Hard knocks

The pandemic and subsequent impact of a prolonged lockdown have continued to ghost China’s legal market in 2022, according to our annual research across 88 leading firms depicting market performance and anticipating future trends. Winny Zhang reports

“ZERO COVID, ZERO GROWTH” may be an exaggeration, yet it bears a resemblance to the state of the Chinese legal market in 2022, according to financial data disclosed by most law firms in our annual survey.

The median revenue for last year stood at RMB181.6 million (USD24.87 million), marking a substantial 18.6% year-on-year decline. The figure represents the lowest median revenue observed in nearly five years. Furthermore, the median revenue growth rate plummeted from 21.3% in 2021 to 0.4% in 2022, with nearly half of the firms experiencing stagnant or negative growth.

Even the industry’s headline firms were not spared from the revenue downturn. Although 10 firms managed to surpass the impressive RMB1 billion revenue mark, their median revenue growth rate stood at -4.38%.

In terms of revenue distribution, as in previous years, the majority of surveyed law firms fell into two categories: those generating less than RMB200 million (54.1%); and those making RMB200 million to RMB400 million (20.3%). The former group witnessed a substantial increase compared with 41.3% recorded in 2021.

The decline in the legal market serves as a bellwether of the broader economic weakness experienced in China. After a robust recovery that saw GDP growth reach 8.4% in 2021, the nation’s growth rate slowed to a modest 3% in 2022.

The domestic GDP growth witnessed two significant slumps during the year: from 4.8% in the first quarter, it fell sharply to 0.4% in the second quarter; and in the second half of the year it declined from 3.9% in the third quarter to 2.9% in the fourth. These declines were primarily attributed to stringent pandemic control measures, particularly the sealing off of Shanghai, a key financial hub.

Only in the early stages of winter did China experience a rapid turnaround in its zero-covid policy, driven by concerns that Guangdong, the southern economic engine, was also at risk of closure. This policy shift was a crucial moment for the country as it aimed to revive economic activities amid challenging circumstances.

However, according to Fan Jiannian, the Shanghai-based managing partner at Gide, the anticipated economic rebound has not unfolded as expected. “During the covid period, cost control was one of the key priorities of many clients and we had to adapt to this new normal situation,” he says.

Lu Junxi, a senior partner at the Beijing office of Kangda Law Firm, says that the dispute resolution department of the firm primarily served large and medium-sized companies, and benefited from comparatively ample room for survival.

Nevertheless, it is undeniable that enterprises of all types and sizes are facing varying operational challenges. The allocation of resources by upstream companies ultimately influences the revenue per lawyer within a legal practice.

Research reveals a substantial 16.9% year-on-year decrease in the median revenue per equity partner in 2022 to RMB4.17 million. Lawyers suffered a more significant setback, with median revenue per capita dropping by 20.3% to RMB813,000.

Notably, the proportion of equity partners falling into the lowest revenue generating range (up to RMB3 million) significantly increased in 2022, reaching 38.6% compared with 17.2% in 2021. The proportion of lawyers in the lowest revenue-generating range (up to RMB500,000) rose from 8.6% in 2021 to 18.1% in 2022.

Rossana Chu, the managing partner at LC Lawyers, a Hong Kong law firm member of the EY global network, says: “When the revenue side is beyond law firms’ control, the most direct factor that law firms may adjust is the costs.”

She highlights the adverse effects of rising interest rates, increasing costs, the global recession and geopolitical tensions in pivotal areas such as capital markets, M&A, direct investment and litigation. These factors have led to a substantial reduction in the total revenue of Hong Kong’s legal market and law firms which, in response to these challenges, have been compelled to manage headcounts and salaries in the best possible manner, says Chu.

Scott Yu, an equity partner at Zhong Lun Law Firm in Beijing, says: “We need to maintain our original client base and business on the one hand, and actively expand our business scope on the other hand, and in the process we are also facing more and more fierce competition in terms of talent and price.”

