Nearly 20 years ago, Z. Julie Gao graduated from Peking University with a law degree and left China for the United States. Eventually landing in Los Angeles, she earned a second law degree there in 1998. She and her husband, a fellow Peking University graduate, became naturalized U.S. citizens, and their son was born in the U.S. in 2002. Her parents and brother moved to America as well.

Today, however, she’s a corporate partner working out of the Hong Kong office of Skadden, Arps, Slate, Meagher & Flom–at least, when she’s not in Shanghai or Beijing. “I lived in the States for 13 years,” says Gao, still sounding surprised at the turn her life has taken. “We had a comfortable life. We had no conscious plans to go back [to China].”

Just a decade ago, China’s rise as an economic superpower still seemed distant and uncertain. For Chinese lawyers able to study or work abroad, the United States seemed a safer bet than their homeland. Back then, the China practice of major international firms was still mainly the province of the Old China Hands–lawyers in the mold of Jerome Cohen and Owen Nee, who cofounded the first foreign law office in Beijing for Coudert Brothers in 1979. These early practices, which attracted many lawyers who perhaps had a deeper affinity for Chinese language and culture than the practice of law, were mainly “inbound” practices, focused on representing U.S. and other multinationals in opening factories and shops in China.

But with the country’s economic rise, the face of the China practice at international firms has grown increasingly . . . Chinese. Unlike their predecessors–who were mostly white males–New China Hands are largely of Chinese descent. Many, like Gao, left China to study abroad, joined top global firms, and are now heading back to take on leading roles at their firms’ Beijing, Shanghai, and Hong Kong offices. They are joined by a new generation of expat lawyers with a far stronger mix of language and legal skills than their predecessors had.

“In five, seven years, there will [probably] be someone from mainland China sitting in this seat talking to you,” says William Barron, the decidedly non-Chinese senior partner in the Hong Kong office of Davis Polk & Wardwell. “And that’s as it should be. The group of Chinese lawyers we have in their twenties and thirties is just outstanding.”

Indeed, global firms have painstakingly groomed the New China Hands. Besides Gao, they include James Lin of Davis Polk; Leiming Chen of Simpson Thacher & Bartlett; Antony Dapiran at Freshfields Bruckhaus Deringer; Peter Wang at Jones Day; Paul Chow at Linklaters; and Alan Seem at Shearman & Sterling. But even as these emerging stars bring new strengths and talents–mainly in the corporate arena–they face enormous new challenges. Whereas many of the Old China Hands had a wide open market early on, the new generation faces what is now the most competitive legal market in the world, with more than 50 top firms from the U.S., the United Kingdom, Europe, Australia, and Asia all furiously going head-to-head. And the increasingly sophisticated but much less expensive Chinese law firms, like King & Wood, Jun He Law Offices, and Zhong Lun–many of whose partners now also have foreign educations and big-firm backgrounds–seem destined to dominate many of the inbound practices previously pioneered by the Old China Hands.

Amid these uncertainties, the New China Hands are forging new paths. If their predecessors mostly worked on inbound China matters, the New China Hands are counting on Chinese business to head around the world. Rather than just relying on multinationals and global banks, they are looking to newly globalizing Chinese companies to be their clients of tomorrow. And some lawyers are wagering that, while firms’ China practices remain a mostly corporate show, the next stage of China’s development will benefit new practice areas like litigation.

After earning her U.S. law degree from UCLA, Gao joined Latham & Watkins as a Los Angeles-based general corporate associate, working first on a steady stream of initial public offerings and venture capital deals, and then–after the dot-com bubble burst–on large-scale public company M&A. In 2003 Latham & Watkins hired Hong Kong partners John Otoshi and David Zhang from what was then Dewey Ballantine. “Shortly after, they had their first deal, [but] they didn’t have any asso­ciates to [help],” Gao recalls. “So they looked around for people and then asked me to fly out in August 2003.”

Working on that transaction, the Nasdaq IPO of Chinese travel site, wasn’t life-changing by itself. But when the deal neared its conclusion in December 2003, Gao saw her future. “I knew I would be doing very well in this market,” she says. “I could tell from the reaction of all the working parties.”

Latham asked Gao to return to Hong Kong full time the following year. She saw that her technical skills would give her an edge in a still-emerging market. But she also noted that many of the other people working on the Ctrip deal had backgrounds similar to hers: mainland Chinese, educated abroad but pursuing their careers back home. For example, there was Neil Shen, Ctrip’s then CFO, now managing partner of the China arm of venture capital firm Sequoia Capital, or Terry Hu, then a Credit Suisse Group banker, now a managing director of China-focused private equity fund FountainVest Partners.

