Outside interest

Beyond Beijing and Shanghai, other Chinese cities are powerful too – and growing faster than the international star venues

In brief

China is not just about Beijing and Shanghai. The country has a number of other cities of significant size and these are growing more quickly than the capital and the financial centre. International and local firms alike are jostling to position themselves for dominance in these economic powerhouses.

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Dalian Xinghai Square

China’s once-a-decade leadership transition has been seen internationally as an event of global significance, equal to the US presidential election. While the challenges facing the country’s new leader are plentiful and uncertainties over its future numerous, there is a common refrain among business leaders and lawyers that with new leadership comes new hope and Beijing will put more focus on economic plans now the changeover has been completed.

Where?

Everyone acknowledges that China is a developing economic powerhouse, but few can name any Chinese cities other than Beijing, Shanghai and Guangzhou.

A long list of lesser-known cities, such as Shenzhen, Tianjin, Chongqing, Chengdu, Dalian, Wuhan and Qingdao are expected to become the main engines driving the country’s next phase of growth.

The most recent economic statistics from China’s government confirm the level of activity in inland cities and provinces. In the first three quarters of 2012 Beijing and Shanghai both reported year-on-year GDP growth of just above 7 per cent. In contrast, Chengdu, Chongqing and Tianjin were among the fastest-growing economic areas, with GDP growth near 14 per cent.

Lower costs is not the only factor drawing foreign investors to second- and third-tier cities.

“Many of our clients are interested in investing in China’s second-and third-tier cities, especially companies from the retail, logistics and consumer-related industries,” says Eversheds China head Sharon Shi. “Lower labour cost is not the only driver for this. These cities offer vast untapped markets with less competition.”

For international firms, these cities have become an important source of outbound clients.

“There are a large number of established provincial-level state-owned companies and private enterprises based outside Beijing and Shanghai, and they too have a need to become more international and invest overseas,” adds Shi.

Variety pack

There are 22 provinces, four municipalities, five autonomous regions and 56 ethnic groups in mainland China. Although it has a unified legal and regulatory framework, a one-size-fits-all approach does not work. As well as laws and regulations enacted by the State Council there are more than 9,000 regulations issued by local administrative and legislative bodies.

“Clients regularly ask us for advice on investing in China, but we can only give a clear answer when we know the specific sector and location they want to invest in,” says Baker & McKenzie Shanghai partner Marco Marazzi. “Doing business in China can vary significantly from place to place. In different regions the levels of development can differ widely; people will have different mindsets and different levels of incomes, while local government officials interact differently with the foreign parties.

“More importantly, there are local regulations and policies governing investment and corporate activity in certain industries and regions. They’re important and must be taken into account when making business decisions.”

Local support

Local firms are the first port of call for the in-house departments of Chinese and multinational companies doing business in China. This has led to some foreign lawyers joining Chinese law firms in a bid to gain wider coverage and stronger local legal support.

Jun He Hong Kong partner Stephen Wozencroft is a case in point. He joined the Chinese firm in 2010 from Dewey & LeBoeuf.

“One of the big problems for many international firms is that they have a small Hong Kong and China presence, and no access to a China practice,” Wozencroft relates. “It’s difficult for them to present an attractive proposition to foreign clients who need legal services in China and to compete with magic circle firms for cross-border deals.”

A number of national firms have pushed their practice standards up dramatically in the past five to 10 years, and foreign clients are now more willing to go to Chinese firms directly.

“My take is that many international firms are well-placed to do high-level, first-time direct investment work,” Wozencroft adds. “But, due to their much higher cost base and practice restrictions in China they don’t have the resources on the ground or the local knowledge to do the nitty-gritty day-to-day work that Chinese firms can.”

Home-grown firms that originated in second-tier cities are also having a good run. Chongqing-based Zhonghao is a good example. Having expanded rapidly since its establishment in 1997, the firm entered into an alliance with Hong Kong’s ONC Lawyers in October.

“We’ve been approached by several international firms for an alliance or merger, but that’s not what we want to achieve in the longer term,” says ONC managing partner Sherman Yan. “We want to form an association with a PRC firm because we believe our future lies in the greater China region and it’s more logical to form an alliance with a like-minded PRC firm.”

Yan adds: “There will be a high degree of co-operation under our alliance. It’s not simply about client referrals.”

Most international firms have also started to work more closely with local Chinese outfits, instructing domestic firms to provide expert advice and not simply rubber-stamping legal opinions. Closer collaboration between international firms and local players is set to be a feature of the Chinese market. As the economic focus shifts to the second-tier cities, the power of the local law firms will increase.

Key figures: China

GDP (2011)

$7.32tr

Inflation (Oct 2012)

1.7%

Population (2011)

1.34bn

Life expectancy at birth

73

Unemployment rate (2012)

4.1%

Source: World Bank