China's leading law firms are riding the country's emergence as a global power, increasingly asserting themselves against their foreign rivals. Alex Aldridge asks how far they can go

On Tuesday 4 May at 7:30am a car arrived to pick up former Lovells Beijing managing partner Robert Lewis from his house in the Shunyi district of the Chinese capital, a part of town popular with expats. As it weaved its way off the estate and onto the traffic-choked main road leading to the city centre, Lewis thought about what lay ahead for him at AllBright Law Offices, the Chinese law firm where he was about to start his first day's work.

His decision to join the firm, where his brief is to overhaul AllBright's structure and expand its Beijing office to match its market-leading offering in Shanghai, is one Lewis has been edging towards for years now, and he maintains it is unrelated to Lovells' recently concluded merger with US firm Hogan & Hartson.

Instead, Lewis asserts that his rare move from the partnership of a large international firm to a local Chinese practice was motivated by something far more fundamental: "I see a natural sunset for the current business model of most foreign law firms here and incredible potential for Chinese firms."

For Lewis, this represents the opportunity of a lifetime, the culmination of 18 years working in China in various guises including Mormon missionary and Asia general counsel for telecommunications equipment maker Nortel, which he left to join Lovells in 2001.

Just over a week after Lewis started at AllBright, former Clifford Chance (CC) partner and partnership council member Rupert Li went through a similar experience, swapping the magic circle firm's Beijing office for King & Wood, one of China's most prestigious practices, to take up a role as international managing partner.

On completing the move, Li – who was part of the team that represented Aluminum Corporation of China (Chinalco) in its unsuccessful $19.5bn (£13.5bn) attempt last year to acquire an 18% stake in Anglo-Australian mining firm Rio Tinto Group – expressed similar sentiments to Lewis, commenting: "It remains very hard for foreign firms to achieve the scale they want to achieve [in China]," adding: "My entire career has been spent somewhere on the periphery of some far-flung legal empire. Now I'm suddenly at the centre."

Lewis and Li's moves were followed a fortnight ago by the arrival at Jun He, another leading Chinese law firm, of James Zhu and Zoe Wang, two intellectual property partners from Perkin Coie's China practice. The pair will help set up and build Jun He's new Silicon Valley office in the US.

Collectively these defections represent just the latest and most visible manifestation of the power shift that has been taking place for years in China's much-coveted legal market.

By common consent, this shift has been accelerated by the prolonged crisis that has gripped markets in the Western world and reinforced the global influence of the fast-growing Chinese economy, this year set to overtake Japan as the world's second largest economy, with gross domestic product estimated at $5.6tn (£3.9tn). China has powered through the global recession and is expected to grow by at least 8% in 2010.

Fired up by this huge expansion and largely protected from international competition by local Bar rules, Chinese law firms are seizing their moment, with a steady flow of dual-qualified associates moving from the Chinese offices of international law firms to the country's domestic practices for some years now.

However, until recently there have been very few partner-level moves. The handful that have taken place include Handel Lee's 2005 switch from Vinson & Elkins to King & Wood. Baker & McKenzie's Stephen Nelson followed him in 2006 to head up King & Wood's tax practice. And in 2007 David Dingfa Liu left his role as a partner in Bryan Cave's Shanghai office to join Jun He.

But this month's round of hires has created a bigger impact, coming as they have in close succession and in the context of Chinese law firms' increasing visibility on deals involving inbound investment into China by foreign companies.

Humble beginnings and hotel rooms

That Chinese law firms are now able to attract senior lawyers from some of the world's leading firms is remarkable given that just 30 years ago they didn't exist. The Chinese Cultural Revolution between 1966-76 saw all of the country's law firms and law schools shut down. Estimates put the number of lawyers in China during this time at around 200, predominantly working in civil servant roles – an incredibly small number for a nation with well over a billion inhabitants.

Jones Day counsel Owen Nee, who co-founded the first international law firm office in China for Coudert Brothers in Beijing in 1979 – operating semi-officially out of a suite in The Peking Hotel – recalls what it was like back then: "There were no Chinese law firms or law schools and almost no lawyers, just remnants of what was left over from before the Cultural Revolution. To get a visa we did a deal with the Beijing municipal Government that saw us teach a course on international trade law in the morning, then in the afternoon we'd go back to the hotel and practise law. The authorities, who were tentatively enthusiastic about encouraging foreign investment, were happy to turn a blind eye."

