The pandemic might be (almost) over, but the sense of unease remains strong in Asia’s legal industry. While life might have returned to normal, and supply chains appear back on track, the region is continuing to experience uncertainty over slowing global economic momentum, tightening monetary policy affecting credit growth, and lingering concerns about inflation. China’s seemingly irreversible economic decline is also hanging heavy.

As M&A transactions dry up and capital markets remain patchy across the region, law firms have responded in a variety of ways. Some have taken the prudent road and looked to scale back their presence, including well-known international firms in Greater China. Others realise it could pay off to be bold at a time like this. As a result, we have seen the landscapes of key legal markets in Asia begin to shift in clear directions, with the momentum expected to accelerate in 2024.

HONG KONG: ‘ADAPT OR DIE’

It was supposed to be the year of the grand comeback for the international financial hub. Three years of COVID might have choked its economy, and geopolitical perils might have maimed its investment allure, but Hong Kong was confident of reclaiming the place it staunchly believed it deserved when striding into 2023.

But as the year drew to a close, there was a sense of sameness. To the dismay of the Hong Kong Stock Exchange, once Asia’s foremost fundraising powerhouse, the much-touted revival struggled to get off the ground. Hong Kong’s once “free-for-all” capital market is now an arena testing the survival of the fittest.

On the face of it, some aspects were reminiscent of Hong Kong’s heydays. “International firms who are strong in capital markets – Davis Polk, Freshfields, Clifford Chance, to name but a few – are still dominating the market, especially after the reopening of the border after COVID,” says Eric Chow, managing partner at Eric Chow & Co. in association with Commerce & Finance Law Offices, one of China’s Red Circle firms famed for capital markets work.

But scratch a little deeper, and the picture starts to change. A number of international firms chose to cut staff in response to dampened market conditions. Linklaters cut at least 20 junior attorneys in China and Hong Kong, while Clifford Chance shed four associates in the debt capital market practice, U.S. firms White & Case and Kirkland & Ellis also trimmed the number of associates in their Hong Kong offices this year.

“These layoffs suggest that these firms are not seeing enough deal flow or volume in their corporate or transactional teams. It certainly doesn’t seem there is much interest in IPOs in Hong Kong for now. These IPO preparations take time and I’m not hearing of a lot of these preparations going on.”
— Basil Hwang, Hauzen

“These layoffs suggest that these big global firms are not seeing enough deal flow or volume in their corporate or transactional teams,” says Basil Hwang, managing partner at Hauzen. “It certainly doesn’t seem there is much interest in IPOs in Hong Kong for now. These IPO preparations take time, and whoever wants an IPO next year should be preparing now, and I’m not hearing of a lot of these preparations going on. That might not bode too well for the IPO market next year.”

The elephant in the room, of course, is China’s slower-than-expected economic recovery, and Nicholas Plowman, Hong Kong managing partner at off-shore firm Ogier, says that it has forced many firms to play defence.

Michael Padarin, Hong Kong managing partner at offshore firm Carey Olsen, agrees that international law firms in the city still rely to a large extent on in and outbound business from China. “If they are here but can’t do work for Chinese clients, then that puts them in a challenging situation,” he says.

“Although for some bigger U.S. firms – we understand that a key function of the work they do is to help with the operation and expansion of larger global private equity firms into Asia. So, there are reserved pockets of work continuing, but the China-focused corporate M&A work, for example, will currently be slower until the market rebounds,” adds Padarin.

Indeed, with Hong Kong still mired in the crossfires of escalating Sino-U.S. animosity, law firms and the clients they serve have been constantly pondering the long-term commercial viability of their presence in Hong Kong - the Chinese special administrative region increasingly seen as being shackled by Beijing’s signals. And with no immediate sea change

in sight, more global firms are concluding that their Hong Kong operation may not be worth the trouble. Chicago-headquartered Winston & Strawn has reportedly become the latest international firm to shut down its Hong Kong office after 15 years, following in the footsteps of the likes of Texas-based Baker Botts and Orrick, Herrington & Sutcliffe, founded in San Francisco.

Hwang, who planted Dechert’s first flag in Asia and ran the Hong Kong office of the Philadelphia-based firm for six years till 2014, says managing partners sitting at overseas headquarters need to ask themselves two questions. “First, how’s the business been the last 12 months for this particular team or office? And what are the prospects for business in the next 12 months? The answer to both questions would need to be negative for big firms to pull out from the market.”

With the presence of international firms waning, Chow believes it’s just a matter of time before PRC firms begin to play a dominant role in Hong Kong’s legal market.

“It is now increasingly common to see two PRC firms acting on both sides of a deal as both cost and quality of the legal services provided (including tapping into their mainland offices’ resources and know-how) have proven more attractive to clients,” says Chow, adding that his firm is now well-placed when competing for deals.

An unnamed lawyer working in the Hong Kong office of a PRC firm recalls that senior lawyers in big inter-national firms once told them, “if all the big Chinese red circle firms having offices in Hong Kong work together - similar to what those U.S. firms such as Cleary Gottlieb and Davis Polk did around 2008, 2009 - PRC firms will be the next wave here, because the clients are all yours.”

Speaking of what to expect in 2024, feelings are mixed. For Plowman, more uncertainty lies ahead. “There is hope that the market will turn around in Hong Kong and China on the equity capital markets and the debt markets side, but the reality is that 2024 will likely be dif-ficult as well, unless we get a bump from the U.S. in terms of deal and capital market activity,” he notes.

Chow, on the other hand, sees a thaw in the IPO winter as deals delayed from this year finally see the light in 2024. “A lot of pitches and opportunities arose after the Lunar New Year. The actual kick-off of those IPO projects was in the second half of this year, aiming to be listed in the second half of next year,” he says while admitting that the current market is still softer compared to pre-2019 times.

For Hong Kong more broadly, Hwang - also vice chairman of the Singapore Chamber of Commerce in Hong Kong - sees Asia’s World City, once thriving on transactions with a heavy Western focus, especially American, now pivoting towards clients from the global South, including Middle East, Latin America, and Eastern Europe. “Contrary to how it’s sometimes portrayed, Hong Kong hasn’t gone from being a very free economy to a gulag overnight,” he says.