Before attempting to enter the Chinese market it is important to identify whether the market is open to you and whether restrictions apply. Certain sectors, for example military, are subject to UK controls and these can be identified from the “UK Strategic Export Control Lists”.
The Chinese Government classifies the market for foreign investment or entry into three categories: encouraged, restricted and prohibited. The ability of a foreign company to operate in China varies in line with these, so in some sectors it is possible to set up a 100 per cent foreign-owned company, but in others entry is possible only through a local partner, and in some it is not possible at all. With some professions, for example legal, it is possible to enter the market, but operation is severely restricted.
It is important to understand your freedom to enter the market. Refer to the official “Catalogue for the Guidance of Foreign Investment Industries”, published by the Chinese Ministry of Commerce (MOFCOM), and seek advice from UKTI, CBBC or professional services companies.
Certification & standards
The Standardization Administration of the People’s Republic of China has responsibility for standards.
China sets its own national standards. These are often referred to as ‘GB standards’ with some mandatory and others voluntary. A prefix code indicates the status, GB=mandatory and GB/T=voluntary.
Not all Chinese standards are aligned with established international standards. It is important to check the Chinese laws, regulations, standards and certification requirements that apply to your area of business.
For some types of product, manufacturers must obtain a China Compulsory Certification (CCC) mark before you can export to or sell in the China market. The CCC mark is a compulsory quality and safety mark.
China’s National Certification and Accreditation Administration (CNCA) publishes a catalogue that lists all the products that require a CCC mark. See CBBC’s video on applying for CCC marks at: www.youtube.com/playlist?list=PLv_tMYysg7ROD-n2hCkPWBaYTRyxzMpFL
Goods for sale in China must be labelled in Chinese. For some products, information must be printed directly onto the packaging. You should always check the labelling requirements for your products.
Source: UKTI March 2015
China has what is officially termed ‘a socialist legal system with Chinese characteristics’. Technically, the legal system is based on both statutory law and custom. The National People’s Congress (or its Standing Committee) enacts national laws while the State Council (effectively the Chinese government’s cabinet) implements and enforces administrative regulations and rules nationwide.
The ministries under the State Council put into effect specific national administrative regulations and rules and can be authorised to issue interpretative implementing rules. Provincial representative bodies known as people’s congresses may also enact local rules and regulations where these are not contradictory to laws, regulations and policies enacted at the national level.
In addition, the Supreme People’s Court issues judicial interpretations from time to time, which all lower courts are required to follow in adjudicating cases. Apart from this, there is no general system of precedent followed in China’s courts. After a period of intensive statutory development over the past 20 years, China now has a relatively complete basic legal system in place.
You must identify whether the market is open to you and whether restrictions apply. In some sectors it is possible to set up a 100% foreign-owned company. In others entry is possible only through a local partner.
Guidance on dealing with commercial disputes in China can be found at: www.gov.uk/government/publications/overseas-business-risk-china/overseas-business-risk-china#commercial-disputes-in-china
The UKTI teams in China can help you find tax and legal advisers before entering into any agreements. See the Contacts section at the end of this guide for details of posts in China.
Tax and customs considerations
The UK has double taxation agreements in place with China. A guide to Tax treaties between the UK and China and related documents can be downloaded at: www.gov.uk/government/
Value Added Tax (VAT)
VAT is charged on the sales and import of goods as well as processing, repair and replacement services. There are exemptions for the import of certain goods identified in relevant regulations. The basic VAT rate is 17%, but a lower rate of 13% is levied on a number of goods.
14 categories of goods are subject to consumption tax. The rate is calculated based on price and is between 1% and 56%.
Taxes applicable to a Foreign Invested Enterprise (FIE) include:
enterprise income tax – 25% (rate for SMEs under Chinese law is 20%)
business tax – usually 3% or 5%
The EU SME Centre at: www.eusmecentre.org.cn/guideline/china-enterprise-income-tax provides information on Enterprise Income Tax in China.
