Doing Business in China Guide

What Are The Challenges?

Introduction

 

Intellectual Property Rights (IPR)

The problems of protecting and enforcing intellectual property rights are often highlighted as a distinct legal issue by some firms. Included in formal and informal protectionism are factors relating to the discretionary powers of government agencies in China and the favouritism extended to domestic compared to foreign firms. However, from having no IP protection law in the late 1970s, China has progressively enacted legislation to the point where it broadly matches or exceeds that in the UK.

UK companies are increasingly indicating support on IP issues from local Chinese authorities. However, it is still important to consider the threat of IPR abuse of your products or services. As part of your market entry strategy you will need to establish how you can protect your rights, how much it will cost and what other steps you could take, such as including IPR in due diligence checks and monitoring the market for possible infringements.

Trademarks and logos can be a particular issue. Unlike many other countries, the first person to register a trademark in China is the legal owner, and if you have been pre-empted, then lengthy cancellation and court proceedings will be necessary, with no guarantee of success. It is important to consider this before entering the market – whether you are selling or buying – as it has been known for Chinese manufacturers to register the trademarks of foreign customers.

It is wise to take a practical, as well as a legal view, on IP protection. In some cases, for example where existing patents are several years old, patent registration in China is not possible; also, smaller companies may struggle with the costs involved. Practical steps include choosing partners carefully; developing business relationships that are of mutual benefit and hence a deterrent to infringement; retaining key elements of IP; and working with several partners, rather than “putting all your eggs in one basket”.

UK Trade & Investment and the China-Britain Business Council provide detailed guidance on protecting intellectual property and this can be accessed via www.cbbc.org and www.ukti.gov.uk . An experienced independent IPR lawyer is invaluable in helping you to establish the best strategy for your company.

The UK's first ever Intellectual Property (IP) Attaché to China was appointed in December 2011 to improve the IP environment for UK companies, and UK SMEs can also obtain free advice from an EU-funded project, thre “China SME IPR Helpdesk” via www.china-iprhelpdesk.eu

 

Getting paid and financial issues

Currency exchange and transfer of funds
Many Chinese companies prefer to be invoiced in US dollars, particularly if they are already doing business with the USA, although it is sometimes possible to negotiate contracts in euros or even sterling. Conversion of the Chinese RMB to foreign exchange is strictly controlled by the “State Administration of Foreign Exchange” (SAFE), a government department, which regulates transfer through the banking system. This affects all financial transactions, from the ability to purchase Chinese RMB before travelling, to contractual payments and dividends. Small transactions, such as the use of ATMs and credit cards, are straightforward, but the controlled currency means that you need to be more careful in setting up contracts and investing in the market. Company dividends may only be paid annually, following audit of accounts by an approved accountancy firm. 

Contracts and payment

As covered under “Business Culture” below, contracts as operated in the UK are relatively new in China. They are, however, essential for successful business there, for the same reasons as in any other market. They also ensure smooth transactions of payments through the Chinese banking system. If payments do not match the contract they may be delayed, or conversion into foreign exchange may be blocked.

It is common for negotiation to continue after a contract is signed in China, so it is wise to build into the final figure some provision for concessions. Substantial additions to the contract need extra care as, if they do not match the original contract, payments may be held up in the banking system.

As elsewhere with large contracts involving stage payments, the final stage, which often depends on “sign off”, may be difficult to realise, and this needs consideration when agreeing terms.

When drawing up a contract with a Chinese organisation you should observe the following: Make it similar to other international contracts, but be very explicit and avoid legal jargon, which may not be understood. Include an arbitration clause, as legal action can be very expensive and difficult to pursue. Take care with milestones and related payments – this is especially important with royalties contracts, for which payments can attract particular attention. Agree and stipulate who is responsible for taxes. Agree and stipulate how agency payments are to be handled. Ensure the contract is fully understood and agreed with the Chinese organisation. The contract should be accurately translated and both versions signed. Consider the law applying to the contract. Contracts under foreign law are permitted and may offer easier prosecution in the ruling country if something goes wrong, but this will need enforcement in a Chinese court. Contracts under Hong Kong law, which is based on English law, may be a suitable compromise.

Short-term finance
When exporting to China normal commercial rules should be followed, and you should discuss the arrangements for security of payment with the international department of your UK bank, the UK offices of Chinese banks or UK-based banks that have offices in China. If you are a first-time exporter to China, the standard method of receiving payment for your goods is by documentary letter of credit.

