ALB China Regional Report: Central China
Due to its unique geographical position and densely populated areas, Central China is a vital part of the country’s economy. In this report, we focus on four provinces, namely Hunan, Hubei, Henan and Anhui, to observe closely the latest industrial and legal market trends.
Central China has been a focus of the Chinese government since the beginning of 2021. In March, the Politburo meeting chaired by President Xi Jinping reviewed the Guidelines on Promoting the High-quality Development of the Central Region in the New Era, a document tailored to provide directions on the development of the Central China region during the 14th Five-year Plan period.
According to the guidelines, “with its geographical accessibility, well-connected transportation and abundant resources, the central region has a solid foundation in industrial development and boasts vast growth potential, making the efforts to promote high-quality development in this region of fundamental importance.”
This region, home to a permanent resident population of more than one-fourth of the national total, has shown clear momentum during its rise in the past few years thanks to both its population and geographical location. In 2020, the region contributed 21.9 percent of China’s total GDP, with average annual GDP growth of 6.4 percent over the past five years.
Innovation is indispensable for economic growth in the central region. Data shows that in the first quarter of 2021, all six provinces in the region recorded growth exceeding 20 percent in high-tech manufacturing or high-tech industry, with “rapid growth in strategic emerging sectors such as integrated circuits and smart manufacturing, and quick emergence of original innovations in quantum communications, dynamic storage chips, etc.”
Although well-connected by public transportation, the central region has long seen lacklustre economic growth due to long-term reliance on agricultural and heavy industries. Going forward, different provinces in this region will play different roles, with Anhui getting more deeply involved in the integrated development of the Yangtze River Delta region, Hunan promoting the construction of the Greater Bay Area, and Hubei and Henan becoming important hubs under the Belt and Road initiative by virtue of the Yangtze River and the China Railway Express.
NEW CAPACITIES, NEW SERVICES
Industrial transformation is crucial to achieving high-quality development. China proposed the establishment of regional technology innovation centres in its 14th Five-Year Plan, which includes plans for central cities of Hefei, Wuhan, and Changsha.
These plans have already started to deliver. Over the past few years, Henan Province has grown its small and medium-sized technology firms to more than 10,000, Anhui saw an increase of 96 percent in the use of industrial robots, Hubei reported growth of 25.6 times in 3D printing equipment, and Hunan doubled the size of its integrated circuit sector.
As service practitioners keenly aware of the local economic pulse, lawyers have noticed the evolving landscape in the central region and how these evolutions are affecting the legal services sector.
“With focus on building five industrial zones and four strategies in support of the Belt and Road initiative, Henan has rolled out full-scale innovations.”
- Li Xuyan, Dentons Zhengzhou
Li Xuyan, director of Dentons’ Zhengzhou office, has been practicing in Henan for more than 30 years. “Henan is a traditional agricultural powerhouse, but it has seen growing momentum in economic development in recent years. With focus on building five industrial zones and four strategies in support of the Belt and Road initiative, Henan has rolled out full-scale innovations in technologies, industries and business models with Zhengzhou as the centre,” she says.
According to Li, upgrading the manufacturing industry and new developments in emerging sectors such as big data and artificial intelligence require lawyers to have a broader knowledge base and deeper professional capabilities. Law firms must also be able to integrate resources. “Law firms must be able to provide one-stop solutions because fragmentation in service offerings is unable to satisfy clients’ needs,” she says.
Ji Min, director of Dentons’ Hefei office, returned to the city from Beijing in 2011 to start her own business. Over the past decade, she has witnessed “thriving legal service sub-sectors in tandem with economic innovations” in Hefei.
The financial sector is an example. "As Hefei strives to develop itself into a hub for head offices of financial institutions, financial regulators have tightened supervision, posing increasing pressure on product innovation by financial institutions. Local ones have begun to seek “specialized lawyers with international exposure and capable of aligning their thoughts with financial regulators.”
The investment sector also faces challenges of innovations. Dubbed the best “government investment bank,” the Hefei municipal government has offered policy incentives over the past decade to attract new industries to land here, and such new industries are extremely demanding on lawyers. When working on an integrated circuit deal recently, Ji noticed that she “could not even review the sales contract if lacking knowledge about this particular industry.”
Changsha of Hunan Province is another city in central China that has fostered its uniqueness in industrial development.
