Resources

Research:

• Firstly, consider what your company’s objectives are in China and carefully research your target market before developing a formal business plan. Discuss your strategy with a local representative who understands the market and economic conditions.
• Consider the unique selling points of your product or service and whether there is actually a market for that product or service in China. If there is, you need to ensure you can be competitive in China and, more importantly, whether you have the time, resources and stamina to handle the demands of communications, frequent travel, product delivery and after-sales service.
• All foreign investments need to be registered with the appropriate local and state authorities, which can be time-consuming and bureaucratic. Exporters will also need to deal with Chinese tax, accountancy and employment law, and China’s transport infrastructure and commercial legal system.
• Understand the basic Chinese regulations which govern your industry or investment in China. Companies are often constrained in how flexible they can be due to the regulatory environment.
• It is recommended that you have a website including product description, indicative FOB price, and unique selling points for your product or service.
• It may be helpful to talk to other Australians with business experience in China, for example, Australia China Business Council members in Australia; China Australia Chamber of Commerce members in China and Austrade’s network of export advisers in both Australia and China.
• The Internet can be an invaluable tool when it comes to researching country and market information before you even begin to formulate your strategy.

Market entry strategy:

• When determining your market entry strategy, consider recent market trends and keep in mind your long-term and short-term requirements for infrastructure, labour and your customer base. Remember China is changing at a rapid pace and it is essential your research and market information is up-to-date.
• Don’t automatically assume Beijing or Shanghai should be your target markets. Many other regions of China are substantial markets in themselves and competition can be less intense. It is therefore advisable to treat China as a global region in its own right and focus your initial market entry approach on a particular region or city.
• It may be highly beneficial to employ an agent or distributor with marketing skills who has excellent knowledge of local market conditions and preferably speaks English. A good agent can greatly reduce set-up costs and time taken to enter the market. As well as having someone on the ground to look after your interests, you will have access to good local knowledge and contacts.
• It may be highly beneficial to have your own well-briefed interpreter available to assist with discussions, formal presentations and explanation of technical issues.
• Potential Chinese business partners are often more interested in the cost-effectiveness of the product rather than the product itself, so it’s important to be able to demonstrate how the product can save money.
• Choose the right partners. In-market contacts are often more important than product and price.

Negotiations:

• Always seek good quality independent legal, tax, and professional advice before signing anything that could have implications for your company. If you are setting up in China, it is important to get the business and tax structure right from the start.
• Use a qualified legal firm with a presence in China to review all contracts. Failure to gain full information about a potential partner’s credit and professional background could lead to serious problems further down the road.
• If you are concerned that your product is in danger of being copied, seek legal advice on how best to protect your intellectual property (IP).
• Halve your expectations, and double your time and budget. Chinese business people prefer to establish a strong relationship before closing a deal.
• Be prepared for tough negotiations and to deal with grey issues. Be firm, polite, and creative, but be prepared to say no.

Etiquette:

• Building up good business relationships and trust is very important in China, so expect to spend a lot of time at meetings and banquets with your potential business partners.
• Business meetings always start promptly, so it’s important to arrive early for the standard formal introductions. It is usual to be introduced to the most senior person at the meeting first, followed by the others in descending order of seniority.
• A handshake is the standard way to greet men and women, whatever their age or seniority. Note that the Chinese respect their elders, so an extra show of courtesy in the presence of an older person will reflect well on you.
• Business cards (ming pian) are essential in China, and it’s a good idea to have your card translated into Chinese on the reverse side. Present your card with both hands with the Chinese side face up. It’s a sign a respect to spend a few moments examining the business cards you receive rather than putting them away immediately.
• When meeting potential business partners, it is helpful to know some Mandarin. Simple phrases such as ‘Ni hao’ (hello) ‘Zao shang hao (good morning) and Xia wu hao (good afternoon) can go a long way. Note that surnames are placed first, eg. Mr Yao Ming should therefore be addressed as ‘Mr Yao’.
• A great deal of business in China is conducted over dinner, where very senior people may attend who were not at previous negotiations, but are key to the approval of a business deal. However, business dinners or lunches can also indicate a general warming of a relationship, and in this case, their role should not be over-stated.
• Never begin eating or drinking until you host does. It is polite to try all dishes that are offered to you, but you can discreetly leave anything you don’t like at the edge of your plate. Don’t place your chopsticks pointing into the bowl – always place them horizontally on the hold provided.
• Dinner speeches and frequent toasts are standard, with locally produced wines or ‘bai jiu’ spirit the usual drinks for toasts. It is customary for toasts to be made by both sides during the meal.
• The Chinese generally like to give small and inexpensive gifts. It’s a good idea to bring small gifts with an Australian theme for your hosts and wrap them in colours such as red, yellow or gold, which are regarded as lucky in China. It is not customary for your hosts to open the gifts in front of you, unless you encourage them to do so.
• Chinese negotiators are shrewd and know that foreigners will be reluctant to travel home from China empty-handed. They are willing to stretch out discussions, which can wear their foreign counterparts down. Be sure that your interpretations of any business deal are consistent with theirs and that everyone understands their duties and obligations.
• Expect to encounter delays or frustration during your business dealings in China, but it’s important to remain patient and polite. The Chinese don’t like to ‘lose face’ so losing your temper or showing frustration will only set you back.
• If you are beckoning to someone, motion towards you using your hand and palm pointed downwards – never palm up. Furthermore, don’t use your index finger or point when speaking.
• Try to speak with your counterparts in short, simple, and jargon-free sentences.
• Be aware that business in China slows down during the Chinese New Year – usually from late January to early February, and for periods such as National Day (1 October) and May Day (1 May). It’s best to avoid arranging meetings during these times.

