Market entry guide China

The Chinese economy is undoubtedly a key player in the global economy. In 2008, real GDP growth reached 9 percent 1 . China’s top 10 trading countries are the US, Japan, Hong Kong, South Korea, Taiwan region, Germany, Singapore, Malaysia, Russia and Australia. China’s trade with these ten economies together accounted for 57% 2 of China’s total external trade in 2008. The Chinese economy registered a total external trade amount of EUR 1812 billion 3 , ranking third among global economies. The major drivers of the Chinese economy are fixed asset investment, sale of consumer goods and the output from foreign-invested companies.
In December 2001, China joined the World Trade Organisation (WTO), following negotiations that lasted over a decade. China had agreed to fundamentally change the framework of its economy in order to become a WTO member. These changes included lifting various restrictions on foreign direct investment (FDI), lowering and removing tariff and non-tariff barriers and improving the transparency of the legal structure for investments and businesses. China’s entry into the WTO ushered in a new wave of FDI. The country agreed to open several sectors including telecommunications, insurance, banking, trade, distribution and logistics. In spite of complicated procedures for foreign investments in the country and additional restrictions during actual implementation, the opening up of these sectors represents a major step forward in the overall opportunities for foreign investors.
The key national regulations for implementing China’s foreign investment are Regulations for Guiding the Direction of Foreign Investment (Guiding Regulations). The Guiding Regulations classify all foreign investment projects into four categories: encouraged projects, permitted projects, restricted projects and prohibited projects. This classification determines the feasibility and establishment method of the project. The key difference between encouraged and permitted projects is that the former can benefit from increased tax advantages and preferential policies. Restricted projects must be examined and approved by the relevant authorities. It is possible for restricted projects, such as those exporting 70 percent of their output, to be approved but most documents must be submitted to higher authorities.
Guiding regulations are provided in two catalogues, The Catalogue for Guiding Foreign Investment in Industries (Foreign Investment Catalogue) and the Catalogue of Priority Industries for Foreign Investment in Central and Western Regions (Central and Western Regions Catalogue). The Foreign Investment Catalogue lists the industries that are encouraged, permitted, restricted and prohibited. The Central and Western Regions Catalogue lists the industries that are greatly encouraged for foreign investments in the central and western regions of China.
Rapid long-term economic growth, a fast expanding share of the global trade and record-breaking FDI inflows justify China’s position as the new business destination for the rest of the world. Establishing a business or investment in China is an attractive prospect; however, this also requires a planned entry and exit strategy, comprehensive understanding and sound professional advice.
The following report aims to discuss the most important issues pertaining to the administrative, legal and financial aspects of setting up businesses and hiring personnel, as well as the living conditions in China.
This section elaborates on the common investment vehicles available to foreign investors, the procedures to be followed in order to establish them and related regulations for each investment mode.
Table 1 lists the most common modes of setting up businesses by foreign investors and the legal particularities involved in the process.
Source: Kaizen Corporate Services Limited
The establishment of an RO involves the following three steps:
An RO needs to be approved by relevant authorities under the Chinese laws. Applicants should apply for approval from different departments depending on their main business. If the RO wants to engage in other businesses as well, it needs to seek approval from relevant authorities. It is important to carefully prepare documents according to requirements as Chinese regulatory bodies work on an ‘approval system’ instead of a ‘register system’. It is possible for an application to be rejected by government authorities without them providing any reason. Table 2 lists the major industries and the authorities they need to seek approval from.
Source: Kaizen Corporate Services Limited
The required documents should include the following 4 :
Upon the receipt of the approval certificate, applicants must get themselves registered with the Administration of Industry and Commerce (AIC) within 30 days.
Documents required for this purpose 5 :
A certificate issued by the approval authority
A copy of the documents that were submitted to the approval authority
A copy of the rent agreement for the office site
Photographs of the chief representative
It has to be noted that AICs in different regions may require different documents for registration. Therefore, it is recommended to consult local sponsors or agents regarding the specific local requirements. After the registration is approved, the relevant authorities will issue a registration certificate for the RO. ROs must obtain Representative Cards from relevant approval authorities to recruit employees 6 .
