It’s often a point of observation for people or businesses looking to make investments in China since to most people, the business and social culture seem unknown. It’s a country that has shown immaculate growth in the past decade and shows no sign of slowing down any time soon. This has led to foreign business and people asking all sorts of questions; what business opportunities are present at the moment? How does one enter this foreign market? How does one go about studying Chinese culture to adequately create a perfect marketing strategy to target a Chinese audience? How would a business go about securing a Chinese incorporation? How would a business go about registering the company domain? What is the significance and cost of setting up a Wholly Foreign-Owned Enterprise (WFOE)? How would one go about securing a business license? How would a business go about setting up its foreign office in China? These are questions that come natural to anyone who goes about enquiring about business opportunities in China or willing to invest in the country.
We’ll look in depth at the various aspects of China business and social culture one should be aware of before making any plans for investments in the country.
A Brief Overview of China
The country’s name originates from the natives who first believed it to be the centre of the earth. Thus, China literally translates to ‘Centre’. Located in Asia, the country has become almost synonymous to when one refers to ‘the East’. It covers one of the largest land mass of any country on Earth at a staggering 9,500,000 square kilometers plus another 27,000 square kilometers covered by sea. It’s also host to one of the largest populations on Earth with a recorded 1.379 billion people living in China as of 2016. The population is also expected to rapidly increase in the near future with statistics putting the number to 1.42 billion in 2020.
With the capital of the country being Beijing, historically most political and administrative structures have existed in this city. The city is also host to most foreign embassies and consulates, making it a premier destination for any business to set up shop.
Main currency of China
The Chinese currency is known as the Yuan Renminbi abbreviated as CNY or RMB. Additionally, most China businesses also deal in US Dollars making it more convenient for any foreign business or person to do business activities such as making international transactions. The acceptance of the US Dollar also makes it easier to register a business in the country. The government also provides foreign businesses or nationals the opportunity to open a bank account online.
China’s Financial Center
Shanghai is known as the primary financial center of China, with most transactions related to trade with the world since past and present. The city took up the major responsibility of becoming the country’s financial hub, with major government policies regarding the country’s economy and financials directly being shaped by Shanghai. The city also hosts major foreign businesses along with new businesses also being set up all the time.
China’s Primary Trade Hub
In present day, Hong Kong serves as China’s primary trading center with the rest of the world. This is due to many factors such as Hong Kong’s unique political and economic system being inherited from the United Kingdom.
After the end of the Opium Wars that took place between China and the United Kingdom, an agreement was reached between the countries where Hong Kong was passed over to the United Kingdom for 100 years. When this 100 year period ended on the 1st of July 1997, Hong Kong was given back to China. This 100 year period brought with it tremendous cultural and economic changes such as Hong Kong being shaped vastly by British culture. Today, Hong Kong still follows UK law as part of an agreement between the UK and China to keep the British system intact for the next 50 years. After this fifty year period ends, Hong Kong’s legal and administrative structure will resort back to that of China.
China learned from Hong Kong’s practices and has also adopted most of it in its own system. Thus, Hong Kong’s unique place on the world stage plus its geographic location gave way to China at present becoming the second biggest economy in the world.
The Major Cities of China
China’s most popular cities, which any person or business should keep in mind when thinking about investing in the country, are listed in order as:
What business cities in China provide the best opportunity to enter into the market?
Let’s look at ten cities that provide foreign businesses the best opportunity to enter into the China market. The below named cities are listed in order, with Shanghai providing the best opportunity followed by Beijing and so on. However, one should note that the nature of the business/investment should be considered to see whether the city’s major market falls into that category, such as Shenzhen being a major technology hub and Shanghai being a financial hub.
What are Special Economic Zones (SEZ)?
The government of China, during its early stages of economic growth, developed policies targeting special cities of the country to be considered designated areas where foreign businesses could come to do business with China businesses. The purpose was also to help the local businesses grow by involving them in trade with the international market. These areas enjoyed special economic privileges such as being tax free havens, not subject to any limitations of land supply and many others.
One of the first cities that was designated by the Chinese government to be a Special Economic Zone was Shenzhen. Today a major market in the technology industry and having one of the busiest container ports in the world, Shenzhen was first declared a Special Economic Zone to attract factories in Hong Kong to move there with a prospect of lower manufacturing costs. The Special Economic Zone is a major aspect to be considered by businesses looking to invest in China.
Establishing a Company in China and Strategies for Foreign Entrants
Forming a strategy to enter the China market can be a frustrating topic. With its unique political and cultural structure, many aspects have to be considered if a business wishes to makes its presence known. But rest assured, by the time all of this read, the reader will have established an idea of how to go about forming a strategy. While the research to some might seem gratuitous, we have done our best to explain things as simple as possible and pride ourselves in being experts in the field of helping foreign companies register their businesses in China.
Business opportunities in China exist for both large and small businesses as long as the right strategy is followed. For foreign investors, the Chinese government offers three modes of business activity i.e. Joint Venture, Wholly Foreign-Owned Enterprises (WFOE) and Representative Office; each giving way to a different plan that must be followed to enter the market.
