ALB CHINA REGIONAL REPORT: WEST CHINA
In this year’s West China regional report, we focus on the urban agglomeration of Chengdu-Chongqing, as well as the city of Xi’an. In March 2021, China launched its latest fourteenth five-year plan, which set specific goals for the two areas based on the principles of innovation, opening up and regional connection. Local lawyers share new opportunities brought by the novel plan, as well as their first-hand observations of the intense competition within the legal market.
Every five years, the Chinese government will issue a new plan to guide the country's socio-economic development in the next phase. The year 2021 is the starting point of China’s fourteenth five-year plan, and the plan sets the revitalization of regional markets as a key priority, with Chengdu, Chongqing and Xi’an, the three major cities in West China, expected to play a greater role.
This February, China, for the first time, elevated the economic position of the Chengdu-Chongqing Dual-City Economic Circle as the “fourth pole,” on par with Beijing-Tianjin-Hebei, the Yangtze River Delta and the Greater Bay Area. The "fourth pole" position of the Chengdu-Chongqing area will address the current imbalance in China’s regional economies, and undertake a "historical mission of becoming an important growth pole and new driver of high-quality development of the whole country.”
Further north, Xi’an, an economic powerhouse in the northwest, set aggressive goals in its city-level fourteenth five-year plan: To reach 1.4 trillion yuan ($220 billion) in GDP and total investment of 3.2 trillion yuan by 2025. With such objectives accomplished, Xi’an would have put in place a modern industrial system and become a key gateway for foreign trade in China.
West China is topographically diverse, unlike East China which is occupied mostly by plains. This has in part contributed to a more developed eastern region than its western counterpart. However, on the other hand, compared to the prevailing agrarian culture in the East, cities in West China have more "flavours,” which is also reflected in their economic development.
"Chengdu is a central city in Southwest China and has unique economic and cultural traits."
-Li Xiaomei, Jingtian & Gongcheng Chengdu office
Take Chengdu for instance. As Li Xiaomei, partner of Jingtian & Gongcheng’s Chengdu office, tells ALB, "Chengdu is a central city in Southwest China and has unique economic and cultural traits." This is particularly true over the past couple of years when the firm has witnessed "an obvious increase in the number of corporate clients in catering, culture and recreation, tourism, pharmaceutical and high-tech sectors as well as government financing vehicles.”
According to Li, this is because the Chengdu-Chongqing area development roadmap creates a clearer identity and role for Chengdu.
As a matter of fact, the Chengdu-Chongqing Dual-City Economic Circle was not proposed until early 2020, followed by the release of the Outline of the Plan for the Development of the Dual-City Economic Circle in October. In less than a year, Chengdu and Chongqing have already joined forces in a number of projects. With the Fuxing high-speed railway now in operation, travelling between Chengdu and Chongqing takes only one hour.
"Our data show that every Chengdu-Chongqing high-speed railway train carries one Tahota staff member on board."
-Liu Zhiqiang, Tahota Law Firm Chongqing office
"Our data show that every Chengdu-Chongqing high-speed railway train carries one Tahota staff member on board. The dual-city economic circle strategy has definitely cut down travelling time, leading to increased cross-regional collaboration among Tahota offices," says Liu Zhiqiang, director of the managing committee of Tahota Law Firm’s Chongqing office.
Han Lifeng, director of SGLA Law Firm’s Chongqing office, also feels the benefits brought by intercity connection. "Chengdu and Chongqing are building a world-class airport cluster, and SGLA is involved in the construction of new runways at Chongqing Airport," he says.
In fact, with considerable economic size of their own, Chengdu and Chongqing are believed to be able to produce "illuminating effect" by their connection, driving adjacent small and medium-sized cities to prosper.
"Regional connectivity is set to provide more room for growth, as evidenced by signs of business boom at border areas between Chongqing and Sichuan."
