The year 2022 could not have panned out more differently for the two Asian hubs. Hong Kong, which aligned itself with China’s Zero COVID policy until quite recently, has seen its economy slow and professionals head for the exit; however, its fundamentals remain strong, and the city is known for nothing if not its resilience. And while Singapore might have gained ground in the process – and attracted a flurry of law firms -the growth of its legal industry could be constrained by its innate drawbacks.

 

ONE REGION, TWO PLAYBOOKS

Throughout the course of the COVID-19 pandemic, which has roiled the world since late 2019, Hong Kong and Singapore have travelled different paths. As 2023 dawns, Singapore has been open for months now – after initially adopting a heavy-handed approach – while repeated COVID resurgence keeps Hong Kong torn between economic sustainability and public health considerations.

As a result, what started as discreet whispers weighing the Asian duo’s respective strengths and weaknesses has gradually and openly pitted them against each other. Although the rivalry never received official endorsement, the jousting between Hong Kong and Singapore is clearly visible.

Officials from both hubs marketed their advantages at duelling flagship conferences. Both governments rolled out preferential policies and schemes to reel in global investment and talent. Leaders spelt out ambitions for their cities to become top-flight international legal and financial powerhouses.

“Hong Kong is back,” declared top government officials after almost three years of isolation following months of social unrest. The message seemed reinforced by images of top global bankers flying in for an exclusive investment summit, and maskless revellers rejoicing during the city’s first Rugby Sevens event in more than three years.

But there remain concerns about Hong Kong shedding its sheen. More than 113,200 residents left the city between mid-2021 and mid-2022, ratcheting up fears of an acute talent shortage. The economy has weakened for three consecutive quarters, with the government downgrading its full-year forecast to a 3.2 percent contraction, even as Singapore’s GDP is projected to grow by three to four percent this year.

In the legal industry, firms cast their votes of confidence through office open-ings and closures.

On the heels of an array of openings in Singapore last year, more foreign firms hit the city-state’s shores in 2022. Those hopping on the bandwagon included U.S. firm Goodwin Procter, Spain’s Pérez-Llorca, and London-head-quartered Charles Russell Speechlys. Houston-based Baker Botts, which shuttered its Hong Kong office last year, has tapped Singapore to advance its Asia endeavour. Meanwhile, in Hong Kong, Addleshaw Goddard bid adieu this year, and few would bet against further exits in the near term.

Traditionally, Hong Kong and Singapore are seen as independent strongholds serving different markets. But amidst the deepening perception of Beijing overshadowing Hong Kong’s rule of law, banks and investment fund managers – many of them clients of big international law firms – were said to have begun to shift their business and staff from Hong Kong to Singapore. Managing partners of law firms are now being forced to contemplate whether to downsize their Hong Kong footprint to chase the gold.

“Singapore has become the broader Asia play for many international firms. But if you are very interested in the PRC market, then Hong Kong is still probably your key China play,” says Anthony McKenzie, Singapore managing partner at offshore firm Carey Olsen.

Notes Antony Sassi, the Hong Kong-based Asia managing partner at RPC: “Those firms that diversify their business will be better positioned to respond to challenges and opportunities in both cities.”

HONG KONG: RESILIENCE IN DISTRESS

The air was brimming with an overwhelming sense of relief and jubilation in Hong Kong on Sep. 23, when the recently anointed Chief Executive John Lee announced the removal of an onerous hotel quarantine scheme that had been vexing international travellers for more than two-and-a-half years.

“Asia’s World City” had endured an arduous trek to reach that milestone. The controversial policy that subjected overseas arrivals to lengthy isolation in designated hotels had whipsawed the city’s retail and tourism sectors, while fuelling an exodus of multinational corporations and working professionals. Foreign business groups, including the American Chamber of Commerce, relentlessly pressed for relaxation of the rules.

Carrie Lam - the city’s leader until June 30 – adamantly insisted that Hong Kong’s pace of reopening needed to align with that of mainland China.

But unabated flare-ups have sent the world’s second-largest economy repeatedly doubling down on its years-long strategy trying to stamp out the virus through hardline measures. Major manufacturing hubs including Shanghai and Chengdu were sealed off for weeks, crimping global supply chains and snarl-ing business operations. As a result, for the first time since its miraculous take-off in the 1970s, China’s economic drive seemed to be losing steam.

With these adverse conditions throttling growth, smothering investment appetite, and encumbering mobility and face-to-face contacts, Hong Kong’s capital markets - having thrived on robust mainland deals and initial public offerings (IPO) work in past years – have struggled. Firms and lawyers focused on this area are bearing the heaviest brunt.

“No one that I’m aware of is doing particularly very well,” says Richard Hall, a corporate partner at offshore firm Conyers. “Small- and medium-sized Hong Kong law firms that were particularly focused on IPO work in mid-cap and small-cap companies are probably struggling the most because that’s just evaporated as a business sector. In that area of the market for law firms, inevitably there will begin to be redundancies, possibly closures.”

