface needs and the most apparent ones.

For clients’ inquiries, how should lawyers reposition them back to the industry, corporation, transaction, or the larger background where they originated from? In my book Breaking the Game, there is an example that addresses this: At the time, the credit card centre of China Merchants Bank (CMB) wanted to terminate a contract, but I managed to find out that the termination only came up when the business needs of CMB had evolved. I then proposed solutions regarding the altered needs to help both sides of the contract solve their real problems and renew their co-operation.

An outstanding lawyer should also be able to stay up to date with the trends in the industry that they serve, whether it is banking and finance, mergers and acquisitions, capital markets, or intellectual property rights, and have a deeper understanding of the legal environment, changes, trends and policies of the industry, not just around specific cases and transactions.

Lawyers should also have the ability to provide creative solutions. This is a top priority, especially for financial lawyers, who should be able to innovate, when it comes to transaction structures, documents and financial products.

Commitment to the law and legal profession, which creates value and solves problems for clients, is another important aspect. Lawyers should create real value, rather than just make it a job that brings money or pays the bills. There should be true devotion.

As for in-house counsel, I have never been one, but I have dealt with many. In my opinion, the first ability a good in-house/general counsel should have is a deep understanding of the strategy of the company. They should serve its business plan, prevent and remove legal risks, and create legal value for their business departments.

Secondly, they need to have the skill to work well with external lawyers. In-house counsel know better about their own industry, internal department structures and corporate culture, while external lawyers mainly provide specialized services. A good in-house counsel can act as a bridge or coordinator between external lawyers and the business departments of the company.

Finally, in-house counsel should have the ability to learn and have a broad vision not confined to their own turf or the relatively narrow field of their company, and keep an open mind and be able to learn newer things in a rapidly developing market.

David Liu
The reform of state-owned banks kicked off in 2004, with Bank of Communications taking the lead in pre-IPO restructuring by bringing in Hong Kong’s HSBC. The team led by Liu advised on the milestone transaction.

CBLJ: When going international, what are the capabilities that Chinese lawyers need to enhance?

David Liu: For Chinese lawyers, an open mind and the ability to learn are very important, which means to learn from international peers, international clients, first-class law firms and international investment banks. After more than 40 years of China’s reform and opening-up, a number of Chinese lawyers have made great progress. However, compared with the first-class lawyers in Europe and the US, I think Chinese lawyers should continue to improve their global vision and polish their skill sets, and challenge themselves to higher standards.

Good professional ethics, or professionalism, is very important. This is not a fancy word or a moralistic stance, but an important trait that runs through the career of lawyers – how to be truly responsible, independent and helpful to your clients. In the case of a conflict of interest, they must maintain professional ethics, confidentiality for their clients and make every effort to safeguard the interests of their clients while abiding by international rules.

China has so far reached more than 100 countries through the Belt and Road Initiative, with a large number of investment and financing, acquisition and infrastructure projects involving hundreds of billions of US dollars a year. However, we are not all familiar with the legal systems, legal cultures, transaction practices and business cultures of more than 100 countries. This is a great challenge.

The Belt and Road Initiative is China’s effort to pay back the benefits that it received following reforms, opening-up and accession to the World Trade Organization. Lawyers also need to truly break their limitations in this process, rather than take a transaction literally, or simply find a local lawyer to get it over with. They need to truly improve themselves, so that they have a broader vision and a better understanding. They should build relationships with their international peers so as to render their services around the world.

[Video]David Liu talks about how first-class lawyers approach questions

CBLJ: What are some of the methods adopted by first-class lawyers?

David Liu: I have a method or set of steps that I call “one to nine”. For any question (such as legal research, or if the client has a question for us), or when a partner assigns a task to a young lawyer, I would want the lawyer (myself included) to be able to do “one, two and three”. What’s “one, two and three”? Taking a cross-border acquisition deal as an example, the lawyer should be able to answer: what problems will be encountered when dealing with administrations of foreign exchange, and what the risks are in terms of the procedures (such as remittance, registration and approval).

For specific questions, “one, two and three” means that the lawyer must have a very clear grasp of what the client is asking, why they ask, how to respond and what the response should include – laws and regulations, policies, judicial practice and feasible practices. At the same time, the analysis should be clearly structured. This is 60% of the work.

They should not stop there at the surface level of clients’ questions, nor be limited to the assignment that the partners ask them to do. Instead, they should try to make sense of the whole transaction, the whole case and why the client is doing the transaction. Going back to the foreign exchange example, this means that they must know what the current foreign exchange policy is, and how it is executed in reality, if the client wants to do an outward remittance. Even so, there is knowledge that they should grasp before everything – what type of payment the client is talking about, and under what circumstances it is remitted.

Now, what does “four, five and six” mean? That is to examine what the broader structure of the entire cross-border transaction is, what the relationship is between the parties, and where the foreign exchange issues lie in the overall transaction. Is it at the beginning, the middle or the end? Does it include the deposit, upfront payments, back-end payments and long-term payments? Does it include bank remittance? Does it include converting renminbi to US dollars?