All service companies obtaining income in China or with consumers located in China are subject to Chinese taxes, unless exempted expressly by Chinese regulations.
Individual income tax is charged between 5% and 45%.
The General Administration of Customs of the People’s Republic of China provides information on customs procedures and tariffs.
China customs uses a valuation database that lists the values of various imports based on international market prices, foreign market prices and domestic prices. Importer’s values are normally accepted, but if they are out of line with the valuation database there may be a recalculation.
You can find more about import tariffs in the EU Commission Market Access Database at: http://madb.europa.eu/madb/indexPubli.htm
Goods being exported to China must comply with domestic legislation.
Certificates of quality, quantity or weight issued by manufacturers or public assessors are normally required. However, goods will be returned to the seller if the goods do not conform with the certificates after re-inspection by the Chinese authorities. In addition, a claim may be lodged for compensation.
Please check with CBBC business advisors for further advice.
Source: UKTI March 2015
Management, control and quality assurance
With the challenges of distance, language and culture, many UK companies are tempted to take a “hands-off” approach to transactions and operations in China. In fact, these challenges increase the need for proactive engagement. A “hands-off” approach allows problems to develop, often to the point where they become major issues.
Once a business presence has been achieved, companies often report numerous obstacles to successfully implementing their business plan, including factors such as protracted lead times from suppliers, supply chain management and quality control issues, administrative delays which result in longer lead times for client organisations, the management of risk, problems with obtaining finance, banking system inefficiencies, and infrastructure deficiencies.
There is no simple solution, and successful UK companies use a variety of techniques. These can include extensive travelling by UK personnel, a controlling or liaison presence in China (such as using CBBC Launchpad), or providing extensive training and good management of Chinese staff. It is important not to allow milestones to slip by, whether these are attending a board meeting in a joint venture or arranging a quality audit at a supplier.
Sourcing products from China, especially from a supplier inexperienced in dealing with foreign companies, requires particular attention to detail. Specifications are sometimes not understood and need to be very clearly explained and agreed, and a quality management system needs to be agreed and put in place with the Chinese company. Many consultancies will offer to undertake all or part (eg the quality management aspects) of this process on your behalf. A list of consultants can be found on the CBBC’s China Business Services Directory at www.cbbc.org.
Finding a customer or partner
Once you have identified where you would like to start and the best market entry option for your company, the next step is to find potential customers or partners for your company. The following are all effective ways of finding potential customers, agents, distributors or partners:
UK Trade & Investment’s Overseas Market Introduction Service (OMIS):
This can be used to tailor-make a list of potential customers, agents, distributors or partners and arrange a programme of meetings with them for when you visit China. In China, CBBC provides OMIS services on behalf of UK Trade & Investment.
OMIS can also be used to engage CBBC to arrange a technical seminar or product introduction event in China, which can be an effective way of getting your message across to a number of potential customers.
Attend trade shows and exhibitions:
Numerous trade shows and exhibitions take place in mainland China and Hong Kong throughout the year and these can be an excellent way to meet potential customers face to face. However, arranging appointments in advance to meet pre-identified contacts at niche industry events is essential if you want to make effective use of your time. Through OMIS, the UKTI Hong Kong team is able to connect you to a wide range of opportunities to break in the Hong Kong, and potentially China, markets.
Take part in a UK Trade & Investment-supported trade mission:
UK Trade & Investment supports a large number of trade missions to mainland China and Hong Kong organised by CBBC, trade associations and local chambers of commerce.
The vast majority of problems that foreign companies encounter when engaging in business transactions in China could have been avoided by carrying out some due diligence at the start of proceedings.
Undertaking market research and due diligence prior to entering into any formal dealings with Chinese companies is essential. However, this may be much harder to do in China’s regional cities, where market and firm-related information is likely to be less readily available than in China’s more advanced cities, and about which knowledge and experience in the foreign firm will need to be accrued over time.