"Hunan is a manufacturing powerhouse. Many Internet firms such as Tencent, 58.com and Kuaishou now have presence in Changsha, while software, media and entertainment sectors are also developing rapidly,”
- Mao Ying, Mao Xiong, Dentons Changsha
"Hunan is a manufacturing powerhouse. It is only within the past several years that emerging industries have shifted from first-tier cities to second-tier cities such as Changsha. Many Internet firms such as Tencent, 58.com and Kuaishou now have presence in Changsha, while software, media and entertainment sectors are also developing rapidly,” says Mao Ying, director, and Mao Xiong, executive director, of Dentons’ Changsha office.
The arrival of new industries gives rise to growing demand for compliance services. “This requires multi-disciplinary knowledge and skills, and thus law firms must prepare in advance. We have already carried out surveys and marketing promotions in this field,” says Mao Ying.
Similar changes have taken place in Hubei’s Wuhan.
“Well-oiled traditional sectors such as steel, textile and tobacco used to form a vital part of the industrial chain in Wuhan. However, optoelectronics, automobiles and petrochemicals have overtaken the traditional sectors in recent years, and biomedicine, high-end equipment, aviation and aerospace sectors also starting to build presence,” notes Luo Changde, senior partner of Dentons’ Wuhan office.
With “younger partners who are receptive to new ideas,” the office has experienced rapid growth over the past few years in intellectual property (IP), pharmaceuticals and health care, and gaming, according to Luo.
“The key is to grasp the opportunities that come with transformation and make a foray into frontier areas.”
- Luo Changde, Dentons Wuhan
Luo believes that legal services development that “rides on” economic development has ultimately driven the legal sector to a more mature state in the central region. “The legal service market used to be rather traditional where the service offering was not diversified and the level of value-add not high. The evolution of emerging service areas over recent years has propelled the legal service market to become more mature, creating more opportunities and challenges alike. The key is to grasp the opportunities that come with transformation and make a foray into frontier areas,” he believes.
Apart from industrial transformation, the geographical location also helps unlock the growth potential of the central region. An important transportation hub at the geographical centre of China, this region will not only connect China domestically, but also link China to other parts of the world under the Belt and Road Initiative.
Take Henan as an example. Li tells ALB that “Henan’s status as a transportation hub is its fundamental competitive edge, with Zhengzhou conveniently located at the centre of China’s high-speed rail network. Zhengzhou Airport Area also ranks first in terms of passenger throughput and cargo throughput in the region. In addition, the China Railway Express that departs from Zhengzhou now covers more than 130 cities in over 30 countries.”
The flow of investment thrives with the flow of goods via the transportation network, enabling lawyers practicing in this region to be more involved in transactions of Chinese enterprises going global and overseas enterprises investing in China.
As to Chinese enterprises going global, Dentons Hefei has gained valuable experience by assisting Sungrow Power Supply and Hefei Huatai Group, two local enterprises, to venture overseas. On the other end, helping overseas enterprises set up shop in Anhui is more challenging to local lawyers. According to Ji, these enterprises will first have needs in IP, as Hefei municipality stipulates that “only enterprises having 30 or more patents in a particular field will be recognized as high-tech enterprises and thereby be entitled to policy incentives,” she says. “IP was not an in-demand practice area in Anhui at all in the past. However, whoever can thrive in the IP area now will enjoy first-mover advantage.”
Compliance and cultural conflict also post issues. “These issues have frequently come to the fore recently, and we are spending a lot of time and effort on them. This is because the robust compliance standards some overseas enterprises have in their home countries may not be suitable for Hefei. In these cases, lawyers need to communicate with the in-house departments and the boards of such enterprises,” says Ji.
Things are a bit different in Wuhan. “For the moment, not many local Wuhan enterprises are going abroad. As to foreign investment flow into Wuhan, we focus more on automobiles and pharmaceuticals, and are more engaged in IP and labour services,” says Luo.
But changes may soon take place. “With the free trade area and other conceptual districts of different themes being constructed, Wuhan has been blessed with abundant opportunities in internationalization. Already offering services in areas of foreign investment and cross-border investment, Dentons Wuhan will next sharpen its expertise, forge closer ties with overseas partners and stay on top of regulatory developments overseas,” he says.
