Hong Kong.

In the wake of last year's frequent political protests and this year's COVID-19 pandemic, law firms in Hong Kong are struggling. 

Before the city had a chance to recover from disruptions caused by last year's political unrest, the coronavirus pandemic put more strain on its economy. So far, the cumulative effects of both crises have already forced two international law firms—U.K.-based Osborne Clarke and U.S. firm Orrick, Herrington & Sutcliffe—to shutter their Hong Kong operations.

But even for firms that have decided to stay, Hong Kong remains a challenging market. And like firms in most places in the world, law firms in Hong Kong have felt the economic impact of the coronavirus pandemic and have sought ways to preserve cash, even as the semi-autonomous Chinese region seems to have stemmed the spread of the virus. On Thursday, Hong Kong reported that there had been no new cases for five days.

Still, at least a half dozen firms have resorted to cost-cutting measures such as downsizing or placing employees on unpaid leave to stay afloat.

At Clyde & Co, which has a sizable dispute resolution team in Hong Kong, nine disputes associates have departed since protests began in June of last year. A London-based spokesperson at Clyde declined to provide details of individual terminations and said the firm reviews the size of all its practices regularly to "ensure they meet our evolving business and client needs."

DLA Piper has also seen eight associates leave in the same period—mainly disputes and corporate lawyers. A Hong Kong-based spokesperson at DLA Piper said the associate departures were the result of prior partner departures. The firm lost M&A partner Sheng Wu last year and capital markets Melody He-Chen earlier this year.

"We had a couple of corporate partners depart … so the associate departures were just resizing to account for the partner departures and workflow," he said.

Similarly, Stephenson Harwood has laid off several corporate lawyers in Hong Kong. A London-based spokesperson said that the firm is revamping its strategy for Hong Kong and referred to four recent partnership promotions in the city. The British firm has also appointed a new Hong Kong managing partner—restructuring and insolvency lawyer Jamie Stranger—replacing longtime predecessor and corporate partner Voon Keat Lai.

Australian firm MinterEllison's Hong Kong office has also seen the departure of several associates from its disputes practice since last year, including at least three from a litigation and enforcement team that the firm brought in from Reed Smith in January 2019. Nathan Dentice, one of the partners who joined from Reed Smith, said the group's move has been a success and the lawyers who left did so for individual reasons. He also said the firm has filled those vacancies.

"We have not laid anyone off in Hong Kong, and have no plans to do so," Dentice said, adding that three trainees will soon qualify as associates.

Short of laying off employees, several smaller firms have placed lawyers on unpaid leave, including Loeb & Loeb and Howse Williams, a local firm with 26 partners. Helen Rogers, Howse Williams' chief operating officer, said the unpaid leaves were requested by lawyers for personal reasons, including the need to take care of children while schools were closed. She said the firm now has one lawyer on unpaid leave who is expected to return to work next week.

But the future of Hong Kong as a legal base for many firms is still unclear.

"The problem is that many foreign law firms [in Hong Kong] are not profitable—they are subsidized by their U.S. or London [operations]," said Ben Cooper, managing director at Ashford Benjamin, a local legal recruitment firm. "If New York and London start to get hit, as it seems to be now, then the firms will ask themselves whether they can afford to be in Hong Kong."

Hong Kong is entering its fourth month of the COVID-19 outbreak, which has infected 1,035 people and caused four deaths. In response, the government has closed the border to all nonresidents and imposed social distancing rules, some of which have been eased in recent days as new cases have dropped to zero. However, quarantine requirements for arrivals from abroad were recently extended for another month, although officials have indicated that professionals including lawyers and accountants entering Hong Kong from mainland China are likely to be the first batch of travelers exempted from these requirements.

Loosening restrictions on travel between Hong Kong and mainland China will be a boon for law firms in the region as many international firms access the vast Chinese market through their Hong Kong offices, with special focus on M&A, IPO and other transactional work due to the city's status as a global financial hub. However, the neighboring city of Shenzhen, a major port for entering the mainland from Hong Kong, still requires travelers from Hong Kong to quarantine for 14 days upon arrival.

The Hong Kong economy is in dire straits as the pandemic has deepened the city's first recession for a decade, ushered in last year by the political turmoil. The unemployment rate has hit a nine-year high and retail sales fell more than 40% year-on-year in February as people are staying home and spending less. The government has responded with an $18 billion financial relief package, including measures to subsidize half the wages of 1.5 million workers for six months and a $254 million subsidy for the flailing aviation industry.

Nonetheless, the city's finance chief, Paul Chan, has warned that the economy could shrink up to 7%—a grim assessment for a city that is expecting to see protests return as the outbreak comes under control.

"The indications are that the Hong Kong economy 's contraction in the first quarter of this year could be worse than during the 2008 global financial crisis or the 1999 Asian financial crisis," Chan told lawmakers Wednesday.

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