ALB China Regional Report: Hainan
The Hainan Free Trade Port Law was officially passed on June 10, one year after China released the Masterplan for the Construction of the Hainan Free Trade Port. In the past year, Hainan Province has seen saw rapid development, with the number of practicing lawyers there almost doubling. Given the rapid pace of developments in the province, legal service provides face both opportunities and challenges.
On June 10, Hainan Free Trade Port Law was adopted, stipulating a “step-by-step approach in establishing policy and governance to ensure the orderly flow of trade, investment, people, logistics and data” in the island province of Hainan.
This transformed the Masterplan for the Construction of the Hainan Free Trade Port, released a year ago into legislative reality, providing legal guarantees for the future development of Hainan. Further, the FTP Law contains amendments to the Masterplan by, for example, adding provisions on refund of VAT and consumption taxes for goods from China’s inland areas, and sets detailed requirements on the movement of goods.
“Just like Hong Kong SAR’s Basic Law, the FTP Law is of epoch-making significance. Hainan's future is planned under the Central Government’s long-term roadmap, and such planning has now become law.”
- Tang Shanghao, Dentons China
“Just like Hong Kong SAR’s Basic Law, the FTP Law is of epoch-making significance,” says Tang Shanghao, director of Dentons Haikou Office. “Hainan's future is planned under the Central Government’s long-term roadmap, and such planning has now become law.”
In the year following the release of the Masterplan, Hainan experienced exponential economic growth: In 2020, its GDP grew by 3.5 percent; this figure rose to 19.8 percent year-on-year in the first quarter this year, the second-fastest across China.
“We need to think out of the box and make constant forays into new areas of service.”
- Wu Hao, Hylands Law Firm
Despite substantial progress, Hainan’s economy remains small. As Wu Hao, director of the Haikou Office of Hylands Law Firm, admits: “Recently many friends in China and abroad have said Hainan is about to become Singapore, Dubai or Hong Kong SAR, while in fact, Hainan’s 2020 GDP was only 553.239 billion yuan [$86 billion], ranking fourth from the bottom nationally.”
However, Hainan is catching up fast thanks to policy support. “In 2020, eleven industrial parks in Hainan FTP posted revenue of 506.78 billion yuan, a year-on-year increase of 49.8 percent,” says Wu, “From the release of the Masterplan in June 2020 to the end of May 2021, Hainan saw a stunning year-on-year increase of 375,000, or 44.33 percent, in the number of market participants, and 180,000, or 132.11 percent, in the number of enterprises.”
Other data also support this observation. Restrictions on travelling abroad amid the pandemic have made duty-free shopping in Hainan a new craze. Total purchases from July 2020 to March 2021 hit 33.6 billion yuan, up 241 percent year on year. Since last June, Hainan has attracted over 168,000 working professionals, an increase of 425 percent year on year. Benefiting from the shortened negative list for foreign investment, Hainan utilized more than $3 billion of foreign investment in 2020, with investors from 80 countries and regions. It became home to 419 new foreign-funded enterprises in the first quarter of this year.
Further, Hainan has also seen a phenomenal increase in the number of law firms. According to Nanguo Metropolis Daily, as of early April 2021, law firms operating in Hainan doubled to 277 from 139 a year ago, while the number of lawyers grew from 2,500 to 4,186. “Legal services will usher in a golden era in the context of Hainan FTP construction,” the newspaper said.
A CLEARER PATH
Hainan has a lower starting point. Yet, China has set eyes on constructing it into an FTP of the highest global standards, as evidenced by the 155 times that the word “autonomy” is mentioned in the Masterplan. Over the past year, governments at all levels sped up the release of policies and legislation to convert “autonomy” into reality. Rough statistics show that more than 110 policy documents have been promulgated over the past year.
“A large number of core policies and their supporting measures have been promulgated and enacted in quick succession following the release of the Masterplan,” Wang Jin of Dentons Sanya Office tells ALB, “These supporting policies focus on key areas such as taxation, talents, trade, investment, finance, transportation, industry, trade parks and business environment. Regulations and rules have also been introduced for intellectual property rights, anti-smuggling, diversified dispute resolution mechanisms, and ecological protection.”
Chinese ministries and departments have unveiled many preferential policies for Hainan since April, according to Reuters. The NDRC and the MOFCOM released 22 measures aimed at liberalizing medical, cultural tourism, commercial aviation, and new energy areas, followed by the PBOC and CBIRC promulgating the Opinions on Financial Support for Hainan's Comprehensive Deepening of Reform and Opening-up.
At the end of April, the MOFCOM issued another 28 measures for facilitating trade in goods and in services; in mid-May, Hainan's Provincial Government announced the Three-year Plan for New Investment Policies in the Free Trade Port, setting a target of more than 10 percent annual growth in private investment in infrastructure.
According to Zhang Ping, partner and management committee member of JunHe, these “policies and regulations have implications on all of our business aspects … leading to innovations in the investment landscape and business climate in Hainan, giving rise to projects involving investments or cooperation in Hainan across multiple sectors, and thereby directly bringing new businesses to law firms.”