Once going through these various issues, you get a much clearer picture of the whole deal structure. Likewise, lawyers must see the foreign exchange policy in the context of the whole foreign exchange management system, how this policy is now implemented, how it will be implemented following the current trend, and, under it, what the different requirements are between the capital account and current account – you’ll know the system better, which includes the trading system, the needs of the client beneath the surface needs and the legal system/architecture/rationale. Like now, as China may strengthen regulation, trading will become more difficult regardless of the terms, and in reality window guidance for remittance of the regulators is almost impossible. Therefore, transactions will be delayed. These practical risks of the transaction must be made very clear to the client.

Having done these steps, one is still only a good lawyer, not yet an outstanding one. Based on the first and second layers above, the third layer is: being creative with your advisory. For example, I would probably propose to the client: “Why not add some protective clauses in the agreement?”; “Maybe we can switch to a different front to do the transaction, for example, maybe now the controls in Shanghai are tighter in this field, it is much easier for our colleagues from my firm doing this type of transaction elsewhere (e.g. in Beijing)”, and so on. The above “one to nine” method applies to lawyers in every city, junior or senior.

[Video] Liu talks about the opening-up of China’s financial sector and its future

Liu has high hopes for China’s financial market, at a time when economic uncertainty has reached an all-time high globally. Compared with other sectors, China’s financial market lags behind in its reform and opening-up. Interestingly, the sector has made gradual progress over the past few years with restrictions on foreign investment being lifted in industries ranging from insurance to bond market. What should investors expect from the reforms? How far is Chinese government willing to go in this regard?

CBLJ: What opportunities and challenges do you see for legal services in banking and finance in the post-pandemic era?

David Liu: To start with, there will be a large number of M&A and restructures across industries due to the pandemic. There are about RMB12 trillion (US$1.72 billion) of (private equity, venture capital) investment in China, of which about 50% needs an exit. However, they can no longer exit through IPOs because of the current economic downturn, which only leaves them an M&A exit. This will bring a lot of M&A and financing business to banks. Restructuring and insolvency will also bring numerous opportunities for the disposal of non-performing assets (NPA) and debt restructuring businesses for banks.

Secondly, one great change that the pandemic introduced to the economy is online services. Internet finance and online banking businesses in the post-pandemic era should also immensely increase.

In addition, the pandemic will also have a great impact on globalization and China’s Belt and Road Initiative. China opened up its financial sector to more foreign investment. It is fair to conclude that restrictions in banking, funds, securities and other industries have been lifted, and foreign investors are allowed to be the controlling shareholders (including in the insurance industry). These changes will bring some new opportunities.

david liu
In 1992, foreign investors flocked to Pudong New Area, Shanghai, when the district had just opened its doors to foreign investment. David Liu (fourth from left) was introducing local tax, land and investment policies to American delegates.

CBLJ: As one of China’s earliest lawyers specialized in foreign-related matters, you have witnessed the emergence of China’s financial market from scratch. What in your opinion are the prospects for the sector?

David Liu: China began its reforms and opening-up in 1978, but the development of the Chinese legal profession, especially lawyers specialized in foreign-related matters, actually began in the late 1980s and early 1990s, and it has been almost 30 years since then. In the past 30 years, Chinese lawyers have grown along with China’s reforms and opening-up. I feel most strongly about the tremendous change that China has gone through during the course of integrating into the world and global economy through reforms and opening-up, from the brink of near economic collapse to the world’s second largest economy. Changes in all fields are formidable, especially for business and finance sectors. Financial lawyers/business lawyers gained exceptional growth in this process and participated in the whole journey, especially for financial lawyers. The securities market has developed from scratch; funds, bonds, banks and project financing have also developed rapidly, granting this generation of lawyers great opportunities to test themselves and grow. The whole process of these reforms and opening-up is the best witness for the growth of Chinese financial lawyers and lawyers specialized in foreign-related matters.

Secondly, in the field of high-end services, for lawyers specialized in foreign-related matters and financial lawyers, this was a process for Chinese lawyers to learn from international peers: to learn from them, to cooperate and negotiate with them and do transactions together, which helped Chinese lawyers greatly, broadening their international vision and cultivating their professional capabilities. I think this is a very important process.

Thirdly, Chinese lawyers cooperate with international peers to serve global Fortune 500 clients, and in each field innovation grows out of nothing; many laws in China also came into being. This process has greatly stimulated the innovation by lawyers in China.

CBLJ: What was your goal in writing your book, Breaking the Game?

David Liu’s new book Breaking the Game
David Liu’s new book Breaking the Game

David Liu: At first, because I was the part-time dean of the Lawyers Institute of the East China University of Politics and Law, the institute wanted to invite every part-time lawyer and acclaimed lawyer to write textbooks and I had to take the lead. But in the process, I found that it was not easy to write textbooks, so I simply wrote it as a summary of my professional experience for the past 30 years, reflecting on some important deals, milestones and personal logs, and re-examining the role of lawyers and my understanding of the industry/legal environment at the time. Therefore, the title of the book, Breaking the Game, also represents my revisit.

The pandemic makes me realize that human beings have great limitations when faced with the virus, regardless of countries, international organizations, religions, nationalities and cultures, or the advancement of technology and healthcare. That is to say, human beings have come to a point where we must rediscover the roads we have travelled and our limitations. Artificial intelligence has already put forward this challenge: what is the value of human beings? What is the value of the life of individuals? Similarly, we lawyers also face this problem. Will we be replaced by artificial intelligence? What is the value of the legal profession? Our values are still very limited, and we have yet to find more deep-rooted ones. This quest is for future human beings, and naturally for the entire banking and financial industry.