The Chinese bank will make the payment provided that the requirements of the letter of credit are met. However, be aware that a letter of credit is a form of contract between two banks. A bank will make payment provided that the documents submitted to it are in strict compliance with the conditions of the letter of credit. This is regardless of the purchase contract. To prevent the possibility of a payment being made if the terms of the purchase contract are not met, the seller should check the letter of credit against the terms of the purchase contract, ensure that they match, and build in any necessary safeguards.

Open Account and Bills for Collection are other payment methods commonly used between UK exporters and Chinese importers when a trustworthy relationship between the two parties has been developed. Major exports and those requiring long-term finance will require specialist payment and financing.

Further information on securing payment can be obtained from www.cbbc.org.

Pricing
Margins achievable in Chinese markets are likely to be lower than in Western ones. This situation is changing rapidly, and increasingly Chinese companies are prepared to pay more for demonstrable benefits, and it is occasionally possible to command a premium for a unique product or service.

 

Payment Terms

Key terms and conditions in an import contract
Chinese importers tend to use standard form contracts in their transactions. Foreign contracts are seldom accepted for fear of being trapped by unfamiliar contract stipulations. Adding special provisions to the contract form is normally acceptable. You can expect to see the following key terms and conditions in a Chinese import contract:

• Terms of price and shipment – Chinese import businesses often conduct transactions at Free on Board (FOB) prices in consideration for using Chinese shipping companies. Cost and Freight (CFR) and Cost, Insurance and Freight (CIF) terms are accepted only if the freight is proved to be cost-effective.

• Insurance – Chinese importers generally have “open insurance” for their import cargoes, i.e. importing companies submit notifications of import cargo shipments and other relevant documents which are then acknowledged by the insurance company as insurance orders, and against which the insurance premium will be settled with the insured.

• Terms of payment – This is normally by letter of credit (L/C). See the ‘Getting paid’ section for more information.

• Inspection – Certificates of quality, quantity or weight issued by manufacturers or public assessors are normally required as part of the process of setting up a letter of credit. However, if the goods are discovered not to be in conformity with the certificates after re-inspection by Chinese inspection authorities, the buyer will either return the goods to the seller or lodge claims against the seller for compensation on losses on the strength of inspection at the port of destination.
  
  In the case of equipment imports, Chinese companies often insert a clause in the contract withholding a portion of the payment – normally 5 to 10 per cent of the total contract value – which will be paid only when the equipment is installed and commissioned. This retention sum tends to become a permanent rebate, so beware of allowing too high a figure.

• Dispute resolution – In cases of dispute, the formal contract has a provision that a solution must be sought through friendly consultation. If this does not work, arbitration is then adopted to settle the dispute. Litigation is used only as a last resort.

 

Insurance

The private sector provides credit insurance for exports of consumer products, raw materials and other similar goods. Speak to your banker or insurance broker for more information or contact the British Insurance Brokers’ Association for impartial advice: Web: www.biba.org.uk Tel: +44 (0)870 950 1790 (Consumer Helpline); Email: enquiries@biba.org.uk

Private sector insurance has some limitations, particularly for sales of capital goods, major services and construction projects that require longer credit packages or are in riskier markets. The UK Export Finance (formerly Export Credits Guarantee Department, or ECGD), is a separate government department that reports to the Secretary of State for Business, Innovation and Skills and provides a range of products for exporters of such goods and services.

 

UK Export Finance

UK Export Finance is the UK’s export credit agency. As a government department (formally named the Export Credits Guarantee Department) that operates under an act of parliament, we complement the private market by providing government assistance to exporters and investors, principally in the form of insurance policies and guarantees on bank loans. Contact Export Credits Guarantee Department: Tel: +44 (0)20 7512 7887 Email: help@ecgd.gsi.gov.uk; www.ecgd.gov.uk

 

Bribery and Corruption

Anyone doing business in China is likely to encounter or hear of corruption in one form or another. Historically, practices such as facilitation payments, bribes and giving and receiving expensive gifts in order to develop relationships were often regarded as a part of doing business. This is still the case in some areas, although the problems vary according to sector, type of business and region.

However, the general perception is that the situation is improving. Our advice to companies encountering corruption is simple – don’t get involved. Not only are there issues of business integrity to bear in mind, but it is also, of course, illegal. Invariably corruption is related to lack of professionalism, transparency and control, all of which are damaging to long-term business.

The Chinese Government is keen to crack down on corruption, and the penalties can be severe. In addition, under the Anti-Terrorism, Crime and Security Act 2001, UK companies and nationals can now be prosecuted in the UK for acts of bribery or other illegal activity committed wholly overseas.

 

SCAMS: How to avoid them

Fraudsters and scammers exist all over the world, and China is no exception. There have been a number of instances of British and other foreign businesses being targeted by fraudulent companies and individuals operating from various locations in China. The most common scams are:

•  “The contract scam” – Fraudulent companies in China make unsolicited enquiries to foreign companies, making orders in large quantities with very beneficial financial terms. The foreign company is often then invited out to China to sign the “contract”. When they arrive, they are asked to pay for expensive “gifts” or meals for “officials”, in order to move things forward. When the foreign representative flies back home the fraudsters vanish without trace. Companies should also be alerted when they are asked to pay for any “administration”, notarisation or foreign exchange control charges.

• “The visa invitation scam” – A fictitious Chinese company may randomly request letters of invitation for visas from UK organisations, so their delegates can visit the UK factory/site with a view to developing business. In reality these individuals have no interest in your company or your product – they are looking for the opportunity to enter the UK. If you are approached by a Chinese company in this manner, ensure that you carry out basic due diligence checks before issuing a letter of invitation.

• “The domain name scam” – A foreign company receives an email from a fictitious “internet database company”, claiming a Chinese company has filed a request to register your domain name, and with a fee they can block that request. Once you have parted with the cash, the scammer disappears.

 Like any other market, operating in China poses certain risks. The UKTI Overseas Business Risk website is an essential read: www.ukti.gov.uk/export

Too good to be true? Once you know the basics, it's relatively easy to prevent yourself from becoming a victim of scams. If you receive an apparently very attractive order from China (or indeed, anywhere else), or see a website offering goods at unrealistically low prices, ask yourself: is this too good to be true? If it looks too good to be true it almost always is. Don’t get on the plane, or send money, without seeking advice from either UKTI and CBBC, or carrying out appropriate due diligence checks. A guidance document on various business scams is available from CBBC.

 

Employing Staff

You will likely need to establish a strong management team to build your business in China, including securing clear and committed support from all levels of your parent company, and assigning good quality professional staff to plan and manage the China-based operations. Associated with this is the importance of transferring established business standards, codes of practice, operating procedures and internal control mechanisms to China in a way that operations there are managed and run no differently from those in other foreign markets.

However, finding the people you need to run your business in China is not significantly different from recruitment in the UK. There are several recruitment agencies currently operating in China, and most operate under the same standards that you would expect of a firm in the West. They will do the sourcing, pre-interviewing of candidates and charge you a percentage of the placed staff’s first year earnings or a one-off fee.

In addition, there are a number of recruitment websites advertising for both jobseekers and employers, which can be highly effective. Another option is to recruit from the huge Chinese population at UK universities. Visa regulations allow Chinese graduates to undertake training and work experience in the UK, before moving to China to take up positions.

One challenge that companies recruiting in China will face is the increasing competition for experienced managers and high-calibre individuals, and as China’s economy continues to grow this will only intensify. Skills levels of employees can be an issue at all levels; in many locations demand for skilled workers outstrips supply. Local education establishments will often assist with collaborative programmes, but this can have significant lead time.

Local and foreign companies are recruiting from the same pool of employees who have the right technical and language skills as well as managerial experience. Candidates with the requisite skills and experience will be in demand and command high salaries. If you are not prepared to offer appropriate remuneration, you will have great difficulty hiring people with these skills. Many employees will leave their current companies for ones that are offering better remuneration packages.

You will need to determine what you are willing to pay at the beginning of the recruitment process. It is important to note that salaries in China have increased over the last few years and will continue to do so. It would be advisable to conduct some market research to get a clear idea of appropriate salary levels for the positions you wish to fill so that you can make an offer that is in line with current market rates. When you are recruiting in China make sure that you carry out all the normal steps that you would if recruiting in the UK.

Ensure that candidates’ technical and linguistic capabilities match their claims:
It is essential to hire staff with the right language skills. Common mistakes include hiring Chinese staff from outside mainland China who do not speak Mandarin to the level required, or alternatively hiring staff whose business English is not sufficiently fluent for their role.