In addition to industrial policies, Wang also points to a batch of significant legal policies, including the launch of the Hainan FTP Intellectual Property Court. The court was officially established at the end of 2020, and heard its first case at end of April 2021. The Opinions of Supreme People's Court on Judicial Services and Guarantees of People's Courts for the Construction of Hainan FTP, and the Regulations on Diversified Dispute Resolution Mechanisms in Hainan adopted by the Hainan Provincial NPC Standing Committee also “provide strong guarantees for law firms to grow.”
As the industrial development path becomes clearer in Hainan amid an array of new policies, law firms have been making moves accordingly. Hylands’ Haikou Office, which was set up almost at the same time as the Masterplan was released, is one example, according to Wu. It initially focused on litigation, but has since expanded to non-contentious and foreign-related areas. Over the past year, Hylands’ Haikou Office has concentrated efforts on healthcare, intellectual property rights, and cross-border practices.
Zhang cites another “duty” of law firms in Hainan, which is to participate in the rule of law development in the FTP, as well as exploring business opportunities that come with it.
Lately, the Xinhua News Agency commented that as a piece of framework legislation, the FTP Law’s enforcement relies on supporting policies. “There is still a long way to go before the rule of law matches Hainan’s FTP status,” said Xinhua.
Hainan is expected to embark on formulating and revising a large number of local legislations, and the progress of the FTP construction largely depends upon if new laws enacted could provide sufficient rule of law guarantees. According to Zhang, JunHe has been involved in the discussion of some local legislation and innovative policies in certain areas.
Meanwhile, “transactions triggered by the new negative list for foreign investment, or innovative policies, are already underway. JunHe also represented globally renowned firms in important cooperation projects in Hainan's duty-free industry,” says Zhang. Going forward, construction of the FTP requires better alignment of legislation and practices, in which the legal sector is bound to play a vital role.
BUT WHERE ARE THE CLIENTS?
As part of the services sector, legal services, particularly high-end legal services, are closely linked to economic development in terms of the degree of business activity. For Hainan, the demand for high-end legal services is yet to emerge. As an increasing number of big law firms looks to operate here, where should they turn to find new clients?
Law firms point out that it is in such context that large full-service firms could showcase their advantages.
According to Tang, Dentons Haikou Office, officially set up at the end of 2007, now has more than 120 staff. As “the largest among all Hainan offices of non-local law firms,” it has recorded annual average revenue of 100 million yuan for four straight years.
“Dentons Haikou office is not the only contributor,” admits Tang, “Out of the 100 million yuan revenue, roughly 30-40 million yuan comes from synergies within Dentons. Our clients not only come from Hainan but also other Mainland areas, and our earnings include earnings from cooperation with offices in Beijing, Shanghai, Guangzhou and other places.”
With an increasingly bigger Dentons network, Dentons Haikou has boosted its capabilities to serve a broader client base, including clients from the nearby Pearl River Delta, Greater Bay Area, or across China, or even across multiple countries under Dentons international network. Tang says, “law firms that are set to gain bigger market shares are those with a larger platform and with modern ideas and advanced structures and mode of operation.”
The JunHe Haikou Office also has close ties with other JunHe branches. Zhang tells ALB that JunHe Haikou Office, established in 1992, is the firm's first branch. “JunHe has a special bond with Hainan. In the early 1990s, Haikou Office contributed a significant part of JunHe’s total revenue. Many senior partners in JunHe today once worked in the Haikou Office, which is an important part of our southern China legal service network,” says Zhang.
“JunHe has recently set up the Hainan FTP practice group, which is capable of efficiently handling Hainan-related projects across multiple sectors, and providing one-stop legal support to clients for investing in Hainan.”
- Zhang Ping, JunHe LLP
In recent years, JunHe Haikou Office has been actively joining forces with other offices to explore new opportunities, including joining hands with Shenzhen Office in STAR market listing deals. It now represents a Shenzhen-based lighting company on a relevant project, which is “a new and significant non-contentious practicing area to Haikou Office.” Moreover, JunHe has recently set up the Hainan FTP practice group that handles deals across traditional practice areas and different offices, which “is capable of efficiently handling Hainan-related projects across multiple sectors, and providing one-stop legal support to clients for investing in Hainan,” says Zhang.
When it comes to future outlook, particularly the cross-border legal service sector that is bound to grow substantially in Hainan, Wang believes that the strengths of large firms surely will be further unlocked. This is because large firms can “cooperate with global firms in areas of cross-border trade, corporate mergers and acquisitions, finance, infrastructural construction, maritime, culture, sports and gaming, tourism, new employment and labour relationship, criminal law and other areas that require world-class legal services.” On the other hand, large firms are more capable of pursuing a better form of cooperation with foreign firms.
As with the much-needed economic restructuring, Tang first points to lawyers’ mindset when it comes to the challenges facing Hainan’s legal market. “Given Hainan’s economic foundation and size, the size of the legal service market, the scope of services and the client base are all rather traditional,” says Tang.
