Guides

Doing Business in China

Doing Business in China

Having the world’s fastest growing economy at a reported $10.98 trillion in the past year, China continues to transform at a steady pace, only second to the United States. Since the 1970s, the country has transformed its model of production from that of a closed economy to an open market focused on manufacturing and export. A major trading partner to Asian and foreign markets, China’s 7% annual rate of GDP has more recently begun to slow down, decelerating to 6.9%.

China’s currency, the Renminbi (RMB), or Yuan, was instituted as a reserve currency in 2015. The inclusion of the RMB in International Monetary Fund special drawing rights (SDR) basket is an important milestone for the country. Reformation of China’s monetary and financial systems, gold and silver Yuan pricing and the switch to the metric conversion of the 1-ounce panda to a 30-gram strike price in 2016, marks a major transition in the world’s markets, as China pushes toward liberalization.

Since 2015, the value of the nation’s currency has dropped, yet China’s foreign investment environment has also been sustained by preferential policy reforms and a commitment to market diversification by the government, creating conditions for a more competitive and profitable investment prospectus. Still, Western economic experts remain pessimistic about the country’s medium-term projections, predicting that changes in the global political economy in the forthcoming few cycles will negatively impact trade.

China’s legislative reforms and failure to control rising debt levels since the early 2000s signals that important policy adjustments must be made to sustain the country’s overall economic prospectus. Domestic anti-corruption campaigns have been central to the change in the way China does business. National regulatory changes to credit lending practices have been critical to anti-corruption policy reform of the country’s investment and trade practices.

Overview When Doing Business in China

In 2017, China should remain a lead investment priority for foreign companies. Contrary to earlier predictions of challenges in trade and profitability associated with a slowing global economy, the country will benefit from new investments in the country’s service sector, as well as legal reforms promoting diversification in e-commerce startups. Other financing trends include investment in manufacturing factories and automation. Business development opportunities will continue to be strong, as both domestic and foreign companies take advantage of China’s investment regime.

More recently, China has decided to cut red tape, easing rules on foreign investment for multinationals in the interest of stabilizing the country’s near future economic forecast. This follows citation of unequal treatment by the Chinese government in the areas of procurement practice and intellectual property right protections by foreign multinationals in court.

In the latest of a series of law changes in the People's Republic of China (PRC), proposed reforms meet environmental regulations to international trade rules and support expansion of China’s public-private partnership agreements in areas not previously targeted for foreign investment, including investment in transportation, terminal and waterway infrastructure projects. The reforms also mark a shift in the foreign investment approval process, expediting registrations.

Leading up to the institution of a new legal regime for foreign investment in October 2016, multinational foreign investment was subject to separate policies and legal registration. The announcement of near future legal reforms was made at the World Economic Forum in 2015, which ushered in a new era of the National People’s Congress (NPCSC) and its adaptation of new foreign investment rules in national law.

Reasons for Doing Business

With a fast-growing consumer market and the largest population of any country in the world, China is expected to see new growth of the middle-income consumer segment in the forthcoming few years. Telhere are more than 160 municipalities with a population of over one million residents in the country.

Structural Reform, Significant Potential

In a landmark decision made in September 2016, China’s Ministry of Commerce (MOFCOM) implemented a Standing Committee of the NPCSC resolution to abolish the country’s existing registration approval regime for foreign-invested enterprises (FIEs). This decision reflects the shift toward regulatory openness and pro-FDI market entry. Following three decades of infrastructural development of mega-cities like Beijing, Shanghai and Guangzhou, economic expansion has been driven by both demand and supply with greater openness of China’s market and PRC policy reform.

Policies to support high-quality growth and innovation in China are proposed to advance supply-side structural reform, as well as “invigorate market players as much as possible and accelerate opening in an all-round way,” said Vice President Li Yuanchao. Coordination of sustainable and green development strategy reflects what the PRC maintains is the country’s commitment to a policy of peace and win-win investment solutions to global economic participation. The awakening of China’s significant economic potential has, as some have suggested, been the result of high-quality labor and technological innovation.

IP Law

Intellectual Property (IP) rights protections are a substantial concern for foreign companies. Recently, China has undergone significant policy adjustment in the area of IP law, and is now well poised to reap the benefits of reforms designed to promote greater interest in the exploitation of intellectual property as both investor target and business asset.

PRC ratification of the country’s new Trademark Law defines new rules to statutory damages for violation of copyright and other IP ownership. The new law now makes it easier for IP rights holders to file claims. Design patent rule reform has also provided substantial protection to multinational companies holding trademark registration of products not intended for exploitation or replication outside of proprietary branding. IP rights law enforcement is seen to be a necessary step in the advancement of an improved foreign direct investment (FDI) regulatory regime.

Challenges for Doing Business

China’s effort to ease rules for foreign investment, registration and administrative licensing are purportedly streamlining the country’s complicated bureaucratic challenge. The American Chamber of Commerce in China reports, however, contrary to PRC reforms, the business environment is tougher than in preceding years. This follows a survey of 496 US companies, which reports that China’s inconsistent regulatory practice and lack of transparency in rule enforcement deviate from claims of equal legal standing for foreign businesses. There are many sectors of the country’s economy still off-limits to foreign investment.

Corruption

President Xi Jinping’s anti-corruption campaign has had a notable impact on how business is conducted in China. However, the registration approvals process for foreign companies continues to require joint venture with a Chinese company. To present, profit repatriation rules and partner or government exercise of intellectual property via technology transfer have been a serious concern for foreign entities unable to legally protect themselves against such losses.

Ease of Doing Business

In 2015, The World Bank’s Doing Business Report ranked China 84th (out of 189 countries) on the ease of conducting business. Ranked in respect to the number of procedures required for business startup and compliance with local regulations, starting a business in China requires 11 procedures in the major cities of Shanghai and Beijing, which takes, on average, more than 30 days to complete. This is despite the Chinese government’s recent efforts to reduce bureaucratic delays for foreign company registration and regulatory compliance.

Taxes

China has stepped up enforcement of new tax rules for multinationals doing business in the country. National taxation reporting rules also apply to foreign operations registered solely with a Hong Kong entity.

Business Culture

Often a challenge to Western business practice, Chinese business affairs generally require negotiation of a complex bureaucratic process, as well as a diplomatic approach to interactions that extends beyond the verbal aspects of cultural engagement. When a disagreement ensues in a business meeting, the other party will be polite, but their tone will change. Therefore, even if you have a general understanding of the language, you may need an interpreter who can assist in translating both the language and non-verbal cues.

More importantly, trust is crucial when conducting business in China and it takes time to build. Unlike in the West, the creation of personal friendships is a prerequisite of doing business, and therefore, professionals working in China should be prepared to spend extra time on business deals.

Conclusion

The challenges of operating in a new country are often daunting—regulations are constantly evolving and no business landscape remains static. Without a solid grasp of the issues at hand, businesses can be exposed to penalties and even the prospect of civil or criminal litigation. If you are considering entering the Chinese market, it is critical to have an experienced partner with a global footprint. 

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