Doing Business in China

by

Janet Yong, Lehman, Lee & Xu (Beijing)

 

The Cultural Revolution in China took place between 1966 and 1976. During this time, China isolated itself from the rest of the world. Not many foreigners came to do business with China, not many foreigners wanted to live and work in China. In 1978, Premier Deng Xiao Ping opened China’s doors. Since then, the scenario is changed. Foreigners are now scrambling to come to China believing that there are a whole lot of business opportunities here.

In China, the types of business open to foreign investors are decided by the Central Government . The Ministry of Commerce (replaced the old Ministry of Foreign Trade and Economic Cooperation (MOFTEC)), monitors the foreign investments and is empowered to approve all applications to establish foreign investment enterprises (FIEs).

In the past, the types of business open to foreign investors were not transparent and often not possible to get reliable information. Now, the relevant authorities have published guidelines on foreign investment, together with a list of encouraged, restricted and prohibited industries. Hence, government investment policy has become more transparent to potential foreign investors.

Doing business in China comes in several forms. For a quick and inexpensive way to establish a legal presence in China, setting up a representative office would be ideal. However, the business activities of a representative office is restricted to carrying out market research, rendering advice, collecting information, coordinating company activities in China. A representative office cannot have direct business activities. Other forms of foreign investments in China include equity joint ventures, cooperative joint ventures and wholly foreign owned enterprises. While the commonly used foreign investment structure are joint ventures as mandated by Chinese laws for most types of foreign investments, many foreign investors prefer to set up wholly foreign owned enterprises because these do not involve a local partner in which case there are no management interference from a Chinese partner. Furthermore, without the involvement of a local party, it is somewhat more difficult for the Chinese authorities to control their activities.

With China's accession into the World Trade Organization, more and more foreigners are entering China to look for business opportunities. Many have heard stories (or tales) of what to expect and how things are done in China, only to find that the perception did not fit the reality once they arrived. Over the years, Lehman Lee & Xu has been involved in various enterprises with a long list of clients, thereby have learned many lessons on doing business in China.

If you come to do business in China, you have to learn the Chinese ways of doing things. Take for example setting up a joint venture with a local Chinese partner. We have found that foreign investors usually find it extremely difficult dealing with the numerous types and levels of Chinese authorities while also maintaining a stable and positive relationship with their Chinese partner. Though difficult it is, some clients still managed to do so and achieved great success in this respect. One of our client's experience was it took them two years of negotiation with the Chinese authorities and the Chinese partner before they established their joint venture. After two years of negotiation they got to know each other well. As a result, the joint venture they established turned out to be a great success. To date, our client still maintains an excellent relationship with their Chinese partner.

Our advice is that understanding and patience plays an important role for a highly rewarding business venture in China. We often advise our clients to begin with an end in mind. Plan your business with an exit strategy so that you are not stuck with regulatory conditions when you decide to leave the country at the end of the day. If you do not speak the Chinese language, seek the assistance of someone who can. You may wish to form a team of independent professionals such as lawyers and accountants to guide you through the complicated process.