After a successful registration process, the following procedures should be undertaken:
Apply for a Corporation Registration Code Certificate
Observe customs formalities for the import of office equipment
All these procedures also apply while establishing other business modes.
Detailed rules of the Ministry of Foreign Trade and Economic Cooperation (MoFTEC) on the approval and control of foreign enterprises’ ROs came into force on 17 March 1995 7 .
The following points list the activities and the legal responsibilities of ROs and their parent companies in China:
| An RO is only permitted to engage in indirect business activities, such as business liaison, product introduction, market studies and technical exchanges. Any other activity including issuing bills or invoices to customers, collecting money from customers, and warehousing and managing inventory in China for trading purposes is prohibited.
| Foreign companies are subject to the jurisdiction of the Chinese law in case of disputes arising from contracts or other property rights.
| A parent company bears all the legal responsibilities for business activities of its resident RO in the People’s Republic of China.
In China, only a few business sectors such as banks and insurance companies are permitted to set up branches. Although the Company Law generally authorises the establishment of Branch Offices by foreign companies, the necessary implementation rules are yet to be issued. Meanwhile, a Branch Office in China is not recognised as an independent legal entity; it can only carry out liaison and coordination work. As a result of these restrictions and the lack of legal standing, a Branch Office is not recommended as a vehicle for foreign investment.
The most common form of JVs is the equity joint venture (EJV) and the cooperative joint venture (CJV). The corporate form of EJVs is a limited liability company with its own registered capital and an independent legal identity. A CJV is a Chinese-foreign contractual enterprise that has joint investments of both parties or conditions.
The establishment of a JV in China involves the following steps:
After the partners reach an agreement, the Chinese side is required to submit a project proposal to the relevant approval authorities. The proposal should include basic information on the project, the technology involved, the energy and other resources required, an environmental impact assessment, a list of equipment to be imported and their value, and ways of capital contribution.
Both parties should work in collaboration on a feasibility study report. Following this, the Chinese party should submit all documents to the local foreign trade and economic cooperation department for approval.
Documents required for this purpose include 8 :
Application form for the registration of the name of the JV approved by the provincial or municipal administration for industry and commerce
Written comments on the project by different government departments
Contract and Articles of Association signed by the legal representatives of both JV parties
List of names on the board of directors
After receiving the approval of the contract and the Articles of Association, the Chinese party should apply for an approval certificate from the provincial or municipal foreign trade and economic cooperation department.
Documents required for this purpose include:
Contract and Articles of Association
List of names of directors approved by the respective approval authorities
The approval authorities are required to make their decision within 3 months for EJVs and 3 months for contractual JVs.
Within one month of the receipt of the approval certificate, the applicant for the business licence should register with the administrative department for industry and commerce of the relevant province or autonomous region. The date of issuance of the business licence will be the date of the formal establishment of the JV.
The procedures required after registration are similar to those required for establishing an RO.
The regulations for the implementation of the Law of the People’s Republic of China on Chinese-foreign equity JVs were promulgated by the State Council on 20 September 1983.
The industries that are permitted to establish JVs include the following:
In general, the foreign company’s investment should not be less than 25 percent of the total investment. If the capital contribution by foreign parties is less than 25 percent in EJVs, preferential policies will not be applicable to the JV.
Detailed rules for the implementation of the Law of the People’s Republic of China on Sino-foreign contractual JVs were promulgated by the Ministry of Foreign Trade and Economic Cooperation on 4 September 1995 9 .
Contractual JVs shall independently carry out business activities and management under the scope specified in the contractual JV agreement and Articles of Association, and are not subject to interference from any organisation or individual.
Contractual JVs may or may not have Chinese legal status.
The following problems are likely to be encountered while setting up a JV:
Difficulty in obtaining data about the commercial situation of private Chinese companies
The need to retain comprehensive control
The procedures for establishing a WFOE are very similar to that of a JV. One major difference is that in a WFOE, a foreign company does not need to find or negotiate with Chinese parties. Therefore, a WFOE is easier to establish and exit from than a JV.
