As part of broader efforts to revitalise the northeast rust belt in China, rejuvenation and reducing institutional rigidity has become a leitmotif for the region’s legal market. Winny Zhang reports

The importance of state-owned enterprises (SOEs) is underscored nowhere more than in northeast China. This was the birthplace of China’s industrialisation, and during the planned economy era it held a unique position as the torchbearer of heavy industry. The newly established leadership at the time regarded it as the “eldest son of the People’s Republic”, a title frequently used to denote SOEs.

However, following the reform and opening up policy, the northeastern region of China ‒ consisting of Liaoning, Jilin and Heilongjiang provinces ‒ has experienced a drastic decline in its contribution to the national GDP, dropping from 13% in 1978 to 4.8% last year. The region, once a thriving industrial hub, now bears an uncanny resemblance to the Midwest region of the US, earning it the moniker of “China’s rust belt”.

As a downstream industry that is heavily reliant on economic development, northeast China’s legal market has been persistently sluggish in terms of business quantity and service quality, and seems to be mired in a stagnant state that makes it challenging to foster new business growth. Nevertheless, there are glimmers of hope on the horizon.

In the first quarter of 2023, the economic growth rates in the region were: 4.7% in Liaoning; 5.1% in Heilongjiang; and 8.2% in Jilin. These figures surpassed the national average of 4.5%, indicating that the 14th Five-Year Plan (2021-25) for Northeast China’s Revitalisation is on the right track.

The plan was approved by the State Council two years ago, and one of the key components involves promoting the development of private enterprises and reforming SOEs.Zhao Tong

Some law firms are constantly monitoring the national policy’s overhaul of the corporate ecosystem, seeking opportunities for legal services resulting from institutional reforms. But they continue to focus on the traditional business of serving SOEs, and leverage their accumulated experience to cater to these regional mainstream enterprises, which have a unique corporate culture and differ from private enterprises. At the same time, they are paying attention to the development of private enterprises.

Despite for the most part not having the geographical advantages of coastal regions, the three northeastern provinces are located close to Russia, South Korea and Japan, which aligns with the Belt and Road Initiative (BRI), extending the local legal market’s influence to northeast Asia.

While challenges persist in the northeast legal market, national law firms recognise its potential and are continuing to enter the market. But they are approaching with caution, considering the differences in the market brought about by the uneven regional development of the three provinces.

The trajectory of the northeast’s legal market mirrors that of the revitalisation programme. While it may be too early to predict the outcome, what is certain is that the rusty northeast is being polished and renewed.

State-run market

The prevalence of heavy industry in the northeast often creates the illusion that the size of SOEs across the region is significantly larger than those in the coastal areas. However, the reality is quite the opposite.

According to publicly available data, the total assets of SOEs in Liaoning were expected to reach RMB2.8 trillion (USD390 billion) in 2021, which is less than one-sixth of the total in Guangdong. Even Harbin, which has the highest figure for total assets of SOEs in the northeast, is only about 14% of the size of Guangzhou.Yuan Feifei EN

However, this does not imply that SOEs have lost their dominant position in the region. “The backbone of the northeast economy is SOEs, which further reinforces the non-market element of the legal services market,” says Zhao Tong, a senior partner at Jincheng Tongda & Neal (JT&N) based in Dalian.

“For instance, the government controls many of the legal services-related resources, giving it greater decision-making power over the selection and pricing of legal services,” says Zhao.

Private enterprises in the northeast continue to lag behind. According to the All-China Federation of Industry and Commerce, the three northeastern provinces combined hosted only seven of China’s top 500 private enterprises in 2021, which is three fewer than the 2019 figure and far less than the 51 based in Guangdong.

“Legal services from SOEs and the government still dominate a substantial share of the legal market in the northeast,” says Wang Zhe, a senior partner at Dentons China in Changchun. “The market potential is enormous and there is room for further exploration.”

This potential refers not only to the existing legal needs of SOEs, but also to new business generated by the requirement to enhance market competitiveness of SOEs outlined in the 14th Five-Year Plan for the northeastern region.

“Revitalising the old industrial bases in northeast China requires breaking through and reforming a lot of SOEs to integrate resources and promote new vitality,” says Yuan Feifei, director of the Changchun new district office at Gongcheng Law Firm.

The mixed-ownership reform in SOEs is a crucial step towards stimulating market dynamics. In 2021, the central government developed an implementation plan for this reform in the northeast, allowing enterprises to have capital from different ownership sources and replacing the situation where only state-owned capital is available for SOEs.Liu Xuan

The pain of transformation has led to numerous restructuring operations. “Old SOEs need to be rejuvenated, adapt to market development and unload the burdens formed in history,” says Wang.