-Han Lifeng, SGLA Law Firm Chongqing office
Han believes that "regional connectivity is set to provide more room for growth, as evidenced by signs of business boom at border areas between Chongqing and Sichuan… We hope to expand to these areas, such as nurturing client pipeline and introducing legal services."
However, as shown in a 2020 survey, although Chongqing and Chengdu were ranked fifth and seventh respectively among all Chinese cities in GDP terms, the industry structure of the two cities have a similarity coefficient of 0.96. "Such homogeneity also dictates the competition landscape in the legal service sector of these two cities,” feels Liu.
According to a survey compiled by the local law societies, "lawyers in Chengdu and Chongqing share 90 percent of the comparative practice areas in West China, as well as 80 percent of the less comparative practice areas nationwide,” says Liu. To him, it will be very challenging to find a real cooperation path between lawyers of the two cities and avoid damage to the legal service sectors due to excessive competition.
Likewise, Xi'an is also continuously underscoring the importance of enhanced connectivity.
As outlined in the fourteenth five-year plan, the Guanzhong Plain urban cluster is tasked to "further develop and grow.” Xi'an, at the core of this cluster, is poised to spur economic development in Shaanxi, the province it is the capital of, as well neighbouring Gansu Province and even the broader region.
"Xi'an has indeed ushered in a historic opportunity. The positive impact of enhanced connectivity is actually being felt in the firm's business.”
-Wang Jie, Dentons Xi'an Office
As Wang Jie, director of Dentons’ Xi'an Office, notes, "Xi'an has indeed ushered in a historic opportunity.” The positive impact of enhanced connectivity is actually being felt in the firm's business. In the past year, Dentons Xi'an expanded to serve clients in other provinces. "For example, we have rendered comprehensive legal services to the municipal government, development zones and State-owned enterprises in Golmud, Qinghai Province," notes Wang.
Zhang Long, senior partner of Tahota Law Firm’s Xi'an office, concurs. "Xi'an is uniquely positioned in growing high-tech, cultural and tourism sectors, as well as can spur growth in adjacent provinces and cities," he says. "Tahota will leverage such opportunities to expand our services to adjacent cities, such as Lanzhou and Yinchuan."
Changes are happening fast in light of the growing role of the Chengdu-Chongqing area and Xi'an in the coming five years.
"The market witnessed many new changes in the past year, including the emergence of novel economic and business models, technological developments and regulatory requirements," Liu Shoumin, director of Dentons’ Chengdu office, tells ALB. "All these changes require highly diversified and specialized legal services.”
Industrial upgrading stands out among all the changes.
In Chengdu, this is evidenced by the completion of the "Unicorn Island" project 25 km away from the city centre. Meanwhile, Chengdu Science City has become home to 438 high-tech enterprises over the past three years, and Chengdu had grown its electronic information industry to hit 1 trillion yuan in 2020.
According to Liu Shoumin, Dentons Chengdu is now serving about 40 clients in the high-tech sector, including Chengdu XGimi Technology, a star company in the electronic information sector, which went public on Shanghai’s STAR Market with Dentons Chengdu as its advisor.
Jingtian & Gongcheng has also been "making efforts to gain a foothold in the high-tech sector, and has now built a solid client pipeline of a large number of pre-IPO clients engaging in medical technology, big data and drone manufacturing,” says Li.
As Liu Shoumin points out, clients from the high-tech sector have different needs for legal services. In addition to "expertise in intellectual property and foreign-related business,” they also require "targeted legal services that stay adaptive to the life cycle of high-tech firms.” For instance, lawyers are expected to develop equity incentive plans for firms at the start-up phase, and to review financing plans and amend articles of association for firms seeking financing in later phases.
Liu Zhiqiang also observes that the evolution of emerging industries spurred "significant breakthroughs in big data, the Internet, venture capital, compliance and corporate governance sectors" in Tahota Chengdu and Chongqing offices over the past year. He summarizes changing client demands as being both "broader" and "deeper": law firms are expected to have a team with "multi-disciplinary and all-faceted expertise,” while also have lawyers who "specialize in a given area, and can even provide customized services.”
