With bulging workloads and a dearth of suitable lawyers, why are law firms stretching themselves to have a presence in Beijing, Shanghai and Hong Kong? Dominic Carman speaks to China’s top lawyers about the three-office debate
“We opened our third China office in Shanghai this year, and I had to spend a lot of time internally explaining why that was necessary,” says Matthew Bersani, Shearman & Sterling’s Asia managing partner. “The simple explanation is that the bankers are in Hong Kong, the state-owned enterprises (SOEs) are in Beijing and the private sector is in Shanghai. It is an unfortunate reality of the China market that it is dispersed like that. If you are missing one of those offices, you are missing a big piece of China.”
Bersani’s assessment is echoed by many of his competitors, both old China hands such as Baker & McKenzie and White & Case, and the more recent US arrivals in Beijing and Shanghai.
But the latest scramble for China licences is not restricted to ambitious Wall Street lawyers. As the UK magic circle firms aggressively expand their longstanding People’s Republic of China (PRC) operations, even Slaughter and May — a big corporate player in Hong Kong since 1974 — is, according to local senior partner Richard Thornhill, “actively looking” at both cities. Meanwhile, Jane Newman at Simmons & Simmons confirms the firm “will have a Beijing presence next year” to add to its Hong Kong and Shanghai offices.
The key question is, perhaps, not why China, but why now? In simple terms, to use a well-worn phrase: “It’s the economy, stupid.” After delivering annual gross domestic product (GDP) growth of 9%-10% for the past 20 years, China’s economy is predicted to surpass Germany’s by the end of 2008, and to overtake Japan’s by 2020.
Continuing this trajectory, China would finally displace the US by 2040 as the world’s largest economy.
China is already the world’s largest recipient of foreign direct investment. New infrastructure projects exceed $150bn (£75bn) per annum, while China’s total trade in goods will surpass $2.1trn (£1trn) in 2007 — up 20% on last year. Corporate transactions with a Chinese target company have trebled in value and volume over the past five years — as, on a smaller scale, have outbound investments by Chinese companies acquiring overseas. In addition to the big-ticket initial public offerings (IPOs) of Chinese banks, private equity is developing as strongly in China as elsewhere.
Zili Shao, Linklaters’ managing partner for Greater China, considered by investment bankers to be “the lawyer with the greatest influence in the PRC”, confirms that “in the last five years, China has become a mainstream global market”.
Slaughters’ Thornhill adds: “Chinese companies are becoming serious global players. The regulatory system and quality of practitioners is improving and, in the next five years, we will see far more Chinese companies acquiring substantial businesses overseas.”
To put the legal market in context, no foreign law firms existed in China 30 years ago when only a handful of domestic state-owned firms operated. Today, nearly 200 foreign (including Hong Kong) law firms have established offices there and China has 120,000 practising lawyers in 10,000 law firms, mostly independent partnerships. Only 10 of these have more than 100 lawyers. The total number of foreign lawyers based in Hong Kong and the PRC exceeds 3,500 — a figure which some predict will double within five years.
Meanwhile, the consequences of China’s World Trade Organisation (WTO) accession continue to stimulate the transition from communism to capitalism: several restrictions on foreign law firms have been lifted as China gradually meets its WTO commitments.
Critically, since 2003, foreign law firms that have been present in China for three years can open more than one office, provoking a further flood of licence applications over the last 12 months.
The China business model for international law firms varies. Many US firms have opened up for specialist reasons — to follow particular clients or to concentrate on niche practice areas. Most start off in Hong Kong and then branch out, although a good number remain with a single Hong Kong office. Others such as LeBoeuf Lamb Greene & MacRae and Wilmer Cutler Pickering Hale and Dorr operate exclusively from Beijing.
But the increasing trend is for a multiple China presence. French giant Gide Loyrette Nouel added to its Beijing base by opening in Shanghai three years ago and in Hong Kong last year. Partner Warren Hua explains: “We are determined to develop a banking and finance practice in the Chinese market. To do that, we need to be in Hong Kong. Many clients divide their activities into north, middle and south China sections — their regional activities are therefore managed best in Beijing, Shanghai and Hong Kong. Our three China offices allow us to be closer to our clients.”
Giles White, Linklaters Asia managing partner, provides a strategic overview of its triple China presence: “For us, developing relationships with major Chinese companies is crucial to our long-term strategy so that major Chinese organisations think of us first when they need international legal advice.”
White’s colleague Shao predicts that “more Chinese companies will list in Shanghai rather than Hong Kong; there will be gradual development of the debt and derivatives markets”.
Another of the most successful China practices, Freshfields Bruckhaus Deringer, has significant PRC operations with nearly 200 lawyers in Hong Kong, Beijing and Shanghai. The firm’s China managing partner, IPO specialist Teresa Ko explains: “’Three offices may give you three sets of overheads, but it also gives you three different sources of income because you really tap into different types of work on the ground. In Hong Kong, you have listed companies that are locally focused; in Shanghai, there are the multinationals; and in Beijing, there are the SOEs. You broaden your reach by being able to tap into the local connections.”
Success can bring its own problems. Last year, Freshfields lost China practice head Michael Moser to O’Melveny & Myers while his predecessor, Thomas Jones, moved to Allen & Overy. This year, the replacement China practice head at Freshfields, Doug Markel, left to head up Simpson Thacher & Bartlett’s newly-opened Beijing arm.
