For foreign law firms in China, 2023 was supposed to be a comeback year, with the post-Covid reopening generating a rebound in deal making — and a resurgence in fee income.

Things could hardly have turned out more differently. Lawyers say that China’s economic slowdown and chilly political winds have helped make the Chinese market a performance laggard for international law firms’ capital markets practices this year. 

Even if China’s economy rebounds soon, some practitioners believe that the golden era for foreign law firms, which peaked in the mid-2010s, may have passed. Fewer Chinese companies are pursuing international deals and public listings, and while there are bright spots in other practices, especially in regulatory and sanctions compliance, those areas don’t produce the same lucrative profits.

The net effect is forcing firms to make tough decisions about reducing their headcount in China — and, ultimately, over whether it’s worth staying in a market whose size and plentiful dealmaking once made it an essential growth area for international law firms. 

For some of the higher end international firms, if the fees get cut, it becomes harder to justify having a presence here…

Lester Ross, partner in charge of the Beijing office of WilmerHale, a U.S.-headquartered law firm

London-headquartered Linklaters laid off around 20 associates from its China and Hong Kong offices in September, while U.S. firms Latham & Watkins and Ropes & Gray have also downsized in Shanghai, with the former exiting the city altogether. In the most high profile breakup, the multinational law firm Dentons exited China in August after splitting from its China office, which now operates independently as Beijing Dacheng Law Offices.

“In terms of deal flow and merger review, the three major jurisdictions [for law firms] are the United States, European Union and China. Everybody else is secondary,” says Lester Ross, partner in charge of the Beijing office of WilmerHale, a U.S.-headquartered law firm. “But China’s economic downturn has gone beyond the economic cycle and into politics, making it harder to overcome.” 

Intense competition from local Chinese law firms is adding to the headaches for foreign firms, which for decades relied on their experience and international connections to maintain a competitive edge. 

	Law Firm	Deals	Headquarters
1	Maples & Calder (Cayman) LLP	12	Cayman Islands
2	King & Wood Mallesons	7	China
3	Davis Polk & Wardwell LLP	6	U.S.
4	Conyers Dill & Pearman	8	Bermuda
5	Harney Westwood & Riegels	8	British Virgin Islands

“Top tier firms have done well in China because they are doing complex work on high profile cross-border deals, where there isn’t much competition and billing rates remain high,” says Evan Jowers, head of Asia at Lateral Link, a legal recruiting firm. “But in the lower tier deal space, a lot of work by major international firms has been gobbled up by top local Chinese law firms, in an already crowded space.”

A key source of edge for local firms is their drastically lower fee schedules. On average, Chinese law firms charged a rate of $430 an hour in 2021, according to a survey by the Chinese Business Law Journal, undercutting even the starting rate for junior associates at many foreign firms. Chinese managing partners charged on average $620 an hour that year – half, or less, of what their counterparts at foreign firms regularly charge, according to Jowers. 

A handful of domestic law firms now dominate advisory roles for deals both in mainland China and, increasingly, in Hong Kong. Three Chinese law firms — Zhong Lun, Grandall and AllBright — alone collected more than a third of all legal fees for work on initial public offerings on China’s stock exchanges between 2022 and 2023, according to data from Wind, a financial data provider. Chinese law firms also advised on 16 initial public offerings in Hong Kong this year, accounting for $2.75 billion, or more than half of the funds raised on the city’s exchange. 

“As IPOs are more focused on the onshore and Hong Kong capital markets, the work will likely go to those domestic firms that have built up the expertise and practical experience,” says James Zimmerman, a partner in the Beijing office of Perkins Coie LLP, an American multinational law firm.

Political pressure on Chinese companies to retain domestic law firms is also affecting foreign law firms’ deal flow. “We used to do a lot of work for Chinese SOEs, but they are reluctant to look at us now,” says Ross. “That is in part because they have reduced deal flow in parts of the world we operate, but also likely because of domestic politics and instructions they have received.” 

	Law Firm	Deals
1	Grandall Law Firm (Guoco)	83
2	AllBright Law Offices	83
3	Zhong Lun Law Firm	80
4	Deheng Law Offices	54
5	Grandway Law Offices (Guofeng)	36

Law firms aren’t the only ones being hit by the political pressure on state companies to direct their business away from foreign services companies. Chinese authorities have also encouraged state companies to replace their contracts with ‘Big Four’ accounting firms with domestic competitors, according to reporting by Bloomberg earlier this year. 

Some foreign firms have found ways to adapt to the drought of deals. “Some M&A lawyers are picking up work on the divestment and liquidation side, as more foreign companies shift operations outside of the mainland,” says Perkins Coie’s Zimmerman. Many of those operations are landing in Singapore, where foreign and domestic law firms have been adding partners this year.

Zimmerman says that business at Perkins Coie is thriving, partly because the firm is focused on areas like foreign media, intellectual property rights and compliance issues.

But for many other foreign law firms, this has been a challenging period. In fact, to improve competitiveness, some foreign law firms in China have altered their fee structures, such as by offering clients longer billing cycles. Others, though, are reluctant to cut the fees they charge, seeing downward price competition as something of an existential risk. “For some of the higher end international firms, if the fees get cut, it becomes harder to justify having a presence here,” says Ross at WilmerHale. He explains that many firms have set revenue expectations, which, if not met, could trigger cost cuts. 

Foreign lawyers in China have long operated in a gray area. Foreign nationals and Chinese citizens with overseas bar memberships can’t obtain certificates to practice law in China, constraining some of their activities. Foreign lawyers cannot issue formal opinions, for example, but are allowed to ‘comment’ on Chinese laws. They are also allowed to attend court proceedings, but not as attorneys of record. 

While it is a delicate balance, “the bottom line is that the Ministry of Justice knows that foreign lawyers and foreign law firms provide value to China by supporting the efforts of our clients in bringing capital, technology, and management expertise to the market,” says Zimmerman, at Perkins Coie.

The flurry of mutual sanctions and trade controls imposed by both Washington and Beijing in recent years has created brisk work for some law firms advising both Chinese and foreign clients. Those specializing in regulatory matters, for example, are finding steady business guiding multinationals on how to comply with China’s strict new data export laws. Chinese companies have also leaned on foreign law firms for advice on how to comply with Western sanctions. 

And while new openings may be in short supply, there is still ample interest from early- to mid-career lawyers in joining their China offices. 

“There are many rising star Chinese-born, foreign-educated associates at top tier law firms in the major U.S. markets. At any given time some of these attorneys are looking to move back to China,” says Jowers, the legal recruiter. Rising Chinese U.S. trained associates may see it being relatively easier to move up the career ladder in a U.S. firm’s offices in China or Hong Kong, where top law firms also provide generous cost of living allowances added on to top market New York associate salaries and bonuses.

A very bad 2024 will cause more layoffs and perhaps some struggling partners to have lowered equity points or get pushed out…

Evan Jowers, head of Asia at Lateral Link, a legal recruiting firm

The problem is finding them roles. “Associate hiring has been frozen across Asia for well over a year now,” says Jowers. “Even places where a team may have enough deal flow such as Singapore aren’t necessarily able to get permission to hire, because the same firm might be underutilizing their associates in Hong Kong or China.” 

For some foreign law firms, 2024 could prove to be a make or break year for their presence in China. Mid-tier firms, facing dual threats from the prolonged downturn and rising domestic competition, are likely the first to get squeezed. 

“A very bad 2024 would cause more layoffs and perhaps some struggling partners to have lowered equity points or get pushed out,” says Jowers at Lateral Link. “With all that said, the vast majority of all international major law firms will remain there.”

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