10月15-16日，刘思达博士在哈佛法学院参加法学教育改革的会议，并在会上作了关于中国涉外法律服务市场发展状况的发言，英文全文如下。

The Chinese Corporate Law Market: Before and After the Financial Crisis

Sida Liu

Presented at Harvard Law School, October 15, 2010

It is my great pleasure to be here. What I’m talking about today is the corporate law market in China, which is perhaps the hottest place for the expansion of global legal services in the past decade.

Let me start with some numbers. In 1992, China first opened up its legal services market to allow foreign law firms to establish offices in the mainland. In the same year, 12 law firms opened their China offices, including 8 firms from HK, which had not been returned to China at the time. In 2002, ten years later, the number of foreign law offices in China, not including HK firms, increased to 96. Another four years later, in 2006, it increased to 149 offices, among which 79 were from the US and the UK. By 2008, right before the financial crisis, there were almost 200 foreign law offices in China, and some large American and British firms even opened two offices in both Beijing and Shanghai.

But behind this huge increase in the number of international law offices is a simple fact that is often overlooked by lawyers and researchers in the West, that is, the China offices of these big law firms are not the only players in the Chinese corporate law market. While American, British, and Japanese law firms rushed into China, Chinese law firms experienced even more stunning growth in the past 10-15 years. In 2002, when I just graduated from law school, there were less than five of Chinese law firms with more than a hundred lawyers. Today, at least a dozen of them have more than two hundred lawyers, and the largest firm, Dacheng Law Offices, employs more than a thousand lawyers. King & Wood, the second largest Chinese law firm, has 16 offices in different parts of China as well as in New York, Tokyo, and the Silicon Valley. These are large generalist corporate law firms doing all kinds of corporate transactions, and in recent years they have become business competitors for foreign law offices in China.

And how big are the foreign law offices? Well, even the biggest foreign law firm in China, combining its two offices, has only less than 100 lawyers, and the vast majority of foreign law offices have less than 20 lawyers. Carole Silver’s recent study on the global legal services market finds that the average number of lawyers in American law firms’ China offices is 7 lawyers per office. Why so small? Because the Chinese market for legal services is not completely open to transnational law practice yet – government regulation forbids foreign law offices in China to handle Chinese legal affairs or to employ licensed Chinese lawyers. So theoretically an American law firm in China can only provide legal advice on American law to their clients, but not Chinese law. Of course in reality this is not the case. Because of this national barrier foreign law firms have developed many creative ways of doing business in China, which some of you are probably aware of. For example, some firms would hire Chinese lawyers and call them China advisors or PRC legal consultants, and simply asking them to stop their bar registration. And when they have to provide a written legal opinion to the clients, they would ask a Chinese law firm to sign the document. In other words, these Chinese firms are like puppet firms, doing the rubber-stamp work for foreign law offices.

If we look historically at the relationship between foreign law firms and Chinese law firms from the 1990s to the present, there are 3 different stages. The first stage was the early to mid-1990s, when most Chinese corporate law firms were rubber-stamps – I call it symbolic collaboration. When we get to the late 1990s, Chinese firms’ expertise and experience in corporate transactions had increased tremendously, so the collaboration between foreign and Chinese firms became more substantive – many foreign firms would outsource some low-end work such as due diligence to the local firms, and there was no direct competition between them. But when we get to the early and mid-2000s, as so many foreign law firms coming into China and Chinese law firms getting much bigger, the relationship between them became much more competitive.

Part of the reason is that many clients, esp. those have been in China for a while, realized that, in most routine transactions (e.g., FDIs and M&As), the quality of the legal services from top Chinese firms was not lower than foreign firms at all, but the price is much lower, and they can provide formal legal opinions. So what you see is that more and more clients would bypass the brokerage of American and British firms and go directly to the Chinese firms. So the advantages of international law offices in routine business transactions are diminishing, but in complex cross-border transactions, including outbound investment for Chinese clients, elite foreign firms still have significant advantages. And of course there are also many clients who have long-term relationship with law firms and use the same firm everywhere they go, but the general trend is more and more business from international clients are moving toward Chinese law firms and lower-tier foreign law offices, and this is particularly salient after the financial crisis, when cost becomes a big issue for companies seeking legal services.

So that’s a quick overview of the market. Now let me say a few words about the labor force, which is the real engine that drives the changing dynamics of the Chinese corporate law market. If we look at the flow of lawyers between foreign and Chinese law offices, there are also 3 stages. The first stage was from the 1990s to the early 2000s, when the personnel flow was basically one direction, from foreign law firms to Chinese law firms. The reason is that foreign law firms did not offer a partnership track to their Chinese associates, only to expatriates and Chinese nationals who worked in the US or the UK for a long time, so when these associates get to their 5th year or 6th year, they had to move out – so it is not “up or out”, just “out!” Many of them moved back to Chinese firms and became partners there, and that’s precisely how large Chinese law firms improved their expertise over time. On the other hand, in the 1990s few foreign law firms would hire lawyers from Chinese firms, because they did not trust the quality of training in local firms. If they needed Chinese associates, they would directly recruit from top law schools.