“But large SOE restructuring is complex,” adds Liu Xuan, also a senior partner at Dentons China but based in Shenyang. “Apart from being determined by market factors, the pivotal status of SOEs also determines their restructuring business and is to some extent influenced by the overall layout of the economy.

“So the restructuring business of large SOEs, though not rare, is not a common focus of the lawyers’ profession,” she says.

Liu says that the most active legal areas last year were compliance and insolvency. She says that since 2017 in Liaoning, there has been a surge of insolvency cases in line with the market-based and legalised insolvency scheme.

“The elimination of overcapacity, the legal exit of entities not adapted to the market economy, the extrication of debtor enterprises with some operational capacity, and the policy of guaranteed delivery of buildings have all contributed to a significant development of the insolvency business,” she says.

Amid the central government’s heightened focus on compliance, 2022 was designated as the “Year of Strengthening Compliance Management” for SOEs. Wang Enqun, the founding partner at Heng Xin Law Office in Dalian, observes: “Compliance-related legal services are a new area that law firms in the region are developing … Many law firms are developing compliance legal service products in areas such as anti-monopoly, anti-corruption, environmental protection and data privacy.”

Huang Xiaoxing, a partner at DeHeng Law Offices’ Shenyang office, predicts: “the corporate compliance sector may become a growth area for law firms in the future”.

Northeast Asia engine

The legal market in the northeast has certain outward features due to its geographic proximity to Russia, South Korea and Japan. However, its potential has not been fully exploited in the past. According to data from the General Administration of Customs, China’s imports and exports to Russia accounted for 3% of China’s total trade last year.Wang Zhe EN

Huang says that due to the geopolitical status quo, the regional foreign trade market in the northeast is not active enough, and corresponding foreign-related legal services need to be continually cultivated.

Nevertheless, China-Russia bilateral trade reached USD190.3 billion last year, the highest level in nearly five years, and continued upward in the first half of this year, growing 40.6% year on year to USD114.54 billion.

Wang Zhe points out that since the Russia-Ukraine conflict began, Russia’s demand for Chinese goods, including bulky commodity goods like cars, has increased.

“Trade between China and Russia is highly complementary,” he says. “Therefore, the bilateral demand for foreign trade legal services is also bound to increase, including legal services for cross-border trade, infrastructure construction and foreign investment.”

Zhao, at JT&N, also notes that some northeastern companies have set up offices in Russia.

The alignment of policies across different countries has strengthened the geographic advantages of the northeast. Liu Tongyang, a senior partner at DHH Law Firm in Shenyang, says: “The BRI links the strategy of revitalising the old industrial bases in northeast China with the development strategy of Russia’s far east and South Korea’s New Northern Policy.”

“This will become a powerful impetus to promote co-operation between northeast China, the Russian far east and South Korea,” she says.

With the increase in trade within the northeast Asian economic circle, there has been a rise in legal services within the region. To aid this growth, the Changchun International Commercial Court was established as the first and only international commercial court in northeast Asia. Its objective is to ensure the protection of the legitimate rights and interests of Chinese and foreign investors on an equal footing, support international economic co-operation in northeast Asia, and contribute to the development of a first-class business environment under the rule of law.Liu Tongyang EN

Zhao expresses concern that domestic law firms may miss out on potential service targets in the growing Russian market due to the shortage of legal professionals familiar with Russian law and the requirement to improve language proficiency. He has also observed a decline in the number of Japanese and Korean companies in the northeast, leading to weaker demand for related legal services.

According to Gongcheng’s Yuan: “The economic hot spot of the northeast is located in the city belt of Shenyang and Dalian, whose foreign economy is heavily influenced by Japanese and Korean industries. A significant amount of Japanese and Korean capital and technology plays a critical role in Liaoning’s foreign trade.”

However, she adds that in recent years, “a considerable amount of Japanese and South Korean capital has been redirected to the Qingdao and Yantai region, resulting in some impact on the Shenyang and Dalian city belt. It is urgent to consider more proactive policies to address this shift.”

Inner diversity

The three northeastern provinces share the same industrial base, are located in the same geographic region and have a strong homogeneity of legal services, but still vary according to the respective economic strengths of each province.

In 2022, the GDP rank order within the region was: Liaoning at RMB2.9 trillion; Heilongjiang at RMB1.59 trillion; and Jilin at RMB1.31 trillion.

While current data on the size of the legal profession in the northeast is unavailable, information from 2016 to 2020 indicates that the scale is aligned with each province’s level of economic development.

“Liaoning, being the only province in the northeast with a net inflow of population and particularly with subordinate Shenyang as a core city in the region, remains critical to future economic development, which will inevitably reflect on the legal services market,” says Liu at Dentons China.