Nick Chan, a partner at Squire Patton Boggs, notes that the withering market climate has suppressed the momentum of once-popular fundraising vehicles, such as special purpose acquisition companies (SPACs). “I expect about eight good SPACs maximum this year, partly because the U.S. that led in SPACs is not doing well in SPACs either,” he says.

The stakes are even higher as the fast-paced arrival of PRC firms has begun to put the screws on incumbent players. Boasting extensive referral networks and resources rooted north of the border, PRC firms are nonetheless girding for hardships after snatching up marquee lawyers from Western outfits. “It’s a difficult time to arrive with a very high cash burn,” says Hall.

For now, “the inevitable impact will be more firms chasing less work and a pushdown on fees, and ultimately, down-sizing in some of the firms,” adds Hall. The pressure is on big IPO firms to batten down the hatches to stay afloat. Those which fail to redeploy corporate lawyers to other practice areas are faced with unsettling decisions to trim headcount.

Amidst the tumultuous time, firms are more prone to lean on policy support, which in Hong Kong’s case is manifested insights being set on the Greater Bay Area. Chan, who also serves in multiple government and public roles, has no doubt that Hong Kong has plenty to offer.

“The central government in mainland China is supporting the HKSAR to integrate further in a number of ways. Individuals, for example, could buy more financial products in Hong Kong. And with rapidly developing law tech, we can enable easier and quicker eKYC to facilitate client onboarding,” says Chan. “There will be a lot of work for lawyers.”

On top of that, Hong Kong is on the brink of joining the RCEP – the world’s largest trading bloc that is expected to foster closer legal service exchanges. And even as Singapore makes strides as a regional arbitration hub, Hong Kong is marshalling its own arbitration clout with the establishment of the Asian-African Legal Consultative Organization regional arbitration centre. Chan is at the helm of the 47-member inter-governmental body.

“This is going to be huge. The Afri-can money is not going to London, Berlin, but Hong Kong,” a lawyer in the SAR who asked not to be named, tells ALB. In contrast, “Singapore is a really small market that can’t take Chinese money. It’s getting better press at the moment because it’s not China” amidst the ongoing Sino-Western rivalry, the source says.

But a retired Hong Kong managing partner of two foreign firms is sceptical that Hong Kong can hold its edge within the GBA, which is increasingly flush with home-grown talent educated abroad, multilingual, and hungry for knowledge.

“Hong Kong still holds an edge for now, but it’s hard to say further down the road,” he says. “Size of the market does matter.”

Political interference in judicial decisions has also at times reinforced negative impressions of the SAR’s legal system. In the latest example, city leader John Lee asked Beijing to intervene hours after Hong Kong’s top court allowed a prominent British barrister to defend a local media tycoon accused of foreign collusion under the National Security Law.

A long-time local senior lawyer, who staunchly defends the independence of the city’s courts, faults the government for jeopardising its messaging that the SAR is truly “back” to the international stage.

“Stakeholders in Hong Kong could do a better job of ‘reaching out’ to the international legal profession in the city,” the lawyer says.

Chan, on the other hand, is confident that the SAR will shine as the beacon of common law bolstered by the world’s largest civil law jurisdiction.

“We are the best of both worlds: We have international expertise, law tech, low tax, and we are going to be the disputes resolution centre and legal services hub,” says Chan. “It’s rather common to see parties in international contracts – even where none of them are Hong Kong incorporated companies – continue to turn to us because they want to use Hong Kong law and arbitration as the way to resolve disputes.”

While Hong Kong’s further embedment in the GBA may rankle those wary of Beijing’s growing grip on the former British colony, Hall of Conyers dismisses the narrative of an exodus taking hold of the city due to perceived deteriorating autonomy.

“Almost none of what’s been expressed to me has been by those who don’t have faith or belief in the future of Hong Kong. Neither are we seeing people exiting the legal profession,” says Hall.

And talking of the brain drain, Chan notes that the swirling frustration precipitated by limited upward social mobility may have driven some people to leave to try their luck elsewhere. The SAR, he says, still retains the best of the crop of legal professionals.

Since 2019, Hong Kong - once the main locomotive powering China’s economic growth - has been challenged by social upheaval, trialled by political polarisation, and tested by the pan-demic. With the government finally inching towards reopening, those who have been calling Hong Kong home for decades are optimistic that the city will stage a comeback.

“Before the 1997 handover, if you had 10 dollars from every person who told you Hong Kong was dead, you could have left Hong Kong a very rich person,” says Hall.

“Hong Kong will do what it has done for the last 150 odds year – to make the best of the opportunity when it presents itself. The city will take off again and you and I will forget we ever had this conversation,” he adds.

SINGAPORE: ALL THAT GLITTERS

With Hong Kong stuttering, Singapore continues to rise as a favourable alternative for a growing number of foreign law firms eager to anchor their Asia offerings.