There are different levels of due diligence that are appropriate for different situations. If your sole interest is in exporting, the best proof of a Chinese company’s ability to pay is whether it is able to raise a letter of credit from the bank. If so, you do not need to check the company’s financial standing as the bank will have already done so. At the end of 2008 China’s credit database contained the personal records of 640 million individuals and 14.47 million companies and is the largest credit information pool in the world. The database includes loan, credit card use, insurance and bill payment information of individuals and companies and is used by financial institutions in China to make personal credit checks on loan applicants and carry out due diligence on registered Chinese companies.
One simple piece of due diligence you can conduct is to get a copy of a company’s business licence which will tell you the following:
The legal representative of the company
The name and address of the company
The amount of registered capital which is also its limited liability
The type of company
The business scope
The date it was established and the period of its business licence
You should check that the information contained in the business licence matches what you already know and if it doesn’t then find out why. If you want to verify the information externally you can do so through the State Administration of Industry and Commerce (SAIC). The local AIC bureau is the Chinese equivalent of the UK’s “Companies House”. All companies in China are legally required to register with their AIC bureau at the municipal level to obtain their business licence.
You will have more security if you know who the legally responsible person is, so find out who you are dealing with. If problems occur, it will be much easier to address issues with the legally responsible person, rather than a middle man, who may go missing when problems arise.
The shareholders of the company are responsible for that amount of liability listed as registered capital on the company’s business licence. You can check whether or not the registered capital has been paid up by using a firm of accountants to get a Capital Verification Report.
If you want to establish a business relationship that goes beyond exporting, you will need to carry out further research. A thorough evaluation of your potential partner may be time-consuming and expensive, but doing so will greatly reduce the risk of serious problems in the future. However, it is not enough to obtain a copy of a company’s accounts, as they may not be accurate. Accounts are unlikely to be audited to the standards routinely expected in the UK, and companies may have different sets of accounts for different audiences, so it is advisable to use such data in conjunction with information obtained elsewhere.
There are a number of private consultancies that specialise in carrying out operational, financial, legal and technical due diligence checks on Chinese companies, typically by looking at the actual operation of the business, and building up a more accurate picture by carefully interviewing people who work in and with the company.
A particular obstacle that British companies must overcome is the reluctance of many Chinese business partners to agree to thorough due diligence investigations. Failure to gain a full understanding of a potential partner’s credit history and professional background can spell serious trouble and financial loss. It is possible to reduce local concerns over due diligence checks through a patient and polite business approach and by stressing the reciprocal nature of the arrangement, but you should expect this stage of negotiations to be lengthy and at times difficult. Good quality consultancy and assistance is available from experienced firms resident in China.
Finally, do as the Chinese do. Expect to spend a lot of time at meetings and banquets with your potential Chinese partners. You might think this is a slow progress, but the Chinese are using this time to establish whether you will make a suitable and trustworthy partner and whether they want to enter into a long-term business relationship with you. It is wise to do the same. Building relationships is by some distance the best way to overcome many of the obstacles to doing business in China.
You will likely need to establish a strong management team to build your business in China, including securing clear and committed support from all levels of your parent company, and assigning good quality professional staff to plan and manage the China-based operations. Associated with this is the importance of transferring established business standards, codes of practice, operating procedures and internal control mechanisms to China in a way that operations there are managed and run no differently from those in other foreign markets.
However, finding the people you need to run your business in China is not significantly different from recruitment in the UK. There are several recruitment agencies currently operating in China, and most operate under the same standards that you would expect of a firm in the West. They will do the sourcing, pre-interviewing of candidates and charge you a percentage of the placed staff’s first year earnings or a one-off fee.
In addition, there are a number of recruitment websites advertising for both jobseekers and employers, which can be highly effective. Another option is to recruit from the huge Chinese population at UK universities. Visa regulations allow Chinese graduates to undertake training and work experience in the UK, before moving to China to take up positions.
One challenge that companies recruiting in China will face is the increasing competition for experienced managers and high-calibre individuals, and as China’s economy continues to grow this will only intensify. Skills levels of employees can be an issue at all levels; in many locations demand for skilled workers outstrips supply. Local education establishments will often assist with collaborative programmes, but this can have significant lead time.
