Amid slowing economic growth and tightening security laws, as international competitors are withdrawing from mainland China and Hong Kong, the eight top law firms in China, known as the “Red Circle,” are stepping up their overseas expansion efforts. This move may be part of a legal battle initiated by the Chinese Communist Party. Experts say the CCP may be realizing the need for Chinese law firms to firmly grasp the legal service industry, creating a dilemma where Chinese firms may need to provide information to the authorities.
According to a recent report by the Financial Times, Beijing-based King & Wood Mallesons has announced plans to establish offices in South Korea and Japan this year; Han Kun Law Office opened a branch in New York in December after setting up a new office in Singapore a few months prior; DeHeng Law Offices established its first Southeast Asian office in Laos last year, providing legal services related to the Belt and Road Initiative; Yingke Law Firm opened an office in South Africa.
Data from the Chinese Ministry of Justice shows that the number of overseas branches of Chinese law firms has increased from 122 in 2018 to 180 in 2022. By November 2023, the number of Chinese lawyers engaged in foreign-related cases had grown by over 4,800 compared to 2018, a 67.8% increase.
According to a senior lawyer in Japan, domestic investors expanding overseas require legal services but often lack knowledge of local languages, preferring to seek Chinese lawyers who understand foreign laws. Starting from last year, Chinese lawyers have been encouraged by Shanghai to establish overseas branches.
These years of aggressive overseas expansion by law firms may be related to China’s overseas investments, particularly in sectors like Southeast Asian manufacturing, new energy, new materials, electric vehicles, and solar panels, as indicated by a rise in Chinese enterprises preferring local lawyers.
In light of the geopolitical tensions between the US and China, many foreign law firms have been leaving China, prompting Chinese companies to increasingly turn to Chinese lawyers for legal services.
Reuters reported in November last year that out of the largest 73 American law firms in China, 32 had reduced their operations in China over the past decade. Since 2018, 26 out of the top 48 American law firms had decreased their activities in Beijing.
From 2017 onwards, the number of foreign law firm branch offices registered to operate in China has declined continuously for five years. From 2018 to 2022, 17 American law firm representative offices in China were deregistered.
In a report by Nikkei Asia in November last year, it was revealed that some private and state-owned enterprises in China had switched from international law firms to domestic ones. Smaller clients cited lower costs at Chinese law firms compared to international counterparts. The tense geopolitical situation also led Chinese clients to prefer working with domestic law firms that share a similar mindset.
US legal scholar and independent commentator Yu Ping told Epoch Times that Chinese lawyers are relatively inexpensive, which is why foreign law firms are hesitant to get involved in the Belt and Road Initiative. Chinese state-owned enterprises prefer using Chinese law firms to ensure that information about their overseas investments is not leaked to foreign entities.
Furthermore, Chinese enterprises have shifted their focus to markets in Southeast Asia, the Middle East, Africa, and Latin America related to the Belt and Road Initiative, explaining the establishment of many law firms along the Belt and Road route.
According to data from the National Bureau of Statistics of China, the country’s outward direct investment decreased by 8.8% in 2022 compared to the previous year, with investments in Asia (excluding Hong Kong) remaining steady at $26.7 billion.
Nikkei Asia reported that in 2023, around 50% of China’s regional investments flowed into Southeast Asia, showing a 27% increase from the previous year. Construction projects are mainly led by state-owned enterprises, with a majority of new private investors entering the energy transition and battery materials sectors. Indonesia is the largest recipient country, receiving approximately $7.3 billion in investments.
Yu Ping stated that investing in “China-friendly” markets as part of the Belt and Road Initiative is not unusual, as it allows influence on the country’s politics with fewer complex legal requirements, often receiving favorable treatment. This approach aligns with the practices of the Communist Party.
Since China’s accession to the WTO in 2001, there was a wave of integration with international legal concepts, providing Chinese law firms more exposure to international business. However, with the CCP gradually tightening control over various legal aspects since 2012, lawyers are now required to pledge allegiance to the CCP during oath ceremonies. In January 2017, the Chief Justice of the Supreme People’s Court of China claimed that judicial independence was a “mistaken concept cherished by Western countries.”
Since the beginning of the US-China trade war, legal battles have become another secretive front of confrontation between the CCP and the West. Since then, the CCP has introduced several laws aimed at countering sanctions and enhancing national security.
In February 2019, CCP leader Xi Jinping wrote in the Qiushi Journal, advocating the use of legal weapons to dictate the rule of law and oppose disruptors and troublemakers in foreign affairs.
In June 2023, Chinese Foreign Minister Wang Yi called for taking an assertive stance, including using legal means, to counteract foreign interference, sanctions, and disruptions and outlined restrictive legal provisions against such actions.