The first step is to reserve a name for the WFOE with the local Administrative Bureau for Industry and Commerce. The applicant needs to submit a proposed name along with two alternative names.
Before the final examination and approval of the WFOE, the applicant is required to submit a project proposal to the local approval authorities. The proposal will normally include information on the purpose of the WFOE, the scope and scale of the business, financial evaluations, technologies and equipment involved, land use requirements, personnel required, wages, etc.
After the proposal is approved by authorities, the applicant can apply for the approval certificate.
Documents required for this purpose 10 :
A standard application form for the establishment of WFOE
Articles of Association for the proposed WFOE
A list of chairpersons, Board of directors and appointment letters
The incorporation document of the WFOE investor
A credit certificate of WFOE investors, issued within 3 months
It must be noted that different cities may require different documents for approval. The approval authorities are required to make a decision within 3 months; however, many local approval authorities are able to grant approval within 5–15 working days.
Within 30 days of receiving the approval certificate, the applicant should register with the local SAIC for a business licence. Documents similar to those required for receiving an approval certificate have to be submitted to the approval authorities. SAIC is required to issue the business licence within 30 days; however, many local authorities are able to issue the licence within 5–10 working days.
The procedures to be followed after registration are similar to those discussed for establishing an RO.
The law of the People’s Republic of China on wholly foreign-owned enterprises was amended on 31 October 2000 12 , while the Company Law of the People’s Republic of China was revised in 2005.
WFOEs can only engage in business activities that are declared in the Articles of Association. If the company wants to explore new areas, further application and approval are required. Generally approved scopes of business are investment consulting, international economic consulting, trade information consulting, marketing and promotion consulting, corporate management consulting, technology consulting and manufacturing.
A minimum of one shareholder’s detailed information is required to be submitted to the local SAIC. However, this shareholder cannot be a Chinese national or reside in China.
The minimum amount of registered capital is CNY 30,000 (around EUR 3,233). According to Company Law, the registered capital is equal to the paid-up capital, which has to be deposited in the bank account to pay for the subscribed shares.
A strong relationship between local authorities and suppliers is a key factor for the success of business ventures in China. The main disadvantage for an inexperienced investor is insufficient knowledge of the Chinese market in terms of administrative processes and cultural customs; often, misunderstandings occur due to communication gap.
A franchisor in China should have a mature business model and the capacity to provide a franchisee with operational guidance, technical support and training services. The franchisor should have at least two directly operated units that have been operating for more than one year.
To apply for a franchising operation in China, the franchisor and franchisee should prepare a franchise contract. The contract should include the basic information on both parties, content and the term limit, amount and method of payment of franchise fees, and details of the business operation.
Within 15 days of its first franchise contract, the franchisor should register the operation with the commerce regulatory authorities. If the location of the business operation is in the provinces, the franchisor should register with local commerce regulatory authorities. If the business operates across provinces, the franchisor should register with the Ministry of Commerce.
Documents required for this purpose:
A copy of the business licence or certificate of business registration
Other files and documents mandated by the Ministry of Commerce
Additional files and documents may have to be produced before the regulatory authorities within seven days. Commercial regulatory authorities will register a franchise operation within 10 days upon the receipt of the relevant documents.
Regulations for the Administration of Commercial Franchising (came into effect on 1 May 2007) – The key issue is that the regulation specifies the prerequisites of the franchisors, namely that they should have at least two directly operated units under operation for more than one year.
Commercial Franchise Registration Management Measures and Commercial Franchise Information Disclosure Management Measures (came into effect on 1 May 2007) – These regulations impose mandatory registration and disclosure duties on franchisors.
Many foreign and Chinese domestic companies choose to register their companies in Hong Kong while conducting their trade business in Mainland China, as opposed to registering in China directly. The major benefits with this kind of structure are listed below 14 .
Companies incorporated in Hong Kong can legally reduce their tax exposure for all trade businesses that are conducted on the mainland.
Companies can avoid foreign exchange restrictions on the mainland by the State Administration of Foreign Exchange, so they are able to trade in a more flexible situation.