Similar changes are also taking place in Chongqing.
Chen Youkun, director of Dentons’ Chongqing office, explains that in the first quarter of 2021 alone, Chongqing Science City has "signed contracts for 40 projects, attracting investment of 47.3 billion yuan, a quarter-on-quarter increase of 399 percent."
He sees a trend of "heightened compliance" from clients in this space. "The tightening regulatory environment, as well as the distinctive technological and business models of particular industries, give rise to demands for segmented compliance services such as criminal compliance, data compliance and so on.
SGLA Chongqing is also making a foray into big data and artificial intelligence. However, Han admits that it will take time for such business to grow and mature. He also points out another interesting trend where "some traditional sectors, say the catering industry, have undergone structural transformation and upgrading in the Internet and big data era, also creating opportunities for the legal sector."
Xi'an, an important research base in the West, is also taking a positive stance in pushing forward with industrial upgrading.
Home to many universities and research institutes, Xi'an is expected to develop a modern industrial system in the next five years and law firms are now catching up with the pace of industrial upgrading. Zhang tells ALB that Tahota Xi'an "primarily specialized in civil and commercial litigation, criminal defence and other more traditional areas in the past,” but now "have been rapidly building up capacity in the areas of M&A, equity financing and corporate bond issuance. We are also building presence in compliance and intellectual property."
To Wang, "the ever-changing demand for emerging services and growing diversification of clients in northwest China" have contributed to the growth of new business in Dentons Xi'an. In the past year or two, Dentons Xi'an has expanded its service offerings to cover, for example, comprehensive legal services for museums, which is a priority in the future development of Xi'an, and has "onboarded as clients heavyweight cultural and exhibition institutions, including the Museum of Terra Cotta Warriors.”
As Chengdu Economic Daily puts it, "innovation is the strongest driver and opening-up is the biggest variable." The next priority for West China will also be to double down on its efforts to open up to the outside world.
In retrospect, the previous boom in the Chengdu-Chongqing area benefited exactly from growth in the export-oriented economy. Being inland areas, however, the region is naturally at a disadvantage in export and international trade. To address such weakness, it must strengthen the construction of aviation and information hubs, and "focus more on novel service functions, including technological innovation, financial, commercial and trade services, and cultural tourism."
The first China Railway Express (Chengdu-Chongqing line) departed on the first day of 2021, paving the way for the European Union and East Asia to become new markets.
Companies in this area are also actively "going out.” Liu Zhiqiang tells ALB that as at the end of 2020, more than 250 enterprises in Chongqing built presence abroad, investing a total of $12 billion overseas; in Chengdu, more than 730 enterprises have ventured out, with total investment exceeding $28 billion. According to him, "firms from this region mainly invest in mining, agriculture, high-tech, industrial manufacturing, medical and healthcare sectors in Hong Kong SAR, Southeast Asia, EU, Africa and South America." For this reason, serving these firms is one of Tahota's priorities, and its Chengdu and Chongqing offices are now advising more than 120 such clients.
Cross-border practice is also one area of strength for Jingtian & Gongcheng Chengdu, and it specifically covers "overseas capital market (i.e., listing on Hong Kong and US markets); cross-border M&As and foreign direct investment; and overseas debt financing,” Li tells ALB.
Xi'an will also enjoy more room for development from the opening-up policy.
As the departure point of the ancient Silk Road, Xi'an boasts superior geographical location. The expansion of the Xianyang International Airport, capacity expansion and renovation of the China Railway Express routes and ports, and construction of the China Railway Express freight hub are all included as priority projects to build China into an economic powerhouse. Statistics show that Xi'an is now distributing cargos to and from 29 provinces, and more than 70 percent of imported goods are distributed from Xi'an to locations across the country.
