The growth of international law firms in Hong Kong has been astounding – in the last five years their number has almost doubled.
This increase is mainly represented by US firms, which followed their major US investment banking clients to Hong Kong between 1990 and 1992, only to follow them back again in 1993 and 1994. But the local Hong Kong-based law firms have also experienced unprecedented rates of growth, and profitability has soared on the back of the Hong Kong property boom.
For many firms, growth has been fuelled by impressive economic results in Hong Kong. The property market, the stock market and the retail sector have all undergone tremendous expansion.
To some extent, this high level of business activity has temporarily peaked. But it is believed that, as 1997 approaches, property, and, therefore, as is usually the case in Hong Kong, the rest of the economy, will begin performing strongly again.
More importantly for commercial law firms, growth has been allied to increasingly rigorous regulatory requirements and complex commercial transactions. Hong Kong is a highly regulated business environment using increasingly sophisticated techniques, such as securitisation and derivatives instruments, which demand a high level of legal input.
The ending of scale fees for conveyancing work will present significant problems for those companies – mainly local – with significant exposure to the property market. For other Hong Kong-based companies, particularly those with international commercial concerns, the increasing complexity of the business and financial markets, the sophistication of the major players in those markets, and the globalisation of the capital markets will be accompanied by increasing dependence on sophisticated commercial legal advice.
The impressive opportunities offered by Hong Kong in the past are likely to be matched by even greater treasures in the future. With only 12 months to go until the end of UK rule and the subsequent re-integration of the territory into mainland China as a Special Administrative Region, the importance of Hong Kong as the gateway to China becomes all the more obvious.
Foreign investment in China continues to increase rapidly. The recent log jam in the financing of China's infrastructure projects, caused by a rush to invest in the country, has finally been broken by the new five-year plan and there are no indications that investment will decline in the future.
Furthermore, China's rigid regulatory regime means that significant investment in the country's business environment is sure to be lawyer-intensive. The ability of mainland Chinese law firms to deal properly with such volumes of economic activity will remain limited for some time to come, leaving the door open for Hong Kong law firms to fill the legal service gap.
At the same time, economic growth rates in South East Asia and the Association of South East Asian Nations (Asean) have, if anything, been even more impressive. The needs of the region's infrastructure are vast. Cross-border privatisation, for example in Indonesia and the Philippines, the projects of UK conglomerate BOT in Indonesia, Thailand, Malaysia and Vietnam, the developing stock exchanges in Thailand and Indonesia and the high level of inward investment in manufacturing and infrastructure across the region place substantial demands on legal firms. Those service providers able to deliver the levels of legal and transactional advice and support needed by the financial institutions, investment advisers and corporates involved in such business activity are sure to reap substantial rewards.
Hong Kong is undoubtedly the leading regional service centre for such activity. There is a clear trend towards the territory growing as a business and financial centre for North East Asia and, particularly, China, with Singapore assuming a similar role for South East Asia and Asean. However, the depth and extent of expertise in the financial, accounting and legal markets in Hong Kong continues to be greater than in Singapore, as is the willingness of the authorities in Hong Kong to respond to the needs of the international business community.
The increasing China-centric focus of Hong Kong's economic activity will reduce South East Asian opportunities for law firms in Hong Kong. But, at the same time, Hong Kong will become a part of the largest potential market for legal services in the world, namely China.