Ensure that you hire staff at the right level for the role:
A recent MBA graduate returning from overseas may not have the experience to navigate the complexities of setting up a company in China without seeking professional advice, and they may not have the capabilities to develop business at a senior level.

Carry out due diligence:
To ensure that the staff you are hiring are right for your company, it is essential to ensure thorough due diligence in recruitment, especially for senior managers, including conducting personal background checks and checking all references before offering them the position.

Offer appropriate compensation:
Once you have found the right staff you will need to give them good reason to stay with your company. You will need to provide sufficient compensation to ensure that you recruit and retain the best employees. Offering employees the opportunity to train overseas is also very attractive at all levels, although make sure that in return for providing such training they make a commitment to stay with your company. In addition, be sure to invest in the mentoring of Chinese management-level talent; this can be done by giving them experience of working around the organisation and grooming them for global corporate positions. A clearly defined career progression route is also attractive and will help to retain staff.

A lot of smaller companies setting up an office in China may well just employ one person to deal with all aspects of running the business. Although this may be convenient and cost effective, it might not be the best way to run your China operation. Staff selection will prove vital, and although the individual may be very willing, honest and capable, they may not be competent or experienced in international business practices. Also, foreign companies in China are at the top of official radar screens. If your employee is not familiar with the relevant Chinese rules and regulations pertaining to the running of an international office or business in China, then you may soon have to deal with issues of noncompliance, which can be very costly. In addition, having one person in control of all financial and legal aspects of the business is obviously risky. An attractive solution to this problem would be to use a service such as CBBC’s Launchpad Scheme where companies can have a representative located in one of CBBC’s China offices and benefit from the support of CBBC’s management and local team.

 

Language

In order to communicate effectively in China it is essential to communicate in Chinese.

Despite clear efforts made by many firms to localise their business model and to use Chinese staff in key managerial positions wherever practicable, language and cultural barriers remain a significant operational issue for many. These issues may become magnified in those regional cities away from the coastal regions of China, where the history of foreign business engagement is much shorter, and where familiarity and understanding with foreign business practices and needs are likely to be less well developed.

Communication is crucial to the success of any company, yet business is all too often lost through simple misunderstandings that could have been easily avoided. When working across different time zones, cultures and languages the chances for misunderstanding are multiplied considerably. It is therefore essential to ensure that you have an appropriate communications strategy not just for China, but for the region of China you are considering, be it a regional city, a city cluster, or Province.

In order to communicate effectively in China it is essential to communicate in Chinese. Your translator or interpreter is therefore one of your key assets and should be selected with care, as without them you are effectively deaf and dumb. The national language of China (including Taiwan), Putonghua, is commonly known in the UK as Mandarin Chinese and on the mainland the characters used to write it are known as Simplified Chinese. This was introduced by the Government in the 1950s and is increasingly used by Chinese communities abroad, although traditional characters are still used in Hong Kong and Taiwan.

If you are working in southern China, in the area between Guangzhou (formerly Canton) and Hong Kong, do not assume that the business language is Cantonese. This region has a vast population of immigrants from non-Cantonese speaking parts of China working at all levels. For the majority of contacts in southern China, Mandarin is the language of business. If in doubt, ask first. If you are going to Hong Kong, Cantonese is the preferred Chinese dialect, although Mandarin is increasingly spoken in business circles. English is also commonly used for business and remains an official language in Hong Kong.

While an increasing number of Chinese companies – particularly those with an international outlook – have English speakers on their staff, don’t assume that everyone in the company speaks English – especially decision-makers. At the very least, get a Chinese name for your company and prepare a one-page company profile in Chinese for insertion into your company brochure and website. A Chinese translation of your brochure would be even better.

Business cards are essential. It is wise to have your business card translated into Chinese, and to bring plenty with you.

Ensure that all your translation is done professionally. For names it is important to use characters which not only represent the word phonetically but also have a symbolic or auspicious meaning. It is worth talking through the choice for names with your translator. There are numerous translation and interpreting agencies which can carry out suitable translations of personal names as well as general translation work. Many of them will also be able to help you address the branding issues detailed in this guide.