Unlike the other two provinces, Liaoning is closer to Beijing and Hebei province. Wang Zhe, at Dentons, believes that it can leverage this advantage by improving its intellectual property protection services in the high-tech sector related to national strategies.

Heng Xin’s Wang Enqun, who specialises in maritime business, says: “Dalian is an important port city in Liaoning. It gives Liaoning certain advantages in the field of maritime legal services and international trade.”

Heilongjiang is the most agriculture-dependent province in the northeast, with the proportion of the industry last year being 22.7% of its GDP, much higher than Liaoning’s 9% and Jilin’s 12.9%.Yu Yaowu

According to Zhao, there are still many legal service gaps to be filled in this area. “There is a gradual trend towards centralised farms and agricultural finance, but legal disputes related to land concentration, transfer, and discounting for stock purchase have not resulted in a distinctive and specialised legal service, which needs to be further optimised,” he says.

“These are areas that are not typically found in developed regions. Increased capital investment in large-scale agriculture can attract legal talent to the area.”

Despite its poor economic performance last year, Jilin boasts the most specialised courts among the three provinces, including an intellectual property court, a financial court, a bankruptcy court, an internet court and an environmental resources court.

All five courts are the first of their kind in the northeast and are based in Changchun.

The region’s economy still lags behind others in the country, and local industry is in dire need of structural adjustments. Consequently, governments at all levels are giving unprecedented attention to attracting investment.

Large-scale projects are being launched to create a more favourable environment for attracting investment from both local and non-local enterprises.

“With all the opportunities available, the biggest challenge for the economy will be whether the service capacity of lawyers can keep up,” says Yu Yaowu, a senior partner at Dentons China in the city of Jilin. “Trade and investment law services will be a new business growth point in the region, and attracting talent will become a new trend in competition.”Huang Xiaoxing EN

Wang Zhe says that the northeast currently lacks talent in areas such as foreign trade, intellectual property rights, antitrust, anti-dumping, maritime commerce and maritime affairs.

Zhao expresses concern that the northeast authorities are too bureaucratic, which may hinder the attraction of talent to the region.

Huang suggests that “fiscal and tax incentives or concessions could be used to attract legal services talent and enhance their business in the area.”

Going their own way

The allure of the northeast remains intact, enticing non-local law firms to show their presence in the region to explore opportunities in northeast Asia, particularly through the BRI.

China Commercial Law Firm, a well-established firm in Shenzhen, opened its first northeast office in Changchun, creating the largest branch of the firm.

Zhang Jialiang, a partner of China Commercial’s Changchun office, says that northeast Asia is a key extension of the BRI, and Changchun’s excellent location has led to a growing demand for foreign-related legal services.

In March this year, the firm followed up on its success by launching its Shenyang office, marking the second phase of a plan to expand its scope in northeast Asia.Zhang Jialiang EN

Zhang also recognises an untapped opportunity in northeast China’s transition to green development. The region, which is a traditional industrial one, has long relied on coal and steel industries. As the central government aims to achieve net-zero emissions by 2060, the three northeastern provinces have been making plans for clean energy development.

Liaoning has planned 48 major clean energy projects with a total investment of more than RMB800 billion. Jilin aims to reach 8 million kilowatts of installed photovoltaic power generation by 2025, and to create three new energy bases of 10 million KW. Heilongjiang focuses on clean energy suitable for cold regions and aims to reach 30 million KW of renewable energy installed capacity by 2025.

“The northeast region is in a transition phase, and green development is gradually becoming the main theme,” says Zhang. “As a result, the demand for legal services in reducing carbon emissions and environmental resources will continue to increase.”

The Changchun branch of China Commercial has set up an Environmental Resources Legal Service Centre to develop the new-energy legal services market.

The region’s homegrown law firm, Heng Xin, takes a more measured approach to expansion. “The size of the legal market is relatively certain everywhere, and blind expansion does not necessarily bring good returns,” says Wang Enqun. “Moreover, with a team-based management model with high requirements for quality control, setting up too many branches is not conducive to quality control.”Wang Enqun EN

Even though Heng Xin has had a presence in the northeast for almost three decades, Wang Enqun points out that the emergence of non-local competitors cannot be disregarded. “We have encountered challenges in the market in the past, including low bidding and chain firms using their national qualifications to bid,” he says.

Gongcheng’s Yuan says that the northeast economy was no exception to the downturn due to the three-year pandemic. “Although our clients are mostly governments and large SOEs, their ability to pay is inevitably impacted by the economy,” says Yuan.

She takes pride in the firm’s corporate model, which is resilient in extraordinary times and ensures that lawyers receive good returns, thus guaranteeing a constant level of service to clients. “The tougher it gets, the less you can compromise on high standards of business delivery and team service.”