Wang concurs. “Legal services in Hainan are currently mainly for the real estate, construction and tourism sectors, and overly dependent on litigation. As Hainan wanes off its reliance upon the real estate sector, this sector may see contraction in business size contract or significant change in service offerings… Demands for non-contentious services are expected to rise in areas of policy consultation, corporate governance, corporate mergers and acquisitions, due diligence, arbitration and mediation, and may even become the mainstay of legal services in the Hainan market,” he says.
Meantime, high-end and diversified new legal service segments that relate to, for example, finance, trade, securities, aviation, intellectual property rights, maritime, will continue to emerge and grow, “existing legal services will no longer be suitable for the needs of FTP construction if they are not promptly upgraded and innovated,” emphasizes Wang.
The lack of highly skilled lawyers is another pain point. As Tang points out, “What Hainan lacks most is top talents with international exposure. Foreign-related talents must, first and foremost, speak relevant foreign languages, and have working knowledge of international laws, including policies, laws and regulations, business practices of different countries…This issue needs to be addressed by attracting talents or forming partnerships.”
Are law firms feeling the pressure competition with an increasing number flocking to Hainan?
Tang admits that a lot of Chinese, and even foreign, firms have set up shop in Hainan over the past year. However, to his knowledge, most “have ten or fewer staff… They exist just nominally, and it still takes time to grow business and workforce.”
In addition, different firms come to Hainan for different “purposes and pursuits.” Given the fixed taxation system adopted in Hainan's legal industry which is more preferential than other parts of the Mainland, some firms set up offices in Hainan solely to save cost. “We have seen cases where a law firm set up an office in Haikou, kept its office closed during normal business hours, and made no improvements after rounds of inspections, and later was ordered to close within one year,” says Tang.
The competition will surely become fiercer in the future. As Wang points out, with the FTP being constructed, demands for high-end legal services are yet to emerge, which means the problem of supply exceeding demand will continue for some time.” In response, Dentons quickly grew new practice areas to avoid cut-throat competition. Specifically, it “is actively developing new business in finance, trade, intellectual property rights, domestic and offshore mergers and acquisitions, while consolidating traditional areas. Further, we’re aiming to transition from traditional consulting and advisory services to rendering full services, including formulating and executing legal solutions,” says Wang.
Tang points out that the future development of Hainan's legal sector is closely aligned with the macro-economic landscape. “If all FTP policies are put into practice, the rule of law environment is effectively improved, and the legal market in Hainan can operate in a well-structured and healthy manner, all stakeholders will benefit. Large or international firms that are equipped with talents will gain bigger market share, while more traditional or smaller firms can specialize in traditional areas that are hard to replace.”
Another practical challenge facing Hainan’s legal sector is the preferential tax regime that is yet to be implemented.
According to legal media LexAlliance, the Regulations on Lawyers in the Hainan Special Economic Zone enacted in 2019 stipulates that “law firms and lawyers may choose the form of tax payment according to law.” Tang tells ALB that for domestic law firms domiciled in other Mainland areas, corporate income tax is levied on an actual basis, while in Hainan the fixed taxation approach has been used for more than a decade. In Tang’s view, it is such preferential incentives and simplified tax system that have attracted many law firms to set up offices here.
However, the Hainan Justice Department mentioned in a briefing last October that the actual-basis tax regime was expected to roll out province-wide. In fact, “this tax regime is already being implemented for law offices newly set up in Hainan, which undoubtedly produced a chilling effect… The full rollout of the actual-basis taxation approach may put a dent in the development of the legal sector,” fears Tang.
The more challenges, the greater opportunities for the winner. The same can also be said for law firms in Hainan, where the lawyers have already formed their visions for the future.
Wu of Hylands underscores the importance of innovation. “In a visit to Hylands’ Haikou Office in late May, provincial officials called for more efforts in intellectual property right protection and conversion, breakthroughs in high-tech, modern trade in services and tourism sectors, and actionable regulations for vessels and yachts,” Wu says, “this reminds us to think out of the box and make constant forays into new areas of service.”
JunHe is also prepared for future challenges. Zhang tells ALB, “Recently we leased a new workplace for Haikou Office which is now under renovation. The new office has bigger space and better facilities, so as to attract talented lawyers.” In terms of key areas of practice, “the Haikou Office is positioned in alignment with JunHe’s overall service package, while taking into account the unique features of the Hainan market.” For example, it will focus on healthcare, education, tourism, modern services, the high-tech sector, duty-free shopping for both departing travellers and residents, etc.
Wang talks about the importance of grooming talent. “Leveraging Dentons’ platform and resource strengths, we will provide lawyers in the Sanya Office with extensive and targeted training courses and learning opportunities to build up the talent pool for important specialized legal services that may soon be launched,” he says.
“The future demand for legal services in Hainan, be it the type, size or quality, will see dramatic changes,” Wang notes. “FTP construction will soon need world-class legal services and cooperation by lawyers worldwide, and we are well prepared for that.”
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