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Insights into the Chinese Legal Market

In late 2017, Who’s Who Legal visited Beijing to meet some of China’s leading commercial lawyers and learn more about the legal market in one of the world’s largest and fastest-growing economies. Interviewees emphasised the significant role of international work in their practice, the increasing complexity of legal questions, and the challenges of meeting heightened client expectations. These factors have led to a thriving legal market as firms embrace new developments and adapt to this ever-changing environment. 

Beijing

Growth in China

The dynamic market in the world’s second largest economy, valued at US$11.2 trillion in 2016, provides abundant opportunities to domestic and foreign businesses alike, which are keen to establish, grow and prosper in China. Internet-based businesses in particular are “booming”, say interviewees, as illustrated in the success of app-based bike rental service Ofo. Since its establishment in 2014, the company has grown at an extraordinary rate and is now valued at over US$2 billion.

Inbound work is a great source of activity as China attracts the attention of foreign companies and investors. In recent years, Chinese companies have increased in size and set their sights on international expansion and overseas acquisitions. As a result, M&A, competition and IP lawyers have reported an increasing proportion of their practice taken up by outbound work. Interviewees take the view that “the future is outbound”. This shift has prompted domestic law firms to develop their international capabilities in order to assist Chinese companies with cross-border transactions and disputes, and steer through the regulatory landscape of foreign jurisdictions. It has also encouraged many international law firms to strengthen their foothold in China to serve this growing market.

The legal regime in China is becoming “markedly more sophisticated”. In this environment, clients have realised lawyers’ invaluable contributions to help them traverse the rapidly changing landscape. Interviewees highlighted the increasing complexity of competition law and the enhanced quality of regulatory investigations. In these situations, “the lawyer’s role has become much more important as the law becomes increasingly difficult to navigate”.

The evolution of intellectual property law highlights the speed and scale of this change and has facilitated the rapid growth of law firms in the area. IP rights were not established in China until the 1980s. The system, as well as the legal market surrounding it, is therefore very young. Over the years, the law has undergone various developments in order to protect a more comprehensive range of rights and has been brought into in accordance with WTO standards in recognition of the fundamental commercial and strategic importance of IP rights. The government has adopted a stance that actively protects IP rights, which “puts lawyers in a strong position to protect them”, say interviewees. Sources also observe that the establishment of specialist IP courts have furthered the development of the law and are producing high-quality judgments.

Legal Market Analysis

Transactions in China continue to increase in scale and value, thus driving the growth of law firms. This is particularly clear in Beijing, Shanghai and Shenzen, three major hubs of the legal market. Lawyers say their clients are becoming increasingly sophisticated and have great expectations of their legal representatives. “They look for the best firm in terms of quality and price. Meeting these demands ensures quick and sustainable growth of a law firm,” report interviewees.

Competition in the legal market can be split between foreign and domestic law firms, who compete “head to head” for the big ticket deals. This is a marked shift from the prevailing landscape 10 years ago, in which US and UK firms dominated. Domestic firms now have an increasingly significant market share, estimated by some interviewees to be close to a 50-50 split. Sources reported that the competition between domestic and international firms is particularly fierce for corporate, M&A and capital market transactions.

This shift is partly attributable to the fact that domestic firms “have become much smarter at innovating, in the way foreign firms have done historically”. This has involved greater investment into training and long-term firm development, coupled with smarter recruitment drives and strategic lateral hires. Domestic firms have been keen to recruit lawyers with international experience, which brings the capability to compete with international firms and enables firms to operate in a global commercial environment. Sources say “this has gone a long way toward the development of many successful domestic law firms”.

As a result, in the words of a lawyer from a leading domestic firm, “Our revenue is increasing so fast that we will soon be able to match magic circle firms in terms of profitability.” According to research by The Lawyer, Han Kun was the most profitable firm in the market in 2016, with each equity partner bringing in average revenue of £12.86 million and earning the firm approximately £1.07 million profit. Fangda Partners closely follows with £956,000 annual profit per equity partner. Global Law Office, Llinks and JunHe are also among the top-performing firms in terms of profit generated per equity partner.

Foreign firms are nevertheless competitive players and their international expertise is highly sought after. For international firms wishing to serve this market it is important to establish a strong presence in China, as clients value having their legal representatives “within arm’s reach” and seek counsel in Chinese. Prominent players include Dentons, King & Wood Mallesons and Clifford Chance. Foreign firms are restricted in their ability to advise on Chinese law or make representations in court. Many overcome these issues by setting up joint ventures with local firms to provide clients with advice on PRC law, while each firm remains and functions independently. Joint venture relationships of this type include Baker McKenzie and FenXun Partners, Clyde & Co and Westlink, and Hogan Lovells and Fujian Fidelity Law Firm.

A common thread running throughout this year’s interviews was competition on price. Clients are typically very fee-sensitive, which challenges lawyers to provide the required standard of service while controlling costs. In response, many firms have altered their financial models. Domestic law firms have increased the salaries of young lawyers in order to attract talent to their teams, and foreign lawyers have adapted their fee schedules to favour fixed fees over hourly rates. While some firms provide heavily discounted prices, the prevailing view is that there is a need for high-quality legal representatives with deep expertise in their respective areas.

Dispute Resolution

Sources reported a significant uptick in international disputes, which is attributed to the increasing volume of cross-border transactions and outbound investments. Cross-border dispute resolution has traditionally been dominated by international firms. However, the playing field is undergoing a shift as Chinese firms have become increasingly sophisticated in their ability to compete at the top level. Sources report “more Chinese lawyers out on the battlefields” and an increasing trend towards Chinese clients hiring domestic firms for international dispute resolution. This has resulted in an increased caseload for dispute resolution specialists in domestic firms. Cross-border arbitration is a significant growth area overall, as contracts and commercial deals with international elements often include an arbitration clause in order to avoid local courts and differentiated litigious practices.

For domestic firms, the litigation market is also very active. Interviewees reported that Chinese companies have become more proactive in taking legal action against domestic and foreign companies to enforce their rights. This is highlighted in the IP arena, where a staggering number of cases are filed before court every year. Confidence in the quality of IP court judgments has risen considerably and the “dramatic increase” in the value of damages awarded by the courts recently has “greatly improved the environment for IP owners” and made them keener to litigate. For antitrust disputes, commentators have seen “more and more companies who previously preferred US and EU courts changing the battlefield into Chinese courts”, which provides firms with further opportunities for growth in this area.

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The key to success for law firms in China is to adapt to rapidly changing market forces and keep pace with client demands spurred by economic growth, internationalisation of the market and technological developments. This environment creates ample opportunities for law firms to thrive and grow. Cost considerations must be taken into account in this highly competitive market, however due to its complexity there is a strong need for deeply specialised expertise to defend and enhance clients’ commercial positions. PRC and foreign firms alike are taking measures to meet these demands and improve their offerings to clients, which make for an increasingly sophisticated legal market. 

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W11 1QQ, UK