Nov. 11 – An issue that frequently crops up at this time of year is the question of getting earned income out of China. As many expatriates look to leave to go home for Christmas, those piles of RMB that have been stacking up nicely begin to look mouth-watering in terms of repatriating the readies. But here comes a catch – for expatriates legitimately employed in China, and paying tax here, there is not a problem. But for those working in China’s grey economy – there is.

China employs strict currency regulations that are designed to prevent large amounts of currency moving out of the country. Your small amount may not seem like a huge deal, but if everyone moved out a few thousand dollars, it would impact upon China’s economy. The movement of illicit cash both into and out of China is known as “hot money” and it can seriously damage a country’s financial stability if not regulated. China controls and monitors the amounts of money coming into and out of the country through a mechanism known as SAFE – The State Administration of Foreign Exchange. In order to legitimately take money out of China (typically wire transfer), an application needs to be made to SAFE (your bank would normally assist with this procedure) with proof of income taxes paid in China, and details of the overseas bank account the funds are to be wired to. The onus is on the applicant therefore to demonstrate the money was legitimately earned and taxes have been paid on it. If so, the money is permitted to be repatriated and there is no daily or annual ceiling limiting the amount an individual can transfer. This should not be a problem for expatriates in China with proper working contracts, visas and tax registrations.

However, many expats in China fall into a different category. Either by design or default (Chinese employers sometimes take advantage and do not fully explain this issue), there are expatriates in China who are not properly registered with the authorities, are not paying taxes, and who have nonetheless acquired a bundle of RMB. Here, there is a problem. Firstly, such individuals cannot meet the SAFE requirements, and this becomes a block. Chinese banks will not allow you to exchange and wire overseas any amount over the RMB equivalent of US$500 for you without SAFE approval, and if there is no tax paid receipts (employers should provide this) or no work permit or visa, this route is barred.

It should be noted, though, that foreign nationals can transfer any amount under or equal to the equivalent of US$500 once per day without providing proof that the money was legitimately earned or that taxes have been paid on it. Chinese nationals are able to transfer the equivalent of US$2,000 per day into a foreign bank account, however Chinese nationals face a US$50,000 annual ceiling when exchanging RMB into foreign currencies while foreign nationals do not face such restrictions.

Under these circumstances, the only practical ways to solve this are as follows:

1. If you thought your employer has misled you over your status, you may have a case. In which case, you’ll need to find a local friendly lawyer to assist. However this may take time to resolve.
2. China does permit the traveling outside of China with up to RMB20,000 or equivalent. You may pack up to this amount and be safe (any more and you face confiscation of all the money if caught). The problem with this is that RMB is not freely exchangeable, and it may be hard to convert it when back home. Hong Kong does provide such facilities – although be warned – the exchange rate issue will be a killer.
3. If more than RMB20,000, you may divide the total up among friends to limit the amount each carries. But make sure they’re good friends!
4. If you have a Chinese friend that you trust, you can transfer the money to their Chinese bank account and they can wire a maximum of US$2,000 per day to your overseas bank account. You can also do this yourself, but foreign nationals are limited to US$500 per day.
5. If you intend to return to China, deposit the money into a bank and withdraw up to the legal amount each time you leave.
6. Convert your RMB into a saleable asset that you can convert to cash back home. China does limit the amount of goods value being exported from the country, but are less likely to question personal belongings. Buying and shipping items from a reputable Chinese fine art dealer may be a solution.
7. Next time, be aware that working in China without paying tax is illegal. It can impact on even realizing the money earned. If in doubt, get a friendly lawyer to look at your employment contract terms and ensure that hard won income can be readily – and legally – repatriated.