Local and foreign companies are recruiting from the same pool of employees who have the right technical and language skills as well as managerial experience. Candidates with the requisite skills and experience will be in demand and command high salaries. If you are not prepared to offer appropriate remuneration, you will have great difficulty hiring people with these skills. Many employees will leave their current companies for ones that are offering better remuneration packages.
You will need to determine what you are willing to pay at the beginning of the recruitment process. It is important to note that salaries in China have increased over the last few years and will continue to do so. It would be advisable to conduct some market research to get a clear idea of appropriate salary levels for the positions you wish to fill so that you can make an offer that is in line with current market rates. When you are recruiting in China make sure that you carry out all the normal steps that you would if recruiting in the UK:
Ensure that candidates’ technical and linguistic capabilities match their claims: It is essential to hire staff with the right language skills. Common mistakes include hiring Chinese staff from outside mainland China who do not speak Mandarin to the level required, or alternatively hiring staff whose business English is not sufficiently fluent for their role.
Ensure that you hire staff at the right level for the role: A recent MBA graduate returning from overseas may not have the experience to navigate the complexities of setting up a company in China without seeking professional advice, and they may not have the capabilities to develop business at a senior level.
Carry out due diligence: To ensure that the staff you are hiring are right for your company, it is essential to ensure thorough due diligence in recruitment, especially for senior managers, including conducting personal background checks and checking all references before offering them the position.
Offer appropriate compensation: Once you have found the right staff you will need to give them good reason to stay with your company. You will need to provide sufficient compensation to ensure that you recruit and retain the best employees. Offering employees the opportunity to train overseas is also very attractive at all levels, although make sure that in return for providing such training they make a commitment to stay with your company. In addition, be sure to invest in the mentoring of Chinese management-level talent; this can be done by giving them experience of working around the organisation and grooming them for global corporate positions. A clearly defined career progression route is also attractive and will help to retain staff.
A lot of smaller companies setting up an office in China may well just employ one person to deal with all aspects of running the business. Although this may be convenient and cost effective, it might not be the best way to run your China operation. Staff selection will prove vital, and although the individual may be very willing, honest and capable, they may not be competent or experienced in international business practices.
Also, foreign companies in China are at the top of official radar screens. If your employee is not familiar with the relevant Chinese rules and regulations pertaining to the running of an international office or business in China, then you may soon have to deal with issues of noncompliance, which can be very costly. In addition, having one person in control of all financial and legal aspects of the business is obviously risky.
An attractive solution to this problem would be to use a service such as CBBC’s Launchpad Scheme where companies can have a representative located in one of CBBC’s China offices and benefit from the support of CBBC’s management and local team. See details of the scheme elsewhere in this guide, or on the CBBC website: www.cbbc.org
China's Labour Law
If you are employing staff in China you will need to make sure that you comply with China’s Labour Law, which came into effect on 1 January 2008. According to this law all employees must have a written contract. If this is not signed within one month, then you will have to pay the employee double their salary for every month they are without a contract. If they are still without a contract after a year then they are automatically deemed to be on an open-ended contract. It is important that the employee receives an original copy of the contract signed by the employer and that the employer gets the employee to sign that they have received the contract.
It is also very important that, in addition to the contract, all employees are given (and sign to say they have received) a company rulebook detailing all aspects of your company policy and what behaviour is and isn’t acceptable. If there are any cases of misconduct you will find it almost impossible to terminate staff employment without written evidence, so make sure that such evidence is documented.
There is additional information on employing staff on the CBBC website www.cbbc.org and many international law firms have guides to the new employment laws on their websites.
