Following a strong 2020 and 2021, in which it weathered the initial shock of COVID-19 to remain one of the fastest-growing major economies, China has been more severely affected in 2022, with recurrent COVID outbreaks, turmoil in the real estate sector, geopolitical tensions and global economic headwinds combining to dent growth. The World Bank projects GDP growth to slow to 4.3% in 2022, down from 8.8% in 2021 and 2.2% in 2020, a year in which it was one of the few economies to report positive growth.

A core issue for China has been its difficulties in maintaining its zero-covid policy, in which the country remains closed to quarantine-free travel and any outbreaks are eliminated through lockdowns and mass testing. While this approach previously saw great success, the emergence of omicron has proven to be a significant challenge, leading to major outbreaks in spring 2022 which required weeks of lockdowns to curb. The major commercial centre of Shanghai was particularly affected, with an outbreak in March infecting hundreds of thousands and forcing a prolonged shutdown. As of summer 2022, the covid situation remains relatively under control, but the threat of further outbreaks has created a chilling effect on business investment.

As a result, M&A activity has been subdued since the Shanghai lockdown. China’s strict border controls have impacted foreign investment, with geopolitical tensions also dissuading international companies from entering the China market. The technology sector has been especially affected as a result of high-profile regulatory investigations into tech giants such as Ant Group and Didi Chuxing, alleging breaches of data protection and antitrust laws. Antitrust has been a particular area of focus, with the anti-monopoly law strengthened in June 2022 to grant new powers to the State Administration for Market Regulation. Geopolitical issues have also more acutely affected the technology space, with the strategic importance of sectors such as semiconductors leading to heightened scrutiny of deals in these industries.

These issues have led to private equity and venture capital funds looking to reduce their exposure to Chinese assets and turning to other countries in South East Asia to invest their capital. The QDLP program has also slowed, with fund managers holding off on establishing these funds in the hope of the regulatory environment stablising. Strategic M&A has been more buoyant, though some multinationals are exiting the Chinese market or reducing their footprints. Take-privates have also been relatively active, with buyers looking to take advantage of declining listed company values, particularly on the Hong Kong Stock Exchange.

China’s real estate sector has also struggled in 2022. A decline in new house sales and tightening of regulations on borrowing have caused severe liquidity issues for China’s heavily-indebted property developers, who also face an overhang of property which has been sold but is yet to be completed. These issues pose a threat to financial stability in China, given the scale of lending to developers and loans collateralised by land or property. Real estate is also a major sector of China’s economy, making up 13% of GDP in addition to being a significant source of demand for raw materials and labour. As a result, the declining real estate market has served as a further headwind for the Chinese economy. Despite wider issues, some sectors of real estate have continued to attract investments, in particular data centres and logistics infrastructure.

In the legal market, joint operations between Chinese and international companies continue to expand, enabling these firms to provide local PRC law advice. While Baker McKenzie was a frontrunner in this area, setting up Baker McKenzie FenXun in 2016, British law firms have more recently been at the forefront of joint operations. Allen & Overy LLP established a joint operation withLang Yue Law Firm in 2020, joining Linklaters–Zhao Sheng Law Firm, Ashurst–Guantao Law Firm, and Herbert Smith Freehills LLP–Kewei Law Firm. Other firms with substantial footprints in China include Clifford Chance LLP, Skadden, Arps, Slate, Meagher & Flom LLP, Freshfields Bruckhaus Deringer, DLA Piper, Slaughter and May and White & Case LLP, Shanghai Office. Many of these outfits have taken a different approach to joint operations, instead seeking to cultivate ties to a range of Chinese law firms across different areas of law.

Amongst domestic law firms, the ‘Red Circle’ remains preeminent, with Commerce & Finance Law Offices, Jingtian & Gongcheng, Global Law Office, Haiwen & Partners, Fangda Partners, JunHe, King & Wood Mallesons and Zhong Lun Law Firm boasting large teams and wide-ranging capabilities. Many of these firms are seeking to expand beyond China, establishing offices i international legal hubs such as New York. Other prominent firms in China include Han Kun Law Offices, Llinks Law Offices, Tian Yuan Law Firm, Dentons, DeHeng Law Offices and Anjie Broad Law Firm. The PRC is also home to a host of boutiques, including Wang Jing & Co in shipping, Sunshine Law Firm in energy, environment and infrastructure, City Development Law Firm in real estate and Baohua Law Firm in labour and employment.