Foreign Law Firms Come and Go as China’s Market Transforms (AI Translation)

【周刊提前读】中国法律服务市场快速转型 外国律所有进有退

From January to March 2025, China witnessed the establishment of 12,603 new foreign-invested enterprises, a 4.3% year-on-year increase, even as the actual use of foreign capital declined 10.8% to 269.23 billion yuan. Historically, Foreign Direct Investment (FDI) in China rose markedly from $920 million in 1983 to $189.13 billion in 2022, although a recent downward trend is observable. [para. 1]

The landscape for foreign law firms in China is similarly complex. Since 2023, over a dozen prominent firms—mostly from the U.S.—have scaled back or exited the mainland, often shifting operations to Hong Kong or consolidating rather than leaving China altogether. Yet some are increasing their presence, reflecting divergent market strategies. Notably, since 2023, the Ministry of Justice has approved 15 new foreign law firm representative offices, with a concentration from Southeast Asia (Malaysia, Singapore, Vietnam) and an emphasis on locations like Shenzhen and the Hainan Free Trade Port. [para. 2][para. 3]

China’s legal services sector began opening to foreign law firms in the early 1980s, enabling their entry through a series of investment laws and, later, specific regulations on representative offices. Initially, foreign law firms could only provide legal advice on non-Chinese law and were prohibited from practicing Chinese law. The 2001 WTO accession was a turning point, leading to the removal of geographic and numeric restrictions for representative offices, which boosted their number to 2.3 times pre-WTO levels within a decade, with an average annual growth rate of 9.04%. [para. 4][para. 5][para. 6][para. 7][para. 8][para. 9]

However, the number of foreign law firm offices—especially American—has declined from 244 in 2017 to 205 in 2022, with a slight rebound to 208 in 2023. Office closures, consolidations, and the dissolution of major alliances (such as Dentons and Beijing Dacheng Law Offices) highlight this retrenchment. Mergers and recent separations (such as Mayer Brown and Johnson Stokes & Master) signal continued industry realignment. Meanwhile, some firms like Loeb & Loeb and Dorsey & Whitney are expanding in China, showing ongoing confidence in the market. Beyond American firms, legal service providers from the UK, Singapore, Malaysia, Vietnam, Cyprus, and Mauritius have also established new offices, particularly favoring Shenzhen. [para. 10][para. 11][para. 12][para. 13][para. 14][para. 15][para. 16][para. 17][para. 18][para. 19][para. 20][para. 21]

Driving forces behind entry and exit include more than geopolitics; they encompass market integration trends, business strategy adjustments, evolving client demands, and the growing international ambitions of Chinese enterprises. As the legal market transforms, both domestic and foreign law firms are adapting to new business models and client needs. Many Southeast Asian law firms are entering China to follow their clients’ outbound investments, while Chinese firms' globalization increases demand for cross-border legal services. [para. 22][para. 23][para. 24]

The withdrawal of some foreign firms is tied to declining investments by multinational clients and intensified competition. Chinese domestic law firms now rival or exceed foreign firms in cost, responsiveness, and local expertise. High operating costs and cutthroat price competition have challenged the profitability of U.S. and UK firms, prompting talent to move from foreign to domestic firms—a trend described as the “internalization of foreign law firms”. [para. 25][para. 26][para. 27][para. 28][para. 29][para. 30][para. 31][para. 32]

Despite declining traditional business lines like IPO legal work, growth areas include cross-border dispute resolution, intellectual property, data security, regulatory compliance, and sectors like artificial intelligence and life sciences. Experts believe foreign law firms can remain competitive in China through local expertise, adaptability, and by targeting emerging client needs. Ultimately, the legal sector's evolution promises greater maturity and higher-quality development for China’s international legal services market. [para. 33][para. 34][para. 35][para. 36][para. 37][para. 38][para. 39][para. 40][para. 41]