A quick look back

In the year 1867, when Englishman William Harwood was admitted to the title of solicitor, he decided that he would start his own business immediately in a city thousands of miles away from his own native country.

It was only 15 years ago when this small city of Shanghai was forced to open to foreigners by the defeated Middle Empire of the Qing Dynasty. Located at the crossing of the Yangtze River estuary and the centre of China’s coastline, Shanghai’s natural potential for trade attracted global attention almost at once. With the arrival of tens of thousands of Europeans and Americans, it soon grew into a business and trade centre of the Far East. Exterritorial concessions were carved out. People of all continents - known as the “Shanghailanders” – started living there. The foreign residents’ Shanghai Municipal Council was created, and finally the “International Settlement” was granted in 1863.

Then came Harwood, who settled himself well with the business people here. During his eight-year practice, he made important regional connections that lasted for over a century, and are still valuable. For instance, connections with the Hong Kong and Shanghai Banking Corporation, or HSBC, which was launched in the city in 1865. When Harwood returned to London in 1875, he joined Henry Stephenson to create Stephenson Harwood, which is practicing law successfully in seven offices across Europe and Asia till this day.

This is simply one among several stories about how much a lawyer could achieve in Shanghai even in the 19th century. However, since then Shanghai itself has not always been a “paradise of adventurers” or “wonderland of lawyers”. The old Shanghai ended with wars, revolutions and a regime change. It was not until 1992 that foreign law firms were allowed to enter the city again.

Yet, we now see another age of prosperity of international business here coupled with the boom of domestic private legal services since the 1990s. About 10,071 lawyers were employed by 889 local firms by the end of 2008, and the figure continued growing rapidly as suggested by the Shanghai Lawyer Association.

International firms are also coming back. As of 2009, 104 out of a total of 188 foreign firms licensed in China are based in Shanghai, according to statistics from the Ministry of Justice. Goes without saying that Stephenson Harwood was one of them.

“Among all the Chinese cities, Shanghai is always the first choice,” said Voon Keat Lai, managing partner of Stephenson Harwood Greater China.

Heritage and the Five-Year Plan

One of the recent newcomers is Cooley, a firm that originated from the Silicon Valley.  For this firm too, opening their first China office in Shanghai was a “natural choice”.

“It is an exciting city,” said Cooley’s Shanghai partner Brad Peck. In Shanghai, his firm plans to focus on venture capital and private equity fund formation, life sciences, digital media, and other technology sectors.

“(It) emphasises and supports the development of innovative technologies,” said Peck.

This was not the case a few years back given that the growth of Shanghai’s economy has long relied on the property market. However, such reliance had been declining since 2005, said Shanghai Mayor Han Zheng in a speech last October. The city’s Communist Party secretary Yu Zhengsheng added that Shanghai is keen to restructure its industrial base, by “moving from manufacturing-based to service-focused”.

By “service industries”, Yu means finance, trading, information services, and innovative industry, state media China Daily explained. The city plans to make the small and medium enterprises (SMEs) the key drivers. Such government strategy since 2009 has recently upgraded into the official 12th Five-Year Plan (2011 to 2015), which ambitiously set the targets as: increasing the share of the service industry to 65 percent of GDP, and catching up with international financial centres like New York and London.

In fact, along with China’s rise to the world’s second-largest economy position, Shanghai has surpassed London in terms of the size of the stock exchange market, according to Lai. But unless some key changes in policies are made, Shanghai is still far behind.

“The yuan has to be fully convertible; the Shanghai Stock Exchange (SSE) has to be open to international companies…International companies have to be able to invest in many industries that are still controlled by the government… These are some necessary ingredients of a genuine global financial centre, but they are not there yet,” he said.

However, lawyers also believe such improvement will certainly happen someday, given the determination and capability of Shanghai’s policy makers and the people.

 “I am optimistic that by 2020, Shanghai will become an international financial center,” said Simmons & Simmons senior counsel Michael Hickman, who has rarely seen major complaints about overall government policies and corporate services throughout his 10-year residence in Shanghai.
“I see Shanghai’s commitment to continuously move toward that goal…It is making significant progress,” he said.

The heritage of being an international trade centre does matter, he believes. There is a relatively efficient government, and a mature atmosphere for commercial activities better than any other place in China.
“Shanghai is traditionally more commercial and pragmatic,” said Zhu Linhai, senior partner at the Shanghai-headquartered AllBright Law Offices. “In contrast, Beijing is much more political and a bit bureaucratic.” It is only a question of whether to stay closer to the business community and private small and medium enterprises (SMEs) throughout Shanghai, or stay closer to the regulatory authorities and gigantic state-owned enterprises (SOEs) in the capital city of Beijing.

Another heritage lies with the people, who are “diversified” according to Hickman, and “open-minded” as described by Stephenson Harwood’s Shanghai Partner CF Lui.

“Shanghai has the willing and [the] ability to grow strong in financial sectors….The entrepreneurs embrace new ideas and concepts such as PE and VC. They learn these things very quickly. They think very fast. It’s their great advantage,” said Lui.

Intense competition

Lawyers always gather where their clients are. Shanghai, “where all the business is done, all the transactions are taking place” as Lai said, has potential for every sector of the economy and space for all the areas of legal practice.

Cooley came for the high-tech development strategy; Stephenson Harwood specialised in ship and finance to stay close to the world’s busiest container port; Simmons & Simmons is interested in energy and infrastructure and TMT; and they are all looking at tapping China’s major securities and commodity markets, as well as numerous financial institutions located here.

Meanwhile AllBright, one of the major firms founded locally, feels the competition against foreign firms is getting tougher.

“There is very tough competition here, especially in the practice of capital markets,” Zhu said. “The Chinese companies are investing overseas; the foreign companies are raising funds in RMB; the domestic and foreign markets of private equity are integrating; many Chinese companies are delisting in the U.S. and returning to [the] Shanghai Stock Exchange; generally, the cross border transactions have increased tremendously.”

But the new trend of Chinese enterprises going for outbound investment gives Chinese firms advantages in this competition, “as long as the domestic lawyers can provide full and satisfactory services of international standards,” he added.

“It is because the client resources are in the possession of the domestic firms. When a Chinese company is initiating a cross border deal, a Chinese firm is usually the leading counsel.”

As the international firms proactively expand their reach to tap clients, Chinese firms have yet another legal protection:  foreign firms and lawyers are not allowed to advise on Chinese law.

“So for the PRC lawyers, once they join a foreign firm, they would have to be able to practice international law,” said Lai. “Luckily, there are excellent Chinese lawyers with good experience,” he said.

Need for talent

Legal talent was listed by the Shanghai government as one of the six highest in demand professions in 2006. The trend continues.

Hickman said the quality of local legal professionals has significantly improved with more and more overseas trainings and experiences. But the supply still cannot meet the demand.

“There is increasing demand for legal talent, and there is a shortage…,” he said.

Insufficient production means that the lateral move is intensive, and competition between domestic and international firms is heating up, as “there is always enough deals but not sufficient people to handle,” suggested Zhu.

“It’s hard to find good people. We anticipate the market will continue to be tight,” said Lai.

While the increasingly internationalised Chinese lawyers are qualified for international firms, who normally offer more generous salaries which appeal to some “impatient” young lawyers, Zhu added that Chinese firms can be attractive for foreign lawyers too.

“The top foreign lawyers based here are not supported well enough from their headquarters back in Europe and America, which are suffering economic difficulties. But Chinese firms are rooted here, and China practice is the core area with higher priority and better support,” he said. “…as long as they overcome the cultural differences and adapt into the Chinese culture and manners.” ALB