The regional management of large multinationals and global banks is increasingly in local hands. Occasionally some big-firm lawyers are answering the call themselves. Mainlander Zili Shao, the former Asia managing partner for Linklaters, was named China CEO for JPMorgan Chase & Co. in November. And there are more Chinese bankers and executives in the pipeline. “At the investment banks, everybody under 30 is Chinese,” says Matthew Bersani, the longtime Asia managing partner for Shearman & Sterling. “Everybody.”

That demographic shift has clearly placed a greater premium on Chinese language ability. Davis Polk’s Lin recalls that when he first went to his firm’s Hong Kong office in 1999, most meetings required simultaneous translation service. “It was like the UN,” he recalls. “But now you show up, and everyone speaks Mandarin.”

Lin, and other Chinese Americans like him, typically have strong Chinese language ability, but they also face many of the same cultural obstacles as other Westerners. Mainland-born lawyers often have a large peer network of rising Chinese professionals and businesspeople. Linklaters’s Chow, a Hong Kong native who works in his firm’s Beijing office, says that mainlanders also have a better understanding of how organizations and bureaucracies work and think in China. “They’re the ones who understand how the hierarchy functions,” Chow says. “They can find out who’s in charge, who are the decision makers, take their temperature, find out whether they are happy with the work–all the important things in a client relationship.”

Inbound foreign investment work remains the backbone of many international firms’ China work, but multinational clients are increasingly comfortable working directly with large Chinese law firms. Moreover, advising on inbound investment forces foreign firms to operate in a gray area, since they are technically barred from practicing Chinese law. (A crackdown threatened in 2005 never materialized, but many firms remain wary.) So Gao’s practice, which focuses on IPOs and other means of finance for China’s growing private sector, fits well with where most foreign law firms hope the market is heading.

State-owned enterprises (SOEs), while responsible for many of the biggest deals, have a reputation for hiring strictly according to price and demanding discounts regardless of the complexity of the transaction. Private company executives, many of whom also studied and worked abroad, are thought to have a greater appreciation of the intersection of law and business. Victor Liang, the Australian-educated general counsel of search engine, says that his company regularly uses Davis Polk, Kirkland & Ellis, and Skadden and other international firms, as well as at least 30 different Chinese firms. “We don’t hire firms according to cost,” says Liang. “We consider expertise and experience.”

Of course, more Chinese firms have plenty of both, a fact that leads many New China Hands to focus on outbound transactions. “Lots of Chinese firms have U.S.–trained lawyers with my kind of background, working for many years at U.S. firms,” says Gao. “They can do the inbound work.”

Glenn Su, a partner at top Beijing corporate firm Haiwen & Partners who worked at Shearman & Sterling for many years, also sees the capability gap closing between international and domestic firms in China, but notes that the competition is not just among the ethnically Chinese lawyers.

“It’s a form of self-discrimination, but many Chinese clients still want to see a gweilo ,” says Su, using the common Hong Kong term for a Western expat, who is usually white. Indeed, several gweilo senior partners acknowledge that clients sometimes want to work with “Western experts.” Though Shearman’s Bersani speaks fluent Mandarin, he says that “there are times I know I’m at the meeting to play a part.”

So the game is not yet over for the expat lawyer. But it has changed. “The old model is what I like to refer to as the Great White Hunter model of China lawyers,” says Freshfields’s Dapiran. “People in the practice liked to cultivate the mystique that China was this mysterious and closed place, and you need me to lead you by the hand and show you how it’s done.”

For the new model, take Dapiran himself. A fluent Mandarin speaker who punctuated his legal studies at the University of Melbourne with two years at Peking University studying Chinese language and law, Dapiran joined Freshfields in Hong Kong in 1999, and began a practice catering to the former British colony’s banks and trading houses. His timing was fortunate. China’s SOEs were just beginning to flirt with capital markets, and the once-distinct Hong Kong practice soon became fully integrated with those focusing on mainland China. Dapiran worked on the $8 billion IPO of China Construction Bank in 2005, and the even bigger debut the next year of Industrial & Commercial Bank of China (ICBC), which soared to $19 billion.

The thrill of such momentous deals is part of why Dapiran loves being a lawyer in China. “You’re witnessing the birth period of a whole new group of multinational companies,” he says. But Dapiran, now in Freshfields’s Beijing office, is well aware that, as a Westerner still early in his career in China, he is moving somewhat against a demographic tide. “I get a lot of credit for the white-face-speaking-Chinese thing,” he says. “But I do think, overall, the mainland native has an advantage. There are times the Chinese client is just going to be more comfortable with a Chinese face.”

Whatever their face looks like, the New China Hands will need to wrestle with some short- and longer-term issues relating to their firms’ core corporate practices. Though capital markets activity revived strongly in the second half of 2009 after collapsing in late 2008, there is significant concern that the Chinese economy will trend down again this year. And the nature of Chinese capital markets work is still an issue. Last year the Hong Kong Stock Exchange led the world in 2009 IPOs, with offerings that raised a total of $31.4 billion, according to PricewaterhouseCoopers International Limited. Shanghai ranked third, with five floats worth a total of $16 billion. But follow-on financings have been relatively few, raising questions about how active Chinese businesses ultimately will be in the capital markets.

