If Beijing features the country’s first-tier state-owned companies, and Shanghai boasts the regional headquarters of most international companies in China, Guangdong Province is beaming with pride about being home to the country’s largest number of private companies, many of which are world-renowned. And the upcoming legal opportunities in the region will revolve around these private companies, lawyers say. Li Shangjing reports.

The Pearl River Delta area or Guangdong province has long been a hub for innovation and reform, boasting of a vast number of world-renowned private companies including Huawei, Tencent and Ping An Insurance and generating around 25 percent of the country’s trade. 

The region, particularly around the city of Shenzhen, is fast becoming a centre for innovation and technology. It is also cultivating a services industry that focuses on law, finance, design and accounting. 

As one lawyer puts it, if Beijing boasts of an outstanding number of state-owned companies and Shanghai serves as the regional headquarters of most foreign companies in China, then Guangdong province should take full advantage of how it has fostered entrepreneurship, which gave rise to numerous private companies. 

Lawyers have long had an eye for the Guangdong market and its potential, and that partially explains why the number of lawyers number in the region is booming and ranked the first across China. 

By the end of last year, Guangdong has a total of 29,138 lawyers and 2,502 law firms. One third of the lawyers (about 10,288) are from the capital city Guangzhou, while 9,500 are from the tech hub Shenzhen. 

“In Guangzhou, we see a steady growth of lawyers every year. We are trying to control the growth rate [to stay at] 8 percent to 10 percent, so it won’t go up outrageously and disrupt the market,” said Huang Yongdong, chairman of Guangzhou Bar Association. 

Huang observed in terms of legal service, lawyers in the city are no longer stuck in traditional sectors like manufacturing and infrastructure. “As lawyers, we are all ‘cutting one cake and sharing the slices’, so we should keep looking for new growth engines.” he said. 

THE DEMAND FROM THE PRIVATE ENTERPRISES 

One increasingly outstanding source of legal demand across the country, especially in Guangdong province, is family-owned enterprises. Many lawyers even use the marketing term “blue ocean” to emphasise just how lucrative these opportunities are. 

This is not hard to understand. Guangdong has always been a pioneer in economic reform and innovation. When Deng Xiaoping’s “let some people get rich first” slogan kicked in, many entrepreneurs started their business in the province, turning Guangdong the province that has the most family-owned enterprises. 

“All family enterprises are pursuing ways to protect, manage and pass down their fortune,” said Zhang Jun, a senior partner at Dentons Guangzhou in an interview with ALB. “Private companies would face inheritance issues eventually. “Family Trust Law is well established in Hong Kong and other developed economies, but not in China,” added Zhang, who is also the author of the book Family Trust. 

U.S. business magazine Forbes defines family enterprise as a business wherein the ownership or control right of the enterprise belongs to a family, with two or more family members involved in the direct operations of the company. Forbes has estimated among all A-share listed companies, one third of them are family-owned. Among the 100 biggest A-share listed family enterprises, 14 of them are from Guangdong, followed by Zhejiang and Jiangsu province. 

“I would say it is completely Blue Ocean here with huge demand,” notes Zhang. 

REEVALUATING THE IP MARKET 

According to many lawyers that ALB has interviewed, the intellectual property sector presents another breeding ground for opportunities. 

An innovation hub generates great demand for IP legal service, but capable lawyers in this sector are still scarce. As such, some innovation giants like Shenzen-based Tencent and Huawei have established their own IP research institute to better serve their needs. 

“The demand of intellectual property service here is huge. But regretfully, [the role of] IP in the professional development of Shenzhen lawyers is only beginning to take shape, and they are far from being competent,” explained Zhou Xuan, a partner at Jingtian & Gongcheng’s Shenzhen office in an interview with ALB. 

“In a highly developed economy full of private companies, the legal service must step up,” she added. “To me, this area is Blue Ocean as well.” 

Shenzhen has introduced many enticing policies over the years to attract overseas talent to come home and work, contributing to the success of the city. And since most of these policies prioritise high-tech and science talents, the city has come to be known as “China’s Silicon Valley”. In comparison, however, incentives for students studying arts or the law are negligible, says Zhou. 

“Every year during the two meetings – National People’s Congress and the Chinese Political Consultative Conference – I would extend my proposals to Shenzhen government to invite more arts talent back home.” She thinks this is one reason for the lack of talent in IP legal service. 

Foreign law firms also sense Shenzhen’s strong potential. Chicago-based IP firm Brinks Gilson & Lione announced this May that it filed an application with Shenzen’s municipal justice bureau to establish an office there. If approved, Brinks Gilson will be the first foreign law firm to open an office in the city. 

“Brinks Gilson & Lione’s purpose in establishing our new office in Shenzhen is simple,” says James R. Sobieraj, the firm’s president. “We want to be closer to our clients in China.” 

