China is inarguably one of world’s economic powerhouse. The country which was once agricultural-dependent has radically transitioned into a tech-driven nation, and has become the top destination for international trade. If you wish to start a business in China as a foreign company, there are a few things that you must learn and follow to start on the right foot. As a smart investor, you must first evaluate the existing opportunities it offers, line of business that will most likely succeed in this landscape, and the advantages that it presents if you finally decide to invest in China.
There are many strategies that you can take if you’re seriously considering on entering the Chinese business landscape. You may find that establishing a foreign company in China to be challenging to say the least. Firstly, you may find it difficult to navigate its unique local business culture. While the country is becoming rapidly modern and a key player of the global business landscape, the road isn’t as smooth and easy. This is why it is but an excellent idea to partner with a business formation company that specialises in setting-up a business in China.
The Economic Landscape in China
In 2019 alone , China reported its GDP to be equivalent to the entire Australian economy. With this in mind, it comes to no surprise that the world’s third biggest country in terms of land mass, has emerged as the top destination for foreign direct investment. Within the local economy alone, GDP growth is projected to exponentially increase when compared to other world economic superpowers.
Despite its promised bright future, it is only sensible for foreign entrepreneurs to do their due diligence and research before investing money in China. For starters, setting up a business in China is way different compared to establishing one in the United States or other Western countries. The Chinese government is more involved in the business landscape, which means that you may need to do more legwork in terms of processing paperwork.
Amidst the daunting task presented by setting up a business organisation, the rewards you will eventually reap investing in China is a worthwhile endeavour after all. To give you a brief summary on how to start a business in China as a foreigner, please continue reading.
An Overview on Foreign Investments in China
Since 2005, the Catalogue of Industries for Guiding Foreign Investment or the Catalogue has been regulating foreign investments that enter China. The laws and regulations are updated every three years in compliance with the country’s prevailing economic and political objectives.
Following the provisions included in the Catalogue is vital if you wish to successfully register in China.
Under the Catalogue, foreign investments fall under four major categories:
- Encouraged – includes a total of 348 industries such as food and vegetable drink production, software products development and manufacturing, and agricultural machinery manufacturing
- Restricted – includes 35 industries that are subject to certain limitations. Examples include exploration and exploitation of graphite, general aviation companies, airport and power grid construction, banks, securities, insurance companies, and railway passenger transportation
- Prohibited – there are at least 28 industries that do not allow the entry of foreign investors. These include weapons and ammunition manufacturing, wholesale and retail sale of tobacco products, and social survey
- Permitted – industries not included in the abovementioned categories are typically permitted in China
You can find the complete list of industries that fall under these categories in the latest Catalogue version. As of 2016, some of the industries may have been included under the Negative category. To be allowed to conduct business in industries under this category, an investor may first seek approval from the Ministry of Commerce.
Step 1 – Select a Business Location
The first thing you need to do before starting a company in China is determining which part of China you wish to put up your business. China is a relatively huge country with new business hubs emerging across the nation. It is recommended to set up shop in cities with established business centres like Beijing, Shanghai, and Guangzhou.
Shanghai is extremely popular due to its many perks and its openness to foreign businesses and furthered innovations. You may establish your business at Shanghai’s 120-kilometre Free Trade Zone that enables foreign businessmen to operate without paying too many taxes. Additionally, fewer industries are restricted from foreign investors. The government displays lenient administrative regulations in Shanghai as opposed to other cities. Office space rentals are easier to find and at par with international standards. Although Shanghai is an ideal location for foreign investors, your final decision will largely depend on your business needs and preferences. Here are things to consider before making a final decision on where to set up shop in China:
- Existing local government regulations
- Logistical resources
- Proximity to local business partners
- Workforce
It’s also recommended to consider the local culture, too. Shanghai has always been a warm and welcoming environment for foreign investors. This means that you’re more likely to succeed in this landscape than anywhere else in China.
Step 2- Choose a Global Expansion Partner
Before you start the selection of a legal structure for your business in China, we highly advise that you have alternative solutions on standby. Due to strict local government policies, a business start-up undertaking can be both time and money intensive. If you desire to incorporate your business with an official legal form, this process may take months to complete. On the other hand, if you choose to start your business with the help of a professional employment organization, you can speed up the set-up process in just a matter of days. A Chinese PEO or China Employer of Record is an integral global partner with the aim of helping foreign businessmen without local resources or interests. PEOs may also implement direct hire local Chinese talent on your behalf. They will assume the role of Employer of Record, involved in distributing payroll, benefits, and the necessary proceedings for withholding tax. Additionally, a China PEO will be ultimately responsible for all employee task obligations and possible penalties in the future.
