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Challenges

The Chinese market can be more complex for uninitiated companies than other international markets. The challenges of a huge market with a different business culture and language are compounded by a controlled currency and relative newness of international trading in modern China.

Whether buying, selling or investing, whether dealing in physical products or knowledge, it is important to be aware of the complexities and risks. None are insurmountable, but they do require time and resources.

The main points are covered below, and there is a wealth of information on both the UK Trade & Investment and China-Britain Business Council websites:
www.gov.uk/government/organisations/uk-trade-investment and www.cbbc.org.

 

Challenges to doing business in China

There are some unique challenges when you are doing business in or with China. These include:

  • large parts of the economy are still closed to full foreign participation

  • strong competition from well-resourced and positioned state-owned enterprises

  • finding and retaining the right skills in the local workforce

  • complex business culture

  • language barriers

  • need for patience to build up trust and networks

  • significant time difference

  • weather extremes across the country and high levels of pollution in certain urban centres

  • anti-monopoly legislation used against foreign firms

  • bribery and corruption

 

Bureaucracy and red tape

Regulations and bureaucracy continue to be the predominant challenge experienced by British companies in China today. Although the issues raised are highly sector-specific, numerous British companies draw attention to difficulties arising from the clarity and transparency of the regulatory environment in which they have to operate, the restrictiveness and excessiveness of rules and “red-tape” with which they have to comply, the frequency at which these rules and regulations change, and the lack of predictability that all this causes. Of course, many of these issues apply across the country, but because the implementation of regulations takes place at a local level, this highlights the importance of understanding how rules and regulations are administered at a provincial and municipal level in China’s regional cities.

 

Intellectual Property Rights (IPR)

China is a World Trade Organization (WTO) member.

It is essential to know how to use, guard and enforce the rights you have over the IP that you or your business own. UK companies are increasingly indicating support on IP issues from local Chinese authorities. However, it is still important to consider the threat of IPR abuse of your products or services. As part of your market entry strategy you should:

  • establish how you can protect your rights

  • find out about costs

  • monitor the market for possible infringements

China uses a ‘first-to-file’ system for trademarks. You may lose legal protection if a similar mark has already been registered within China. Therefore, you must register your trademarks in China before entering the market.

Read the UK Intellectual Property Office’s (UKIPO) guides to IP in China. This 12-page document can be downloaded at: www.gov.uk/government/publications/intellectual-property-rights-in-china

Bilateral Cooperation
The UK Intellectual Property Office (UKIPO) has cooperation relationships with a number of Chinese government agencies working on IP. The UKIPO and China’s State Intellectual Property Office (SIPO) signed a cooperation agreement in 1996 covering patents and designs. The UKIPO signed a framework for cooperation on trademarks with China’s State Administration for Industry & Commerce (SAIC) in 2009, and has operated a formal programme for cooperation with the National Copyright Administration of China (NCAC) since 2010.

In addition, the UKIPO works with other UK Government partners and China’s State Council Information Office to hold regular UK-China Internet Forums. These events look specifically at issues which both China and the UK face in managing copyright on the internet, including peer-to-peer file sharing and live streaming of sporting events.

The Foreign and Commonwealth Office (FCO) and UKIPO fund a number of cooperation projects on important IP topics in China. These include online IP infringement; copyright enforcement; protection of geographical indications; IP in technology transfer and collaborative research; and facilitating exchanges between IP judiciaries.

IP Attaché
Since December 2011 the UKIPO has based an attaché in the British Embassy in Beijing, working with representatives from UKTI and the FCO. The position is central to the government’s plans to enhance trade relations and to support IP and innovation-led businesses abroad.

IP attachés provide a focal point in host countries for supporting UK businesses with IP related issues, promoting UK Government interests and working with local IP agencies. Attachés help to build relations with governments of host countries to understand and actively engage with IP policy makers.

UK SMEs can also obtain free advice from an EU-funded project, the “China SME IPR Helpdesk” via www.china-iprhelpdesk.eu.

Watch CBBC’s webinars on 'Registration and enforcement strategies for patents in China and Trade Marks in China' at: 
www.youtube.com/playlist?list=PLv_tMYysg7RNu280zoFB6Ggw6xqs0FyG0 (no.11)

Source: UKTI March 2015

 

Getting paid and financial issues

Currency exchange and transfer of funds
Many Chinese companies prefer to be invoiced in US dollars, particularly if they are already doing business with the USA, although it is sometimes possible to negotiate contracts in euros or even sterling. Conversion of the Chinese RMB to foreign exchange is strictly controlled by the “State Administration of Foreign Exchange” (SAFE), a government department, which regulates transfer through the banking system. This affects all financial transactions, from the ability to purchase Chinese RMB before travelling, to contractual payments and dividends. Small transactions, such as the use of ATMs and credit cards, are straightforward, but the controlled currency means that you need to be more careful in setting up contracts and investing in the market. Company dividends may only be paid annually, following audit of accounts by an approved accountancy firm.