In 1982 a new state constitution permitting the founding of state law firms gave rise to the establishment of a handful of outfits as extensions of government departments. Then towards the end of the decade another change in the constitution permitted private law firms to open up, leading some lawyers from the state firms to establish the current first-tier of Chinese law firms such as Jun He (founded in 1989), Commerce & Finance Law Offices (1992), DeHeng Law Office (1993), King & Wood (1993), Haiwen & Partners (1993) and Fangda Partners (1993).

"It was an absolutely different era," recalls Adam Li, co-founder of Fangda Partners and now a partner at Jun He specialising in international M&A and capital markets work, where he arrived following a stint with Cleary Gottlieb Steen & Hamilton in New York. "At the time David Dali Liu [also a partner at Jun He] and I were the only two lawyers in Shanghai with graduate degrees. Now you can't get a job without one," he adds.

With commercial agreements in China still extremely basic at this stage and the scope of practice limited to a few core areas, China's law firms in this first incarnation were staffed by generalist lawyers working independently of each other in a style sometimes compared to UK barristers. Their Spartan offices closely resembled the government departments in which these firms had their roots. Veteran China-based Western lawyers recall the Chinese firms' "poorly furnished buildings" and "scruffy, civil servant-style clothing" of the lawyers of the day. But the opening up of China to foreign investment – which in 1992 saw international law firms granted permission to set up in China officially (although not permitted to practise Chinese law) – marked the beginning of a process that would see the country's domestic firms evolve dramatically.

"When China opened up it didn't have a credible legal community, so for foreign direct investment and large-scale fundraising, international law firms filled the void," recalls King & Wood's Li, who worked under Nee at Coudert Brothers. "But Chinese firms quickly became an indispensable intermediary, interfacing with not only the international law firms but international investment banks. Basically what you had was a nascent profession that just happened to be dropped into the extremely fast-moving process of international fundraising, with a consequent huge transfer of knowledge taking place."

Before long the top Chinese law firms had moved to smart new offices in the buildings springing up in the centres of Beijing and Shanghai, their lawyers now clad in designer suits. Their structures evolved to increasingly resemble those of their international peers – albeit via lockstep pay models characterised by heavy elements of 'eat what you kill' payouts for the best-connected business generators.

King & Wood and Jun He, for example, both operate locksteps where leading partners often earn more than 10 times the amount of a partner at the lower end of the pay scale. AllBright, meanwhile, is in the process of re-evaluating its structure for associates and partners – a project being led by Lewis. "As legal work in China has become more complex, specialisation has become increasingly valuable to clients, so the old model of simply rewarding for originating work has begun to make less sense. Having said that, the Chinese model will always place a premium on personal relationships, so for the leading firms it's been about blending that with a growing consciousness of the power of the brand."

All this time, Chinese firms have been growing at a startling rate. In 2005 Jun He had around 150 lawyers; it now boasts around 400 working out of offices in Beijing, Shanghai, Shenzhen, Dalian, Haikou, Hong Kong and New York. There has been similar growth at King & Wood, which now employs over 800 lawyers across 16 offices. Statistics on Chinese firms' revenues are notoriously hard to come by, but are said to have risen annually by double-digit percentage rates until the global financial crisis slowed inbound investment into China in 2008.

Last year the leading Chinese practices are believed to have turned over between YUAN300-YUAN400m (£30-£40m) and YUAN1bn (£101m). And some firms have bucked the slowdown altogether, with Dacheng Law Offices reportedly doubling its revenue between 2008 and 2009. Despite possessing a lower profile internationally than firms like King & Wood and Jun He, the fast-growing Dacheng now has more lawyers than both, with a total of around 900 fee earners and approximately 400 partners operating out of 27 offices. Last year alone the firm opened 14 offices, the majority through the acquisition of local firms, though Dacheng is seen as having far less clout for high-end corporate work than China's more established outfits.

Salaries, meanwhile, are fast approaching Western levels, though not on par with packages available for commercial lawyers in markets like New York and London. Annual associate earnings at leading Chinese law firms start at around $15,000 (£10,400) and reach $100,000 (£69,300) plus bonuses, which can add another 40%-50%. Equity partners take home between $250,000 (£173,000) and $750,000 (£520,000) a year. Individual high flyers can earn as much as $1m-$2m (£693,000-£1,386,000) after tax.

Given the much lower cost of living in China, these sums go a long way. Dan Harris, a partner at Seattle-based law firm Harris & Moure and co-author of the China Law Blog, comments: "At partner level many of these guys are rolling in it, because they're charging near-Western rates but paying Chinese costs. It is not at all uncommon for partners at China's top law firms to own condo after condo, car after car."

