Considerations for conducting business in China
With the rapid transformation of China’s domestic economy, China’s commercial laws are also changing quickly to mirror Western commercial laws.
“In order to succeed in doing business in China, SMEs need to pay careful attention to not only the business environment, but also the changing legal environment in the Mainland,” says Irene Tse, Head of Corporate Banking, HSBC Brunei.
a contract that are not under your control. For example, you cannot guarantee that your client will receive a visa if you are asked to specify in the contract that they must visit your overseas production facilities. Sometimes, differences between Chinese and your cultural norms may lead to different interpretation of the same facts or terms. When signing a contract, make sure with the help of your legal counsel that your Chinese counterpart and you have a common understanding of what you are agreeing to.
Laws and regulations
Be ready to obey all Chinese laws and regulations, even if you find ways to avoid them at the initial stage. Question any agreement where you are told you can ignore the law, or else you run the risk of your business being associated with illegal practices as well as possible sanctions or fines. At the same time, beware of any relevant regulations of other countries. For example, if you are exporting technology from the US to China, take a look of the US Bureau of Industry and Security regulations as American law prohibits transfer of some sensitive technologies without a license.
Do your due diligence to make sure that if your partner is a shell subsidiary of a larger company and in case they default on payments, you will be able to collect from the parent company. You can do this by hiring a corporate due diligence consultancy, if needed. Check the reliability of the data on your partner from independent sources. Don’t limit your research to speaking only to those people to whom your partner directs you. Ensure that your negotiating partners have the authority to make a decision, and the contract creates a “win-win” situation so that they are willing to do whatever is laid down in the contract. You could lose a lot of money if you make a great deal with the wrong partner.
Pay careful attention to when and how you get paid and in which currency. Check with legal counsel to determine the specific payment terms that are customary for a certain type of transaction. Protect yourself from loss by using financial instruments with an international bank, such as letters of credit.
If you do not want to use a letter of credit, get your partner agree to make advance payment. Unless you are absolutely comfortable with the standing of your partner, never agree to unsecured payments after delivery. For most large projects, a combination of advance payment and payment after delivery with a letter of credit are common with Chinese companies.
All in all, China has numerous laws that encourage, restrict or prohibit investments in specific industry sectors. It is advisable to learn if any of these laws apply to your business when investing in China.
Enter into an agreement only when you have sound legal advice from your legal counsel. In your contracts, specify exact terms of payment, performance standards and time lines and what should happen in the event that one party defaults. Beware of claims that the Chinese law requires specific covenants in your contract – do not agree to provisions in