China law: what you really want to know

Once the microphones are turned off, what are the big questions UK and US lawyers are asking the Chinese? Here they are – and the answers too

Not long ago I attended a gathering of senior lawyers from the region to talk about the state of the Asian legal market and key trends and developments in the market. About 12 to 15 leading international law firms were represented, together with four top-20 Chinese law firms (three in the top 10 and one from the second 10). There was a lot of talk about the future of Big Law and New Law as well as the projected emergence of a group of 10 elite global law firms and a trailing group of 10 to 15 global law firms with some differentiation in terms of pricing and service offerings.

Robert Lewis
Robert Lewis

The conversation quickly turned to questions about the Chinese legal services market. In such an intimate setting, the discussion was open and frank, and quite illuminating. Without naming names or violating confidences, a high-level summary of some of the questions posed and responses given may prove to be useful as an indication of prevailing market conditions and trends in China.

Are foreign firms planning to open offices in the Shanghai free trade zone (FTZ)?

Perhaps the international firms represented were holding their cards close to the vest, but no one seemed to be particularly keen. The rules are not clear at this stage and even in the best case scenario the upside of cross-secondments is not entirely apparent. The prospects for a true joint law venture perhaps were a little more attractive in the abstract, but several pointed to the experience in Singapore, which has been mixed at best.

The Chinese lawyers all expected that some international firms would look to form a joint law venture office in the FTZ with a small captive local firm, perhaps a spin-off firm set up by current Chinese associates in the foreign firms’ Shanghai offices in order to be able to provide formal Chinese legal advice, which we all acknowledge the foreign firms now do but on an informal basis, subject to appropriate caveats.

None of the Chinese lawyers seemed particularly concerned that this would change the competitive positioning in the market between foreign and local firms. One Chinese lawyer candidly acknowledged that the foreign firms and the local firms are already in direct competition, so this would be no different. He was quite comfortable that the top Chinese firms would continue to do well, even in the face of possible further opening of the market to the foreign firms.

My view? I expect that the MOJ will open the market further to the foreign law firms in the coming five to 10 years, but this will not change the fundamentals of the market. International and local firms each have their respective competitive advantages and disadvantages, and overall the market segments itself rather neatly based on the nature of the clients and the work, completely independent of the regulatory scheme in place. Overall, the local firms are in ascendency, and the market positioning of the international firms is evolving, but there is room for both. This opening up in the Shanghai FTZ may be a first step, but it remains to be seen whether in and of itself this is meaningful. In any event, it marks a trend towards of further opening up of the market that is neither unexpected nor of particular concern to the top domestic law firms.

Are the local firms at risk of losing top partners to the international firms in China?

This question arose from some comments which suggested that the senior partners in some of the top local firms were doing quite well financially, thank you very much, some on par with partners in very respectable London or New York firms. The premise of the question appeared to be that in some Asian firms the equity is held quite closely by a small number of senior partners, so perhaps this was also the case in China; if so, this may suggest that some strong younger partners may be at risk of being poached by a joint venture law office set up by a top international law firm.

While no one from the China law firm side suggested that there was zero risk that this may occur, it hasn’t been overly common in the market. In fact, the movement has been primarily in the opposite direction, with more senior foreign lawyers moving to some of the top Chinese firms. One reason is that the profit-sharing arrangements in the top Chinese law firms is not as unfavourable to younger mid-level partners as it may be in some of the other leading regional firms in other parts of Asia. If you perform well, you typically get paid well.

My view? Most foreign firms can’t offer enough money to attract the top-tier talent in local firms, and the ones you can afford, you probably don’t want. There’s a reason you can afford them. Having said that, I would not be surprised if some elite local lawyer made the move, probably more for prestige than money – but the money will still need to be very attractive, say plateau partner points in a robust lock-step system. The challenge will be to persuade the lateral partner’s clients to accept a 50 per cent-plus increase in hourly rates for the same work. Could be tricky.

Should we expect consolidation among the leading Chinese firms?

No one on the Chinese side ruled this out completely, but the more prominent dynamic in the Chinese legal services market has been the flight of strong partners/teams from second- and third-tier firms to the top-tier local firms. And on the other hand, refugees from top-tier firms tend to set up boutiques, many of which have done quite well. Or they go to another top-tier firm, but that is somewhat less common than one might expect based on lateral hiring trends in the more developed markets and even based on lateral partner merry-go-round among the foreign firms in China.

My view? I think there is room for more top-tier national full-service law firms in China, and that the market will be better served if more second-tier local law firms were to step up their game to compete at the top end.

Do the local Chinese firms receive pressure from their Chinese clients to expand internationally?

The consensus appeared to be that, generally speaking, there is not significant pressure from Chinese clients for the Chinese firms to set up offices abroad, and most of the Chinese firms represented appeared to be relatively cautious about expanding abroad. Some had no intention to set up overseas offices (a representative of one of the Chinese firms made a pretty compelling case for his firm’s decision to focus exclusively on the China market where the Chinese firms have considerable competitive advantages and not venture abroad where the foreign firms had all of the advantages) while other Chinese firms reported they had set up or were considering setting up only a few small liaison offices in a small number of locations, mostly for marketing purposes with an intention to cooperate more closely with local firms in the foreign market.

The grand exception to this overall conservative approach, of course, being Hong Kong, which is so closely integrated with the China market, so a larger presence may be warranted there. However, all recognized that Hong Kong is an extremely competitive market, so expectations on the part of most top Chinese firms need to be tempered in terms of what can be achieved by the Hong Kong branch office of a China-based firm. The consolidated King & Wood Mallesons (KWM) Hong Kong presence is a unique case and could be a game-changer in the Hong Kong market. While the other Chinese firms perhaps are not as likely to be quite so aggressive as KWM, the trend is that the Chinese firms will need to expand in Hong Kong just to service their China-based business.

My view? I think we at Zhong Lun are safely with the majority on this point. We are first and foremost a top Chinese firm, so everything we do should have a China nexus. If we have a foreign office, it should be to facilitate inbound or outbound work to/from China and cooperation with our friends in other top independent law firms around the world.

Who has had serious problems collecting fees from Chinese clients on outbound projects?

I posed this question. All hands went up. No surprise there. Even so, all seem to be keen on developing more outbound work from China in the expectation rates and collections will improve.

My view? Count me in. This is a market that cannot be ignored, and there is room for both the international firms and the leading Chinese firms in this market. As I told the group, I didn’t move to a top Chinese firm because there was no future in the foreign firms in China, but because I saw an under-served market on the local law firm platform. Just as in the case for inbound work, the market for outbound work nicely and neatly segments itself between foreign and local firms based on the nature of the deal and the clients. Now we just need to get them to pay reasonable fees in full and on time. It’s a good thing I am an optimist!

Robert Lewis is international managing partner at Zhong Lun Law Firm. He is based in Beijing.