Latest Issue of Caixin Weekly | Foreign Law Firms at a Crossroads (AI Translation)

最新财新周刊｜外国律所进退之间

China saw the establishment of 12,603 new foreign-invested enterprises in the first quarter of 2025, up 4.3% year-on-year, but actual used foreign capital fell 10.8% to 269.23 billion yuan versus 2024's equivalent period. Historically, Foreign Direct Investment (FDI) in China grew from $920 million in 1983 to a peak of $189.13 billion in 2022 before showing signs of decline. Foreign law firms' presence in China is not fully reflected in the sheer count of offices or business volume, as over a dozen, mostly U.S.-based, law firms have scaled back or left the mainland since 2023, often consolidating their Asian operations in Hong Kong, though some have also increased their China investment. Since 2023, 15 new representative offices for foreign law firms have been approved, with a strong showing from Southeast Asia and a tendency to choose Shenzhen or the Hainan Free Trade Port as their base [para. 1][para. 2][para. 3].

The legal services market in China began opening to foreign firms in 1992 following the introduction of comprehensive FDI laws and the promulgation of the "Interim Provisions" for foreign law firm offices. These allowed foreign law firms to offer specific legal services but barred them from Chinese law matters. By joining the WTO in 2001, China pledged to remove constraints on city locations and office numbers for foreign law firm offices; regulatory changes in 2004 implemented these commitments. The number of foreign law firm representative offices surged post-WTO entry, growing at a 9.04% annual rate to 2.3 times the pre-WTO level a decade later [para. 4][para. 5][para. 6].

However, since the start of the Trump administration (2017), the number of foreign law firm China offices, especially American, started to contract, dropping from 244 in 2017 to 205 by 2022, though recovering slightly to 208 in 2023. Mergers, restructurings, and exits have followed: Dechert consolidated to Singapore; Dentons and Beijing Dacheng ended their alliance in 2023; and Mayer Brown’s Hong Kong operations split from the global firm in 2024. Conversely, firms like Loeb & Loeb and Dorsey & Whitney have expanded in China. Recent approvals include British, Singaporean, Malaysian, Vietnamese, Cypriot, and Mauritian law firms, with many favoring Shenzhen. The shifting dynamics reflect more than just geopolitics—market adaptation and regional integration are also influential [para. 7][para. 8][para. 9][para. 10][para. 11].

Many Southeast Asian law firms are entering China to closely serve their clients amid increased Chinese investment into their home markets. At the same time, U.S. firms’ retreat is attributed to factors including China’s rising domestic legal capability, higher U.S. operating costs (with first-year U.S. associates earning $200,000 versus a fraction of that at Chinese firms), and a reduced pipeline of U.S.-bound Chinese IPOs, exacerbated by stricter data and cybersecurity regulations (e.g., after Didi’s fined IPO). Chinese firms have caught up in quality and efficiency, offering lower-cost, locally tailored services, which has pressured foreign firms on price and talent retention [para. 12][para. 13][para. 14][para. 15][para. 16][para. 17].

In response to declining business and increasing competition, foreign partners often join leading Chinese firms, leading to a brain drain sometimes described as “internalization.” The legal market is also shifting away from traditional sectors to fields such as cross-border dispute resolution, intellectual property, compliance, and technology-related industries. Experts expect that foreign law firms that localize and adapt can still thrive, but only diversified, agile firms will remain competitive. It is anticipated that a minority of firms will capture the majority of opportunities as the sector matures [para. 18][para. 19][para. 20][para. 21][para. 22].