2023 – The legal year in review

From artificial intelligence and de-risking from China to energy transitions and global taxation, law firms and in-house counsel had plenty to keep them busy in 2023. George W Russell looks back at an eventful year

The winds of geopolitics swept the global legal landscape during 2023, blowing many sectors off course, from trade to supply chains to cross-border financial transactions. US sanctions on Russia caused many clients to pause transactions, while tension continued to affect relations across the Taiwan Strait, the Korean Peninsula and elsewhere in the Asia-Pacific region.

The most significant new shift over the course of 2023 was in diplomatic and economic relations between China and the West. North American and European economies are seeking to reduce their trade dependence on China and restrict Chinese access to advanced technology with potential military applications. Beijing is responding with sanctions of its own.

Private companies are also looking for alternatives. In November 2023, DHL chief executive Tobias Meyer told Bloomberg TV that a growing number of its customers sought manufacturing locations in Southeast Asia, or even in Mexico and Turkey, as companies look to reduce production reliance on China. “We really do see changes in the trade pattern,” he said.

The US led the way, with President Joe Biden’s executive order issued in August 2023, which constrains investment in advanced technology in China. Other governments, such as South Korea, have restrictions on outgoing flows into mainland China, but the US order threatens up to USD10 billion in investment, mostly in tech and startups. US private equity and venture capital investment into the mainland had already fallen 76% to USD7 billion in 2022 due to geopolitical tensions and the coronavirus pandemic.

“The most impactful – and not quite unexpected – event was probably the White House executive order in August 2023, which prohibits US investment in certain critical China tech, namely quantum informatics, semiconductors, and artificial intelligence (AI),” says Benjamin Qiu, a partner at Elliott Kwok Levine & Jaroslaw in New York.

Other countries – from Canada to India – have also put Chinese investment on notice by invoking security concerns. Robel Sahlu, an associate in the competition, antitrust and foreign investment group at Blakes in Calgary, says: “Foreign investment from the Asia-Pacific region, including in Canadian businesses involved in critical minerals or sensitive technology areas, can expect to be subjected to pre-closing enhanced national security scrutiny by the Canadian government.”

Gautam Khurana, managing partner at India Law Offices in New Delhi, says one of the country’s most serious challenges to emerge is the inability of Chinese companies to do business. “Geopolitical issues between China and India have curtailed business and investments significantly,” he says. “We see an unprecedented interest from Indian as well as overseas clients to invest in manufacturing facilities in India – except for China.”

The investment curbs have occurred amid a year that saw a weak post-covid-19 recovery for China, as the property sector flatlined and consumer spending remained depressed. Kelvin Dalrymple, a senior credit officer at Moody’s Investors Service in London, says: “China’s slowdown could accelerate a de-risking of supply chains and moves towards greater self-sufficiency in key technologies and sectors already under way from geopolitics.”

A survey released in October by the Japan Chamber of Commerce and Industry (JCCI) revealed widespread disillusionment with China’s economic trajectory. A quarter of respondents said they would not invest further, while a further 22% said they would scale back existing investment plans.

Japanese enthusiasm for China has been cooling since the pandemic began, with the government setting aside USD2.2 billion to subsidise relocating industrial production back to Japan, or to Southeast Asia. “The perception of the economic situation among Japanese companies in China continues to be negative,” the JCCI wrote in its findings. “The situation is particularly severe in southern China, central China and western regions.”

Jonathan Goacher, a partner at Stephenson Harwood in Singapore and an expert on sanctions, says he detects some “unease” among Western investors in China. “Some investors are nearshoring,” he says. “For some based in the US, a supply chain tied to Mexico rather than China is looked at as better risk management.”

Western consultancies have faced increasing government scrutiny in China during 2023, with agents raiding US-based Bain & Company, due diligence group Mintz and expert network provider Capvision, while a senior executive at risk advisory firm Kroll has been barred from leaving the mainland. “The market is looking at this,” says Goacher.

Chinese authorities spent much of 2023 trying to shore up the economy by, among other initiatives, actively promoting electric vehicle (EV) production, battery production and investment in wind and solar generation. “However, market commentators are sceptical about the rate of growth of these industries, and whether they will effectively offset the job losses in the property market and other key sectors coming out of the pandemic,” says Jenny Zhuang, of counsel at Dentons in Hong Kong.

The effects of China’s sluggish recovery have spread beyond its shores. The end of the country’s pandemic curbs was a relief for Southeast Asian economies with strong links with China. Speaking on the Vietnam situation, Oliver Massmann, a partner and general director at Duane Morris in Hanoi, says: “The primary impact is reestablishment of the supply chain between Vietnam’s retailers and those in China. This reconnection includes the import of input materials from China.”

Yet despite such pressures, many foreign investors in China are staying put, having spent decades building up suppliers, plants and talent. Qiu says: “They realise that China has retained strengths in high-end manufacturing, and still sees growth opportunities in certain industries, such as EVs, thus certain businesses relating to manufacturing and sales in China will continue.”