Many multinational companies operating in China have found themselves in a dilemma when deciding whether to comply with US or Chinese laws. For instance, in January 2021, the Chinese Ministry of Commerce issued new regulations prohibiting Chinese companies and individuals from complying with “unreasonable” foreign laws and measures, discouraging foreign companies from adhering to US restrictions on business transactions with Chinese individuals and companies like Huawei.
Simultaneously, the importance of complying with local government laws when conducting overseas business operations has increased for Chinese enterprises. In 2022, China’s largest ride-hailing platform Didi Chuxing was delisted from the New York Stock Exchange due to data security concerns. Last year, officials from the China Securities Regulatory Commission warned lawyers to strictly adhere to the new regulations for companies seeking overseas listings issued in February 2023, citing Article 12, which prohibits negative information about China.
“Foreign legal compliance” gradually emerged as a high-frequency term in 2022 and was mentioned for the first time in the CCP’s 20th National Congress report in 2022. In November 2023, Xi Jinping emphasized the importance of strengthening foreign legal compliance and fostering top-notch Chinese arbitration institutions and law firms, nurturing talented individuals adept at international rules and foreign legal practices, and actively participating in setting international rules.
The CCP’s official newspaper, Liberation Daily, reported in September 2023 that Shanghai is actively creating the Asia-Pacific Arbitration Center and the Shanghai International Legal Service Center. The Shanghai Lawyers Association has implemented a long-term training program called the “Pioneering Program,” which has trained 302 lawyers proficient in foreign business, international rules, and cross-language and cross-cultural application abilities. The number of practitioners specializing in foreign legal services in Shanghai has reached nearly 3,500, accounting for 10% of all lawyers in the city.
In the context of the US-China decoupling, mutual sanctions, and legal battles, the motivations behind Chinese lawyers’ overseas expansion are complex.
Tang Yaonan, chairman of the Hui Li International Policy Advisory Group, explained to Epoch Times that during China’s limited period of openness, Western law firms initially operated through Hong Kong and later expanded into Beijing and Shanghai. However, their operations in China were still fundamentally Western-style, focusing on the maximum benefit to clients and avoiding governmental constraints. The CCP has since realized a conflict between this approach and its strategic objectives.
Tang stated that previously, Western firms provided services to China, including technical equipment, legal, accounting, investment banking, and financial services. Chinese enterprises mostly worked with these large Western law firms until a few years ago.
“After the pandemic, Beijing began to realize that the legal service industry at the end of the red supply chain, which happens to be the most important aspect, must be firmly controlled by Chinese law firms, and all legal services must be provided by law firms centered on China. If the structure providing detailed, complex, and in-depth legal services, including contracts and litigation prevention or handling, is absent, how will such functions be fulfilled?”
He believes that Western law firms are unlikely to do business with China in the future, followed by investment banks, which is already happening. It’s estimated that the same trend will apply to accounting and auditing services. These changes indicate that Beijing has started to understand that important sectors, such as legal services, should no longer be managed in collaboration with Western, especially Anglo-American, major law firms, but rather placed under the control of Chinese law firms.
Analysts point out that China lacks Western legal practices, independent judicial institutions, and widespread corruption in the government, judiciary, and business sectors, resulting in stark differences between Chinese lawyers and their clients’ daily experiences and expectations compared to those of Western lawyers and clients.
Most “Red Circle” law firms in China have a significant connection with the government, distinctly different from international firms. Chinese law firms have Communist Party branches and are regulated by Party-controlled associations like the China Law Society and bar associations. The Chinese Ministry of Justice’s Law Firm Management Regulations stipulate that law firms must consider upholding CCP leadership as a basic requirement of the profession, submitting annual assessment results to Party-controlled judicial bodies.
This dynamic aligns Chinese law firms with governmental policies, evident in numerous reports from mainland official media about Chinese lawyers safeguarding Chinese overseas interests for the CCP, backing China’s response against reasonable anti-dumping and anti-subsidy investigations led by Western countries.
In 2019, the Beijing Lawyers Association urged active participation in anti-dumping, antitrust investigations, and lawsuits related to foreign legal services, enhancing a stance that guides lawyers to work within the framework of the nation’s diplomatic work.
On December 8, 2019, the founding members of the Belt and Road Initiative Lawyer Alliance, consisting of 85 members from 36 countries and regions, officially established the organization in Guangzhou. Top-tier law firms like Beijing Dacheng Law Firm, JunHe Law Firm, and Yingke Law Firm have received awards such as the “Belt and Road Health Road” and the “Belt and Road Compliance Road.”
In 2019, Shanghai JMK Law Firm began collaborating with law firms from G20 and Shanghai Cooperation Organization members as well as BRICS countries through the “Belt and Road” Legal Research and Service Center. Over the past three years, the center has set up 68 stations across five continents.
Yu Ping highlighted the early involvement of legal professionals with the Belt and Road Initiative, with organizations like the China Law Society and the China Bar Association taking the lead, aiming to serve government policies. Several law firms also participated in drafting legal compendiums for countries involved in the initiative.