Amid this context, Zhang observes "surging demand for cross-border legal services centering around the Belt and Road Initiative.” Tahota Xi'an is, therefore "actively attracting specialists with foreign-related expertise, and doubling down on serving areas relating to BRI and foreign investment.”
However, as Xi'an remains a less-developed market, lawyers there have a lot of work to do to substantiate their vision. According to 2019’s data, lawyers practicing in Xi'an only handled seven foreign-related deals that year, and participated in merely one international commercial arbitration.
Things are fast improving, according to Wang. For example, Dentons Xi'an itself has handled some 23 foreign-related arbitrations and litigations in 2020, and this number has already reached 14 so far in 2021. It also advises over 20 foreign entities on a long-term basis and has represented foreign-invested enterprises in liquidation, M&A and reorganization and other non-contentious matters.
The hard work of law firms is more likely to be paid off precisely because Xi'an's foreign-related legal service market is less sophisticated. For instance, Dentons Xi'an formed a team with Korean language proficiency in 2019, "leading to an exponential increase in foreign-invested enterprises using us for perennial legal advisory services over the past two years,” says Wang.
Admittedly, the foreign-related legal service sector in Xi'an is far from mature, and one of the biggest challenges lies in the mismatch of opportunities and resources. How to rapidly match supply with demand and avoid high-end business from being grabbed by outside lawyers is an urgent task to be addressed by legal practitioners in the city.
CHALLENGES AND OUTLOOK
Economic prosperity is usually accompanied by a robust legal service market, which is reflected in the lawyer population in Chengdu, Chongqing and Xi’an.
The latest data show that Chengdu currently has about 16,800 lawyers and is home to 880 law firms, Chongqing has approximately 13,400 lawyers from 894 law firms, with revenue of 4.2 billion yuan in 2020, and Xi'an has a lawyer population of 4,770 across 294 firms.
Speaking of the characteristics of the local legal market, Liu Shoumin of Dentons Chengdu notes that "a firm's brand is no longer the only consideration for clients. Rather, clients prefer a team with strong strength in a particular area." In addition, "clients increasingly prefer to get involved in the process, and clients from emerging industries tend to take a more Internet-based, digitalized and transparent approach to the consumption of legal services.”
Another trend felt by lawyers is the constant consolidation of regional legal markets. SGLA Law Firm Chongqing is a perfect example, which was transformed from Solton & Partners, an established firm with 26 years of history in Chongqing, only this March. Han tells ALB that most of SGLA's members are established local big firms, which represents some kind of "reverse" integration as opposed to established firms in Beijing, Shanghai, Guangzhou and similar top-tier cities setting up branches elsewhere.
Han admits that since they predict the legal sector is bound to polarize towards scale or specialization, the SGLA model may be seen as an innovative attempt for a regional firm to scale up. As he puts it, SGLA "growing into a national firm will definitely help us in terms of business expansion across the country, and member firms are also expected to complement their respective strengths and fill in gaps in areas of weaknesses."
Going forward, one of the priorities of SGLA Chongqing is internal collaboration, "particularly with SGLA offices in Yunnan, Guizhou and Sichuan provinces,” says Han.
Wang of Dentons Xi'an also observes a similar trend. "In the past year or two, almost all major national law firms from Beijing and Shanghai have opened offices in Xi'an, and leading local Xi'an firms have also been stepping up consolidation. The legal sector in Xi'an will soon embrace reorganization within industry segments, creating new opportunities for lawyers with industry knowledge and experience."
In Chengdu, Jingtian & Gongcheng is also ready to adapt to changes. They are "constantly learning about new industries to embrace the new industrial era,” says Li. As the market increasingly goes through segmentation, consolidation and renewal, lawyers practicing in regional markets are set to play a bigger role. "Competition in Chengdu's legal sector is in severe disorder… As the Chinese economy is increasingly international-oriented, the future legal market must also be more specialized and market-oriented. Jingtian & Gongcheng partners will take the challenge head-on and guide the Chengdu market to compete with fairness and order," she says.
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