The following are some basic conditions for Hong Kong company registration:
At least one shareholder and all shareholders must be over 18 years old
All shareholders must present their identity cards or passports
Legal persons must submit copies of their identity card and business licence
The lowest amount of registered capital is HKD 10,000. (EUR 946.3)
In order to start a business, the legal and bureaucratic hurdles that companies/entrepreneurs must overcome need to be identified. Registration to access a range of market infrastructure, including finance, physical infrastructure (electricity, water) and contract enforcement is typically critical. The greater the number of procedures, the wider is the scope for enforcing them in uneven ways.
According to a World Bank report, the average time taken to start a business in China is high in comparison to that in countries such as OECD, Mexico and Russia. Figure 1 illustrates the obstacles inherent in starting business ventures in various countries.
Source: The World Bank Group – Document: Doing Business 2009
Note: OECD = Organization for Economic Cooperation and Development
Numbers represented for OECD based on the average calculated for the 27 countries in this category
Foreigners must obtain the permission of relevant authorities of the Chinese government for entry, transition, work or residence in China. For entry into the country, foreigners must hold visas that should be applied for through Chinese diplomatic missions, consular offices or other resident agencies authorised by the Ministry of Foreign Affairs. Under certain circumstances, foreigners may, in compliance with the provisions of the State Council, apply for visas at ports designated by the relevant authorities of the Chinese government.
The entry of nationals from countries with visa agreements with the Chinese government will be managed in accordance with the agreed terms by both parties. In cases where another country has special provisions for Chinese citizens entering and transiting that country, the relevant authorities of the Chinese government may adopt reciprocal measures contingent to the circumstances.
For the convenience of foreigners who plan to stay in China for more than one year, the Ministry of Public Security announced the formal implementation of The Supervisory Laws Governing the Examination and Approval of Foreigners being granted the Right to Permanent Residence in the People’s Republic of China (also known as Supervisory Laws) in 2004. Without a Chinese green card, foreigners must renew their resident permit once a year. There is a restriction placed on the duration and location of their visit in China. The Chinese green card is valid for 5 years if foreigners are below 18 years of age, while it is valid for 10 years for those above this age. Besides, foreigners with green cards are able to enjoy almost the same rights as nationals in matters regarding entry and exit, employment, children’s education, residence, investment, etc.
However, for many, the Chinese green card requirements are not easily satisfied. Except for the spouses of Chinese citizens, their children and elderly family members, there is a rather high threshold for investors, highly skilled individuals and other individuals who have made significant contributions towards the development of the country.
Individuals who manage to procure the green card should not stay in China for less than three months in a year or less than a year in five years. Special causes will need approval from citylevel public security bureaus. Moreover, foreigners with Chinese green cards will still need to observe rules concerning travelling, temporary residence in other cities and visiting areas that are generally closed to the public.
Table 3 lists the different types of visas issued by the Chinese Government.
For all kinds of visa applications, foreigners must present a valid passport and, if necessary, provide pertinent documents.
For the visa applications of foreigners who have been invited or hired to work in China, the evidence of invitation or employment should be submitted.
Foreigners planning to reside permanently in China shall, when applying for visas, present status-of-residence identification forms. Applicants may obtain such forms from public security organs at the place they intend to reside.
To reside in China, foreigners must possess identification papers or residence certificates issued by the relevant authorities of the Chinese government. The terms of validity of identification papers or residence certificates will be restricted by the purpose of entry. Certificates to the local public security organs for examination within the prescribed period of time should be submitted by foreigners who have resided in China.
Visa applications for entry, transit, work or residence should be submitted to China’s diplomatic missions, consular offices and other resident agencies abroad that are authorised by the Ministry of Foreign Affairs.
The Ministry of Public Security, its authorised local public security organs, the Ministry of Foreign Affairs and its authorised local foreign affairs departments are the government agencies in China handling foreigners’ applications for entry, transit, residence and travel.