Basic Madarin The written language is uniform throughout China*, however, as in any other country, Chinese dialects vary from region to region. The standard language, Putonghua (often called Mandarin), is based on the Beijing dialect and is spoken by most people across the country. This is the language of business in China and if you would like to learn some Chinese, Putonghua is the language to study. Whereas in Hong Kong and parts of Guangdong Province Cantonese is more widely spoken, Putonghua is still generally understood. There are numerous free-to-access websites designed to help you learn Putonghua (and Cantonese), and some simple phrases are below. *Hong Kong and Taiwan use traditional Chinese script whereas mainland China uses a simplified version

 

Useful Phrases

 

Bureaucracy and Red Tape

Regulations and bureaucracy continue to be the predominant challenge experienced by British companies in China today. Although the issues raised are highly sector-specific, numerous British companies draw attention to difficulties arising from the clarity and transparency of the regulatory environment in which they have to operate, the restrictiveness and excessiveness of rules and “red-tape” with which they have to comply, the frequency at which these rules and regulations change, and the lack of predictability that all this causes. Of course, many of these issues apply across the country, but because the implementation of regulations takes place at a local level, this highlights the importance of understanding how rules and regulations are administered at a provincial and municipal level in China’s regional cities.

 

China's Labour Law

If you are employing staff in China you will need to make sure that you comply with China’s Labour Law, which came into effect on 1 January 2008. According to this law all employees must have a written contract. If this is not signed within one month, then you will have to pay the employee double their salary for every month they are without a contract. If they are still without a contract after a year then they are automatically deemed to be on an open-ended contract. It is important that the employee receives an original copy of the contract signed by the employer and that the employer gets the employee to sign that they have received the contract.

It is also very important that, in addition to the contract, all employees are given (and sign to say they have received) a company rulebook detailing all aspects of your company policy and what behaviour is and isn’t acceptable. If there are any cases of misconduct you will find it almost impossible to terminate staff employment without written evidence, so make sure that such evidence is documented.

There is additional information on employing staff on the CBBC website www.cbbc.org and many international law firms have guides to the new employment laws on their websites.

 

Foreigner Participation in China’s Social Insurance System

On 15th October 2011, the ‘Interim Measures for Participation in Social Insurance System by Foreigners’ came into effect. The Measures mean that foreigners employed in China who have obtained a Permanent Residence Certificate for Foreigners, or employment certificates such as the Employment Permit for Foreigner, the Certificate of Foreign Experts, or the Certificate of Permanent Foreign Correspondent are now required to participate in the country’s social security system. Five kinds of insurance contributions are to be made: basic pension insurance for employees; basic medical insurance for employees; work-related injury insurance; unemployment insurance; and maternity insurance. Social insurance fees are to be paid by both employers and foreign employees in accordance with the regulations. The Measures state that employers must undertake social insurance registration for foreign employees within 30 days of applying for their employment permits. Failure to conduct registration and payment for social insurance may mean employers are subject to financial penalties.

 

Social Security Law

The changes will add extra costs to all businesses employing foreigners as they are now required to make contributions on their behalf. This will hit schools and SMEs that hire a large amount of foreigners particularly hard, and may result in employers turning away from hiring foreign workers. There is, however, a cap for the amount of contributions made, based on three times the local average salary. Although, this is not universal and the city of Dalian has already removed this cap (which could mean that employers have to pay up to 37% of an entire monthly salary paid to their foreign employees).

Foreign employees are also required to make contributions and despite the cap this is still a substantial cost for lower-paid foreign workers.

Although the new tax requiring foreign workers to pay social security contributions is currently in effect, the system for registration and implementation of the tax is not yet fully operational, and some businesses have not yet been able to register foreigners with their relevant social security bureaux or make payments.

The only situation in which foreigners will be able to avoid making contributions is where they meet the requirements specified in bilateral or multilateral agreements, of which there are currently only two (Germany and Korea). Even these agreements only allow citizens of these countries to opt out under certain circumstances. There is still a lot that remains unclear, and there are some outstanding issues that still need to be clarified:

• Pension
  How to reclaim the lump sum? In the event of death how will payment to a relative be organised?

• Medical insurance
  At which clinics can medical insurance be claimed – International sections of domestic hospitals or international clinics?

• Maternity insurance
  Foreign women are not restricted to having one baby. Can they use the policy multiple times or just with their first-born?

• Unemployment insurance
  If a foreigner loses their job, they are not allowed to reside in China, thus they cannot take advantage of this insurance.

 

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Source - UKTI

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