Gateway to the East

City law firms with Hong Kong offices are adopting a wider strategic view as they prepare for next year's handover to China. By Robert Verkaik

One City lawyer who recently returned home after a long tour of duty in his firm's Hong Kong office described the colony's fast-approaching handover as like staring down the barrel of a gun.

"The closer it gets the more jittery people become," he said.

But although thousands of Hong Kong nationals queued to beat the deadline on 1 April for British Nationals Overseas passports, and many more took to the streets to demonstrate, UK law firms have no plans to leave. In fact, most lawyers are talking up the arrival of their new Communist landlords.

Linklaters and Paines has an office in Hong Kong with 11 partners and more than 100 staff.

Terence Kyle, Linklaters' managing partner, says the firm has no reason to fear Chinese rule. "We will carry on as normal. We are not going to immediately close the office on 1 July [1997] nor are we are making any drastic changes."

But Hong Kong itself is changing at a quite rapid rate. Local Chinese have taken over the senior public services posts and the Hong Kong Stock Exchange and the Securities and Futures Commission have been "localised". More and more expatriates, now finding themselves out of jobs, have returned home. Law firms have also had to adjust.

Linklaters is typical in having taken on more and more Mandarin-speaking employees. Now the firm has a clear majority of local Chinese. Doing business in the Special Administrative Region, which Hong Kong will be known as after 1997, will mean lawyers will have to find their own way in the unpredictable environment of Communist capitalism.

Hong Kong has been facing up to this reality for some time by making itself indispensable to China's needs. Hong Kong-based business has already made an enormous investment in southern China and the city's seaport and new airport are vital links for China with the rest of the trading world.

Mr Kyle says: "So long as there is an established, stable business environment where the rule of law is upheld then Hong Kong is set fair to continue to boom. Rather than a self-contained entity in its own right it will become one of China's major gateways looking outwards into the world."

However, Hong Kong's lawyers are perhaps understandably a little bit more concerned about what might happen after 1997. The Law Society of Hong Kong has signalled its intention to maintain strong links with the Law Society of England and Wales after the handover. The theory seems to be that a Hong Kong Law Society closely tied to its Western counterparts will be more difficult to usurp. Last year Patrick Moss, the president of the Law Society of Hong Kong, paid a visit to Britain to seek reassurances.

Jonathan Goldsmith, head of the international department at the Law Society, stresses the importance of the mutual recognition given by the Hong Kong and UK jurisdictions to each other's solicitors.

Says Mr Goldsmith: "We would be concerned if there were any dilution in the reciprocal access to the title [of solicitor]. We will also want to make sure that our own members will be able to continue to operate in the same way that they do now."

Mr Kyle hopes the sort of political obstacles that sometimes make it difficult to conduct affairs in China will not characterise Communist Hong Kong.

He says: "The principal difficulty in doing business in China is the dependence upon which political connections you have." He says law firms are sometimes caught in the middle of a political dispute between the central administration of Beijing and one of China's many regional power bases.

"As long as there is an environment which is friendly disposed to the influx of Western capital through Hong Kong into China and outwards then the financial institutions will continue to require servicing by City law firms," adds Mr Kyle.

But City law firms are still precariously placed. The new Chinese entrepreneurs have tended to build relationships with the Hong Kong-based businesses rather than foreign companies. Because of this it has been the Hong Kong law firms, rather than their City counterparts, which have benefited.

To this end Nabarro Nathanson, in preference to establishing an independent Hong Kong office, has decided to forge links with Hong Kong solicitors Livasiri and Co, one of the fastest-growing law firms in Hong Kong. Many of its clients are owned by the People's Republic of China.

Under the agreement between the two firms, Nabarro will provide legal expertise and will second staff to Hong Kong. In return Livasiri will recommend the UK firm for European and Middle East work.

Charles Harvey-Kelly is the latest partner to return home from the Slaughter and May Hong Kong outpost of seven partners and 100 staff. While he was there he detected a trend in the movement of UK law firm clients from Hong Kong to Singapore.

"People now feel they can maintain operations in two centres [Hong Kong and Singapore], which is efficient if you are trying to cover a wide area," he says.

As 1997 approaches Singapore is replacing Hong Kong as a business centre for dealing with India, Indonesia and Malaysia. But Mr Harvey-Kelly says Hong Kong will still remain an important operational centre for doing business with China, Taiwan and the Philippines.

Law firms are keeping a close eye on who goes where because, as Mr Harvey- Kelly acknowledges, City law practices are "client driven".

Lawyers are only too aware that without the business confidence to invest in China their own services will not be required. Mr Kyle says this investment has been "very patchy" over the past two years. "There have been one or two big tickets but a lot of people have been very wary of putting a lot of money into China because of the economic and political uncertainty."

So under what conditions would law firms start pulling out of Hong Kong? Mr Kyle says: "We would consider closing the office if it was clearly ceasing to have a business role or if there were to be a breakdown of acceptable standards of law and order." He says this would include an unacceptable standard of human rights. But Mr Kyle feels quite strongly that Hong Kong will continue to do business as usual.