Guangdong’s legal market is robust, diverse and sitting pretty for future growth, but there remain crucial challenges, writes Winny Zhang
Guangdong’s law firms are feeling the strain of success. More lawyers have been hired as demand for legal services remains robust, buoyed by record economic output even as the risk of a global economic slowdown has increased. Added to that is the prospect of new growth opportunities, including emerging green industries and the growing focus on corporate governance in the state sector.
But some say they’re finding it harder to get noticed in their home market because bigger, better-known brands have set up business and they’re outgunned in the battle for the richest veins of legal advice. The stakes are high as China’s biggest legal market continues to be a focal point for industrial and regulatory innovation, just as it was when China began its unprecedented march from poverty to become the world’s second-biggest economy.
Home to modern-day China’s first law firm, provincial bar association and legal partnership, Guangdong played a pioneering role in the creation of a legal system from the disarray of the Cultural Revolution. As the country embarked on reforms and opened up to foreign companies and investors, it urgently needed trained lawyers able to service the needs of the new and more complex markets-oriented economy.
Strategically located on China’s southern coast and with the colonial – at the time – entrepôts of Hong Kong and Macau as neighbours, Guangdong prospered as the bridge connecting overseas companies and capital to the mainland’s vast pool of workers. Today, the traffic is more two-way: Chinese companies going global; overseas firms and investors eyeing the growing wealth of China’s consumers and its world class companies as much as its unrivalled manufacturing and logistics resources.
After more than four decades of mostly blistering expansion, Guangdong is China’s wealthiest province, as well as its top exporter. The provincial capital of Guangzhou and the tech hub of Shenzhen, together account for about 5% of national GDP, while the province’s economic output in the first nine months of 2022 passed RMB900 billion (USD129 billion) for the first time.
Guangdong’s solid economy and diverse mix of businesses from phones and communications equipment, to children’s toys and unmanned drones, has helped underpin the confidence to take on more professional staff. The number of lawyers in Guangdong has grown twice as fast as the number of law firms, providing a constant supply of skilled workers, but also creating a more intense talent battle.
Fierce competition from local rivals isn’t the only front on which Guangdong’s law firms are defending their market share. Big national firms from Beijing and Shanghai, alongside well-known global names, are all jostling for a slice of the pie. And in July, lawyers from Hong Kong and Macau joined the fray under an initiative to encourage integration of the Greater Bay Area (GBA).
Still, Guangdong’s legal market is the country’s biggest and the resilience of local players should not be underestimated. Outsiders are finding it no easy task to overcome the barriers of local firms, with branches of national-scale firms failing to dominate.
As the competition heats up, how will the cake get divided?
NO HEATED CHALLENGES
“Guangzhou, for example, has seen a large increase in the number of lawyers in the past few years, and with the significant economic slowdown caused by international conflicts and the pandemic, the legal services market is now more competitive,” says Zhang Ping, managing partner of the Guangzhou office of JunHe.
The number of lawyers in Guangdong grew 12.4% in 2021 from a year earlier to 61,946, making it the biggest pool of legal professionals in the country. The province added law firms at about half that rate, indicating that local firms are bulking up.
There is still room for expansion. For every 10,000 residents in the provincial capital Guangzhou and the tech hub of Shenzhen, there are about 10 lawyers, with 14 in Shanghai and 17 in Beijing. The number in the US is 40.
While China’s weak employment market has ensured sufficient new lawyers to enlarge law firms across the board, there is a shortage of talent to meet the needs of some practice areas. “There are areas where the specialising lawyer’s quantity has not caught up, or the quality may not be there yet,” says Zhang Baisha, a partner in Zhong Lun Law Firm’s Guangzhou office.
In areas like antitrust, only one or two big firms can handle complex cases. “Given the professional requirements of antitrust practice, which require years of study and accumulation, few lawyers are qualified in this area,” he says. “Even though there are some who can occasionally handle merger filings, they still have a large gap if compared [with the top-level firms] in terms of project size, complexity and professionalism.”
The Guangzhou Law Society shows firms’ revenues grew by about 30% per year between 2014 and 2019. However, the outbreak of covid-19 slammed on the brakes, with sales growth plummeting to 8.5% in 2020. The city’s law firms bounced back to RMB9.6 billion in revenue in the next year, increasing 15% year-on-year.
Zhang Ping says Guangdong has been affected by US trade policies and the pandemic in the past three years. “The demand for legal services in certain areas is actually declining, while of course there may be areas that will increase, such as dispute resolution,” he says.
Zhang Baisha holds a similar idea that the zero-covid policy has temporarily created demand for legal services in areas such as dispute resolution, labour law and bankruptcy. But at the same time, he questions “when these companies are gone, what about your legal fees next year?”, and argues that the long-term development of the legal market relies on the overall growth of the economy.