Most firms tend to concur that the city-state’s allure is heightened by its efficiency of governance, sound legal system, social stability, and the multi-lingual proficiency of its population of 5.7 million. Additionally, Singapore’s proximity to a fast-growing Southeast Asia and India is what makes it a formidable contemporary to Hong Kong, according to Carey Olsen’s McKenzie.

“Because of these things, Singapore has become a leading regional tech, private client and asset management hub, and increasingly, a banking finance hub,” says McKenzie.

Koh Swee Yen, disputes and arbitration partner at WongPartnership, also notes the surging prominence of family offices in the Lion City. “The growth of family offices in Singapore is phenomenal, and the wealth is not just coming from Asia but also from America and Europe, no less due to geopolitical tensions and instability in many parts of the world. High-net-worth individuals would want a place which is safe, predictable, reliable and secure,” she says.

The influx of capital, combined with the government’s efforts to attract world-class talent, has certainly helped Singapore in its goal of becoming a premier global legal hub. But Rachel Eng, managing director of PwC network firm Eng & Co., does not expect foreign firms to find it easy.

Currently, foreign law firms in Singapore eyeing a slice of domestic law advisory work will have to attain the highly coveted Qualifying Foreign Law Practice licence. Alternatively, they can also enter into Formal Law Alliances with domestic partners while remaining independent entities with separate financials.

Eng, who spent two decades at one of Singapore’s biggest local firms before opening her own practice, explains that the policy stemmed from the government’s philosophy to discourage litigiousness in the society. As such, domestic law practices “will always uphold the social ethos” and thus stay in a relatively comfortable position.

For foreign firms, they may end up in a scenario where their vision and appetite outsize what they can actually do.

“If you’re an international firm but don’t have one of those tickets – which hasn’t been issued for about 10 years, you’ve got to tie up with a local firm,” says McKenzie. “I expect many of these new entrants, particularly the U.S. firms, to be very focused in their offerings. They are not trying to be all things to all clients here.”

Central to how law firms perform in Singapore, Eng stresses, is their ability to “grow the pie” together. “If the pie didn’t grow, we can’t absorb so many lawyers,” she says.

However, there might just not be enough pie for everyone as foreign practices settling down on Singapore’s soil are likely to find themselves vying for work trickling out of a tighter-than-expected pipeline.

“A big challenge for Singapore is its exchange. There’s little liquidity here and clients will often look elsewhere in the region if they want to list,” says McKenzie. “At the moment, there’s not much listing work going on. Equity capital markets work has dried up across the region and there’s a lot of scrutiny by China on listings of Chinese businesses.”

Neither are domestic firms as impenetrable as they are perceived to be, with the home teams buffeted by intensifying competition. “Even the Big Four are not in the luxurious position that they used to be in Singapore,” observes McKenzie.

The Big Four is shorthand for Singapore’s prestigious domestic legal quartet – Allen & Gledhill, Drew & Napier, Rajah & Tann, and WongPartnership. The group used to dominate cross-border work, but now, “cross-border transactional work is being divided amongst a much larger pool of law firms in Singapore,” says McKenzie.

“For a cross-border deal that involves multiple jurisdictions, one may find it makes more sense to use an inter-national firm based in Singapore simply because they can advise on the laws of those different jurisdictions,” he adds.

In addition, economic headwinds have further thwarted the upper hand that domestic firms hold over their overseas counterparts. Before Singapore finally moved to phase out all pandemic-related curbs in the middle of this year, measures that the government re-invoked to halt the rapid spread of contagious COVID variants had blunted the country’s recovery at a time when most of the West opted to dismantle zealous countermeasures and live with the virus.

“Somewhere from late last year to early 2022, the U.S. and the UK markets opened up first,” recalls Eng. “As a result, when Singapore was still under tight COVID restrictions, the U.S. and UK firms were already busy and raised compensation to retain talents. That hit us almost immediately.”

Koh of WongPartnership concedes that talent retention has become an entrenched headache for law firms with the new generation of professionals reshuffling their priorities in life. Younger lawyers have also flocked to establish their own practice - one of the major trends characterising Singapore’s legal workforce in recent years.

But Koh is less wary of local practices losing the talent war to deep-pocketed overseas firms. “What matters is the value proposition that is being offered - developing one’s practice at the home jurisdiction, the type and scope of work, and the progression to partnership. While there is bound to be some outflow, the overall situation may not be that bad as there is only a certain number of lawyers the international firms can hire in their foreign offices,” says Koh.

With grand plans and rosy visions checked by reality, a part of the enthusiasm is giving way to pragmatism. Both existing and new players are confronted by the realisation that the burgeoning Singapore market is not without its limitations.

“I expect that U.S. firms may continue to enter the Singapore market because of the spectre of China in Hong Kong,” says McKenzie, before admitting that “Singapore is starting to become a more crowded marketplace for law firms.”

Eng agrees: “Some overseas firms told me, ‘Our head office sent us to Singapore thinking that it’s easy to get work since all the clients have offices here, and they are wrong partly because every law firm is here and competition is so keen.’”