Foreigner Participation in China’s Social Insurance System
On 15th October 2011, the ‘Interim Measures for Participation in Social Insurance System by Foreigners’ came into effect. The Measures mean that foreigners employed in China who have obtained a Permanent Residence Certificate for Foreigners, or employment certificates such as the Employment Permit for Foreigner, the Certificate of Foreign Experts, or the Certificate of Permanent Foreign Correspondent are now required to participate in the country’s social security system. Five kinds of insurance contributions are to be made: basic pension insurance for employees; basic medical insurance for employees; work-related injury insurance; unemployment insurance; and maternity insurance. Social insurance fees are to be paid by both employers and foreign employees in accordance with the regulations. The Measures state that employers must undertake social insurance registration for foreign employees within 30 days of applying for their employment permits. Failure to conduct registration and payment for social insurance may mean employers are subject to financial penalties.
Social Security Law
The changes will add extra costs to all businesses employing foreigners as they are now required to make contributions on their behalf. This will hit schools and SMEs that hire a large amount of foreigners particularly hard, and may result in employers turning away from hiring foreign workers. There is, however, a cap for the amount of contributions made, based on three times the local average salary. Although, this is not universal and the city of Dalian has already removed this cap (which could mean that employers have to pay up to 37% of an entire monthly salary paid to their foreign employees).
Foreign employees are also required to make contributions and despite the cap this is still a substantial cost for lower-paid foreign workers.
Although the new tax requiring foreign workers to pay social security contributions is currently in effect, the system for registration and implementation of the tax is not yet fully operational, and some businesses have not yet been able to register foreigners with their relevant social security bureaux or make payments.
The only situation in which foreigners will be able to avoid making contributions is where they meet the requirements specified in bilateral or multilateral agreements, of which there are currently only two (Germany and Korea). Even these agreements only allow citizens of these countries to opt out under certain circumstances. There is still a lot that remains unclear, and there are some outstanding issues that still need to be clarified:
Pension: How to reclaim the lump sum? In the event of death how will payment to a relative be organised?
Medical insurance: At which clinics can medical insurance be claimed – International sections of domestic hospitals or international clinics?
Maternity insurance: Foreign women are not restricted to having one baby. Can they use the policy multiple times or just with their first-born?
Unemployment insurance: If a foreigner loses their job, they are not allowed to reside in China, thus they cannot take advantage of this insurance.
In order to communicate effectively in China it is essential to communicate in Chinese.
Despite clear efforts made by many firms to localise their business model and to use Chinese staff in key managerial positions wherever practicable, language and cultural barriers remain a significant operational issue for many. These issues may become magnified in those regional cities away from the coastal regions of China, where the history of foreign business engagement is much shorter, and where familiarity and understanding with foreign business practices and needs are likely to be less well developed.
Communication is crucial to the success of any company, yet business is all too often lost through simple misunderstandings that could have been easily avoided. When working across different time zones, cultures and languages the chances for misunderstanding are multiplied considerably. It is therefore essential to ensure that you have an appropriate communications strategy not just for China, but for the region of China you are considering, be it a regional city, a city cluster, or Province.
Your translator or interpreter is therefore one of your key assets and should be selected with care, as without them you are effectively deaf and dumb. The national language of China (including Taiwan), Putonghua, is commonly known in the UK as Mandarin Chinese and on the mainland the characters used to write it are known as Simplified Chinese. This was introduced by the Government in the 1950s and is increasingly used by Chinese communities abroad, although traditional characters are still used in Hong Kong and Taiwan.
If you are working in southern China, in the area between Guangzhou (formerly Canton) and Hong Kong, do not assume that the business language is Cantonese. This region has a vast population of immigrants from non-Cantonese speaking parts of China working at all levels. For the majority of contacts in southern China, Mandarin is the language of business. If in doubt, ask first. If you are going to Hong Kong, Cantonese is the preferred Chinese dialect, although Mandarin is increasingly spoken in business circles. English is also commonly used for business and remains an official language in Hong Kong.
While an increasing number of Chinese companies – particularly those with an international outlook – have English speakers on their staff, don’t assume that everyone in the company speaks English – especially decision-makers. At the very least, get a Chinese name for your company and prepare a one-page company profile in Chinese for insertion into your company brochure and website. A Chinese translation of your brochure would be even better.
Business cards are essential. It is wise to have your business card translated into Chinese, and to bring plenty with you.
