Companies tempted to bend the rules when setting up operations in China risk heavy penalties.
Since the onset of the 2008 financial crisis, China has accounted for 45% of all growth in global GDP. This growth and increasing propensity to trade has brought challenges along with opportunities for prospective partners. One notable challenge is the navigation of a legal framework geared up for regulation, not commercial activity. China’s commercial laws and its legal system as a whole have traditionally been viewed as part of the apparatus of government.
For overseas companies tempted to cut corners in their Chinese operations, the penalties are severe. Those who choose to set up shop in China without even securing their status as legal entities can hardly complain when their hosts throw the book at them. If you don’t establish a recognised legal presence, then you are literally nobody.
What are your options when setting up in this lucrative market?
A representative office offers a minimal legal presence, an intermediary equipped and entitled to assess market opportunities. Representative offices are low-cost and low-maintenance, but as a rule they won’t be allowed to engage in sales activity, sign binding contracts or issue invoices.
A joint venture between a foreign operation and a Chinese company offers a presence and a degree of local knowledge and credibility, but it inevitably means relinquishing a level of control, and differences in working practices can sour a partnership very quickly.
A wholly foreign owned enterprise (WFOE) offers 100 percent ownership to foreign shareholders, allowing them to conduct business in China, sign contracts, recruit local staff, engage in research, development and marketing, and issue invoices and take payment in local currency. A WFOE must be clear in its scope and aims and will usually be expected to stay within the boundaries set for it.
Whichever option companies choose, accurate advice is crucial. Not only in matters of law but in matters of language. Some have cut corners by using bilingual lawyers to translate important contracts and lived to regret it. A bilingual lawyer is not a qualified translator any more than a person who owns a microwave oven is a qualified chef. The mistranslation of legal terminology in the courtrooms of Beijing and Shanghai has been a decisive factor in many cases. If you’re taking the trouble to establish yourself as a legal entity in this closely scrutinised market, why risk undoing your good work and good intentions by taking the cheap option?
Navigating China’s language is as specialised a challenge as navigating its laws. Most linguists recognise seven distinct Chinese dialects, but there are numerous local variations. Can your translation partner call on native speakers with a mastery of local language and tone? If not then your message, your service and your legal status will be in peril.
Establishing a presence in China is far sighted and bold. To capitalise on this boldness and fulfil your long-term vision, you need specialist help. You need to work with people who’ll help you be somebody.
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