On several occasions I have reported on the growing importance of Mainland China in the Asian legal recruitment market.  It is simply a case of lawyers moving to where the business is in order to provide the necessary support services.  One of the relatively few brakes on non-domestic legal expansion in China has been the PRC’s regulatory framework. 

However, certain barriers to foreign business activity in the Chinese market are coming down, not least because of the Government’s obligations under World Trade Organization rules.  Over the last few years, this has led to foreign law firms setting up and growing rapidly on the Mainland.  The recent announcement that the first foreign banks have been given final regulatory approval to incorporate in Shanghai is another very important step.

The four banks in question, HSBC, Standard Chartered, Bank of East Asia and Citigroup are likely to be the first of many.  Indeed several other banks, such as Overseas Chinese Bank, DBS Bank, Bank of Tokyo Mitsubishi and ABN Amro have already received initial approval, while applications from others are said to be pending.

While these overseas banks and others already have a presence on the Mainland, local incorporation will enable them to extend their operations to include a wide range of yuan denominated services.  In particular, they will be able to operate in the retail banking sector, meaning they will be able to offer services such as wealth management and credit cards.

From a legal recruitment perspective, it is a development that is likely to result in a whole host of both direct and indirect changes.  The most obvious, short term consequence is likely to be an increase in the number of in-house banking roles on the Mainland, and in particular in Shanghai, which seems to be the preferred base for a majority of banks.  As there will, in essence, be a raft of big start up businesses, there are likely to be opportunities at all levels from junior to senior, both on the legal and compliance sides. 

These businesses will also undoubtedly generate a very significant amount of work that is over and above that which can be dealt with by in-house legal teams.  Accordingly, there is likely to be a big growth in banking and finance work for the private practice firms in Shanghai, which in turn is likely to create increased demand for finance specialists within those firms.

However, arguably the most important likely effects of foreign banks gaining full access to the China market are those more indirect consequences that may well develop over the slightly longer term.  The previous regulatory impediments to these banks incorporating on the Mainland provided other Asian financial centres, most notably Hong Kong, with a huge advantage over Beijing and Shanghai.  For obvious reasons, notwithstanding its status as the World’s fastest growing economy, few international Banks would be willing to have their regional headquarters in a Chinese market in which they could only operate a limited business.  Their desire to be close by has long worked to Hong Kong’s significant benefit.

Now that the door is open for the region’s key banks to incorporate in China, and with many of them seeking to do so, the PRC and its key cities have genuine potential to develop rapidly into much more serious financial hubs.  Hong Kong’s dominance as the region’s financial centre is suddenly under serious threat.  A great deal of the SAR’s business is closely tied to its status as a financial centre, which has developed in large part due to its status as a window into China.  In turn, this has provided significant justification for leading international law firms to base their Asian operations in the City.  However, if the door is open, there is little need to enter through a window.

In the event that major banks begin to shift the focus of their operations to Shanghai, the possibility must also exist that over time that the Mainland’s second city will also become the region’s legal capital.  That said, there are undoubtedly other issues to be taken into consideration, such as, for example, the attractiveness of the Hong Kong legal system over and above that of the Mainland, the inertia involved in moving and Hong Kong’s impressive infrastructure.  Nevertheless with the Mainland continuing to open up to overseas investment, Shanghai will become increasingly important for international law firms, lawyers and as a base for in-house legal teams.