Guangdong’s economic development is mainly driven by Guangzhou and Shenzhen. As the provincial high court, procuratorate, maritime court and intellectual property court are in Guangzhou, the city gains unique legal resources.
Chen Xiangyong, the Guangzhou-based managing partner of Wang Jing & Co, compares the two: “Guangzhou has abundant political and judicial resources, and a significant advantage in dispute resolution, while Shenzhen, as a hotbed of venture capital in China, is dominated by financial and capital markets, and technology innovation.”
Sam Wong, founding partner of Guangzhou-headquartered Wang Jing & GH Law Firm, notes that Shenzhen, as a special economic zone, has a different legislative system from Guangzhou. Its “special economic zone legislative power” allows the city to adapt the specific provisions of the existing relevant legislation on its own, without having to rely on the People’s Congress of Guangdong, to promote the development of new industries and to drive the unique local businesses.
“To take international sanctions legal service as an example,” says Zhang Baisha, “it can be found in other provinces, but many big companies targeted by international sanctions are engaged in chip, semiconductor and other such businesses from the high-technology industry. This type is mainly based in Shenzhen, such as Huawei and ZTE.”
Late this year, Shenzhen launched two regulations orientated towards self-driving cars and artificial intelligence (AI). Lin Xiaochun, director and senior partner at Shu Jin Law Firm in Shenzhen, foresees that demand for legal services related to these emerging technologies will be strong, particularly around data compliance, intellectual property and capital markets.
Innovation drives Shenzhen’s development, with the equivalent of 5.5% of the city’s GDP ploughed into R&D in 2020 – more than twice the national average. The city ranks first in China in terms of the number of international patent applications and domestic patent grants under the Patent Co-operation Treaty (PCT).
“Shenzhen has strong electronics, information services and financial sectors, and an outward-oriented economy,” says Wang Lixin, Guangzhou-based partner at King & Wood Mallesons. The city has greater potential than Guangzhou to become a centre for foreign-related dispute resolution in South China, he says, while cross-border business in the special economic zone is set to continue its upward trend.
As well as their individual strengths, both cities have been boosted by national policies. The Guangzhou Futures Exchange opened in April, focusing on green finance, technology and other emerging industries as part of China’s plan to meet its commitment to limit greenhouse gas emissions.
“More and more companies, investors and even regulators are turning to ESG [environmental and social governance], and major stock exchanges worldwide have also staked out their presence in this area,” says Chen Zuoke, the senior partner at Dentons office in Guangzhou, adding that the firm has set up a special unit to explore for opportunities in what is now a wide-open new market.
Early movers stand to benefit most from cascading growth as the new industries expand and mature. “The new energy industry will in turn drive the offshore engineering and marine wind power industries, which will then create higher demand for the corresponding legal services, especially for us in Guangdong, a large coastal province,” says Chen Xiangyong, of Wang Jing & Co who specialises in maritime matters.
JunHe’s Zhang Ping has his eye on another potential driver of growth. “Recently, it has become clear that there is more activity in the area of compliance for state-owned enterprises,” he says. Guangdong’s State-owned Assets Supervision and Administration Commission in April issued a three-year plan to have all provincial enterprises certified to the ISO 37301 global corporate compliance standard released by the Geneva-based International Organisation for Standardisation.
In September, the commission published guidelines for investment activities of SOEs, driving the concept of compliance further into the minds of management. “Private enterprise clients are paying more and more attention to tax planning and compliance when conducting transactions such as investments and M&A,” says Dentons’ Chen Zuoke. “The business of tax lawyers has grown more substantially as a result.”
While Guangdong’s size and continual advances in key sectors mean it ranks alongside Beijing and Shanghai as the triumvirate primarily leading China’s economic development, they each have key differentiating features. Beijing is dominated by state-owned enterprises, Shanghai is favoured by foreign companies and Guangdong is propped up by the private sector.
Zhang Baisha of Zhong Lun says one consequence of this is that Guangdong’s companies tend to be smaller and less well known than the SEO giants and foreign multinationals from Beijing or Shanghai. But when it comes to the diversity and number of businesses, Guangdong leads the pack.
“Guangdong is a big market with many Fortune 500 and multinational companies setting up branches here,” he says, adding that “Guangdong’s business types and numbers will continue to increase as will its prosperity and the growth and integration of the Greater Bay Area.”
That means a wealthy and diverse client base, each with its own set of legal needs.
“As the richest province in China, it creates a huge legal market. Such a big cake cannot be fully digested by the branches of national law firms alone,” says Chen Zuoke, noting that local firms in Guangdong have focused on size and market expansion in recent years.
China Business Law Journal collected data from the government-run National Lawyer Credit Information Publicity System to gauge how open the legal market is to outside competition. As of the end of November, there were 65 law firms with more than 50 members in Shenzhen, almost half of which were branches of national firms.
The SEZ’s openness contrasts with other cities, where the clear majority of law firms are home grown. In Guangzhou, for example, almost three-quarters of the 67 law firms were local.