Li also has a lot to share in this regard. With the central region, including Henan, opening wider to the outside world, “how could we play a better role by leveraging the well-built platform amid the right climate? With a global legal service network, Dentons should better structure deals involving Chinese enterprises going abroad and overseas entities investing in Henan, but we are not yet at our best. However, we have already set up the team, and will interact more with partners via Dentons internal channel and the international cooperation departments of our local bar associations.”
In the backdrop of the future dual circulation plan, internal connectivity, in addition to external connectivity, will constantly drive growth. This is particularly important for the central region as it enjoys certain exclusive geographical advantages.
Ji emphasises this strongly: “Besides going abroad, Anhui enterprises are also investing domestically in places such as Shandong and Inner Mongolia. For example, some local car manufacturers are invited to set up operations in other provinces or cities, and in such cases, they also need lawyers to assist with negotiations for more policy support.”
Changsha is another perfect example of the central region-building internal connectivity.
As mentioned earlier, Hunan, at the southernmost part of the central region, is poised to “fully advance the construction of the Greater Bay Area,” says Mao Ying. “Hunan's connection to Guangdong is actually not new. Hunan has always been important in accommodating industries transferred from Guangdong, and some joke that almost half of those working in Shenzhen are from Hunan.”
Mao Xiong adds that “Changsha is fully supportive of the Greater Bay Area initiative,” and positive interactions with law firms in the Greater Bay Area have brought huge opportunities for Dentons Changsha. He cites two examples. The first relates to urban renewal. “Shenzhen was the first in China to start urban renewal. After the Changsha municipal government issued the direction in April to vigorously develop urban renewal, government-linked companies immediately approached us because they are aware of Dentons' remarkable performance in such projects in Guangzhou and Shenzhen.”
Another example is in criminal justice. “The coastal city of Guangzhou generally has a larger number of smuggling cases. As Changsha looks to build three free trade zones, a larger number of smuggling cases is expected to emerge, particularly in places where customs offices are located. This will create huge opportunities for anti-smuggling expertise. Many few lawyers in Changsha practiced in this area before the establishment of the free trade zones. Dentons’ core expertise is thus clearly on display via its professional network,” says Mao Xiong.
Apart from connecting with other provinces, Changsha is also actively expanding its city cluster, as evidenced by the Five-year Plan for Integrated Development of Changsha, Zhuzhou and Xiangtan released in early June. This city cluster is expected to grow its GDP to 2.5 trillion yuan or more by 2025, with an average annual growth rate of 7 percent or higher.
Mao Xiong tells ALB that integration of Changsha, Zhuzhou and Xiangtan is not new, but the recent rapid pace in such integration has enabled lawyers to clearly see the new opportunities. “The three cities signed the Collaboration Agreement on Sharing and Building Intellectual Property Resources at the end of April, which envisions the establishment of three world-class industrial clusters covering machinery manufacturing, aviation and rail transportation and the enhancement of the impact of IP in the relevant fields,” creating more opportunities to IP lawyers.
Lawyers can also expect opportunities in areas of capital market development in tandem with the efforts to build Xiangjiang New District into the financial hub of Changsha, Zhuzhou and Xiangtan, infrastructure construction as part of city integration, as well as new infrastructure projects such as 5G network construction.
There are huge opportunities ahead, but how is the legal services market in the central region preparing?
Although its share in the nationwide market is still insignificant, the central region has a sizeable number of lawyers. Rough estimates show that Henan has the largest number of lawyers at 27,000, followed by Anhui and Hubei at 16,000, and Hunan at 14,000. Both Anhui and Hubei witness an annual increase of more than 10 percent in the number of lawyers.
With four offices in the central region that have been active for the past ten or even twenty years, Dentons has witnessed dramatic changes in the local legal services market.
Dentons’ Hefei office is a case in point. As Ji recalls, “Dentons Hefei was founded in 2011 when big firms in Beijing and Shanghai did not yet have a presence in Anhui… After a decade, non-local law firms have opened dozens of offices in Anhui, and an inevitable trend of specialization has started to take shape in this market.”
As the legal services market matures, lawyers are also sensing growing recognition by clients of local lawyers. “Clients are increasingly willing to engage local lawyers. They used to prefer lawyers practicing in Beijing, Shanghai, Guangzhou and Shenzhen to handle deals in securities, cross-border deals or multi-disciplinary matters. Now clients are increasingly aware of the narrowed gaps between different regions in the Internet era as information is more transparent, and local lawyers are building up their capabilities via various knowledge acquisition and information sharing.”
