China’s record-setting outbound inv-estment boom in 2016 was a boost to both international and domestic law firms in that country. For example, China National Chemical Corp.’s $43 billion acquisition of Swiss agribusiness group Syngenta A.G. and the related financing and regulatory proceedings gave work to at least nine firms, including global firms Simpson Thacher & Bartlett, Davis Polk & Wardwell, Clifford Chance, Linklaters and White & Case [see "High-Stakes Diplomacy," page 68].

But the deals did little to alleviate the overall difficulties facing global firms in China. The longstanding problem of fee pressures and low profitability has worsened with Hong Kong capital markets deals becoming smaller and the Chinese economy continuing to slow. Some firms have reacted by pulling out of the Chinese market. Other firms have opted for a leaner presence. After a 40-lawyer corporate and capital markets team left Orrick, Herrington & Sutcliffe’s Hong Kong office, Orrick said Hong Kong law securities work was no longer part of the firm’s strategy globally. Vinson & Elkins lost two partners after a strategic review shifted the China practice’s focus to global energy clients, international disputes and intellectual property. Winston & Strawn closed its Taipei and Beijing offices and saw multiple departures from its Hong Kong and Shanghai offices.

The Chinese government has put some brakes on the outbound investment, restricting capital outflow this year for transactions involving real estate, hotels, cinemas and sports clubs, while deals in infrastructure, energy and logistics will still be encouraged.

Emma de Ronde, a Hong Kong-based partner at Norton Rose Fulbright, says volume of larger-ticket outbound deals has already dropped so far in 2017; she is now seeing work coming from small-to-mid-cap market deals, which tend to receive lower levels of scrutiny.

Meanwhile, global firms have continued their efforts to go local in China. Although barred from practicing Chinese law, foreign law firms have several options for forming alliances with Chinese firms. Last year, two more international firms, Hogan Lovells and U.K.’s HFW launched joint offices with Chinese partner firms in the Shanghai Free Trade Zone. And earlier this year, Linklaters set up a “best friends” firm with a group of its former lawyers in the Shanghai FTZ, with an eye on forming an official joint office in a few years.

Despite hurdles, China will remain indispensable to many U.S. firms. “Most firms will still want to maintain a strategic base in China, especially after the 08-09 financial crisis,” says Laura Zhao, head of Hong Kong-based recruiting firm Togni & Zhao. “As firms reinforce what has already been a quite bottom-line driven business model, the market in China will likely keep status quo instead of seeing massive pullouts.”