‘Joint Venture’ Strategy to enter the China Market
A joint venture is when two different companies enter into a contractual agreement or arrangement whereas a mode of business is handled by both entities. This includes sharing operational and management resources, expenses, investments along with other resources that both companies possess. A joint venture is usually undertaken by two companies when each company has something of value to trade, which the other company requires.
The joint venture scheme is one of three modes of business activities for foreigners allowed by China. The government of China encourages foreign companies to enter into joint ventures so that the local companies can gain exposure to new technology and other operational skills whereas the foreign company can gain from the low labor costs along with cheaper means of production. For some sectors, this is the only method of doing business in China if a sector is still controlled and regulated by the Chinese government. Many examples of this exist such as the construction sector, restaurant sector, cosmetics etc.
‘Wholly Foreign-Owned Enterprise’ strategy to enter the China Market
The only strategy under which a foreign business can fully control its operations in China without government interference, the Wholly Foreign-Owned Enterprise strategy requires a foreign company to be registered under this domain if it wishes to enter the China market in this business capacity.
Common questions that arise while setting up a foreign-owned enterprise in China include queries regarding costs for the setup, method to register the company, limitations and techniques to trade in the country.
For starters, a WFOE is registered as a type of limited liability applicable to taxes according to China law. A WFOE is allowed to control and make changes to its operations without any government intervention. The typical share capital at minimum must begin from 10,000 RMB. Companies find this method of entering the China market very attractive because of its option of full control without being interfered with in its operations by the government.
Looking to set your company up as a WFOE? We can help.
‘Representative Office’ or ‘China Market Entry’ strategy to enter the China market
The Representative Office strategy offers the cheapest and most straightforward method to enter the market and establish presence as a business doing trade activities in China. A foreign business of this nature does not result in direct profits as for these form of businesses, the government does not allow them to be functional as partners or sole owners due to not being documented as legal persons. The question of where to open a representative office first depends on the nature of the foreign company’s business and research regarding the product and where best the market for it would be. Normally, representative offices are mostly opened in the cities of Shanghai, Shenzhen, Guangzhou and Beijing.
The government allows multiple offices of this nature to be opened in the country. If not direct profits, the representative office is encouraged to perform activities of an indirect operational nature as act as representatives of the business, conduct research into the China market, supply of information regarding the foreign company’s business, introducing new products to the China market and the trade of technology. The foreign business looking to enter the China market as this type of business must be registered in its own company as a functional business for at least a year.
What are the advantages of entering the China market through China Market Entry Strategy?
What are the disadvantages of entering the China market through China Market Entry Strategy?
What can a foreign company registered in China be used for?
How to enter and trade in the China market?
Registration Process of a Business in China
Our firm provides you the service of registering a business in China and consultation regarding the best course of action you should take before you decide to enter the China market. This is dependent on the nature of your business and several other factors that would determine the strategy such as deciding the city to enter depending upon the product being sold. Once your company is registered and incorporated within the legal time period of 30 days, you can go about legally trading in the country.
Our job comes in when you need to be saved from the hassle of completing paperwork and being provided simple instructions regarding the corporate documents that need to be signed. A brief look at the registration process and how we handle it is explained below as:
A Brief History of Development of Different Company Types in China
Joint Venture Entry Strategy
This category exists to protect several Chinese sectors from being taken over by foreign businesses. The strategy allows foreign companies willing to invest in a sector such as car manufacturing to join with a local company and trade resources for bigger returns in profit.
Mostly, in the initial stages, it is observed that foreign companies providing Chinese companies technical expertise and management skills along with 80-100% of the finances, while in return the Chinese companies are responsible for providing resources such as labor and land. The foreign entrant can thus use a Chinese manufacturer to drive down costs of the product or infrastructure.
WFOE Entry Strategy
For certain sectors, the government of China has enabled foreign businesses to completely set up their own manufacturing plants in the country with full ownership. With no government interference, the foreign entrant into China will be able to operate freely. In order to attract these foreign companies, the government offers tax relaxations of up to 100% for a time period of 15 to 20 years. Additionally, the land is also free for a certain number of years. So, in this early stage of planning taxes, the company can profit from sending the saved costs of manufacturing to the overseas company.
Historically, materials from a foreign company were sent to China where the factory was responsible for its production and assembly. When the final product was made under cheaper manufacturing costs, they were sent back to be sold. Thus, once foreign companies started investing in this manner, the locals started gaining insight into the technology and product being used to manufacture the final product. Once local companies started to learn these practices, they set up their own businesses which made these products cheaper. At present, these products manufactured at a local level by Chinese companies are now part of the trade being done with representative offices that exist to buy Chinese products.
Representative Office Entry Strategy
Liaisons of foreign businesses come to the country to place large orders with Chinese manufacturers due to cheaper costs being offered by Chinese factories. The final product is then shipped back to the country where it needs to be sold. Historically, these liaisons became so repetitive in their orders and the need for these products became so necessary that companies found it much more convenient to open a foreign branch with one or two staff members to overlook operations in the country. These staff members exist to act as representatives of their company and place orders along with having the responsibility of overlooking quality and quantity of the products being made.
Purpose for Entering the China market
The purpose of entering the China market can vary depending on the nature of the business of the foreign entrant. In broad terms, these reasons can be generally categorized as: