As western markets went into freefall a year ago with company collapses and banks going bust, Asia – particularly China – was being viewed as the brightest light in an otherwise overcast economic sky. Top-line economic growth exceeded even the ‘conservative’ 6% that was predicted by the World Bank.

It’s not difficult to see why, with a host of local companies having the wherewithal, risk appetite and capital to strike overseas and domestic deals.The country’s recent stellar economic performance (or for that matter, over the past 30 years) shouldn’t obscure an important emerging reality. As far as China has come, it still has much further to go. And lawyers will have a central role to play.

Whereas in the past it was relatively easy to draw a distinction between the roles of international and domestic lawyers, the last six months have shaken up the complexion of the legal services market. The impulse to grow, while never abating in China’s expansionary domestic law firms, has been thrown into overdrive by the financial crisis. Headcounts have swelled exponentially, offices have been opened at break-neck speed and domestic law firms are fast attaining a quality some thought was the exclusive province of international firms.

China’s firms have racked up the lead roles on securities deals and mega-M&A transactions and snared the international clientele to prove it. There is a seismic shift underway in the legal services market – a continuous revolution – and it’s seeing local firms become international.

State of the market

The complexion of the legal services market over the past year was in many ways a carbon copy of that seen elsewhere in the region. Inbound M&A volumes dried up, securities and capital markets work disappeared (seemingly overnight)and the mega-deals were replaced instead by a trickle of less frequent but large ‘strategic’ outbound investments. Work in counter-cyclical areas such as dispute resolution, insolvency and restructuring came into its own. In other places there was little hope for a speedy recovery; in China, it was only a matter of months until things returned to normal.

If recent activity is anything to go by, the Chinese market has bottomed out and is on the upswing. Deals of all sizes are again flowing freely and securities work such as A-share listings and red-chip offerings are back. Boards are lighting up as deals such as CSCEC’s US$6.2bn offering, Zhongwang’s US$2bn IPO, 361 Degrees and BaWang push through. It will only become busier, according to lawyers ALB interviewed.

“In late 2008 and in the first quarter of 2009, there was talk of China leading economic resurgence and it has,” says David Liu, a partner with Jun He. “On the transactional side things were slow, but even then we could sense clients were positioning themselves … there was a feeling that the market wouldn’t be down for long and for lawyers there was a need to be patient, to wait for the market to bottom out. Judging from what we have seen over the last few months, we are now at that stage.”

Outbound M&A – rather than inbound volumes – has been at the centre of this rebound. This is shown by deals such as Chinalco’s quest for a US$19bn stake in Rio Tinto, Yangzhou’s acquisition of Australian miner Felix Resources and CCB’s acquisition of IAG’s consumer credit business in Hong Kong.

But whether the outbound activity will continue once the markets return to ‘normal’ and inbound activity picks up is another story. “[The move] away from inbound investment to outbound investments is understandable, due to problems in other parts of the world … but we think it will come back,” says Peter Charlton, Clifford Chance’s foreign legal consultant in the Hong Kong office. “We do think that Asia, particularly China, is still on the radar as an opportunity for international investors, so it’s just a matter of when  outbound will pick up, but this is difficult to predict.”

These will be changes that are sure to present local practitioners with a number of challenges in the months ahead. Just as global economic slowdowns affect macroeconomic change, so too do they cause paradigm shifts to things such as the business development strategies of law firms and the fabric of the legal market itself. Such changes will ensure that practicing law in a legal market in recovery will be a markedly different proposition from practicing law in the good times.

Changes are good

Even the most cursory glance at the empirical data offers an indication of how the domestic legal market has shifted since the onset of the financial crisis.In just over 12 months, most of the country’s leading domestic law firms have grown, at rates unimaginable elsewhere. Dacheng increased its headcount by just under 300 – it is now unrivalled as the country’s largest firm by numbers, with 835 lawyers.

King & Wood increased its staff count by 150, DeHeng by 270, Grandall and Allbright by nearly 50.
Just as these firms’ lawyer numbers have grown, so too has their regional and international footprint. Dacheng now has over 28 offices, four internationally, which is 13 more than in 2008, DeHeng has opened four additional offices and King & Wood has opened three, including its much-publicised New York office. (It should be noted that in addition, Jun He, Shanghai-based firm Richard Wang & Co and Shenzhen-based firms Guanghe and Shujin also have a United States presence).

Is this slightly counter-intuitive in an environment where some of these firms’ international counterparts have downsized – or are actively looking to pare back their operations? Zhang Yi, a partner with King & Wood and head of the firm’s Shanghai operations, doesn’t think so. He says that it’s not always accurate to compare international and domestic firms on this point, as growth for local firms is often motivated by a different set of concerns. “The local legal industry is still developing so it’s no surprise to see that many are still focusing their attention on achieving growth,” Zhang says. “The size of the firm is important as the deals that happen here, both inbound and outbound, are extremely complex and often require teams of lawyers. Firms that do not have the critical mass simply can’t compete. It’s a different proposition for international firms as they have access to lawyers in countless branch offices.”

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