Step 3- Obtaining the Service of a Recruitment Firm to Employ Chinese Staff
If you’re entering China as a foreign business, it is highly recommended to employ Chinese stuff instead of foreign nationals. Chinese employees have greater understanding of the local market. Furthermore, they will be able to provide you insights that can aid in improving your product and service offerings. A Chinese workforce is crucial if you want to remedy cultural differences along the way. It can be challenging to secure a talented Chinese staff as they are in great demand especially in a thriving market. You will find it difficult to secure the best in your chosen industry, as they may already have been approached by companies with excellent job offers. We highly recommend that you partner with a China-based recruitment agency to help you secure the best local talents. The benefits of working with a dependable hiring company is plentiful.
- Design search strategies and accurate job descriptions
- Look for the best local professionals
- Narrow down your selection and interview clients included in the short list
- Recommend hiring decisions
- Take over administrative and legal duties that typically come with the hiring process
- Manage payroll and other benefits
A local staff from the first day of operations will be an advantage for your brand; hence using a reputable recruitment agency is the only way you can keep an excellent Chinese staff under your wing.
Step 4- Choose a Legal Form
If you wish to decide to incorporate your business rather than operating as a PEO, the next step in setting up a business is choosing a legal form. You can choose from a wide variety of business structures. Once you’ve made the decision as to which legal structure to take, you’ll then have to face other activities such as deciding on minimum registered capital and more.
-
Wholly Foreign-Owned Enterprises
A wholly owned foreign enterprise (WFOE) is a business created by foreign parties without any direct influence from a Chinese investor. It is the most common types of foreign invested enterprise (FIE) in China. Here are some of the distinct characteristics of a WFOE business structure:
- A company is an FIE if at least 25% up to 100% is controlled by foreign nationals.
- 100% foreign owned
- It comes in different types, the most popular of which come in the form of Limited Liability Companies (LLC)
- Foreign nationals who own WFOE share the same rights as local business owners.
- LLC owners does not hold any liability while partners will be responsible for their own investment.
- WFOEs will operate as retail stores or trading companies as prescribed by China’s membership with the Word Trade Organisation (WTO)
- WFOEs may engage in profit-making ventures across China
- Can hire local and foreign staff
Disadvantage of Setting up a WFOE
The entire process of filling out, registration, and approval is complex and requires close collaboration and scrutiny from the follow Chinese administrative offices:
- Various local authorities
- Ministry of Commerce (MOC)
- National Development and Reform Commission (NDRC)
- State Administration for Industry and Commerce (SAIC)
The registration process and approval proceedings can take a few months to complete. It is important to note that business owners planning to operate as WFOE will be required to invest a minimum capital for certain regulated industries. Otherwise, there is no required capital maximum limit for WFOEs. WFOEs are required to submit annual report of their respective financial books to concerned government agencies. The PRC Company Law in 2014 was amended and now prioritises a comprehensive reporting system over the inspection system.
Depending on the unique situation of a company’s plan for growth and expension, other legal forms may be considered:
- PEO Solutions/ Sales Office through Staffing
- Representative Office
- Joint Venture (JV)
-
Joint Venture
Features and Advantages
- The second most common business legal form used by foreign investors in China.
- There are fewer restrictions for JVs and certain industries that are closed to foreign nationals become a viable option.
- Leverage the knowledge and skills of local partner in running the business smoothly in China. They will determine the best approach to certain undertakings and will help remedy the language barriers between foreign and local staff.
Risks
- With a Chinese partner with some control over the business, you will still experience some conflicts and differences that may negatively impact your business as a whole.
- Increased risk of loss of the brand or exposure to trade secrets made by Chinese counterpart resulting in intellectual property issues.
To succeed in starting a joint venture in China, foreign investors must be diligent in constantly monitoring their operations. Solely relying on your Chinese partner to run the business will not lead to growth and expansion.
Representative Office
Features and Advantages
- Also called a Liaison Office, a Representative Office (RO) will function as a separate legal entity that will represent an existing foreign company in China also known as Hongda.
- Easier and less costly to establish.
ROIs are prohibited from running certain activities, including:
- Accepting payments
- Import and export
- Implementing contracts
- Issuing legal receipt or official invoice in China as evidence of proof of purchase
- Doing business with other companies
- Products manufacturing
In essence Ros are only limited to research and marketing activities; hence are not recommended if you wish to take advantage of the lucrative economic market in China. The ones listed below are the only activities that ROs may tap into:
- Research and study market
- Ads creation and development
- Rent residential and commercial properties
- Activities that are non-profit generating
- Promote other foreign companies
- Foreign company marketing professionals
- Customer support
- Data collection useful to companies
- Creation and development of contact networks
Disadvantages
- Unable to generate profit and collect payments
- May be subject to taxation depending on business plan, location, and many more
- Short lifespan up to two years given its very limited range of operation
- A rented office space must already be established before setting up a RO
- Since creating a RO paves the way to a deeper understanding of the market, it becomes rather difficult to switch from RO into a WFOE. ROs must first close business before expanding their business operations.