Contracts and payment
As covered under “Business Culture” below, contracts as operated in the UK are relatively new in China. They are, however, essential for successful business there, for the same reasons as in any other market. They also ensure smooth transactions of payments through the Chinese banking system. If payments do not match the contract they may be delayed, or conversion into foreign exchange may be blocked.

It is common for negotiation to continue after a contract is signed in China, so it is wise to build into the final figure some provision for concessions. Substantial additions to the contract need extra care as, if they do not match the original contract, payments may be held up in the banking system.

As elsewhere with large contracts involving stage payments, the final stage, which often depends on “sign off”, may be difficult to realise, and this needs consideration when agreeing terms.

When drawing up a contract with a Chinese organisation you should observe the following:

  • Make it similar to other international contracts, but be very explicit and avoid legal jargon, which may not be understood.

  • Include an arbitration clause, as legal action can be very expensive and difficult to pursue.

  • Take care with milestones and related payments – this is especially important with royalties contracts, for which payments can attract particular attention.

  • Agree and stipulate who is responsible for taxes.

  • Agree and stipulate how agency payments are to be handled.

  • Ensure the contract is fully understood and agreed with the Chinese organisation. The contract should be accurately translated and both versions signed.

  • Consider the law applying to the contract. Contracts under foreign law are permitted and may offer easier prosecution in the ruling country if something goes wrong, but this will need enforcement in a Chinese court. Contracts under Hong Kong law, which is based on English law, may be a suitable compromise.


Short-term finance
When exporting to China normal commercial rules should be followed, and you should discuss the arrangements for security of payment with the international department of your UK bank, the UK offices of Chinese banks or UK-based banks that have offices in China. If you are a first-time exporter to China, the standard method of receiving payment for your goods is by documentary letter of credit.

The Chinese bank will make the payment provided that the requirements of the letter of credit are met. However, be aware that a letter of credit is a form of contract between two banks. A bank will make payment provided that the documents submitted to it are in strict compliance with the conditions of the letter of credit. This is regardless of the purchase contract. To prevent the possibility of a payment being made if the terms of the purchase contract are not met, the seller should check the letter of credit against the terms of the purchase contract, ensure that they match, and build in any necessary safeguards.

Open Account and Bills for Collection are other payment methods commonly used between UK exporters and Chinese importers when a trustworthy relationship between the two parties has been developed. Major exports and those requiring long-term finance will require specialist payment and financing.

Further information on securing payment can be obtained from www.cbbc.org.

Pricing
Margins achievable in Chinese markets are likely to be lower than in Western ones. This situation is changing rapidly, and increasingly Chinese companies are prepared to pay more for demonstrable benefits, and it is occasionally possible to command a premium for a unique product or service.

 

Insurance

The private sector provides credit insurance for exports of consumer products, raw materials and other similar goods. Speak to your banker or insurance broker for more information or contact the British Insurance Brokers’ Association for impartial advice: www.biba.org.uk Tel: +44 (0)870 950 1790 (Consumer Helpline); Email: enquiries@biba.org.uk

Private sector insurance has some limitations, particularly for sales of capital goods, major services and construction projects that require longer credit packages or are in riskier markets. The UK Export Finance (formerly Export Credits Guarantee Department, or ECGD), is a separate government department that reports to the Secretary of State for Business, Innovation and Skills and provides a range of products for exporters of such goods and services:

 

UK Export Finance
UK Export Finance is the UK’s export credit agency (formerly the Export Credits Guarantee Department). As a government department that operates under an act of parliament, they complement the private market by providing government assistance to exporters and investors, principally in the form of insurance policies and guarantees on bank loans. For more information, please see the 'Resources' section and their article in 'Supporting Organisatons'.

Contact UK Export Finance at: www.gov.uk/government/organisations/uk-export-finance

General enquiries: enquiries@ukef.gsi.gov.uk

Tel: +44 (0)20 7271  8000

 

Payment terms

Key terms and conditions in an import contract
Chinese importers tend to use standard form contracts in their transactions. Foreign contracts are seldom accepted for fear of being trapped by unfamiliar contract stipulations. Adding special provisions to the contract form is normally acceptable. You can expect to see the following key terms and conditions in a Chinese import contract:

  • Terms of price and shipment – Chinese import businesses often conduct transactions at Free on Board (FOB) prices in consideration for using Chinese shipping companies. Cost and Freight (CFR) and Cost, Insurance and Freight (CIF) terms are accepted only if the freight is proved to be cost-effective.