But the direction of personnel flow changed dramatically since China joined the WTO in 2001. Because so many new foreign law offices were established and the existing offices were doubling or tripling their sizes, obviously they had to find lawyers somewhere. At the same time, many foreign law firms that have been to the China market for a while also realize that it is really important to have lawyers with localized expertise. As one of my law school friends puts it: “Chinese law is not complicated, but the conditions of Chinese law are extremely complicated.” By the conditions of Chinese law he means both the diversity of client types and the complexity in government regulation. Only lawyers who have practiced in Chinese law firms for at least a few years can develop this kind of localized expertise. So what happened from 2001 to 2007 is the massive lateral employment of Chinese lawyers by old and new foreign law offices in China, and the direction of personnel flow changed from one direction to both directions. For senior or middle-level associates in Chinese firms, if they move to a foreign firm, they could easily double or triple their salaries.

Then the financial crisis came in 2008. It changed the flow of lawyers once again. As some of you know, most foreign law offices laid off a large number of lawyers, and they didn’t hire anymore. For large Chinese law firms, they also cut some lawyers, but most lawyers kept their jobs. What our recent interviews in Shanghai suggest is that, instead of firing lawyers, Chinese law firms reduced their salaries by about 20% and asked their lawyers to use flexible work hours to reduce cost, but still kept these lawyers, with the assumption that the Chinese market would recover in a relatively short time. And the market did recover since the second quarter of 2009. The most recent news I heard from a friend in Shanghai who works in a legal consulting firm is that even foreign law firms begin to hire again, so it seems like the general impact of the financial crisis on the Chinese market was relatively mild and short compared to other markets.

But in another sense, the financial crisis is still a very important event in the development of the Chinese legal services market, because this is the first time in the 30-year history of the Chinese legal profession that law firms experienced a downturn in business. For almost 15 years the Chinese market had been growing exponentially, and many law firms doubled their profits every 2-3 years. When I interviewed lawyers in both foreign and local firms in 2007, everybody was so optimistic about the future. So in this sense the financial crisis is a big lesson for the Chinese legal profession. It showed the importance of diversification – many large Chinese firms found that, after 2008, corporate litigation, bankruptcy, and work for domestic clients, those areas used to be considered less profitable work, became the only areas that still make money. And the impact of the crisis is bigger on foreign law offices precisely because they cannot do litigation and they do not have so many domestic clients. So how to diversify the businesses to accommodate market changes will probably become a major issue for both Chinese and foreign law offices in the near future.

The last question I want to talk about before I stop is the question that I’ve been asked at least a hundred time, that is, when will the Chinese government remove the barriers to transnational law practice and completely open up its legal services market. It is always hard to make predictions, but when I did interviews in 2007, when most people were still optimistic, nobody believed that the market would open up in the next 5-10 years. Now, after the financial crisis, the process will probably take even longer.

But there are a few things that any American or British law firm trying to expand in the Chinese market must understand. First of all, even if the market is completely opened up, it doesn’t mean that American lawyers can practice Chinese law. This is not going to happen anywhere, not in Germany, not in Japan, not in China either. What will happen is that foreign law firms are permitted to hire Chinese lawyers or merge with Chinese law firms. It may be 20-30 years before it happens, but when we actually get there, how could this work in practice? Think about it, now the top Chinese law firms already have more than 500 or even 1,000 lawyers, and it is likely that they will get even bigger in the future. This would present a new situation, or a new challenge, in the globalization of the legal profession, because when American and British law firms merged with local firms in Europe, in Japan, in Latin America, they were dealing with firms with less than a hundred lawyers, at most a few hundred lawyers. But these Chinese firms have become big elephants that you can’t eat them up. Even if you only want to grab a leg of the elephant, it would still be a much tougher process than the previous experiences in other countries. And with the rise of China as a global economic power, it is entirely possible that some top Chinese law firms would expand overseas, and it is already happening in HK, Singapore, and the whole East and Southeast Asia.

So what does all this mean for legal education? Ironically, I think the Chinese government’s restriction on foreign law firms has actually benefitted the internationalization of legal education, particularly American law schools. Here is the difference. If a German lawyer wants to work in the Frankfurt office of an American law firm, she does not need an American law degree, because the office is full of German lawyers. But for a Chinese lawyer who wants to work in the Beijing or Shanghai office of the same firm, she probably wants to have an LLM or a JD, and most importantly, to pass the New York bar, because she cannot work there as a licensed Chinese lawyer in a foreign firm. And this creates a huge demand for American legal education, and that’s why so many Chinese law students are coming to Harvard Law School and other law schools in this country to study every year.