Ensure that all your translation is done professionally. For names it is important to use characters which not only represent the word phonetically but also have a symbolic or auspicious meaning. It is worth talking through the choice for names with your translator. There are numerous translation and interpreting agencies which can carry out suitable translations of personal names as well as general translation work. Many of them will also be able to help you address the branding issues detailed in this guide.
A growing number of younger Chinese managers and government officials speak English to a good standard, particularly in advanced sectors such as ICT. But you will usually need to use an interpreter for formal meetings and negotiations in China to prevent the discussions being hampered by misunderstandings. A good interpreter is the key to successful communication. If they have not understood what you have said, your message will be lost on your audience.
There are two forms of interpreting. Consecutive interpreting means you speak and then your interpreter speaks; this is the usual form for meetings, discussions and negotiations. Simultaneous interpreting involves the immediate translation of your words as you speak them. This requires special equipment and can be expensive. It is generally used only for large seminars and conferences. Interpreting is a skill requiring professional training. Bear in mind that just because someone is fluent in English and Chinese it does not necessarily mean that they will make a good interpreter.
If you are giving a speech or presentation, remember that the need to interpret everything will cut your speaking time approximately in half (unless using simultaneous interpreting). It is essential to make sure that the interpreter can cope with any technical or specialist terms in the presentation. It is better to be slightly restricted and speak close to a script than to fail to sell yourself. If you are giving a speech, give the interpreter the text well in advance and forewarn them of any changes.
If you decide to bring an interpreter with you (for example an overseas Chinese from Hong Kong or Singapore), ensure that they speak clear and comprehensible Mandarin. If you are travelling to an area where there is a regional dialect, it is also essential to check whether your interpreter can also speak and understand this.
Getting the best out of your interpreter
Hiring a well-briefed professional interpreter is the best policy. Though this is likely to be expensive, it will be money well spent.
The Chinese will usually, but not always, provide one interpreter for their side. It is advisable to have your own interpreter available to assist with discussions, when possible. One interpreter working for both sides may become tired and start missing the meaning or detail of what is being said. Chinese partners often spring interpreting on junior staff who have studied English but are neither experienced at interpreting nor pre-briefed on the topic of the meeting. With your own interpreter, you should also have some feedback afterwards on the nuances behind what was said (and – just as importantly – not said) during the meeting.
Try to involve your interpreter at every stage of your pre-meeting arrangements. The quality of interpretation will improve greatly if you provide adequate briefing on the subject matter. Ensure your interpreter understands what you are aiming to achieve.
Speak clearly and evenly with regular breaks for interpretation. Don’t ramble on for several paragraphs without pause. Your interpreter will find it hard to remember everything you have said, let alone interpret all your points.
Conversely, don’t speak in short phrases and unfinished sentences. Your interpreter may find it impossible to translate the meaning if you have left a sentence hanging.
Avoid jargon, unless you know your interpreter is familiar with the terminology.
China has no single number for “million” or “billion” which are translated respectively as “one hundred ten thousand” and “ten hundred million”. However, it does have unique numbers for “ten thousand” and “one hundred million” – “wàn” and “yì”. Therefore, the chance of mistranslation of large numbers is high, so make sure you clarify numbers by writing them down.
Listen to how your interpreter interprets what you have just said. If you have given a lengthy explanation but the interpreter translates it into only a few Chinese words, it may be that they have not fully understood. Or they may be wary of passing on a message that is too blunt and will not be well received by the audience.
Make sure your message is getting through clearly and in a tone that will not cause resentment. But be prepared in the response for the propensity of the Chinese language to be ambiguous.
A list of Chinese translators and interpreters can be downloaded from:
You should obtain a visa to enter mainland China before arrival. You can find details of visa requirements on the Chinese embassy website: www.chinese-embassy.org.uk/eng/visa/
If you’re travelling to China for business, check beforehand the FCO travel advice page at: www.gov.uk/foreign-travel-advice/china
Source: UKTI March 2015
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