With so many law firms jostling for position in a fast growing and fragmented market, identifying the leading players is far from straightforward. However, the general feeling is that King & Wood and Jun He are the pace-setters for major corporate work with a cross-border element, having led the way in hiring Chinese lawyers from international firms. Haiwen & Partners, whose strategy has been to remain relatively small (the firm has around 100 lawyers) and focus on providing high-level service from its Beijing and Shanghai offices, also commands wide respect.

Holding all the cards

Of course, aside from the major boost of servicing a huge and fast-growing economy, domestic firms have another major advantage over international rivals: the ban under Chinese Bar rules on foreign firms practising local law. In addition, the Chinese-qualified lawyers they employ must surrender their practising certificates, taking the role of 'consultants'.

In practice though, the restrictions are not particularly tightly policed. "Actually, the Ministry of Justice is pretty accommodating to foreign firms, enforcing the restrictions far from rigidly," says AllBright's Lewis, giving an example of a meeting of international law firm managing partners and Chinese Government officials he attended four years ago while at Lovells: "I remember one managing partner of an extremely high-profile New York law firm turning to the senior Ministry of Justice official and saying, 'You do know that if you enforced your rules properly, you'd have to kick us out'."

But there is little doubt that the ban – which lawyers say they do not expect to be lifted anytime soon – has substantially held back the near 200 foreign law firms operating in China, putting a ceiling on their ability to expand.

"Foreign firms do well in China, with a business model that sees them represent international clients investing in the country and offering foreign products to Chinese corporations going abroad, but this restriction means there will always be an awkwardness in the way the Chinese law service is rendered," says King & Wood's Li.

The ban has also curbed expansion outside China's two major business centres, says Lewis. "While it has been possible for many of the foreign firms to open up a third office outside Beijing and Shanghai for almost five years now, nobody has done it – mainly because it's an extremely hard sell to central management back in London or the US."

The result is that as Chinese firms keep growing, the international law firms with the largest presence in mainland China like Baker & McKenzie and CC rumble along at around the 50-100 lawyer mark, limiting their ability to provide career paths to their native Chinese lawyers. Keen to play a part in their country's economic renaissance, these lawyers – who have been targeted by international firms in China for some years for their language skills and understanding of the way business works in the country (see box, page 14) – increasingly view Chinese law firms as the best bet for furthering their careers.

"In a Chinese law firm, people like me can make partner earlier and have more flexibility in developing their own business," says former Skadden Arps Slate Meagher & Flom associate Kirk Tong, now a partner at Jun He. Zhong Lun partner Lefan Gong (pictured), previously an associate in Jones Day's Shanghai office, having trained with LeBoeuf Lamb Greene & MacRae in New York, has a similar take: "[A Chinese law firm] is a much greater platform. The entrepreneurial nature of the business forces you to step out of your comfort zone to generate business. But what I have gained in return is a much wider network, a diversified and more loyal clientele, a richer variety of interesting and challenging projects and more doors opened to all kinds of opportunities. For better or worse, I work much harder, but it is a gratifying and rewarding journey when I get to sit in the driver's seat."

Then there is the small matter of price. Put simply, Chinese firms are far cheaper than their international counterparts. For Lewis, this has been a crucial factor in their rise: "Chinese law firms charge much less, simple as that. International firms' pricing is holding them back far more than any restrictions imposed by the Government," he argues, adding that AllBright is charging him out at YUAN3,200 (£325) per hour, 45% less than the rate his clients at Lovells were paying for his services. The figure corresponds with average rate differentials between leading local and foreign firms, with the former typically charging out partners for between $300-$500 (£208-£347) per hour and associates between $150-$300 (£104-£208) per hour. "The problem international law firms face," Lewis continues, "is that their whole cost base over here have been built around their current rates, so changing them would be far from straightforward. And, of course, if they drop their rates they'll be perceived as going downmarket."

Related to this is the way international companies operating in China are increasingly staffing local operations – including legal teams – with Chinese nationals, albeit usually Western-trained, who are more inclined to use domestic law firms. For these Chinese nationals, there is little incentive to go to international firms when they can instruct dual-qualified Chinese lawyers for half the price at a local firm. Their greater understanding of the market also means they do not need to go externally for basic advice – something that is also hitting international law firms.

Zhong Lun's Gong comments: "When I started my legal career with an international law firm in the mid-90s, it was not uncommon to see multinational clients getting charged high legal fees for memos about incredibly basic stuff like opening up bank accounts in China. With a much more competitive legal market now, that seems to be ancient history."