In terms of item (6), I can relate a recent anecdote. Admiring a hugely expensive diamond necklace in a Chinese jewelry store recently, I enquired about who was going to be lucky enough to wear it. The carefully worded reply was “Oh Sir! This necklace will never be worn.”

This article is by Dezan Shira & Associates. For further information please contact the practice at legal@dezshira.com, or visit the firm’s web site at www.dezshira.com.

Listed below is a detailed summary of the bureaucratic and legal hurdles an entrepreneur must overcome in order to incorporate and register a new firm, along with their associated time and set-up costs.

China's e-commerce companies may yet turn a logistical nightmare into a dream business opportunity.

Massive government investment in road, rail and air infrastructure means that China's transport network is approaching developed-world standards. But the cost of moving goods from A to B remains high. Logistics costs as a percentage of GDP are around 21%, compared with 10% in the U.S. and 13% in India.

Part of that gap is explained by China's focus on manufacturing. But beyond that, the country has a fragmented system, high tariffs for road transport and multiple providers piling on fees. Even outside the manufacturing sector costs are high. A Chinese government investigation found that two-thirds of the retail price of vegetables represents logistics costs.

And even though costs are high, service is often poor. Local logistics providers are famously slow and unreliable. Assuring end-to-end delivery of products across provincial boundaries is a real challenge. That's a particular problem for e-commerce companies such as Alibaba Group, 360buy and Joyo Amazon, which rely on guaranteeing delivery of goods from supplier to customer.

The central government says it is committed to the development of a modern, efficient logistics network. But ambitious goals set in Beijing are running up against a difficult reality at a local level. Provincial governments benefit from local firms that contribute tax revenue, even if they are less efficient than larger national players. State-owned firms often run their own in-house transport and distribution services, reducing the size of the market for specialist logistics firms.

For third-party logistics providers, working through the tangle of local regulation has proved difficult, if not impossible. Jeffery Wong of global advisory firm KPMG says even the bigger players remain mainly confined to provincial markets. But for e-commerce firms, the rapid growth in online sales is providing both motive and opportunity to get to grips with the problem.

For Amazon in the U.S., efficient distribution has been the key to keeping prices low and gaining market share. The aspiration for e-commerce firms in China is to do the same. Online retailer Alibaba has invested in its own system of warehouses and is working with existing logistics providers to stitch together a national system, and 360buy is partnering with Wal-Mart to build a network.

The rapid growth of e-commerce means that major players can take advantage of scale in their operations. On a single day in November 2010, Taobao Mall, the business-to-consumer arm of Alibaba's online empire, shipped 15 million packages. Building an efficient logistics system won't be easy, especially for e-commerce firms whose core competences lie elsewhere. But the Chinese market is wide open. For companies that can get it right, the solution to a business problem could turn into a driver of future profitability.

“Compared to October last year, many cities have issued implementing rules for the PRC social insurance contributions by foreign nationals,” said Gordon Feng, chair of Paul Hastings’ employment law practice in Shanghai. Beijing, Chengdu, Qingdao, Suzhou and Chongqing have all issued local implementing rules requiring foreign employees to enroll in government schemes for pension, medical care, work-related injury, unemployment and maternity.

With many of China’s foreigners residing in Shanghai, the city still maintains that contributions to the schemes are voluntary in the country’s most populated municipality. “It seems Shanghai is not interested in enforcing the Social Insurance Law against foreigners as it is keeping quiet about any implementing regulations and so far the enrollment remains voluntary,” said Feng.

Hong Kong, Macau, and Taiwan residents were also part of the initial measures, but later removed as previous legislation required contributions from them. “The Ministry of Human Resources and Social Security already had regulations for Hong Kong, Macau, and Taiwan residents in place, requiring them to enroll in the social insurance system, but the enrollment was not mandatory in practice before October 15, 2011” said Feng. He believed HMT residents were later removed because otherwise the rules would have been redundant.

The southwestern city of Chengdu and the eastern city of Suzhou are two cities where contributions are mandatory. Despite the removal of HMT residents, Chengdu and Suzhou are unique in that their implementing regulations included HMT residents. “The Chengdu Circular and Suzhou Circular do not go against the Ministry because previous regulations required HMT residents to pay social insurance,” commented Feng.

But what about enforcement? China is notorious for releasing measures where enforceability is non-existent. Despite repercussions of forced transfers from the social insurance administrative authority and interest fee penalties of 5% for non-compliance, there has not been any news that they have been enforced or companies employing foreigners chased for contributions.