- The process of switching to a WFOE will take between six to 18 months.
Sales Office or Labor Dispatch
Features and Advantages
- Easiest and cheapest to set-up in China.
- According to Order No. 22 of the Ministry of Human Resources and Social Security (MOHRSS) of China enacted in 2014, use of dispatch labor became more accessible to foreign investors.
- Sales office running on a dispatch labor business model typically involves outsourcing administrative and legal responsibilities of a foreign company to a PEO based in China.
Disadvantages
- Payment processes and FAPIAO issuances are primarily via local payment or invoicing partners.
- Company funds in China will be managed by the local administrative partner of dispatched employees. All benefits and funds will be sent directly to China.
In essence Professional Employment Organisations (PEOs) function as ready-made HR departments that foreign company employs to facilitate a streamlined expansion of business in China. PEOs are fully licensed and certified in China to implement legal, HR, administrative, and fiscal activities which may include the following:
- Expense management
- Tax compliance
- Recruitment
- Employee benefits services
- Workers’ compensation administration
- Payroll outsourcing and processing solutions
The Advantages of Hiring a PEO
- PEOs offer foreign companies to expand globally with the added opportunity of relying upon its subsidiary in China rather than going through the painstaking process of creating a new legal entity from scratch.
- Partnering with a PEO minuses delays, expensive cost, and complicated processes in creating business structures such as RO, WFOE, and JV.
- Foreign companies can concentrate their efforts in strategising on how to run and grow their business, while PEO is left to focus on the administrative side.
- No direct relationship between a foreign company and PEO employees; hence the former can operate without encountering problems along the way.
- PEO, in essence, will function as a foreign company’s local counterpart.
- PEOs can facilitate hiring foreign staff in China, making them the employer of record for benefits, tax and insurance purposes. This type of set up is called co-employment or joint employment.
- Partnering with a PEO makes a business launch more streamlined while minimising legal issues and delays that typically come when hiring staff.
- PEOs deals directly with employees instead of the foreign company.
When deciding on which legal form to take on as a foreign company in China, here are some pointers to remember:
- Understand the pros and cons for each legal structure.
- Make sure your requirements and objectives complement the legal form you choose.
- Easy and fast penetration is possible by choosing Sales Office via labor dispatch structure as PEOs deliver excellent benefits.
- Do your research to find the most reliable and trusted PEO to partner with in China.
What is the minimum registered capital for foreign companies in China?
While the Chinese government has abolished the need to invest a minimum registered capital, it’s a good practice to declare a capital upon registration. For instance, declaring a capital amount of 1,000,000 RMB offers the following benefits
- Simplify the business registration process
- Offer governmental benefits, including temporary residence sponsorship and increased foreign employee allotments
- Facilitate the solidification of your preferred legal structure
- Can be used to cover for expenses, including salaries, rental fees, purchases, and many more
It is not necessary for foreign investors to pay it into the company in lump sum. Rather, the minimum registered capital states the amount of money you plan on generating as a WFOE in within a time period of 29 years. You can use the capital to pay for products and services to operate the business in China.
You may need to seek the professional services of a lawyer to help you pick which suits your individual needs. Moreover, hire an accounting agency that specialises in the Chinese business landscape. An accountant will assist during the process of company incorporation. Lastly, you should also consider hiring a business consultant to determine the ideal minimum capital for you to register.
Step 5 – Create a Business Plan
Design a well-strategised business plan that includes a thorough description of your industry and the products and services you wish to offer. Other information that you should include in your business plan are as follows:
- Budget requirements
- Business location
- Projected number of employees
- Projected revenue
It is recommended to include your employment process and operational workflow for your business plan. Review existing employment regulars with a Chinese lawyer and business consulting partner. Once your finished with the business plan, you will then submit it for approval by the Chinese government. You will be expected to adhere to the guidelines you’ve enumerated in your business plan, or otherwise pay fines or other penalties by the government. With this in mind, it’s best to create a business plan that is neither too broad nor specific. As a foreign company, you want to present a robust marketing strategy that will be your guide in further business expansion.
Here are some tips that can help your foreign business to succeed in the competitive Chinese market:
-
Market to the Chinese Audience
Learn new marketing tactics that appeal to local consumers. Don’t rely on strategies that may have worked for you in the past in foreign markets. Obtain the services of a local expert to conduct market research on your behalf and help you with developing new marketing strategies for your target audience.
-
Create Long-Term Partnerships
Choose a reputable local business to forge a partnership with. You need to concentrate your efforts in making these partnerships long-lasting as this will help you gain trust and build reputation in the local business landscape. Your choice of partner will have a great impact on your credit score; hence it is imperative that you do your due diligence and find one that complements your needs and goals.
