In the last 12 months, Hong Kong has been absorbed into China, the stock market has slumped and the region has slipped into recession. Linda Tsang analyses how the legal market is coping. Linda Tsang is a freelance journalist.
With Hong Kong's Hang Seng Index crashing to half its value one year after the handover, lawyers in Hong Kong are seeing the volatility of the markets in the Far East, rather than any political upheaval, as the driving force in the legal marketplace.
There was a mood of optimism in the run-up to the handover, on the basis that it was unlikely to affect how the former colony conducted business. Any apprehension over how the one country, two systems principle would work was overshadowed by concerns over the much wider implications of the economic crisis – spanning Japan and Indonesia, with China and Hong Kong somewhere in the middle of it all.
Economic commentators have suggested that a devaluation of the yuan would have harmed China and been a catalyst for more financial turmoil. Although it would have boosted exports from China, it might also have knocked Hong Kong from its 15 year-old peg to the US dollar, which would, in turn, have sparked off another round of currency devaluations in the region.
With the mainland becoming a front-rank player in world economics and finance, it has adapted itself to playing a leading role in the region, which means that Hong Kong is also repositioning itself within the one country, two systems regime to play a supporting role.
The fallout from the financial fracas has received mainly positive reactions from the legal marketplace – or at least those involved in insolvency and restructuring. In common with most lawyers in Hong Kong, David Mullarkey, managing partner of the Hong Kong office of Linklaters, considers that “there is no real story vis A vis the handover. The volatility of the markets has had a huge impact on business and generally”.
At Linklaters, there has been a huge reduction in securities work and in some of the main areas of practice. This has caused a significant slowdown because of the loss of certainty and the fall in the number of investments both on infrastructure projects and joint ventures.
“The flipside is that there are a number of buying opportunities because prices have fallen. This is certainly the case with the companies which are in trouble but not doomed. There is also inevitably a fair amount of restructuring work, but the situations are different in the different markets of Indonesia, Malaysia and Japan,” says Mullarkey.
But it is not just a matter of judicious juggling of people to meet the demands. A number of firms have already been beefing up on the sectors that have been expanding. Cameron McKenna sent out insurance partner David Kidd and insolvency partner Tim Ingham with a view to building up that expertise.
Clifford Chance has been adapting and expanding. As regional managing partner John Woodhall says: “The tenor of the work has changed. We are still incredibly busy, but doing restructuring, insolvency and default work.”
Other firms such as Deacons Graham & James have benefited from the economic downturn. As managing partner Mark Roberts says: “It is very much business as usual. There were more fireworks in October after the handover when the Hang Seng Index dropped.”
For other firms, however, the story is different. As one partner says: “It is an open secret that local conveyancing firms are suffering – and there are redundancies – due to the abolition of the monopoly of scale fees and the huge drop in property prices.”
Roberts adds: “Having been hit by that double whammy, a number of conveyancing lawyers, who have already made a fortune in the 1980s and the run-up to the handover, have more than enough money to retire on when they reach their late 40s and early 50s.”
The perception in the business community is that the expatriate firms are still seen as the advisers to go to. But as Cameron McKenna partner Henry Sherman comments: “There will be areas where those firms may become less credible if they have not got the Mandarin [speaking] capability.”
For the US firms, the view is the same. White & Case partner Ned Neaher says that the firm is looking to diversify to become a local firm and offer capabilities for both UK and Hong Kong law as well as US law advice. “There is still a lot of activity in restructuring and securitisations rather than new projects. The firm has not reduced its numbers. This is the sort of market where firms are selectively increasing their numbers.”
But in the areas of banking and capital markets, most firms have seen a drop in business – which does not necessarily mean reductions in the firms. As Linklaters' Mullarkey says: “Building teams is enormously difficult. If you get the right sort of people, you don't want to let them go. No one saw the severity of this economic downturn coming, knows how long it will last or what is on the other side, but the lawyers will be riding it out.”
Generally, given the economic climate, lawyers who have come to the end of their stints in Hong Kong and are returning to head offices in the UK and the US are not being replaced. As Freshfields partner Nick Johnston comments: “No one wants to downsize because it takes a long time to build up that expertise again. All the international firms have the basic philosophy that in ten years' time, they should all be bi- and tri-lingual.”
But those firms also still have a slightly privileged position post-handover – the Law Society of Hong Kong issued a memorandum stating that firms in Hong Kong have to get special clearance to share profits with foreign partners. The only surprise appears to be that this did not happen sooner.
Hong Kong does not set the trends. It plays more of a reactive role in the region because of its interests in the other markets, including badly-hit areas like Indonesia and Thailand. In the meantime, the view is that parts of the region are a bargain basement for M&As and that the restructuring will provide more than enough work to compensate for the drying up of projects in India and Pakistan following the sanctions imposed due to the nuclear tests.
As Linklaters' Mullarkey comments: “It is a matter of battening down the hatches… It has been a while since Hong Kong has seen a downturn, and it is a long way removed from the optimism of 1 July 1997. In the event, the predictions were correct on the political side but off on the severity of the economic recession. It is likely that Hong Kong will be one of the first to recover — it has always been a vibrant financial centre and able to adapt – there will be jobs and deals, but it is probable that the situation will get worse in the short term before you can start talking about recovery.”
But it is not all doom and gloom – the new airport at Chek Lap Kok opens this week and Chief Executive Tung Chee-Hwa has announced a stimulus package to kick-start the economy. And as Freshfields' Johnston says: “One of the features is that a lot of investors and their funds are looking for a home in Asia, and are trying to get into China – which is good for Hong Kong.”