Social insurance for PRC nationals is a far greater problem in China. The social insurance centre does not have the energy or the appetite to go after foreigners. Foreigners are such a small percentage of the population compared to local residents, and the authorities already have a big problem dealing with nationals.

Even though stories of enforcement or penalties have yet to surface, Feng always recommends his clients to follow local laws. Companies employing several foreigners need to be careful, as enforceability of the measures could increase at anytime. It remains to be seen which other municipalities will release circulars and whether Shanghai will require such regulations.

By David Tring www.chinalawandpractice.com

All power within the government of the People's Republic of China is divided among three bodies: the People's Republic of China, State Council, and the People's Liberation Army (PLA). This article is concerned with the formal structure of the state, its departments and their responsibilities. Most, but not all, positions of significant power in the state structure and in the army are occupied by members of the Communist Party of China which is controlled by the Politburo Standing Committee of the Communist Party of China, a group of 4 to 9 people, usually all older men, who make all decisions of national significance. As the role of the Army is to enforce these decisions, the support of the PLA is important in maintaining Party rule.

Power is concentrated in the Paramount Leader, currently Hu Jintao, who heads all three bodies: He is General Secretary of the Communist Party and of the Central Committee, President of the People's Republic of China, and Chairman of the Central Military Commission. Recently, experts have observed growing limitations to the Paramount Leader's de facto control over the government.

The legal power of the Communist Party is guaranteed by the PRC constitution and its position as the supreme political authority in the PRC is realised through its comprehensive control of the state, military, and media. According to a prominent government spokesman:

We will never simply copy the system of Western countries or introduce a system of multiple parties holding office in rotation, although China’s state organs have different responsibilities, they all adhere to the line, principles and policies of the party.

The primary organs of state power are the National People's Congress (NPC), the President, and the State Council. Members of the State Council include the Premier, a variable number of Vice Premiers (now four), five State Councilors (protocol equal of vice premiers but with narrower portfolios), and 29 ministers and heads of State Council commissions. During the 1980s there was an attempt made to separate party and state functions, with the party deciding general policy and the state carrying it out. The attempt was abandoned in the 1990s with the result that the political leadership within the state are also the leaders of the party, thereby creating a single centralized focus of power.

At the same time there has been a move for having party and state offices be separated at levels other than the central government. It is unheard of for a sub-national executive to also be party secretary. This frequently causes conflict between the chief executive and the party secretary, and this conflict is widely seen as intentional to prevent either from becoming too powerful. Some special cases are the Special Administrative Regions of Hong Kong and Macau where the Mainland Chinese national laws do not apply at all and the autonomous regions where, following Soviet practice, the chief executive is typically a member of the local ethnic group while the party general secretary is non-local and usually Han Chinese.

Under the Constitution of the People's Republic of China, the NPC is the highest organ of state power in China. It meets annually for about two weeks to review and approve major new policy directions, laws, the budget, and major personnel changes. Most national legislation in the PRC is adopted by the Standing Committee of the National People's Congress. Most initiatives are presented to the NPCSC for consideration by the State Council after previous endorsement by the Communist Party's Politburo Standing Committee. Although the NPC generally approves State Council policy and personnel recommendations, the NPC and its standing committee has increasingly asserted its role as the national legislature and has been able to force revisions in some laws.

By mid-2007, the Shuikoushan Non-Ferrous Metal factory in Hunan Province faced a crisis. As part of its 11th Five-Year Plan (2005-2010), the Chinese government was closing down high-polluting factories–and the Shuikoushan factory was among those at risk. The 110 year-old state-owned factory, with a gross annual income of more than US $1 billion and 12,000 employees, was emitting high levels of heavy metals into the local water supply. This polluted water was flowing directly into the Xiang River and affecting the drinking supply for millions of people within the nearby city of Changsha. Despite several attempts to remove the heavy metals by using conventional chemical treatment methods, the factory continued to emit dangerous levels of pollution.

In late 2007, US-Pacific Rim International, Inc.(USPRI), a US consulting company that assists US companies market and sell their products and technologies in China, began to promote the electrocoagulation (EC) water treatment system of one of its client companies, Kaselco, to the factory. USPRI highlighted the EC system’s unique electrochemical process to remove heavy metals from water. Faced with the risk of closure, the Shuikoushan factory decided to try the product.

During a pilot test of the EC system in late 2007, the factory found it could almost completely eliminate the heavy metals that the factory was emitting. After three months of further tests and negotiations, the Shuikoushan factory decided to purchase and install the EC system.

The EC system began operating in May 2008, and the results were dramatic. The factory was able to reduce the amount of heavy metals it discharged by almost 99 percent, meet the highest national water pollution emission standard and treat 4,100 tons of water a day. Deputy Director of the Hunan Provincial Environmental Protection Bureau Xie Lishuai inspected the EC system and praised the project as a model for wastewater treatment. In the space of several months, the Shuikoushan factory had gone from being a dangerous polluter to a socially responsible enterprise.

Even as China faces enormous environmental challenges, success stories like Shuikoushan’s EC system reveal an excellent opportunity for US environmental companies to export their advanced technologies to China. American companies can play a role in helping China address its environmental problems.

A review of some of China’s environmental statistics demonstrates that as China continues its rapid growth, it also faces significant environmental challenges. Currently, 70 percent of the country’s rivers, lakes and reservoirs are not safe for human use, 70 percent of its energy comes from high-polluting coal and 5,800 square miles of its grasslands are lost to desertification every year.

As these environmental problems grow, the market for environmental products and technologies is expected to expand as well. The China Greentech Report 2009 estimates that by 2013 the market for environmental technologies will be between US $500 billion and US $1 trillion. According to the US Foreign Commercial Service, the greatest opportunities for US environmental companies lie in municipal and industry wastewater treatment technology, hazardous waste and medical waste treatment technology, waste-to-energy technologies, de-SOx and de-NOx technologies, as well as air and water monitoring equipment.

Investments by the Chinese and US governments on a variety of environmental initiatives in China also offer opportunities for US greentech companies. Of China’s US $586 billion 2008 stimulus plan, approximately 37 percent is dedicated to greentech-related projects. China’s upcoming 12th Five-Year Plan (2011-2016) is also expected to build on the 11th Five-Year Plan’s significant focus on the environment.

US-Chinese government cooperation on environmental issues has also been growing. During President Obama’s visit in November 2009, the US and China committed to spending at least US $150 million of public and private funding on a US-China Clean Energy Research Center, as well as agreeing to a host of other initiatives related to energy, coal and shale gas.

The complexity of many environmental problems will also require collaboration between US environmental companies. Multiple companies may be needed to complete just one environmental project. For example, a lake clean-up project could require different companies to provide industrial pre-treatment, pipes for dredging and adequate infrastructure. Such collaboration is especially important for small and medium-sized enterprises, when they approach Chinese municipalities and companies they can offer comprehensive environmental solutions. Public-private initiatives such as the American Water Working Group, sponsored by the Foreign Commercial Service, and the US-China Energy Cooperation Program, based out of AmCham China, are promising examples of such collaboration.

Even while there are bright prospects for US environmental companies in China, the challenges of cost, intellectual property rights (IPR), lack of transparency in project bidding and domestic competition must be recognized by any greentech business that wants to export to the Chinese market.

The advanced nature of some US technologies means their prices can be relatively high in China, but still find a place in the market. While the higher costs of certain US technologies will price them out of some markets here, it should not lead US environmental companies to give up on the country completely. Many Chinese companies respect, and are willing to pay a higher price for, high-quality US technologies. In addition, while costs may be too high in some regions of China, in more developed parts of the country, Chinese companies and state-owned enterprises will pay for exceptional US products. Further, companies should consider becoming original equipment manufacturers in China for all or part of their products in order to drive down costs.

As with any company that wishes to export its technology to China, US greentech companies should be particularly concerned about IPR. Even as IPR enforcement has improved in recent years, and even if appropriate safeguards are taken, it is almost certain that companies will have some of their technology copied in China. Recognizing this reality, and treating it as part of a business strategy rather than a legal issue, is a necessity for any US environmental company looking to export to China. To stay ahead of IPR violations, companies must ensure that their products remain leaders in their field.

The lack of transparency in the bidding process for environmental projects can also prove a challenge for US companies. In order to address this issue, companies should hire Chinese staff or engage local sales agents to represent them in the bidding process. Local knowledge of Chinese culture and business practices will enable Chinese staff to illuminate the complex and opaque bidding process for American companies.

Significant public and private sector investments in China’s green industry means US environmental companies will face growing competition from local Chinese companies. Nonetheless, American companies can continue to offer unique technologies in China. In order to offer the greatest value, US environmental companies exporting to China should conduct thorough market research, determining where the country lacks advanced and integrated technology to meet their greatest environmental challenges.

Exporting environmental technologies to China holds enormous potential for small and large US companies. While selling greentech products also presents some challenges, these issues can be addressed by taking a realistic approach to the Chinese business environment. By increasing US environmental exports to China, US companies will not only expand their market, but will also help raise China’s living standards.