-
Establish Good Relationships with Local Government Agencies
Look for a local expansion partner with a solid and positive relationship with local government agencies. Always be mindful of how you run the business to ensure you aren’t getting on the wrong side of government authorities. Establishing a good connection with local government offices will also help in ensuring operational compliance.
-
Make Sure to Have a Local Business Expert on your Team
Look for a local partner who can expertly guide you through logistical and cultural challenges that you may face in the future.
Step 6- Setting Up a Bank Account
If you are setting up a WFOE, it is imperative to open a bank account. If your business isn’t incorporated, you may open different types of non-resident bank accounts such as bank account exclusively for foreign nationals. Setting up a bank account in China can be challenging. Requirements may differ between cities, so make sure to call ahead and inquire about their individual requirements to save time. However, some requirements are the same. When setting up a bank account, you will be expected to submit the following documents:
- Valid ID for legal company representatives such as officer-in-charge, directors, and principal shareholders
- Company chop or seal
- List of directors’ names
- Company legal form and ownership information
- Recorded state of approval for your business venture.
Here are popular bank options for foreign companies:
- Hang Seng Bank
- ICBC
- Bank of China
- HSBC
- Standard Chartered
- Bank of America
If you have an existing bank account in an international bank with a large presence in China, it may be possible to transfer that account to a Chinese branch instead. However, having a local bank account streamlines the process of running a business in China. With a reliable bank account under your company name, you’ll enjoy more transparency into your daily business transactions.
Step 7 – Work with a Local Market Entry Consulting Firm
While running a business in China is rewarding in the long run, its market is highly complex and sophisticated for foreign nationals. Regardless of legal structure, you need to seek help from a China consulting agency that will help you create a strategic market entry. You will need a local expansion partner that can help you navigate the intricacies of the Chinese social credit system, local regulations, and cultural differences.
A consulting team will help in the following fields:
- Assess and evaluate prevailing market trends
- Develop a market-entry strategy
- Identify a preferred procurement method
- Conduct consumer research and market surveys
A top-calibre consulting firm has all the knowledge, skills, and experience you need to start a business in your chosen local area, city, or province, as well as where to buy raw materials at the cheapest rates, and how to go about a business deal with local entrepreneurs.
Step 8 – Safeguard your Intellectual Property
Many investors are wary of cautious of intellectual property theft in China. However, if you take the necessary preventive steps, you can safeguard valuable intellectual assets while running a smooth business operation in China. While processing your registration, make sure to do the following measures:
-
Register your trademark
By rule, China doesn’t recognise trademarks filed in other countries. The country observes a first-to-file rule, which means that the first individual to file the trademark has the right to legally use them in China. After confirmation that your trademark is currently available, you must go ahead and register your trademarks and patents immediately. You may still appeal if your application is denied under the following conditions:
- Logos and symbols that distinguish specific goods and services that are synonymous to your bran
- Words, designs, letters, numbers, and 3D symbols that are unique to your business.
- Colour combinations that are distinct to your business, goods, and services.
-
Watch Chinese Trademark Filings
The trademark agency of China regularly releases trademark applications so that companies may oppose trademarks that are similar to their own. Watch your for these filings so that you may oppose or raise an appeal for fraudulent marks before they are approved by the trademark office.
-
Work Closely with the China Customs
Register your trademark and design patents with China Customs so they can prohibit the import and export of fake products. Report the location and other pertinent details of an offending company, you may report this incident to the Chinese Customs for further action.
-
Request Takedowns on Chinese Webpages
After the successful registration of your IP, you may raise petitions with Chinese eCommerce websites such as Taobao, Alibaba, and Baidu to take down infringing goods. When you submit the right set of paperwork, the process of takin down webpages can take about a week.
Following these preventative measures will keep your IP safe and start your business operations on the right foot.
Step 9 – Submit Any Remaining Documents
Once you’ve successful accomplished steps 1 to 8m, the only thing left to do is finish the remaining paperwork. Your consulting team will help you through this final step of setting up a business in China. They can help you identify the following:
- Applications that you may have overlooked
- Provide you a list of documents that you need for final approval by government agencies
- Estimation of paperwork completion
The final step may surprise you as some agencies may require you to fill out more paperwork, and in some cases, request for you to show a physical sample of your products or the facilities you wish to run your business. To avoid delays, dedicate more time to prepare all documents and requirements.
Setting up a business in China as a foreign is complex but extremely exciting as it will generate lucrative earnings and expand your business opportunities over time. With the help of our company formation specialists in China, you will soon reap the financial gains of doing business in China. Damalion can help you in all your business start-up needs in China. Call us today for more details.