Although capital markets are understandably quiet given the current level of US interest rates, Christopher Bickley, head of the Hong Kong office of Conyers, says there is a “steady flow” of Chinese companies looking to list in the US, “which shows economic ties between the two countries are still important”.

China hopes to build up its manufacturing and services bases to alleviate rising joblessness. Zhuang notes that the unemployment rate remains high, with youth unemployment in particular at a record level. “A sense of disillusionment and pessimism about the future is keeping young graduates out of the job market,” she says.

The year also saw the first full 12 months of Hong Kong’s Top Talent Pass Scheme, under which about 100,000 working visas were issued to 30 September, 2.5 times more than the total number granted in 2022. Bickley says: “Hong Kong is creating more opportunities to welcome talent from mainland China and other Southeast Asian countries to join the workforce, which in the middle to long run will benefit the whole region.”

Cutting-edge technology

The Asia-Pacific region continues to be a hotbed of technological innovation across a multitude of sectors.

In Taiwan, ProLogium Technology’s advanced solid state car batteries have attracted investment from Mercedes-Benz and Posco, while Japan’s Hirotsu Bio Science invented a revolutionary method of cancer detection using a tiny roundworm. Hong Kong-based Archireef makes synthetic coral reefs to rebuild ecosystems while, in India, ACE Green Recycling has pioneered small and replicable battery reuse facilities.

But no development during 2023 matched AI in terms of capturing imagination and investment. Goldman Sachs Research estimates AI investment could approach USD100 billion in the US alone, and USD200 billion globally by 2025. Last year, 48% of total equity funding of AI startups came from China, compared with 38% funded from the US.

Matt Sheehan, a fellow at the Carnegie Endowment for International Peace, notes in a recent report: “China is the largest producer of AI research in the world, and its regulations will drive new research as companies seek out techniques to meet regulatory demands.”

But law firms have observed many regulatory roadblocks, as Lauren Hurcombe, partner and global co-chair of the technology and sourcing group at DLA Piper in Hong Kong, points out. “AI is such a broad area and largely the regulators across Asia have not yet offered a clear regulatory framework, especially as regards generative AI,” she says. “Most of this is driven by uncertainty on how to approach regulating AI in a way that fits the diverse needs, cultures and priorities of their own jurisdictions.”

After all, the wide use of AI has raised concerns about the risks. Albert Yuen, counsel and head of technology, media and telecommunications at Linklaters in Hong Kong, cites concerns ranging from existential threats, the spread of misinformation and biased outputs being created from biased datasets to protecting data privacy and intellectual property. “As a result, law and regulation have struggled to keep up,” says Yuen.

Hurcombe notes that one exception to this uncertainty is China, where generative AI legislation – the Provisional Provisions on Management of Generative Artificial Intelligence Services – came into force on 15 August 2023, and domestic tech companies have been encouraged to invest in the area. “The response we have seen is a large number of new players in the market and an uptick of international clients exploring potential partnerships with local generative AI providers in China,” she says.

AI is also becoming an integral part of law firm infrastructure. For example, in February 2023, Allen & Overy became the first law firm user of Harvey, an AI platform specifically for lawyers. Sequoia Capital, which led the Harvey fundraising round, said in April more than 15,000 law firms were on the platform’s waiting list.

Saranpaal Calais, a partner at Allen & Overy in Sydney, says: “Harvey is an intuitive platform that uses natural language processing, machine learning and data analytics to automate and enhance various aspects of legal work, such as contract analysis, due diligence, litigation and regulatory compliance. Harvey has helped our lawyers to deliver faster, smarter and more cost-effective solutions to their clients, including generating insights, recommendations and predictions based on large volumes of data.”

The year also saw turmoil in cryptocurrency, even as bitcoin’s volatility decreased. Scandals erupted both globally with the collapse of FTX (which had begun in November 2022) and regionally with the fallout from the implosion of Three Arrows Capital in Singapore during 2022 and the JPEX fraud scandal in Hong Kong that emerged in September 2023. In June 2023, the US Securities and Exchange Commission charged Binance, which operates the largest crypto asset trading platform in the world, with a variety of securities law violations.

Attitudes towards crypto varied greatly in Asia over the course of the year. The Philippines favoured more regulated crypto trades, while Singapore tightened rules in the wake of the Three Arrows fiasco and large losses by retail investors. South Korea continued its harsher stance since the 2022 Terra and Luna token crash. Mainland China has retained its outright ban, but Hong Kong wants to be a regional crypto hub.

Hong Kong’s new licensing regime for centralised virtual asset trading platforms under the Anti-Money Laundering and Counter-Terrorist Financing Ordinance came into effect in June 2023. Under the new regime, platforms operating in Hong Kong will need to apply to the Securities and Futures Commission (SFC) for a licence.

Katherine Liu, partner at Stephenson Harwood in Hong Kong, says there has been a mixed reaction to the licensing regime. “There were diverse views in the consultation,” she says. “If you become regulated by the SFC, maintenance and compliance costs are a lot higher, and the new framework could drive out smaller market players that wouldn’t be able to afford that added expenditure. There is always a delicate balance to be struck between investor protection and innovation.”