As many companies continue to venture into China’s most innovative region, law firms and legal service will follow suit. The opportunities in this practice area are diverse, but one thing is for certain: they will all revolve around private enterprises. 

As ETR’s Huang points out, “Private companies account for majority of China’s enterprises. As lawyers, we will definitely serve them more.” 

HSBC in charm offensive to woo China skeptics 

Battling against skeptical Western investors, HSBC is on a mission to explain why its push into a slowing China is good for the global bank’s future growth. 

HSBC, which reported flat annual pre-tax profit in 2015, is betting that the Pearl River Delta region in southern China is succeeding in rapidly upgrading its economy from low-value manufacturing to high-growth industries, creating big opportunities to provide banking services. 

But overall negative sentiment towards China has meant its shares, have dropped 26 percent over the past year. 

In the run up to its annual shareholder meeting in London last April, HSBC took analysts and investors on a three-day tour of the Pearl River Delta, an area with 60 million people just across the border from Hong Kong. Its UK-based board went on a similar tour of the region last year, according to people familiar with the situation. 

HSBC, which is the largest bank in Hong Kong and currently has 65 bank outlets in Guangdong province, which includes the Pearl River Delta, is hoping to produce $1 billion a year in pre-tax-profit from the area. But some investors are doubtful given the economic slowdown in China and a spike in Chinese bad bank debt. 

HSBC’s growth plan envisages adding 4,000 employees to the Pearl River Delta area over the next three to five years. It also plans to redeploy capital from other regions into Asia, though it is unclear how much of that will target southern China. It currently has around 1,500 bank employees and 13,000 IT and support staff in the Pearl River Delta. 

Citi analyst Andrew Coombs, who was on the trip, says HSBC is looking to grow its branch network in the region to 100 outlets, but HSBC will not comment on that. 

“The bank’s Pearl River Delta strategy is perfectly sensible,” said Ian Gordon, who heads bank research at Investec bank and was on the trip. “However it will likely be three-plus years before we see any meaningful incremental contribution. It does nothing to soften the impact of near-term headwinds.” 

Last year, HSBC made 83.5 percent of its unadjusted pre-tax profits in Asia and 52 percent in Hong Kong alone. Its mainland China banking profits, excluding associates, stood at $1.05 billion. 

FROM OLD TO NEW 

The Pearl River Delta, which has played a crucial role in China’s opening up to the world since the late 1970s, accounts for one quarter of the nation’s trade and has been known as the ‘workshop of the world’ for its production and export of massive amounts of garments, electronics and other products. 

The region, particularly around the city of Shenzhen, is now turning into a hub for innovation and technology, as well as developing a services sector that includes law, design and accounting. Its $1.1 trillion in annual gross domestic product is already bigger than Indonesia’s. 

During the road show, participants were introduced to local HSBC clients such as appliances maker Midea and telecoms giant Huawei, according to the trip’s agenda. 

Other HSBC customers in the region include DJI, a Shenzhen-based manufacturer that supplies three quarters of the global market for commercial drones thanks to its Phantom model. 

“The Pearl River Delta is a natural area for (HSBC) to be operating in,” said Joost de Graaf at Amsterdam-based Kempen Capital Management, which owns shares in HSBC. “But the issue that the majority of investors will have is that (China) is not a transparent market, and the lack of bankruptcy law or formal procedure to repossess assets when clients default, makes it hard for people to truly judge the health of the financial system.” 

Citi, which rates HSBC as its top pick among UK banks, says HSBC currently only makes $100 million in the Pearl River Delta. HSBC is the biggest foreign player in China, where collective market share by foreign banks remain below 2 percent. 

DIVIDEND 

To retain investors and attract funds that focus on dividend-paying stocks, HSBC distributed about $10 billion of its 2015 profit in dividends, offering a chunky 8 percent yield, one of the highest in the global banking world. Gulliver told Hong Kong shareholders at the bank’s informal annual meeting that the bank is also studying the possibility of a buyback of its shares, which are now trading below book value. 

“My major concern, as I am sure it is to other investors, would be whether they are able to maintain their dividend policy and balance sheet ratios during the Asian Pivot,” said Tony Jordan at EFG Asset Management (UK), which owns HSBC shares. 

A securities joint venture due to be launched in China, which HSBC will majority own, will give it the chance to offer services ranging from investment banking and domestic securities trading, where it faces stiff competition from local lenders. 

For some Asian-based investors with a long-term view, HSBC’s focus on China is precisely the reason to invest in the bank. 

“We re-entered HSBC with our Asian funds four years ago on the basis of its return to its Asian roots,” said Hugh Young, managing director at Aberdeen Asset Management Asia. 

“The China strategy is important. But for many of the investors, who don’t look at it that closely, it may be too esoteric.”