Mainland China may have thrown open its doors to investment, but operating there still poses serious legal headaches for companies. While the legal system has been modernised and made more accessible, the problems involved may still deter some prospective investors. 'I think it's fair to say [China's legal system] is another layer of difficulty facing companies making strategic decisions on whether to invest or increase their investment,' Jonathan Moult, head of Asia Banking and Finance at international law practice Herbert Smith, said. 'It's a real operational problem. Having said that, if you're talking about a major international company that was going to invest, I think it's a problem that they would factor in from the outset.' Companies operating within the special economic zones were no better off, he said. While there were tax breaks and other economic benefits designed to attract international investment, laws were the same as other regions of China - although regulations regarding the establishment of businesses were more flexible and obtaining the necessary approvals more streamlined. In insolvency cases, a common problem facing banks and creditors involved companies with manufacturing operations on the mainland which operated out of Hong Kong. 'It's interesting because often you have Hong Kong-incorporated entities who have a substantial presence in Hong Kong and who have raised their capital and borrowing here, but whose main business is conducted in the mainland,' Mr Moult said. That meant it was often difficult for banks and other creditors to take security over a business to which they had lent capital because the valuable sections of the company, such as manufacturing facilities, were situated on the mainland. He said investors dealing with mainland China generally under stood the difficulties of obtaining what would be considered internationally-standard security. The mainland's legal framework was, however, making steady progress towards internationally acceptable standards. Improvements to the legal system were being made, Mr Moult said, but 'it's a different system and, for example, land use rights in China operate differently from property laws in Hong Kong or other international jurisdictions.' There were more regulatory hurdles to be crossed: for example, registering mortgages in mainland China meant obtaining (local) government approval. International law firms wishing to engage in legal business in the mainland had to obtain the requisite licence from the Chinese Ministry of Justice. International law firms were restricted to one licence in respect of one city in China and this meant, in practice, they had to choose between establishing in either Beijing or Shanghai (al though they could select any other place to set up business). Once such firms obtained a licence, it did not entitle them to give legal opinions on PRC law. This was still strictly the reserve of local PRC law firms, so international firms still relied on such firms to issue requisite PRC legal opinions. Foreign law firms cannot employ local PRC lawyers to issue opinions in the name of the foreign law firm. 'As a firm, we're positive about expanding and the work we do in respect of, and in, China. That's why, subject to our licence application being approved by the Ministry of Justice, we're looking forward to opening an office in the mainland,' he said. Herbert Smith opened its first Asian office in Hong Kong in 1982 and also operates offices in Singapore and Bangkok. It has a co-operative arrangement with a law firm in Jakarta, to which Herbert Smith staff are seconded.