Wang Jing & GH Law Firm’s Wong says a different picture emerges when looking at the revenue breakdown. Three-quarters of the top 20 law firms in Guangzhou last year were local, he says, in line with the breakdown by number of members. On a per capita basis, however, the regional offices of national firms prevailed.
“Overall, local firms are on par with [branches from] Beijing and Shanghai. But in terms of highly sophisticated business, more lucrative business, it is Beijing and Shanghai firms [branches in Guangdong] that are doing more,” says Wong, adding that this is especially pronounced in capital markets.
Outsiders are making their presence felt in China’s rapidly growing market. At the same time, the path for Guangdong’s local firms to expand their footprint has proved rocky.
At ETR Law Firm, one of the biggest in southern China, Guangzhou-headquartered senior partner Xiao Shuobin says: “Although we’ve set up regional offices in Beijing, Shanghai and Wuhan, we still feel we’ve been struggling to develop [out of Guangdong]. So, our management or strategy turns to deeply ploughing the Greater Bay Area.”
Compared with clients of general practice firms, those in niche areas are more loyal to local firms and are resistant to being poached, says Huang Hui, director and senior partner at the Guangzhou headquarters of Huang & Huang Co Law Firm, which specialises in foreign-related maritime and offshore business.
“Law firm strength is often not related to size, but rather to the professions and historical accumulation of the teams,” he says. “Advising on the foreign-related maritime sector in Guangdong province is basically divided among several local law firms that traditionally focus on maritime and offshore business.”
Wang, from KWM, says that the competitive pressures of Guangdong’s legal market have blurred the differences between local firms and branches of outside ones. It is better to see them all as local, and the more important question is whether they can find the right development model and practice areas within the “convergence”.
“The legal services industry is actually relatively traditional, even conservative, with its own rules, values and traditions,” he says. “But like almost all industries, innovation remains the biggest variable for future development.”
NO GBA INVASION
One of the interpretations of innovation in the Greater Bay Area is how to link resources from three different legal systems of the mainland, Hong Kong and Macau. In July, four lawyers from Hong Kong and Macau received licences to practise in the nine mainland cities of the GBA, having passed the necessary exam.
Zhang Ping of JunHe believes that based on the further integration of the three jurisdictions, demand for legal services in areas such as cross-border investment and financing, IP, trade co-operation and cross-border civil and commercial disputes will grow. “Hong Kong and Macau lawyers who can balance the jurisdictions and are good at bilateral battles will have a unique market opportunity,” he says.
Most Hong Kong lawyers entering the Guangdong market are from local firms in Hong Kong. “Hong Kong’s economy is slowing down and the market is becoming saturated,” says Zhang Baisha. “Competition for legal services is fierce with high-end business basically monopolised by international law firms such as those from the UK and the US.
“Hong Kong law firms are facing great challenges under fierce market competition and they are more willing to come to the GBA after the State Council has launched a pilot scheme to relax practising restrictions.”
Zhang Baisha adds that existing lawyers and law firms in Guangdong are not yet feeling the competitive pressure of lawyers from Hong Kong and Macau. However, he says that the average practice quality of Hong Kong and Macau lawyers is higher, which may subtly contribute to improving the standards of Guangdong lawyers.
There are restrictions on Hong Kong and Macau lawyers practising in the nine GBA cities; they cannot represent criminal or litigation practices, and can only handle civil and commercial matters. Xiao, of ETR, and says the main clients of this group of lawyers now are Hong Kong and Macau citizens on the mainland, but in the longer term, they will need to capitalise on their strengths in foreign-related matters, and commerce and capital markets to survive in Guangdong.
Whether Hong Kong and Macau lawyers will eventually be able to bring about significant changes in the Guangdong legal market remains to be seen, but problems have been surfacing since they started practising on the mainland.
Wang worries about lawyers from the two Cantonese-speaking cities being sufficiently bilingual to operate on the mainland. Differences in the legal system, processes and terminology may lead to difficulties, at least in the short term.
Huang suggests that the rules should be optimised. “For example, the Hong Kong Solicitors Ordinance stipulates that lawyers must take out practice insurance, but if a Hong Kong lawyer is hired by an associate firm on the mainland, some accidents happening here may not be covered by the practice insurance.”
In June, the State Council unveiled the last of its strategic plans to develop the GBA’s three free trade zones of Nansha, Hengqin and Qianhai.
The new plan for Nansha proposes policies to deepen co-operation within the GBA, including allowing Hong Kong and Macau research institutions to be exempted from compulsory product certification for scientific aims, and supporting Hong Kong-invested innovative technology enterprises in Nansha to finance via eligible Hong Kong private equity funds.
The policy document also briefly touched on the legal sector, calling for improvement in the mechanism for setting up associate law firms between the mainland, Hong Kong and Macau.