Although Simpson Thacher has been in Hong Kong since 1993, Markel explains that the PRC move — like other Wall Street law firms that have recently arrived in Beijing, such as Milbank Tweed Hadley & McCloy and Davis
Polk & Wardwell — is entirely client driven: “For us it is about following our clients. As with most of the leading firms, China is a very attractive place for clients,” he says.
“Quite simply, there is too much work and not enough lawyers to serve the need. Our attention is on two key areas: capital markets and China-related M&A — inbound and increasingly outbound investment. Our objective is to be very focused so size is not critical.”
It is a similar message at Weil Gotshal & Manges, where Steve Xiang, a former Clifford Chance (CC) partner, has overseen the opening of three China offices: Shanghai in 2004 and Beijing and Hong Kong this year. “China transactions are growing in scale and in number,” he says. “As multinational corporations, banks and investment funds move their operations to China, it is increasingly hard to justify that you do not have your resources close to your client.” Weil Gotshal’s current China headcount of 30 lawyers will, he predicts, rise to 50 by the year end.
Linklaters’ White welcomes other “quality US law firms alongside us”.
“In a market that is developing it is good to share ideas to build things together,” he explains. “Integration in terms of products and translation of expertise across our three China offices is fundamental — one difference in quality of firms is whether they are genuinely able to implement that.”
Like most practices, the performance of Linklaters’ China offices is aggregated due to the overlap in strategy, personnel and operations. For many firms, the much lower tax rates in Hong Kong also play a part. Ko confirms that Freshfields’ China practice operates similarly “on a completely integrated basis”. At Weil Gotshal, Xiang is keen to point out: “Some UK and US firms operate fairly independently with different China offices fighting to get a piece of the action.”
Competition for legal talent in China is certainly immense. A recent Hildebrandt survey highlighted the shortage of lawyers of the calibre required by international firms with a consequent upward pressure on salaries. Simpson Thacher’s Markel agrees that its approach will be to pay the best to get the best. “Good people have options,” he says. “Being a lateral hire myself, I know that from my own experience at Freshfields. The recruitment problem is most acute in China — making more lateral hires will be inevitable.”
Paul Chow, a former Slaughters partner now based in Beijing, is one example of the high level moves — he was recently recruited by Linklaters. “Lateral hires are useful in very limited circumstances in China,” concedes Linklaters’ Shao.
One interesting route has been that of Paul Hastings Janofsky & Walker, which acquired local Hong Kong firm, Koo & Partners, in 2002. China managing partner Neil Torpey explains: “That gave us a tremendous start.” Within a year, the firm had opened full offices in Beijing and Shanghai.
“We now have 140 legal professionals on the ground,” Torpey adds, “and if we could find another 30 good people, we would certainly keep them all busy.”
Torpey offers an interesting glimpse into the future: “China is going to become like the US,” he suggests, “with quite a few major business centres where global firms could have several offices.” He predicts Guangzhou and Chongqing as likely candidates.
Simmons’ Newman agrees. “What happens in China is a long gestation period and then a period of vast change,” she says. “Yes, law firms may one day be in a huge city like Chongqing, also in Xian, and maybe Chengdu given the Government’s ‘Go West’ policy, encouraging investment in the interior.”
At Freshfields, Ko believes the consensus view — a shift in gravity where Shanghai surpasses Hong Kong — may in time prove to be correct. “China needs to maximise the opportunities of both places,” she argues. “All eyes are on the investment banks — whether they are granted securities brokerages which may see a quicker transfer of business and personnel to Shanghai or Beijing.”
But if you want to have a more dramatic vision of where the practice of law in China is going, then Jim Baird, CC’s managing partner in Hong Kong, is the man.
“More and more specialists are being based in mainland China,” Baird says, “which will inevitably lead to a contraction in our Hong Kong operation. For serious work done in an IPO you have to be in Beijing. To find new clients — banks, petrochemical companies and insurance companies — you have to be in Beijing. But the main emphasis will be in Shanghai — our office there will be the largest and will expand significantly, offering a broad service. In a few years’ time, my prediction is that we will open up other offices in mainland China.”
Chongqing and Wuhan are his favoured destinations. Baird also predicts that CC numbers will increase within a decade from the current 190 to more than 500 China lawyers. “We will have more than 100 lawyers in both Beijing and Shanghai,” he says, anticipating as “inevitable” the ability to practise PRC law. China already contributes two-thirds of the firm’s Asian income.
“Many clients expect and want us to be a one-stop shop,” he explains, adding that a merger or an association with a big PRC firm is a clear objective for CC. “I am fed up of trying to predict when international firms can do this — maybe another five years — but we will be very quick to move once it is allowed.”
One practice that has already colonised
China is King & Wood, the largest PRC firm with nearly 600 lawyers, and offices in
Shanghai, Shenzhen,
Chengdu,
Guangzhou, as well as a
Beijing headquarters. After forging a recent alliance in
Tokyo and opening offices in Hong Kong and
Palo Alto, the firm plans to open for business in
New York. King & Wood’s chairman, Wang Junfeng, explains: “We want to reach more
US clients who want to invest in
China.” There should be no shortage of takers.
