Due to mergers and acquisitions and a drying up of capital market activities, an increasing number of US law firms are choosing to shut down their Shanghai offices and reevaluate their business operations in mainland China.
In recent months, US law firms such as Sidley Austin, Perkins Coie, Latham & Watkins, and Orrick have either closed or indicated their intention to close their Shanghai offices. Meanwhile, Weil and Akin Gump have closed their Beijing offices.
Shanghai, as China’s largest stock market and financial center, is also the region most sensitive and impacted by changes in the legal industry.
“The biggest factor is the drying up of mergers and acquisitions and capital market activities, followed by a decrease in transactions by other companies,” a mainland Chinese lawyer who declined to be named told the Financial Times.
“Many companies are starting layoffs in Shanghai first, as that is where business is drying up the fastest,” he added.
On the flip side, top Chinese “red circle” law firms are accelerating their overseas expansion, targeting the US law firms’ home turf. Additionally, Chinese law firms sometimes charge fees that are even lower than half of what Western competitors charge.
The Financial Times previously reported that in the past year, top Chinese law firms have opened nearly a dozen new offices in Asia and the United States.
Data from Dealogic shows that total commercial M&A activities in China (including inbound and outbound transactions) are currently at their lowest levels since 2012, standing at $72 billion so far in 2024, while domestic stock market activities are at their lowest in a year since 2009.
Shanghai New York University finance professor Lin Hansheng told the Financial Times that in the current operating environment, US law firms are finding it increasingly challenging to bear the operational costs in China.
He further noted that if US law firms work for Chinese state-owned enterprise clients, there could be due diligence or security issues, and there is also the possibility of facing delayed payments for legal fees. On the other hand, onshore transactions for Chinese companies going overseas have become scarce.
“If a US law firm in Shanghai targets Chinese domestic companies going global, the law firm may only get a small portion of referral fees compared to their US counterparts managing the business in the end,” he said.
A position paper released last week by the British Chamber of Commerce in China cited data from the Chinese Ministry of Justice indicating a 16% decrease in the number of foreign law firms establishing representative offices in China from 2017 to 2022.
Additionally, 70% of companies providing professional services expressed that doing business in 2024 is even tougher than during the COVID-19 period in 2022.
Julian Fisher, chairman of the British Chamber of Commerce, stated, “There has been a significant reduction in business activities from last year to this year.”
The report from the chamber mentioned, “Regulatory barriers are expected to increase rather than decrease in the next five years.”
Furthermore, the escalating risks of geopolitical and trade tensions continue to add pressure on foreign investors, further constraining the confidence of foreign enterprises.
Companies like AstraZeneca, Jaguar Land Rover, Standard Chartered, and Rolls-Royce are among the members of the British Chamber of Commerce.
“China is evidently charting a new course in its relationship with businesses, but clarifying the role of businesses is essential,” Fisher said, noting, “The current ambiguity is frustrating.”
Data from the Chinese Ministry of Commerce shows an 8% decrease in foreign direct investment in China in 2023.
Data from the State Administration of Foreign Exchange of China reveals an approximately 80% drop in foreign direct investment in 2023, amounting to only $33 billion. This marks the largest decline since recording began in 1980.
In addition to the British Chamber of Commerce, US and German chambers of commerce also hold pessimistic views on the business environment in China.