Luo concurs. “This used to trouble us,” he says. “Now with a higher level of competency, local lawyers are winning more opportunities from clients. Cost considerations and Wuhan becoming more economically developed and important are also factors driving non-local clients and agencies to choose local lawyers.”
Take capital market as an example. This practice area used to be dominated by lawyers practicing in first-tier cities. However, Dentons Wuhan has now managed to “build a presence in IPO, private equity and fund establishment” by proactively reaching out to the financing needs of local enterprises and capitalizing on Dentons’ service network, according to Luo.
To Ji, although economically disadvantaged, the central region is not necessarily at a disadvantage when it comes to collaboration. “The premise for collaboration is investment and industry transfer. For example, the less economically developed Anhui Province is a perfect destination if Jiangsu enterprises look to transfer their operations. Furthermore, with funds poured in and operations set up, litigation will surely ensue after one or two years of operation, which must be tackled by local lawyers,” she says.
Lawyers in the central region believe they are already leading the charge in innovative thinking, which is somewhat surprising.
Li tells ALB this belief is first manifested as “addressing existing deals with new ideas.” For example, Dentons Zhengzhou used to derive revenue mainly from dispute resolution. In this process, it turned attention to retrial. The innovative step of “establishing a retrial research centre has reaped better earnings performance.”
“Law firms keeping pace with such developments will have unlimited business opportunities, while those standing still will face a worsening market environment.”
- Ji Min, Dentons Hefei
Ji agrees. “The legal service sector develops alongside economic restructuring at national or regional levels. Law firms keeping pace with such developments will have unlimited business opportunities, while those standing still will face a worsening market environment.”
She gives an interesting example. Lawyers practicing traffic accidents in Hefei used to be able to wait for clients to approach them. In recent years, some law firms joined forces with enterprises and started to expand the reach of their business directly to the orthopaedic departments of major hospitals. “Anhui has huge legal service market opportunities. As long as one is proactive in embracing changes, one can reap all the business opportunities.” Ji points out.
CHALLENGES AND OUTLOOK
While optimistic about the future, lawyers in the central region admit that challenges remain in the local markets.
The biggest challenge is market concentration. The lawyers interviewed all point out that more than half of the lawyers and the businesses in the central region are concentrated in provincial capitals, which is far from being balanced. Ji thus tells ALB that one of the objectives of Dentons’ Hefei office for the next five years is to “seek partners from all cities, prefectures and counties across Anhui.”
An immature market and mindset is another pain point. As Luo points out, “Law firms in Wuhan are generally small in size, with poor management and weak brand reputation.” Mao Ying comments that law firms in Changsha are “weak in organizational management and IT infrastructure… resulting in gaps to client needs when opportunities arise.” Li believes law firms in Zhengzhou face challenges in terms of management philosophy, and “the traditional mindset may easily lead to failures.”
How can professional capabilities be improved to take up the constantly emerging opportunities? With mixed feelings, law firms in the central region are all making solid strategies for the future.
Li says that the next step for Dentons Zhengzhou is to “better define its market position, and develop strategic plans based on its strengths and weaknesses in the Henan market.” Second, it will “attract and groom professionals because only with a strong team equipped with the required skill sets can we respond to challenges and develop sustainably.”
Dentons’ Hefei office recently rented a “big house” of 6,400 square meters. “We occupy the largest office space at the highest floor in Anhui, says Ji, "We expect to grow the team to 400 staff over the next five years, and have key talents in each specialized area of practice.”
Dentons Wuhan Office aims to develop towards the direction of “strong brand, specialization, large scale and teamwork.”
Mao Ying summarizes the future development of Dentons’ Changsha office as “working hard.” The team will work hard to venture into new markets, and also work hard to serve the special service needs of big clients. Dentons Changsha will also dedicate more efforts to cross-border transactions going forward.
As Li concludes, “economic development, geographical accessibility, level of opening up and growing demand for new services… will all bring tremendous opportunities. The key challenge is whether we have enough talents and professional competency to serve clients and nurture the market in a sustainable manner. In a nutshell, development brings both opportunities and challenges.”
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