What just happened?

A troubled region. Hong Kong was once the mighty financial centre that had a strong presence within the G20 market. It is now facing protest and coronavirus – problems that have significantly impacted its economy.

What does this mean?

According to the findings by the Economist, figures released on 3rd February 2020 demonstrates the Hong Kong GDP has decreased by 2.9% from its last quarter of 2019.[1] This came in the time of the infamous ‘Hong Kongers’ protest, reaching its peak in the vulnerable region towards the end of 2019.[2]

Then came the ‘Coronavirus,’ and despite funding of $3.8 billion (US Dollars) in additional liquidity relief made by the HSBC to control the adverse effects of the coronavirus outbreak on the economy, this may fail to deter the imminent fall of capital.[3] This is because the analysts in international banks such as the UBS still expects a fall of over 6% in the first quarter of 2020 compared to the same period in 2019.

How will this affect the legal industry?

The Coronavirus has halted production from the world’s foremost manufacturing powerhouse and a significant player in the global supply chain.[4] This will cause a domino effect in sectors that rely on any Chinese offerings and would, therefore, create a potential deadweight loss in the market. If no purchase is made of Chinese offerings, the fall of Chinese business will cause a catastrophic impact on Hong Kong’s economy. This is because of the currency of Hong Kong, which has been closely tied to the American Dollar since 1983[5], where if the unrest continues, Chinese businesses may opt to convert their holding to American Dollars. But here is the catch, the Hong Kong Monetary Authority’s foreign-exchange reserves amount to $440 billion. However, this figure is small in contrast with customers’ deposits with banks for a sum that exceeds $800 billion. This means that if the majority of Chinese businesses converted their holdings into American dollars in order to escape from this downfall, there would not be enough money to go around. The Chinese banks will become empty, and what started as a disease from Wuhan will bankrupt the ‘New York of the East.’

This will largely affect law firms with global aspirations as China’s strong economic growth generates deal flow and opportunity for transactional and disputes lawyers. But when a virus can even stagnate upper-mid market merger deals,[6] the international businesses facing a failing economy in a troubled state will begin moving to other countries in Asia at a significant pace to take advantage of their economic growth. Global law firms will follow its clients, but they will have to invest more to start afresh again as new countries will have legal and commercial implications that may oppose the traditional way of dealings that take place in the Western World.

The Assessing Law Firms: #Allen&Overy #Ashurst #Baker&McKenzie #CliffordChance #Dentons #DLAPiper #EvershedsSutherland #FreshfieldsBruckhausDeringer #Linklaters #NortonRoseFulbright #Slaughter&May

References:

[1] ‘A train of troubles: Just how stable is Hong Kong’s economy’ (The Economist, 6th February 2020)

[2] Violet Law, ‘In Hong Kong, a new virus rekindles old animosities towards China’ (Al Jazeera, 12th February 2020).

[3] Chad Bray and Enoch Yiu, ‘HSBC to provide US$ 3.9 billion in additional relief to Hong Kong businesses hit by coronavirus outbreak’ (South China Morning Post, 9th February 2020)

[4] See an example of Nissan and Hyundai facing problems due to the Coronavirus in ‘Coronavirus & Force Majeure – a get out a jail card’ (The Businessfirstonline, 18th February 2020)

[5] A train of troubles: Just how stable is Hong Kong’s economy’ (The Economist, 6th February 2020)

[6] Hudson Lockett and George Hammond, ‘Coronavirus epidemic hits China dealmaking and IPOs’ (The Financial Times, 11 February 2020)

Disclaimer: This article (and any information accessed through links in this article) is provided for information purposes only and does not constitute legal advice.