The persistent issue of undercutting prices has drawn criticism from the legal profession. “Under the stress of competition and the economy, some law firms may resort to doing just that, which is understandable, but it’s really not a healthy and sustainable practice for law firms and corporates,” says Wei Shuangjuan, a partner at Haiwen & Partners’ Beijing office.

“When fees are set too low, law firms may have to compromise by reducing project resources or taking on a higher workload. This can increase risks for both the firm and the clients involved.”

Wei expresses hope for a gradual shift in the legal market in a more positive direction, where a reasonable and appropriate fee model would be established to ensure the sustainability of high-quality services.

Cautious optimism

The Ministry of Justice has reported a decrease in the total number of legal cases handled by lawyers nationwide, dropping from 13.09 million in 2021 to 12.74 million in 2022. While this 2.6% decline is the highest drop in the past five years, it is worth noting that the total volume of business remained the second highest, surpassed only by the previous year’s figure.

The substantial volume of business lays a solid foundation for an overall optimistic outlook on the legal market in the near future. The survey reveals that 33.3% of the firms are “very optimistic” about the future, compared with 30.8% last year.

Compared with the previous survey results, which showed a substantial rise in “neutral”, there was a decrease in this option from 11.5% to 4.2% this year. The overall position is predominantly focused on “optimistic”, which accounted for 62.5%.

Zhang Xiaowei, a partner and chairman of the management committee at W&H Law Firm in Beijing, says the overall economy will continue to improve in 2023, “but due to the lagging nature of the legal industry, a short-term economic recovery will not directly translate into a business rebound. Incremental opportunities may not arise until the end of the year”.

Haiwen’s Wei points out that the current challenges present an opportunity for reflection and strategic review. “Whether it’s empowering ‘inner strength’ or making adjustments in light of the overall environment, it could be an opportunity for us to climb up the ladder,” she says.

Raymond Wang, the managing partner at the Beijing and Shenzhen offices of Shihui Partners, describes China’s appeal as “a mega-market that garners envy from all quarters”. Wang outlines the firm’s observations and potential steps, noting: “We have witnessed market volatility and shifts in some clients’ financial capacity. However, we have also noticed unmet needs of high-growth clients in various niche and emerging sectors.”

According to Chen Jinjin, a partner at Jingtian & Gongcheng in Beijing, the act of meeting clients’ needs, within the framework of corporate cost control involves integrating the firm’s internal resources. “Given comprehensive client requirements, many law firms may not be able to provide services across all areas and processes,” says Chen.

“In the first half of the year, our firm successfully delivered synergic services, packaged solutions or one-stop services for many projects. It is also a highly efficient and convenient approach for our clients.”

Law firms like Grandway Law Offices, which previously relied on a single area to generate revenue, are now placing increasing emphasis on diversification. This year, the firm intends to promote the service capabilities of its dispute resolution, real estate and construction engineering, intellectual property and cross-border legal services teams, while maintaining its strength in capital market legal services.

Grandway’s Beijing-based chief partner Zhang Liguo says: “This strategic shift not only enhances our ability to meet clients’ comprehensive legal needs but also strengthens our resilience against risks. Based on this foundation, we aim to minimise the adverse impacts of the external environment as much as possible.”

With the elimination of the zero-covid policy and the reopening of China’s doors, law firms have resumed offline promotion, engaging in face-to-face interactions with clients to showcase their strengths. In the first half of the year, Gide’s China-based lawyers conducted business development activities in Europe, including the promotion of the firm’s China business in Paris in June.

While investing additional resources to expand into new territories may appear risky in an uncertain economic climate, some firms are more concerned about missing out on a new wave of economic opportunities due to hesitancy.

Shanghai-headquartered Wintell & Co is preparing to open branches in Beijing and Shenzhen this year. Baijus Law Firm and Hui Ye Law Firm are focusing on the western regions of the country, with the former planning to establish a branch in Kunming and the latter already having set up two new offices in Yinchuan and Zhengzhou. Hui Ye is also in the process of establishing branches in Tianjin, Xuzhou and Zhongshan, with the aim of creating three to five “rising star branches” employing more than 100 professionals.