Introduction
Hong Kong is both a gateway into China, but also as a superb conduit for Chinese outbound foreign investment. As the China Daily reported recently, echoing a sentiment expressed earlier this year by Deacons Executive Partner Jeremy Lam in an interview in BusinessWeek. During the first half of 2012, foreign investment by China climbed more strongly than in 2011. And according to a newly released report authored by Derek Scissors of the Heritage Foundation, the U.S. led all countries in receiving new Chinese investment in the first half of 2012 (after receiving little in 2011). Indonesia was just ahead of several others for second, well behind the U.S.
Importantly, as the Heritage Study points out, Hong Kong acts as a transhipment point for almost two-thirds of those investments. The attraction of China’s domestic market for foreign companies is well known. Despite any slowdown, the Chinese economy may experience in the short to medium term, foreign direct investment by China as well as foreign corporate interest in the China market – appears likely to continue to expand significantly. With this in mind, there is an increased focus on the Hong Kong legal market by overseas law firms, as well as domestic incumbent law firms seeking to continue to capitalize on their long-term local knowledge and experience.
Hong Kong is becoming more central to Beijing’s plans
“Beijing’s top planning agency is drafting a raft of measures to encourage mainland firms to use Hong Kong as a springboard for offshore investment”, as Toh Han Shih reported in the South China Morning Post last week from the China Overseas Investment Summit.
Indeed, as Leung Chun-Ying, Hong Kong Chief Executive, stated when the China Overseas Investment Summit began: “Figures released by the Ministry of Commerce showed direct investment from Hong Kong in the mainland totalled 37.3 billion dollars in the first half of 2012, making up 63% of its total investment. Meanwhile, Hong Kong has become the gateway for mainland enterprises to go global. 65% of mainland investment is destined or executed through Hong Kong.”
Which law firms are best poised to secure new business in this environment?
Since 2010 Hong Kong has seen at least 14 U.S. law firms convert their Hong Kong representative offices into domestic law practices qualified to advise to offer advice on local law. These include Milbank, Tweed, Hadley & McCoy LLP and Davis Polk & Wardwell LLP. As Legalweek recently reported, Deacons is Hong Kong’s leading independent law firm. Founded in 1851, Deacons is Hong Kong’s oldest and largest independent, commercial law firm with three representative offices in Mainland China.
In my original blog post about Hong Kong as a China Gateway, I cited Jeremy Lam, Deacons Executive Partner, who, in an interview in BusinessWeek indicated that Deacons plans to remain independent as it prepares for the expansion of its three offices in China when rules are changed to let overseas firms advise on local laws.
I had an opportunity to speak with Jeremy Lam last week, where he expanded upon his views of Hong Kong as a gateway to China, Deacon’s role in that marketplace, and what plans Deacons has for the use of social media in the future. Here are his thoughts:
On the mainland China (PRC) market for foreign law firms
Lam stated that many people viewed the merger between Mallesons and King and Wood [KWM] with much interest. However, the arrangement does not permit Mallesons to practice local PRC law, which the former King and Wood partnership continues to undertake.
I don’t see the regulations in China in the short to medium term changing to permit foreign firms to practice PRC law. PRC regulatory authorities recognize a value to be gained by local law firms having affiliations with overseas firms. Initiators are underway to facilitate joint ventures between PRC and Hong Kong firms, but they are still a work-in-progress – a pilot program with a limited remit.
On Deacons plans for China
[Deacons has “3 offices in PRC, the growth will be measured and strategic, having regard to the current regulatory restrictions or practising PRC law. Deacons are positioning themselves along current lines. A focused, on-the-ground presence in the PRC, leveraging off its large Hong Kong resource base” stated Lam.
On capturing China-related legal work
Lam cited two objectives: “Capturing inbound work, which has slowed and capturing outbound work. On outbound work, there is a second Hong Kong China Overseas Investment Summit occurring right now. Beijing is looking to ensure Hong Kong will remain a gateway to China – and at ways to encourage the additional flow through Hong Kong.
There is a lot of outbound work going to regions rich in resources and commodities. Australia, and Latin America, of which a significant amount is going through Hong Kong structures. Owned by the PRC but flows through Hong Kong. Hong Kong remains a gateway at the moment, particularly on Renminbi-denominated transactions. Hong Kong has been used to test the internationalization of the Renminbi.”
On Asian legal market liberalization
I asked Mr Lam about whether the recent liberalization of the Korean, Singapore and Malaysian legal markets posed a threat to Hong Kong as a focal point for capital markets legal work in Asia. Not a current threat as it relates to Hong Kong as a gateway into China ” stated Lam. However historically Singapore has been much more successful at positioning itself for servicing investment in India, Indonesia and Malaysia and more recently Cambodia and the surrounding regions.
Lots of business in Indonesia is done via Singapore. While Singapore is very innovative, and without doubt a comparable alternative Asian hub, with a stable and well-serviced banking and legal structure. I believe the PRC and Hong Kong will increase cooperation to solidify Hong Kong’s position as a conduit for China. Liberalization in Singapore and Korea are seeing domestic firms there having to reevaluate their position”, he said.
On foreign law firms in Hong Kong
Lam cited the continuing stream of large law firm mergers and the pursuit of international growth. “I question the economics of some of these mergers”, Lam stated. “A number of US firms have made significant investments in expanding their Hong Kong practices to capture capital markets work. However, deal flow has slowed and remains volatile.
It will be interesting to see how these firms evolve. Hong Kong remains vulnerable to economic shocks outside the region. Hong Kong is now more tied to China, and capital markets have slowed. Historically it happens often and rebounds. So much uncertainty makes strategic planning challenging. Deacons is pursuing a cautious and prudent approach”.
On Social Media
Deacons are “traditional, old-fashioned” stated Lam. We have not embraced [social media] as the US and international firms have. We are looking at it. It’s difficult to control, police and monitor. It’s something we won’t rush into. Once in, you can’t withdraw.”
“Deacons focuses on growing work from its existing client base, giving media interviews, speaking at conferences, and using traditional media. Social media has a place but one must look at and understand it before one jumps in. At the moment it’s not a tool we use to generate new business.
We may in due course with appropriate controls. We encourage people internally to grow businesses and give them more traditional tools to do so. US firms are ahead on these initiatives. Deacons will look, learn, and when ready, adapt and move forward. We will also listen to our client’s views.”
Conclusion
Chinese foreign direct investment is expanding and Hong Kong is the primary conduit for that investment. The market has attracted a large number of overseas law firms with the goal of capturing. New business around both inbound and outbound China investment. Independent law firms like Deacons, the oldest law firm in Hong Kong, and new market entrants among the Am Law 100 remain among them. Those at the centre of this competition for business related to the growth of China.
With Hong Kong remaining a key conduit through which China’s outbound work continues to flow, it will be interesting to see which law firms succeed in what remains an extremely competitive environment.
China placing increasing importance on a Hong Kong presence as important for law firms. If you wish to secure outbound work, time will tell as to which law firms in Hong Kong are most competitive for securing this business. But one thing seems likely: With Beijing’s emphasis on Hong Kong as central to its outbound investment activities. Law firms in Hong Kong will be at the epicentre of legal work related to the second-largest economy in the world for a very long time.