There are additional worries. U.S. firms are concerned that in recent years many Chinese companies—such as ICBC, China Zhongwang Holdings Limited, and Metallurgical Corp. of China—skipped a U.S. IPO, once de rigueur, and only listed on the Hong Kong and Shanghai exchanges. Many international firms already have Hong Kong law capability, but Shanghai listings would be off-limits.

Moreover, for all of the talk about the potential for outbound investment, a steady stream of work has yet to materialize outside the natural resources sector. Even that busy sector saw the biggest outbound deal ever–Aluminum Corporation of China’s $19.5 billion bid to buy a stake in Anglo-Australian mining giant Rio Tinto PLC–fall apart last year. “We’re in this in-between stage where the old model doesn’t work anymore, but we’re not clear what the next model of China practice is,” says Dapiran.

Jones Day’s Wang sees the same difficulties ahead. He believes that the new model, whatever it is, must diverge from an overwhelming focus on transactional activity, which becomes a major liability for law firms in downturns. Instead, it should more closely resemble the balanced model that has worked for his firm elsewhere. That means more emphasis on litigation. “Why should we only be corporate in China?” Wang asks.

A second-generation Chinese American born and raised in Pittsburgh, Wang learned to speak his not-completely-fluent Mandarin during weekend Chinese school, but always expected to have his career in the United States. Wang, now 40, spent 12 years in Jones Day’s Washington, D.C., office working on litigation and antitrust. Then, in 2003, the firm suggested that he move to its Shanghai office to start a China-focused litigation practice.

Jones Day was prompted by the notion that growing foreign investment in China would invariably lead to disputes. But the firm found that although disputes certainly existed in China, enthusiasm to litigate them was lacking. Many potential litigants–both U.S. and foreign parties–worried that getting involved in lawsuits would hamper their efforts to expand in China, and were wary of either litigating in Chinese courts or trying to enforce U.S. judgments in China. Wang, now based in Beijing, says his practice instead began to center on U.S. litigation with Chinese facts, such as contract disputes between non-Chinese parties over Chinese manufactured goods, as well as global IP litigation. When U.S. mobile technology company Qualcomm Incorporated sued Finland’s Nokia Corporation for patent infringement in almost a dozen courts around the world, Wang coordinated Nokia’s defense in China. Another major focus has been investigations of potential violations in China of the U.S. Foreign Corrupt Practices Act.

But recently the prospects for litigation work in China have been looking brighter. The country’s new antimonopoly law, which went into effect in late 2008, has companies around the world concerned about meeting a major new regulatory burden. Though the Chinese government has so far been hands-off about mergers outside of the country, last March it blocked The Coca-Cola Company from purchasing a Chinese juice company, a deal that would have been the largest foreign acquisition of a Chinese company ever. And in Chinese courts, a brace of multimillion-dollar verdicts against multinationals for patent infringement has drawn significant attention. France’s Schneider Electric SA, sued by a rival Chinese manufacturer, paid $23 million to settle the case, after being previously ordered to pay almost $50 million by a court in Zhejiang province. Samsung Electronics Co., Ltd., faced a $7 million verdict for patent infringement, and PepsiCo, Inc., was ordered to pay around $440,000.

Several firms have beefed up litigation capability in the region over the past year, often relocating top lawyers from Europe or the United States. Skadden sent Paul Michard, QC, to Hong Kong from its London office in May, and Linklaters relocated senior litigation partner Tom Lidstrom in January 2009. Still, it remains uncertain whether litigation will take its place as a central part of the China practice of most international firms. Chinese courts remain out of bounds for foreign firms, who take a coordinating role in such matters and hire local counsel to actually litigate. Litigation in U.S. courts is certainly a growing area, but the fact that such matters largely take place outside of China diminishes the role of China-based lawyers.

Likewise, the outbound China work that many international firms are hoping for might end up being performed by lawyers based in, say, New York or London, at higher rates than those typically charged in Hong Kong–or Beijing and Shanghai. New China Hands could find themselves sidelined. “It wouldn’t be great to just be a relationship office here,” says Dapiran.

Especially since there’s still no place Dapiran would rather be. He finds London “boring,” and though the clean air and relaxed lifestyle of his native Australia is nice, after about a week that gets boring, too. “I’m always eager to see what’s going to happen next in China,” says Dapiran.

Gao wants to see what’s going to happen next as well—especially whether her bevy of clients will continue their upward trajectories. “My dream is to serve the best private companies in China,” she says. She has no plans to resume her life in L.A. Instead, it seems to be following her. Her parents returned to China from America two years ago, and her brother and his family came back last summer. For the moment, at least, she’s fulfilling the American Dream in the conference rooms of China.