Tang Yaonan outlined the essential difference between Chinese law firms or the legal industry in China and Western legal practices, particularly concerning their relationship with the government. Western law firms are largely independent in their operations, focusing on client benefits and avoiding government controls. However, in China, it is the opposite.
“Western law firms tend to have strict legal and professional constraints, including maintaining client confidentiality and complying with ethical and industry norms that have been upheld for over a century, which are missing in China’s legal system,” Tang explained.
For instance, whether client-lawyer confidentiality obligations or other regulations differ for Chinese law firms compared to their Western counterparts in the scope of services provided under the Belt and Road Initiative remains unclear. It is suggested that Chinese law firms should communicate this information to the public, but Tang noted a lack of clear communication on this matter.
Tang emphasized that while Western law firms operating in China may face similar challenges, this red line is maintained clearly. However, it remains unclear whether the same line applies to Chinese law firms. “I am not sure, and it requires Chinese law firms or bar associations to provide specific explanations on how to handle these issues concerning sensitive operations.”
He continued, stating that when the Chinese government requires specific actions, including offering assistance and complying with associated regulations, Chinese law firms have already embedded those requirements in the legal system. This represents the biggest challenge or difference in how Chinese law firms operate compared to Western practices.
Nevertheless, Yu Ping believes that both Chinese law firms and lawyers operate in a highly marketized environment, where their profit structures and business logic do not necessarily align too closely with the CCP, sometimes even positioning them as adversaries of the government.
He underscored that the profit mode of law firms, reliant on selling service time for survival, dictates their market focus. Most law firms do not view issues from a political perspective unless there is a specific reason to do so. They follow a simple profit model based on bringing in more clients, essential for revenue, and the status of partners depends on their annual earnings, which are settled yearly.
Tang Yaonan added that while law firms are profit-driven companies, they possess unique attributes different from other profit-centric businesses due to stringent regulatory and normative constraints. This setup at times surpasses commercial necessities, with a waste in professional and ethical norms, especially when encouraging them to conform to governmental objectives. Therefore, law firms do not approach matters purely from a profit standpoint.
He stated that the relationship between law firms and the government in Western countries is substantially different from that in China. Western law firms show a strong commitment to legal and professional ethics, including client confidentiality and information disclosure protocols, which are deeply ingrained in their operational norms. The Chinese legal industry is yet to clarify how they address such issues.
While both Chinese law firms and lawyers are expected to follow certain guidelines when working in One Belt One Road countries, they are not obliged to act in line with government policies unless warranted.
Yu Ping highlighted that it’s not entirely evident whether Chinese law firms have been compelled to engage in Belt and Road-related matters or whether they have chosen to do so based on their interests. Many large law firms have turned down Belt and Road projects in favor of compliance services that command higher remuneration.
Yu Ping emphasized that if viewed objectively, Chinese law firms should be seen as adversaries of the CCP. Regardless of government directives, lawyers remain the CCP’s adversaries since they safeguard private enterprises and bear significant pressure. Despite these challenges, they must handle the roles where their business thrives and the income is reliant on it.
He mentioned that many firms went overboard and arrested numerous lawyers, including their families, focusing on the crackdown on legal practitioners who assist private companies. However, these lawyers have continued to support private enterprises and face immense pressure.
Yu Ping pointed out that Chinese law firms are highly market-oriented, with profit models that do not necessitate deep ties with politics. They depend on selling services to survive, and most practitioners do not address issues with a political perspective unless the profit margin justifies it. Their core business is primarily centered around regulatory compliance.
Yu Ping opined that while Chinese law firms were once state-owned in the 1980s, they are now mostly partnership enterprises, not funded by the state. Law firms are formed by individual combinations, lacking a unified leadership structure, operating as a collection of entities where decisions are based on the profits brought in. The status of partners is determined annually based on revenue generation, covering individual costs and proceeding to maintain a team and pay salaried attorneys.
He suggested that deeper insights into Chinese law firm management are crucial, considering if Chinese firms are obligated to comply directly with political requirements, or if they have different standards of conduct. Regarding the One Belt One Road initiative, it’s unclear how Chinese firms observe norms applied by Western law firms concerning legal standards, ethics, and industry codes.
“I think this area within the Chinese legal industry remains underaddressed, and the…
Yu Ping noted that the interactions of Chinese law firms and lawyers with the government are notably market-driven, with their profit structures and business logic illuminating the limited need for strong governmental ties. They rely on selling their services’ time to generate revenue, focusing on compliance…
Overall, with the increasing global influence of Chinese law firms and the shifting dynamics in international legal practices, the interactions between law firms, clients, and governments are evolving rapidly. The intricate balance between legal compliance, business interests, and political landscapes will continue to shape the landscape of legal services and influence the strategies of law firms in the years ahead.