Recently, the closure or downsizing of Chinese business operations by a large number of American law firms has sparked concern and analysis as to what factors may be contributing to this trend. Some experts attribute the accelerated exodus of law firms from China to factors such as China’s economic downturn, deteriorating legal environment, and increasing provocations by the Chinese Communist Party on neighboring countries, leading to a reduction in business opportunities with China. Additionally, there seems to be no immediate signs of improvement in this situation.
In recent times, several American law firms have announced the closure or reduction of their operations in China. On July 4th, the Chinese Ministry of Justice issued a statement on its official website, announcing the approval of the cancellation of the Beijing representative office of Weil, Gotshal & Manges LLP, a prestigious law firm headquartered in New York and one of the largest in the world. This decision reflects the ongoing trend of American law firms scaling back their presence in China.
According to reports from Voice of America, in recent years, many British and American law firms have withdrawn from China. In early July, Dechert, a prominent American law firm, declared its intention to completely exit the Chinese market by the end of the year.
In a similar vein, Sidley Austin LLP, the sixth-largest American law firm, announced in early May that it would not renew the lease of its Shanghai representative office. Former US President Obama and his wife had previously worked at Sidley Austin LLP.
Furthermore, Mayer Brown, another major American law firm, has revealed plans to divest its current business in Hong Kong. Other American law firms that have either closed or indicated the closure of their offices in China in the first half of this year include Akin Gump Strauss Hauer & Feld, Perkins Coie, Orrick Herrington & Sutcliffe, and Lathem & Watkins.
Additionally, data from the Chinese Ministry of Justice shows a 16% decrease in the number of foreign law firms with representative offices in China from 2017 to 2022. Among the 73 largest American law firms in China, 32 of them have reduced their number of lawyers over the past decade. In Beijing alone, out of the 48 largest American law firms, 26 have seen a decrease in lawyer headcount since 2018.
Not only in the United States but according to Chinese Ministry of Justice data, foreign law firms with offices in China have decreased by 16% from 2017 to 2022.
Former mainland Chinese lawyer Liang Shaohua analyzed the situation by pointing out that the main reason for the exodus is the decoupling effect between China and the Western countries. This decoupling has resulted in the gradual withdrawal of law firms from China.
The worsening legal environment in China has been also cited as a significant factor contributing to the departure of foreign law firms. There have been concerns raised about the increasing complexity of regulations and laws in China, including recent enactments such as the amended Anti-espionage Law and National Security Law, which are perceived as unfriendly towards foreign individuals and businesses.
In March 2023, Chinese authorities conducted raids on the Beijing office of the US investigative firm Mintz Group, detaining five employees. In April, a surprise inspection was carried out at the Shanghai office of the management consulting firm Bain. In May, another raid took place at the China office of consultancy company Capvision.
State media CCTV reported on these incidents, accusing “overseas agencies” of colluding with domestic consulting firms to conceal their foreign backgrounds to evade Chinese laws and regulations.
Liang Shaohua expressed concerns about the safety and security of high-ranking executives and employees stationed in China by foreign law firms due to the increasing uncertainties and risks associated with conducting business in the country. He highlighted that the vague regulatory environment and potential legal repercussions pose significant challenges and risks for employees engaging in investigative work or information collection.
Moreover, Peter Zeughauser, the founder of the Zeughauser Group, a US consultancy firm that advises global law firm leaders, attributed the significant departure of foreign law firms from China to the sharp decline in direct investments in the country. According to Zeughauser, investments have decreased by 90% compared to two years ago, leading to a reduction in business opportunities for law firms.
Recently, the Chinese Ministry of Commerce disclosed that from January to June, China’s foreign direct investment (FDI) amounted to 498.91 billion RMB, marking a 29.1% year-on-year decrease. The actual utilization of foreign investment from January to May was 412.51 billion RMB, representing a 28.2% decline compared to the previous year, continuing a downward trend since June 2023.
Liang Shaohua emphasized that despite the questionable reliability of official Chinese data, the substantial decline in investments represents a significant anomaly for the Chinese economy. This downward trend and the substantial decrease in business activities have prompted many foreign law firms to withdraw from China.
Looking forward, the UK-China Business Association recently released its “2024 Recommendations for British Companies in China,” indicating that this trend of foreign law firms exiting China is likely to persist. The report suggests that the ongoing situation is largely a reflection of increased economic uncertainties in China, heightened geopolitical tensions, and deteriorating business environments for foreign companies.
Liang Shaohua concluded by stating that the gradual withdrawal of foreign entities from various sectors including securities firms, financial institutions, and law firms signifies a continued severing of external ties by China. He pointed out that even if the Chinese authorities were to recognize the need for reform and openness in the future, rebuilding trust and confidence with foreign entities would not be an immediate process, given the current circumstances.
The prevailing uncertainties and challenges in China have cast a shadow over future foreign investments, trade activities, and business interactions, signaling a period of significant impact on Chinese enterprises looking to engage in the global market.