  • Insurance – Chinese importers generally have “open insurance” for their import cargoes, i.e. importing companies submit notifications of import cargo shipments and other relevant documents which are then acknowledged by the insurance company as insurance orders, and against which the insurance premium will be settled with the insured.

  • Terms of payment – This is normally by letter of credit (L/C). See the ‘Getting paid’ section for more information.

  • Inspection – Certificates of quality, quantity or weight issued by manufacturers or public assessors are normally required as part of the process of setting up a letter of credit. However, if the goods are discovered not to be in conformity with the certificates after re-inspection by Chinese inspection authorities, the buyer will either return the goods to the seller or lodge claims against the seller for compensation on losses on the strength of inspection at the port of destination.

In the case of equipment imports, Chinese companies often insert a clause in the contract withholding a portion of the payment – normally 5 to 10 per cent of the total contract value – which will be paid only when the equipment is installed and commissioned. This retention sum tends to become a permanent rebate, so beware of allowing too high a figure.

  • Dispute resolution – In cases of dispute, the formal contract has a provision that a solution must be sought through friendly consultation. If this does not work, arbitration is then adopted to settle the dispute. Litigation is used only as a last resort.

 

Bribery and corruption

Anyone doing business in China is likely to encounter or hear of corruption in one form or another. Historically, practices such as facilitation payments, bribes and giving and receiving expensive gifts in order to develop relationships were often regarded as a part of doing business. This is still the case in some areas, although the problems vary according to sector, type of business and region.

However, the general perception is that the situation is improving. Our advice to companies encountering corruption is simple – don’t get involved. Not only are there issues of business integrity to bear in mind, but it is also, of course, illegal. Invariably corruption is related to lack of professionalism, transparency and control, all of which are damaging to long-term business.

The Chinese Government is keen to crack down on corruption, and the penalties can be severe. In addition, under the Anti-Terrorism, Crime and Security Act 2001, UK companies and nationals can now be prosecuted in the UK for acts of bribery or other illegal activity committed wholly overseas.

You should ensure you take the necessary steps to comply with the requirements of the UK Bribery Act. See: www.gov.uk/government/publications/bribery-act-2010-guidance, where you can download the “Bribery Act 2010 guidance”.

 

Scams: How to avoid them

Fraudsters and scammers exist all over the world, and China is no exception. There have been a number of instances of British and other foreign businesses being targeted by fraudulent companies and individuals operating from various locations in China. The most common scams are:

  • The contract scam” – Fraudulent companies in China make unsolicited enquiries to foreign companies, making orders in large quantities with very beneficial financial terms. The foreign company is often then invited out to China to sign the “contract”. When they arrive, they are asked to pay for expensive “gifts” or meals for “officials”, in order to move things forward. When the foreign representative flies back home the fraudsters vanish without trace. Companies should also be alerted when they are asked to pay for any “administration”, notarisation or foreign exchange control charges.

  • The visa invitation scam” – A fictitious Chinese company may randomly request letters of invitation for visas from UK organisations, so their delegates can visit the UK factory/site with a view to developing business. In reality these individuals have no interest in your company or your product – they are looking for the opportunity to enter the UK. If you are approached by a Chinese company in this manner, ensure that you carry out basic due diligence checks before issuing a letter of invitation.

  • The domain name scam” – A foreign company receives an email from a fictitious “internet database company”, claiming a Chinese company has filed a request to register your domain name, and with a fee they can block that request. Once you have parted with the cash, the scammer disappears.

Watch the CBBC’s recorded webinar on avoiding common scams when doing business in China, at: www.youtube.com/playlist?list=PLv_tMYysg7ROD-n2hCkPWBaYTRyxzMpFL (series 3)

Like any other market, operating in China poses certain risks. See the Foreign and Commonwealth Office’s (FCO) Overseas Business Risk report for China at: www.gov.uk/government/publications/overseas-business-risk-china

 

Too good to be true?

Once you know the basics, it's relatively easy to prevent yourself from becoming a victim of scams. If you receive an apparently very attractive order from China (or indeed, anywhere else), or see a website offering goods at unrealistically low prices, ask yourself: is this too good to be true? If it looks too good to be true it almost always is.

Don’t get on the plane, or send money, without seeking advice from either UKTI or the CBBC, or carrying out appropriate due diligence checks. A guidance document on various business scams is available from the CBBC.

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Source – UKTI


 

 

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