Stellungnahmen | 03-02-21

The new norms of the China legal market

In this article, Shawn Chen discusses the new norms of the China legal market and how these elements are shaping this competitive field of expertise.

 

New players – from 2 to 4

For the past three decades the high-end cross-border legal work in China belongs either to the leading Chinese law firms or to those international law firms having China operations. Over the years, these firms have grown or shrunk, competing or cooperating with each other side by side for premium China inbound and outbound work, but most recently it seems the Chinese firms are winning over their foreign peers in this China game.

 

In the meantime, new players have come in with solid investment and ambitious plans: (1) the ‘Big 4’ accountancy giants and (2) the joint operations/alliances set up by a few leading international law firms and boutique Chinese firms. SSQ has assisted these players over the past few years in successfully establishing and further expanding their association or alliance law firms. Taking advantage of their huge and in-depth global network, all of the ‘Big 4’ have already formed their associations with Chinese law firms in Beijing and/or Shanghai, with more to follow in other major Chinese cities. A few of them have developed very successful practices and teams in practice areas such as M&A, regulatory/compliance, employment law, financing and even dispute resolution. These ‘Big 4’ will continue to invest in their close cooperation with boutique Chinese law firms, and will surely grow, although the pace may not be as quick as they have been able to achieve in other more developed jurisdictions.    

 

Up to early 2021, seven leading US/UK law firms have obtained the official Chinese alliance status through the SFTZ route (Shanghai Free Trade Zone), namely: Baker & McKenzie, Hogan Lovells, Holman Fenwick Willan, Ashurst, Linklaters, Herbert Smith Freehills and Allen & Overy. A few others have achieved similar legitimate relationships with their Chinese law firms under CEPA policy (Mainland and Hong Kong Closer Economic Partnership Arrangement), which include Clyde & Co and Stephenson Harwood. SSQ has assisted with the establishment of many of these unique Chinese relationships and we are currently working with more international and Chinese law firms on similar strategic moves. We predict that in a few years’ time there will be around 10-20 leading international law firms legally armed with Chinese law firm alliances to compete from a much better position in this market. 

 

If you are a lawyer individual looking for another career option, or a senior partner managing and planning the future of your law firm in China, you should take serious note of these latest two new players. They may look relatively small and insignificant now, but everyone committed to this market for the long term should plan in advance how they will compete and cooperate with them, or become one of them.  

 

New Practice and Expertise – from transactional to contentious; from generalist to specialist

   

Capital markets, M&A, PE investments, various financing, TMT transactions, life sciences deals, huge outbound projects –transactional matters such as these have been what has been viewed as the premium work in China for years. However, the regulatory and compliance field broke the monopoly around 5 years ago here, and this has now become a busy and money-making piece for many Chinese and international law firms. And more recently, the real contentious work – various litigation and arbitration matters – is attracting serious attention and investment from many law firms in China. More international law firms are picking up big-ticket litigation mandates from Chinese state-owned and large Chinese private companies, who have investment and/or operations overseas but face increasingly challenging legal environments in these alien jurisdictions. Similarly, ‘Red Circle’ and quality boutique Chinese law firms are also becoming busier and busier with a variety of international and domestic disputes, including advising on Chinese law disputes or litigating in Chinese courts for global household brands across the country at different jurisdictional levels, and sometimes even acting for large Chinese companies as lead counsel on huge dispute matters involving multiple jurisdictions overseas.

 

Niche practices are just heating up and cutting-edge expertise is becoming so valuable nowadays. These practices and expertise include tech-related transactions or litigation in niche sectors such as TMT and healthcare; cross-border investments involving Chinese public companies; government related regulatory and compliance work comprising various sanctions or inter-country tensions; multi-jurisdictional litigation involving public securities; and inbound and outbound transactions involving restructuring or liquidation. Clients are still very willing to pay premium fees for these areas of work, simply because they really add value or solve the clients’ true headaches. Law firms and individual lawyers should look seriously into whether their practice and expertise fall into these categories and try to develop to be ready for these future trends.     

 

New legal talent map – from more international to more Chinese  

 

The high-end legal talent map in China has changed fundamentally, from everyone chasing lawyers of international background and foreign qualification to a universal preference for Chinese experience, Chinese Bar and local skillsets and local connections. How quickly the shift has happened is unbelievable for many, in particular for those who previously spent years of their career in the more developed and stabilized legal markets such as the US, UK, Hong Kong and Singapore.

 

The talent shift has happened so quickly and sharply thanks to the speed at which Chinese lawyers learn, the increasing influence of Chinese corporates and financial institutions as clients, and the open and healthy competition between the international and Chinese law firms – who have nurtured a steady pipeline of quality lawyers locally over the past few decades. Every player in this market should bear it in mind that competition will ultimately benefit everyone. What has happened over the past 30 years to the China legal talent market as a whole has cemented the great value of free and healthy competition between different types of law firms and in-house legal departments. We should all keep that shining success and history in mind when moving on together and pursuing each of our own goals.

 

Diversity and inclusion should be embraced when a law firm and a hiring partner staff their teams and when an individual lawyer develops his or her career to its next stage. International law firms should continue to strengthen their China team’s local skillsets, local client base and local practice coverage, which will eventually help the firm to better utilise their global network and resources; Chinese law firms should not become complacent about their successes and must try to resolve their existing issues – many of which may have been building for years and finally cause unexpected fallouts – and make their successes bigger and more sustainable. Every individual lawyer in this market, no matter how international or Chinese their background and experience are, should please try to think the other way: what if I become more international in my thinking or learn to understand more about local work?  The more diversified and inclusive your skillset and mindset are, the more capable and convincing you will become both within your firm and outwardly to clients.

 

 

New regulatory environment – from separation to gradual cooperation  

 

The China legal market and its regulatory regime are continuing to open up, through different free trade zone and special trade policies across the country. It’s true that the restrictions on foreign law firms’ practice coverage in China will last; and the progress made by leading Chinese law firms in foreign jurisdictions is still very minimal. Within the China territory and especially for inbound work Chinese and international law firms co-exist as competitors rather than co-workers in most circumstances. However, the latest solid developments of the Chinese-international law firm alliances have sent a strong signal to all Chinese and foreign players in this market not only that the market is opening up but also that this is widening. There is now a truly legitimate way for international law firms to work with local Chinese lawyers on Chinese law under one shared brand; and for Chinese law firms and lawyers to seamlessly operate with an international law firm on US/UK law and provide a ‘one-stop shop’ service. Obviously, this opening-up has paved a solid way for both parties to join forces in the closest manner possible under current regulations. 

 

Serious and widespread arguments continue around this hybrid alliance model – some focusing on the sustainability of the opening-up policy itself and some worrying about the financial prospect of the new operations. The good thing is many firms have stepped into this new route, invested to the joint efforts and made great successes already; more are still trying and watching. We are confident that given the huge prospect of the Chinese economy and its legal market, and the irreversible nature of so many globalized businesses, more international and Chinese law firms will eventually come together and try to cooperate on one single platform in this way or another, in order to better service their Chinese and international clients.

 

The regulatory bodies must be watching the development of this opening up closely, too. We understand more joint operations between foreign and Chinese law firms are expected. A further opening up - if any - will have to rely on how many joint operations will come into being and how successful the existing joint operations will become. Interested readers could make a serious study of how the Singapore and Hong Kong regulation in this area has developed and evolved over the past few decades, which may offer some predictive findings on this regulatory topic.     

 

If you would like to discuss the above issues, please contact one of our consultants in Beijing and Shanghai.