Last US Firms in China Now Face Slow Economy, Local Competitors

China risks the loss of additional US law firms as a struggling economy and domestic competition cause leaders to reevaluate where to deploy resources.

Orrick Herrington & Sutcliffe, Baker Botts, McDermott Will & Emery, Vinson & Elkins and Latham & Watkins have closed at least one China office since 2020. Foreign law firms with China offices fell to 205 in 2022 from 244 in 2017, according to an annual report of the Chinese Ministry of Justice.

“If things continue as they are, more middle-tier American law firms—especially ones with significant industrial client bases—will reduce their presence in China,” said Robert C. Bata, principal at advisory firm WarwickPlace Legal, in an interview. “Some will leave China in the next five years.”

The investment landscape for US law firms is changing as China, once a land of golden opportunities, faces slowing economic growth and falling foreign direct investment.

Loan growth in China fell to a record low last month, Bloomberg News reported Feb. 9, citing data published by the People’s Bank of China. Foreign direct investment in China fell by 8% in 2023 from a year earlier to 1.13 trillion Chinese yuan, (US$157.1 billion), the first decline since 2012, according to the Chinese Commerce Ministry.

Against the dour economic backdrop, US firms face rising competition from Chinese law firms. “Over the last decade or so, the quality of their law practices have become comparable to Western firms,” said Peter Zeughauser, a law firm management consultant. “Today, multinationals are happy to work with Chinese law firms.”

Many Chinese lawyers once worked in government agencies so they know the regulatory policies and how to navigate them, Zeughauser said. Companies doing business or initial public offerings in Hong Kong, especially state-owned enterprises, are “very price sensitive and they hire Chinese firms because of lower costs,” he said.

Trade and other tensions between Washington and Beijing add to the difficult climate. President Biden plans to sign an order to prevent countries such as China from accessing Americans’ sensitive data.

Chinese authorities last year raided the Shanghai office of US consulting firm Bain & Co., detaining five employees. They also raided US company Mintz Corp’s Beijing office last year.

China also implemented a new data security regime in 2023 giving Beijing the authority to shut down or fine companies that leak or mishandle sensitive information.

Questionable Profitability

Most Western law firms don’t make a profit in China, but the big, well-established Wall Street law firms will stay there, Bata said. “Either they are loss leaders, or it is important for them to be there, or they have connections to Hong Kong and it’s important for their visibility,” Bata said.

Baker McKenzie has a joint office with local firm FenXun and now has about 450 lawyers and fee-earners in China and Hong Kong.

“We have been steadily building and strengthening our China offerings over the years,” Tracy Wut, Baker McKenzie’s China managing partner, said in an email. “We take a long-term view on China and are here to stay.”

Bata said, however, few new operations are likely to set up shop in China.

“There will be niche law firms coming in either because of disputes or because of some maritime work or insurance,” he said. “Some might come to do offshore structuring type of work.” However, “pretty much everybody who was going to enter China” has already done so, he said.

Still, there are some new market entrants. At least four foreign law firms have opened new offices in China in 2023 and 2024.

US firm Morgan Lewis already had offices in Beijing and Shanghai and added one in Shenzhen in 2023. Quinn Emanuel Urquhart & Sullivan opened its Beijing office in 2023 after setting up in Shanghai office in 2016.

UK firm Holman Fenwick Willan (HFW) opened its Shenzhen office in 2023. Allen & Gledhill opened its first mainland office in Shanghai in January 2024, its first outside of Southeast Asia.

China’s “Greater Bay Area,” linking Shenzhen, Macao and Hong Kong, was an important draw for his firm, HFW partner and chief representative in Shenzhen Justin Sun said. The firm launched its Hong Kong office in 1978 and set up in Shanghai in 1999.

“The Greater Bay Area is one of the most vibrant and exciting economies on the planet,” Sun said via email. “We see it as an area of almost limitless potential for the firm and our clients.”

The other firms that opened offices declined to comment.

Bata said each of the firms had a unique reason for expanding in China. “Quinn Emanuel for litigation work; Morgan Lewis and HFW, it was to take advantage of the new prospective tech hub and free-ish trade zone in Shenzhen, and Allen & Gledhill, to be a conduit for Chinese capital shifting into Singapore,” he said.

The travails of the pandemic may have discouraged some law firms from considering China, but that will pass, said Doreen Jaeger-Soong, managing director of legal talent recruitment firm Hughes-Castell (Hong Kong) Ltd.

“There are opportunities in every downturn,” Jaeger-Soong said. “History has shown, everything is cyclical.”