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Resilience is a word that often crops up when international lawyers discuss Hong Kong’s future as an international financial centre.
The imposition of the national security law by Beijing is testing this attribute.
The law, which was imposed on the Hong Kong Special Administrative Region by Beijing on 30 June, brought the ongoing pro-democracy protests to an abrupt halt thanks to the sweeping powers it grants China’s national security agency. It also drew fierce criticism from many of the world’s most powerful democracies and the threat of sanctions from the US.
The Hong Kong Bar Association’s response, on the day after the law was introduced, was measured in its tone, but devastating in its critique of legislation which, it said, lacked ‘basic safeguards as to legal certainty and fair treatment’.
“Hong Kong has flourished on the basis that it recognises the rule of law, a concept that doesn’t exist on the mainland,” says Tony Williams, principal of Jomati consultants and former managing partner of Clifford Chance. “There is also a deeply concerning extra territorial aspect to this. That being said, there has always been a distinction between business and politics in Hong Kong. The international law firms have been deafening by their silence – but that is understandable and inevitable.”
This year two international law firms — Orrick and Osborne Clarke – have pulled out of the city while Stephenson Harwood has refocused its practice and Vinson & Elkins is reviewing its small presence.
Arrivals and departures
But departures are not new. International law firms have always come and gone as their strategies and fortunes have changed — making money in such an expensive and competitive market has never been easy.
“Our strategy is to lose less money than our rivals,” one US law firm managing partner is said to have once quipped.
Williams says: “People have written off Hong Kong several times over the years and it has proved very resilient and business friendly. And international law firms are not inundated with alternative bases although clearly Singapore is one option. So I don’t see mass departures. Law firms are very pragmatic so it will depend on business activity.”
When Milbank hired capital markets partner Liang Tao from Allen & Overy last month it described the hire as ‘testament’ to its commitment to the Hong Kong and Greater China markets.
HFW Hong Kong partner Noel Campbell, who is co-head of fraud and insolvency, says: "We remain committed to the Hong Kong and China markets and the clients we advise across this region. Our Hong Kong office opened more than 40 years ago, and our Shanghai office more than 20 years. During this time, we have witnessed much change, and our commitment has endured. We believe that Hong Kong will continue to prosper as a global hub for finance and business, in a safe and stable operating environment."
Hong Kong veteran Kevin Bowers, who recently founded the boutique Bowers.law, observes: “I’d expect a decline in international M&A at least in the short term and that will affect the international firms with a high cost base in expensive offices. So they might contract slightly, but otherwise I think it will be steady as she goes. Longer term it is very hard to predict, but Hong Kong is very resilient.”
He is, however, concerned that international companies may struggle to persuade people to move to Hong Kong and there may also be a brain drain out of Hong Kong.
“You might also see companies moving their headquarters elsewhere,” he says. “My firm has only been operating for a very short time, and we have already advised on two management buyouts with local teams spinning out of international companies. So that is saying something.”
Depth of feeling
The depth of feeling within sections of Hong Kong’s legal community against Beijing’s clampdown surfaced in June when a group of lawyers standing together on a ticket to ‘fearlessly’ defend the rule of law secured four out of five available seats against establishment candidates in the Law Society of Hong Kong’s council elections.
Writing shortly before the security law was introduced, Dennis Kwok, who represents the legal profession on Hong Kong legislative council and is a founder member of the pro-democracy Civic Party, said he feared he would not be able to serve another term.
‘Whatever happens going forward,’ he added. ‘I am sure the legal profession will continue to stand united together on matters of principle and the rule of law.’
Hong Kong’s courts along with its world-class regulators and tradition of freedom of speech have underpinned its status as a thriving bridge between China and the rest of the world, making it one of the world’s leading financial and legal hubs.
And its legal credentials extend beyond transactional work to litigation and arbitration where Singapore is vying with it to be Asia’s leading centre for international disputes.
Much will depend on US-China relations, with the Financial Times reporting last week that US and European banks have been conducting ‘emergency audits’ of their clients to identify officials who may face sanctions imposed by the US in response to the introduction of the new law.
‘The most likely scenario is that Hong Kong’s institutions face gradual decay and that it drifts away from being a globalised financial centre towards one that is more mainland Chinese,’ argues The Economist. ‘China would be left with more control over a less effective capital market, raising the cost of capital for its firms.’
But the magazine says local officials and executives also speak of a nuclear scenario in which Hong Kong’s role as a financial hub is destabilised.
“A lot depends on how heavy-handed China is going forward,” suggests Williams. “Things will be manageable so long as China lets things settle down. But it could unravel very quickly.”