Passport valid for more than 6 months and with enough blank space for visas
Completed visa application form of PRC
One recent passport-size photograph
Other application documents according to different purposes for entry into China
Other application documents that are required by the visa officer
Over 18 years of age and in good health
Technical qualifications or relevant work experience
A valid passport holder or international travelling document holder
The employer that intends to employ a foreigner should complete the Application Form for the Employment of Foreigners and submit it to the relevant authorities at the same level as the labour administrative authorities, along with the following documents:
The average office rental expenses in Shanghai, Beijing and Shenzhen are much higher than those in other Chinese cities.
Reports by Jones Lang LaSalle in Q1 2007 indicated that the average rental expense of A-level office buildings increased to EUR 0.83 per square metre per day. In the core business area of Puxi, the figure reached EUR 0.93 per square metre per day, while in the Pudong New Area, the figure was EUR 0.85 per square metre per day. The average office rental prices are expected to continue to grow in Shanghai till 2010 20 .
The average rental expense for office space in Beijing has slightly increased due to the effect of foreign exchange. In Q1 2007, Colliers International showed an increase of 2 percent in the average rental expenses for office space as compared to the previous quarter, which was EUR 0.6221 per square metre per day (including property management fees). The average rent expenses of A-level office buildings are EUR 0.79 per square metre per day (including property management fees) and the average rent expenses of B-level office buildings are EUR 0.52 per square metre per day (including property management fees). The global real estate advisor, DTZ, has anticipated that the average price of office rents will continue to grow in Beijing 22 .
In the Q1 2007 report of DTZ Shenzhen, the average selling price of office buildings had increased by 20 percent to EUR 1,390 per square metre, with the average rental expense for office space increasing to EUR 0.35 per square metre per day. This represents a 6 percent increase as compared to the previous quarter 23 . The average rental expense of A-level office buildings has increased to EUR 0.42 per square metre per day 24 .
The cost of living in most Chinese cities is much lower than that of the cities of developed countries. Food, public transport, clothing, etc., are much cheaper—for example, a can of Coca Cola costs approximately EUR 0.22, a burger is approximately EUR 1.22 at KFC, and metro fares range from EUR 0.32 to EUR 0.64 25 . However, housing is considerably expensive when the local income level is taken into account. For instance, in 2004, the renting expense (in Beijing) for foreigners ranged from EUR 813 to EUR 4,065 per month; this rate has been growing over the years 26 .
Maintaining the quality of life in China on a par with those in other western countries can be quite expensive. According to the Annual List of Most Expensive Cities for Expatriate Employees by Mercer Human Resource Consulting, Shanghai and Beijing ranked 26th and 20th, respectively, while Luxembourg ranked 43rd in March 2007 27 .
According to Mercer’s Worldwide Cost of Living Survey 2008, three Chinese cities (Hong Kong (6), Beijing (20) and Shanghai (24)) were ranked among top 50 costliest cities across the globe. Two other cities Shenzhen (61) and Guanggzhou (70) appeared in the next 50 28 .
The main Chinese cities are reported to have high house rentals and international education fees, making it costly for expatriates. However, many of them dwell on free/subsidized housing, free healthcare, low cost of food, cheap domestic help and cheap local products as included in their employment contracts. Cost of living in eastern cities such as Beijing, Shanghai, Qingdao and Guanghou are high compared to western China 29 .
The Labour Law of China states that employers and employees must join the social security system. Employers should design employee welfare plans to include basic social security and extra commercial insurance plans according to their own operations and profitability. However, a basic social security plan is compulsory for all employers and employees.
China’s social security system includes social insurance, social welfare, special care and placement system, social relief and housing services. The main focus areas of China’s social security system include old age, unemployment, medical, work-related injury and maternity insurance. Basic social security (usually called Sijin) covers old age insurance, unemployment insurance, medical insurance, and housing funds.
The basic social security system involves regular payments by both employers and employees. Part of the sum payment has to be deposited in the employees’ personal account, while the remaining is deposited in the national social security fund, which is administrated by the Chinese government for increment and future payout. The Chinese government sets the lowest base payment percentages for employers and employees, respectively, while payment percentages are slightly above the base payment percentages and vary from one city to another.
