International firms head for China's capital as focus turns to Beijing benefits. Elizabeth Broomhall reports

Home to cash-rich state-owned enterprises (SOEs) and a huge urban population, Beijing – like Singapore, Hong Kong and, more latterly, Korea – has long been a focus for international law firms. 

This year in particular looks set to see a raft of firms open up in the Chinese capital, with Berwin Leighton Paisner last month announcing plans to launch there in May, while a string of other firms – including Ashurst, Kirkland & Ellis, Eversheds, Gibson Dunn & Crutcher and Clyde & Co – also expect to receive their licences to practise in the coming months. 

Those that already have offices on the ground have also been busy ramping up their offerings. DLA Piper announced in January that it had hired a five-strong King & Wood Mallesons (KWM) team for Beijing, including projects partner Carolyn Dong. Norton Rose has brought in three new Beijing partners since March 2012: banking partner Li Jinnan from KWM, corporate partner Jing Wang from Allen & Overy and corporate partner Barbara Li from Baker & McKenzie. 

Linklaters and Cadwalader Wickersham & Taft have also boosted their corporate teams in recent months, with the former hiring Pui Hong Chik from Bakers and the latter taking on Rose Zhu from K&L Gates. Certainly, the trend seems to be towards bolstering M&A capability.

"It's becoming apparent that you need a presence in Beijing in order to complete your China strategy," says Kirkland Hong Kong senior corporate partner David Zhang. "Before, there was a perception that Beijing was the political centre of China and Shanghai was the economic and financial centre. Without downplaying the importance of Shanghai, Beijing is now where most of the action is."

Li He, a corporate partner at Davis Polk & Wardwell's Beijing office (pictured), agrees that the city has acquired an edge in recent years: "Beijing is very attractive if you want to focus your business on SOEs. The other thing is that if you look at the private sector, most of the technology growth companies are based in Beijing's Zhongguancun area, which is often called China's 'Silicon Valley'. So for [work with] both SOEs and growth companies, Beijing makes sense."

For most firms, one of the main reasons to have a permanent base in Beijing is to tap the outbound investment market. According to a report by PricewaterhouseCoopers (PwC) in February, the number of domestic and inbound deals dropped from 3,744 in 2011 to 2,953 in 2012, whereas outbound deal volumes declined only slightly from 206 in 2011 to 191 last year. li-he-web

At the same time, the value of inbound deals fell by 28% over the 12-month period, while transaction values in the outbound market reached a record high of $65.2bn (£42.7bn), up 54% from $42.4bn (£27.8bn) in 2011. In future, PwC predicts a growth in private equity transactions and those by privately owned enterprises. 

The problem though is that Beijing is not an easy place to do business. As well as being strangled by difficulties retaining staff and rules banning them from advising on PRC law, international outfits are also facing fierce competition from local firms. This is combined with a reluctance from Chinese companies to pay international rates, making it difficult to generate profits.

"Chinese firms are aggressive," says a corporate partner at a US law firm. "They often price very well and have good relationships with the clients. That's a big deal. I think what they still lack is the international experience required to act for multinational companies on cross-border deals."

However, other partners say that even foreign investors into China, who were traditionally more comfortable with international firms, are becoming increasingly open-minded about using Chinese players.

"Local firms are growing more and more sophisticated," says Davis Polk's He. "Ten years ago, even if you did a very simple investment transaction in China, some of the foreign investors were very nervous about a PRC lawyer. Nowadays, many of the PRC firms are growing and they have got a lot of exposure."

Adding fuel to the fire, he says that some US-qualified lawyers have started migrating from international firms to local outfits.

"Many people like me who grew up in China, received their education overseas and worked at a foreign law firm for a few years have joined local firms for better opportunities. The practice for international firms is niche. The market isn't very big. But for local firms there are vast opportunities."

Also problematic in China is the tendency among local companies to keep costs down. While fee quotes in the country can be anything from 20% to 50% lower than standard international rates, global firms have been known to lose money where deals fail to close. 

"A lot of firms think it is a feeding frenzy in China," says another corporate partner. "But the problem is you get a lot of busted deals because Chinese companies can't move fast enough. Then they are really unhappy with a big legal bill and it is difficult to get paid. They will say they want to pay a third."

But in spite of the problems, international firms continue to pile into Beijing, determined to be part of the China growth story. What is needed to succeed, they believe, is a specialist approach to the market, concentrating on areas where global players can bring expertise, such as international arbitration and intellectual property. 

They also believe firms should focus on clients who can pay, such as foreign investors into China or Chinese companies who have previously listed in the US and UK.

Yuk Tong Cheung, a corporate M&A partner at Bakers, concludes:  "In the foreseeable future, even though the pressure on fees is increasing and profit margins are being squeezed, major international law firms have to stay in the field, be it inbound or outbound."