Avoid China Legal Problems by Getting in Front of Them

The key to batting in baseball and the key to China law is to stay in front

One of the keys to avoiding China legal problems is to get in front of them. By this I mean getting buy-off from relevant Chinese government officials before you do something. This consent by Chinese officials is not a 100% guarantee some other Chinese official may not years later have a problem with what you did, but it often is pretty close to that.

Clients and potential clients often ask our China lawyers whether something they plan to do in China is legal or not. Foreign companies looking to do business in China (or change how they are doing business in China) often tell us what they are seeking to accomplish in China and then have us figure out the best legal way for them to do so.

Probably ninety percent of the time our work on these sorts of matters is six parts China law research and four parts discussion and soft negotiating with Chinese government officials. The research is to determine the written law. The discussions are to determine the law as practiced and enforced in the applicable jurisdiction/location. The negotiations portion is working to explain to local government officials how what our client proposes to do is both legal and a good thing.

It is important to know there are all sorts of “local laws” that are not in writing anywhere.  

In China Employment Law: Local and not so Simple, we wrote about what we typically do to figure out China employment law situations:

China’s employment laws and regulations vary from city to city and they depend on the specific situation and for us to be able to give you anything resembling actionable advice we would need to know ALL of the facts of your situation, especially the city (or cities) you are discussing, then review the contract you have with your employer and then research the applicable laws and regulations in the relevant city (ies?) and then discuss these laws and regulations with the appropriate governmental authorities.

Speaking with government officials is also of paramount importance when seeking to form a WFOE. With China’s economy declining, China’s government wants to preserve employment. This has led some China cities to tack on (unwritten) employment requirements to WFOE formations. In the below email exchange, I explain how our China attorneys have been dealing with this new requirement. The below is a portion of the email from the U.S. company that started the discussion:

I’m looking to set up a WFOE for _________ here in China. I’ve previously done so as the MD of a larger _____________, but I’m now breaking out of that enterprise and wanting to set up my own shop. The kind of work we do necessitates hiring a good number of foreign employees to successfully perform projects and service clients.

My ideal structure would be to have about 60%/40% foreign to Chinese employees in this future enterprise, hired inside the WFOE. However, I’ve heard that there are some new restrictions mandating that WFOEs need to hire ten Chinese employees for every foreign employee – in order to satisfy some ratio requirement that’s recently been put in place.

Do you know anything about this? Just wanted to see if you’d heard of this or if you had any wisdom to share.

And here is my response, explaining how we handle this issue (and similar issues as well) relating to WFOE formation:

I am aware of it, mostly through Grace Yang, our China employment lawyer.

Here’s the situation. There is no law, just local government pressure, which can be every bit as important as the law. This pressure varies depending on the city and the business and on how the WFOE is handled. In some cities this pressure essentially rises to something nearly equivalent to law.

We do hear of others having problems with this pressure, but I can tell you none of our clients have ever been impacted by it and that’s because we do everything we can to preempt it. It also helps immensely to have proper contracts with your employees and a proper set of employee rules and regulations, because if your employees complain about the situation, you are just opening doors for the government to do the same.

We preempt this issue by working with government authorities to make sure they know our client will be a good corporate citizen and will generate local jobs and help the economy, whether or not our client meets some arbitrary foreign-local employee ratio the day it opens. We also explain why our client will initially need so many foreign employees and how as it grows its foreign employee to local employee ratio will likely change. But more importantly, a bet on our client is a good bet on local job creation. It pays to have a good relationship with Chinese governmental bodies, but to accomplish that, you need to start now, not when you have a problem. In other words, one of the keys to avoiding China legal troubles is to preempt them, or to get in front of them.

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