Tables 4 and 5 list the basic components of the social security systems in Shanghai and Beijing, respectively, with the required contributions of employees and employers.
Source: Shanghai University of Finance & Economics
Note: The payment base should be the average monthly salary of the employee for the previous year.
Source: Ministry of Construction HR
Note: The payment base should be the average monthly salary of the employee for the previous year.
In order to attract FDI and increase exports, China has established various types of special zones throughout the country. Free Trade Zones (FTZs) are a typical example—a wide range of business activities are permitted in FTZs, such as warehousing, foreign exchange transactions, marketing, trading and export processing. FIEs located in these zones can take advantage of a host of preferential policies, such as the absence of bond requirements for imports within the zone and liberal foreign exchange rules. Tax incentives are the main advantage including exemptions from customs duty and VAT. In addition, the government offers a package of tax incentive for FTZs:
During the first two years of operation, FIEs do not have to pay corporate income tax.
For the next three years, FIEs only need to pay corporate income tax at the rate of 15 percent.
After the fifth year, FIEs have to pay the full tax rate.
Different zones often offer their own preferential policies or incentives apart from those offered by the central government. Local governments may provide land-use or utility incentives, and may also decide to exempt in-zone enterprises from local income tax.
Table 6 provides the names and official websites of all FTZs in China at the end of 2008
The capital market in China is relatively underdeveloped compared to that of the developed countries. Bank deposits represent the major financial stock and bank loans are the primary source of corporate financing. There are three types of retail banks in China, namely state-owned banks, joint-stock banks and citylevel banks. The major regulators in the banking sector are the China Banking Regulatory Commission and the People’s Bank of China. This sector faces several problems that include nonperforming loans, the lack of transparency and corporate governance. Despite these challenges, the growth of foreign banks in the Chinese market has continued to accelerate. By the end of 2007, 193 foreign banks from 47 countries and regions had established 242 branches and 117 sub-branches in China 31 .
Table 7 lists the major banks in China and their total number in terms of category.
Source: China Banking Regulatory Commission
FIEs in China are requested to open two types of bank accounts: RMB accounts and foreign exchange account. Foreign currency is not allowed to freely circulate within China. A FIE must apply for registration of foreign exchange with local SAFE within 30 days after receiving business licence.
The documents to be submitted to SAFE are 32 :
After receiving the foreign exchange registration certificate, the FIE shall open a foreign exchange bank account. The major types of foreign exchange accounts are capital account and current account.
This account is for the purpose of capital items such as direct investment and securities investment. It is available for current expenditure and capital expenditure.
This account is for the purpose of revenue and expenditure in current foreign exchange. It could be available to capital account expenditure if the State Foreign Exchange Regulatory Bureau gives permission. The documents required by banks may vary, but usually include the foreign exchange certificate, business licence, Organization Code Certificate and the application form.
There are several types of RMB accounts available for FIEs. The basic one is called a basic deposit account. This account is for the purposes of cash revenue and expenditures, as well as for settlement and transfers between accounts. An entity is only allowed to have one basic account in China.
Foreigners with valid passports can open a bank account in any branch of the retail banks in China. The only procedure required is to complete a standard application form. However, it is advised to have the name of the applicant translated into Chinese before opening an account, as it can simplify official processes. Foreigners can open an account in EUR, USD or CNY. Some banks require a minimum balance of EUR 243–406.
There are various recruitment channels available in China. These include campus recruitment, headhunting agencies, media advertisements (newspapers, magazines, TV and broadcasting), Internet recruiting, on-site recruiting, internal references and ‘walk in’. Different approaches are needed for various recruiting requirements. Table 8 provides the major recruiting approaches in China and their target groups.
Table 9 lists the major recruitment agencies in China and their websites.
Source: Top.weamax.com and China HRD.net
The Labour Law of the People’s Republic of China33 came into effect on 1 January 1995. It sets the basic standards for labour-related matters in China. Labour contracts comprise a major part of this law including probationary periods, terms of contract, labour protection, emuneration, termination and its consequences, leave, and social insurance. In the 12 years since the introduction of the labour law, China has witnessed.