International law firms have reacted to this trend by increasingly shifting their local practices away from the original band of gung ho expats who carved out the first local practices for foreign firms in favour of Chinese-born lawyers.

Prominent examples of leading Chinese lawyers at international firms include James Lin of Davis Polk & Wardwell; Leiming Chen of Simpson Thacher & Bartlett; Antony Dapiran of Freshfields Bruckhaus Deringer; Paul Chow of Linklaters; and Alan Seem of Shearman & Sterling. But while this new breed of lawyer has helped US and UK firms to an extent, the underlying shift in favour of Chinese-born lawyers is doing more to benefit national law firms.

Not quite there yet

While Chinese law firms may be unrecognisable from just a few years ago, there is a consensus that in terms of truly meeting international standards they are not quite there yet. The most commonly voiced criticism is that outside an elite group of internationally-qualified lawyers they lack depth of quality. "What you've got at these firms is a very impressive layer of internationally-trained lawyers with some incredible CVs, but beyond that most don't have international experience," says one China-based partner at an international law firm. Perhaps surprisingly, this view corresponds with that of many lawyers at Chinese firms.

"We're not at quite the same level yet. We could be, though, in the next 5-10 years," says John Du, a partner at Jun He, around a fifth of whose lawyers have either worked for an international law firm or studied law abroad.

"International firms still have better training systems and better access to marquee work, which gives them a glamour factor that enables them to keep attracting some of the best Chinese talent," concedes King & Wood's Li (pictured).

Indeed, a look at the advisers on the major China transactions of 2010 shows international firms to be holding their own. The recent $3.2bn (£2.2bn) rights offering by China Merchant Bank, for example, saw instructions for Herbert Smith, Freshfields and Davis Polk, alongside Chinese firms Jun He and Commerce & Finance, while Diageo called on not only Haiwen & Partners, but Slaughter and May and Freshfields to assist with its $925m (£642m) acquisition of a controlling stake in Chengdu Yingsheng Investment in March.

International firms also dominate on the admittedly less frequent 'outbound' deals involving Chinese companies investing abroad. King & Wood and Jun He have attempted to build their profiles by opening offices in the US to service Chinese clients going overseas, but have made limited progress. Though these firms have US and UK-qualified lawyers, such offices operate on a project management basis for Chinese clients rather than attempting to offer foreign law – which inevitably limits their scope.

The recent big outbound deals – Chinalco's attempted acquisition of a stake in Rio Tinto, which reached an advanced stage before collapsing, Zhejiang Geely Holding's $1.8bn (£1.25bn) purchase of Volvo from Ford Motor Company, and the failed $250m (£174m) acquisition of General Motors' Hummer brand by Sichuan Tengzhong Heavy Industrial Machinery – were handled predominantly by international advisers.

Such outbound work – largely carried out by the country's band of powerful state-owned enterprises and focused on the energy and natural resource sectors – looks set to grow dramatically, even if such deals will have to overcome Western fears regarding job losses and the control of sensitive assets.

Former King & Wood managing partner Xiaoming Li – who left the firm in 2005 to focus on outbound transactions at White & Case – comments: "I don't see Chinese firms driving major outbound deals. It's hard for them to compete effectively on this: it's a language thing and it's a law thing."

Historically considered their greatest strength, the Chinese economy could also become a problem for local firms. Opinions remain sharply divided on the issue, but the rapid growth of the economy has led to mounting claims that China is a bubble market set to burst. In particular, concern is being expressed about signals that the country's booming property market may be overheating, and over the debt position of the country's 8,000 investment companies, after China's faster than expected recovery from the global financial crisis.

The situation led hedge fund manager Jim Chanos to describe China as "Dubai times 100 – or worse" earlier this year, though such dramatic language is far from the norm in the legal community. Lawyers acknowledge that China has some economic imbalances to address, but also point to its huge capacity for growth. "Look," says White & Case's Li, "China will have its problems and no one is saying we're immune to economic issues. But collapse? All I'll say is that China is the longest uninterrupted surviving civilisation in the world and there are some great opportunities ahead of us."

When considering the potential for the country's law firms and businesses, it is worth noting that there are 160 cities in China with a population of more than one million inhabitants (compared to 35 such cities in Europe) – and still only around 190,000 lawyers, a small figure for a country with a population of 1.36 billion. It is no surprise, then, that harnessing this domestic market is a priority for the top Chinese firms.

"There are huge opportunities outside of Shanghai and Beijing, which make up only a small proportion of the market, and the firm is naturally looking to develop into these second-tier cities," says King & Wood partner Jonathan Pan. "Chinese deals already represent roughly half of our work," says Jun He's Tong. "And as a strategy we're beefing up our domestic capacity." Other commercially significant cities include Guangzhou, Shenzhen, Tianjin, Chongqing and Hangzhou.

Even if the gloomy market predictions are proven right, it is hard to envisage Chinese law firms losing out in the long term. The carefully calculated restrictions placed on foreign law firms have, by all accounts, done their job, bringing in much-needed experience to help develop the market while protecting local champions. Accordingly, it appears China could one day come to resemble America's sprawling legal market, which provides huge rewards for essentially domestically-focused law firms, but has proved challenging to all but the most determined foreign hopefuls.

"There are significant differences between the markets, obviously, but look at Japan," says Slaughters Beijing head George Goulding, citing another international parallel. "Despite the fact that foreign lawyers are allowed to practise local law there, the market is dominated by a small number of extremely good Japanese law firms. I don't expect that China, where what the leading Chinese law firms have achieved in a rather short period of time is astonishing, will be any different."

————————————————————————————————————————————————-

Foreign companies – still welcome?

If there has been a note of unease regarding China's emergence as a business market of huge significance it has come from the perceived toughening stance of the ruling Communist party towards foreign companies.

In March, four employees of Anglo-Australian mining giant Rio Tinto, including Australian citizen Stern Hu, were found guilty by a Chinese court of bribery and stealing trade secrets and sentenced to prison terms ranging from seven to 14 years. Many in Western business circles have expressed fear that the prosecutions were politically motivated, as the initial arrest of the four last July followed hot on the heels of Rio Tinto's rejection in June of a bid for 18% of the company by the state-owned Aluminum Corporation of China (Chinalco).

In the same month, Google pulled out of mainland China, redirecting its users in the country to its unrestricted Hong Kong site, after cyber attacks from within the country on the email accounts of Chinese human rights activists.

Though it received less publicity, there was also concern in the international business
community when Chinese authorities blocked a $2.4bn (£1.7bn) bid by Coca-Cola to
acquire Chinese drinks makers Huiyuan Juice Group – a decision viewed by some as naked protectionism. Perhaps unsurprisingly, local lawyers generally played down the significance of such events. "You may see some reviews of policy by the Chinese Government, but I wouldn't call it a trend. In a 30-year context, it doesn't amount to much," argues White & Case China head Xiaoming Li.

However, there is widespread acknowledgement of the importance of ensuring that deals fit in broadly with government objectives and of the usefulness of native Chinese lawyers' 'cultural understanding' in this respect.

"There is a strong political element to doing deals in China, which makes it very different to the West," explained one partner at a leading UK-based law firm. "In the practise of law in the country there are often two factors: what's in the rules and regulations and what's feasible. As a result, the role of a lawyer extends very much to advising not just on what the law may say, but on what is possible – something that Chinese lawyers have a much stronger feel for."

————————————————————————————————————————————————-

It's not just transactional work that's booming in China…

While corporate and capital markets work has attracted most of the attention in China, the country has a fast-growing litigation scene increasingly being used by leading international companies looking to resolve disputes.

According to a recent report delivered by the nation's top judge,Wang Shengjun, president of the Supreme People's Court, employment disputes were up 94%last year to 286,000 cases, and disputes involving healthcare, housing and consumer rights rose by 45% to 576,000 cases. Intellectual property (IP) cases, meanwhile, were up by 33%, with the Chinese courts – which operate in an inquisitorial, civil law-style system – concluding 27,876 of them.

"From a starting point of relatively little litigation, we're seeing very rapidly evolving dispute resolution machinery here," says Slaughter and May China head George Goulding.

Bird & Bird Chinamanaging partner Matthew Laight is impressed by developments in the country's litigation scene over the last decade. "There has been a great deal of investment into getting the court system working well here, with Chinese judges constantly being sent on secondment to the leading jurisdictions around the world and judgments nowmuch longer and more complex than the 12-page-long judgments you'd get 10 years ago," he says, adding that the courts themselves are often very modern, kitted out with laptop points and plasma TV screens.

But the ban on lawyers employed by foreign firms providing foreign legal services means they must partner with local firms on litigation matters – hence Bird & Bird's recent alliance with Beijing-based IP boutique Xiang Kun Law Firm. Such tie-ups are worthwhile, say Western lawyers, particularly in areas like IP wheremultinational companies including Pfizer, Honda and Philips have been involved in patent disputes in the country during recent years.

Click here for more international coverage