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China Business: Turns Out it is Easy After All

China media and entertainment lawyer

I did a post the other day, China Business. We Never Said It Would Be Easy, that discussed how the global economic downturn is generating legal problems.

Someone named Tim left the following comment, to which this post is addressed:

I think there is a disconnect between your assertions of Beijing interests in not turning back the clock and what is happening on the ground in terms of FDI. At the local levels, we are beginning to see a reverse on policies regarding quantity vs. quality that was introduced in late 2007/early 2008. Mid-Summer ’08 it was almost impossible to setup an export-oriented trading company within a 2nd/3rd tier development zones in the Yangzi River Delta Region, now many of these areas are beginning to introduce incentives to draw in new investment: including 2/3 tax holidays, subsidized rents, etc.

We are also beginning to see these incentives being offered in districts within Shanghai regardless of whether or not the entity has qualified for incentives underneath encouraged statuses.

Further, WSJ, just reported that Beijing is easing the registration process by allowing investments under US$100 million to seek approval from local commerce bureaus. It is not clear from the article if they mean local AIC’s; however, this could effectively take state-level interests out of the approval process and a reversion of the trend.

I would suggest, however, that in the long run you will be right as many of these local-level changes will fall on the wayside, but at least right now it looks like pre-’08 investment climate.

I agree with Tim 100%. There is a dichotomy between what happens in terms of getting into China and what happens once you are there. There is also a dichotomy between getting into China legally and operating legally, and making legal mistakes. Let me explain.

A couple months ago, I wrote a post, China Joint Ventures and The Hotel California Effect, on how joint venture business was (and still is) going great guns at my law firm. We have seen a massive uptick in BOTH forming China joint ventures and in helping Western companies extricate themselves from their existing China joint ventures. In that post, I explained the situation as follows:

The down economy has had the interesting effect of accelerating the formation of joint ventures by companies that likely would have gone it alone when funding was easier and also accelerating the breakup of joint ventures due to disputes that were overlooked when plenty of money was coming in. Four to five years ago, many companies would contact my firm with very ill-formed ideas of how to go into China. These companies were seeking to go into China not so much with well formulated plans for success, but because they were worried that if they did not go in, they would be missing the boat. To a lesser extent, those days have returned as foreign companies feel they “must” go into China because its economy, though weakened, is a last bastion for growth. Believing they lack the funds to go it alone, many mouth the joint venture mantra.

The problem with joint ventures is that their formation is virtually never easy, because the key to a good joint venture is to raise and resolve as many potential problems as possible, before entering into the joint venture agreement. It is virtually always more expensive to form a joint venture than to form a wholly foreign owned entity (WFOE). This is not a reason not to do a joint venture, but it is a reason not to think of them as easy, quick or cheap. The problem with easy, fast and cheap joint ventures comes down the road, when the problems arise.

That down the road time is now for many joint ventures. The end of the boom times means that what could once be passed over or ignored is now important. Foreign businesses that entered joint ventures 4-5 years ago are now trying to get out of them with some semblance of assets, while their Chinese partners insist that they instead put more funds into the venture.

The problem we are seeing is that so many of these hastily formed joint ventures were set up in such a way that the Western company pretty much has two choices: walk away and turn everything over to the Chinese partner or continue in the money draining venture.

The same is true of China overall. It has always been relatively easy to get your money into China or to start a business in China illegally; the difficulty usually only comes down the road when you cannot get your money or assets out, or when you get deported, or when you are hit with a massive tax penalty, or when you get jailed, or when someone uses your intellectual property and you have no recourse.

Now though, what is happening — and what I think Tim is highlighting — is that there is much more of a welcoming attitude by the various Chinese governmental agencies towards foreign business. We too are seeing that. Foreign businesses that a year ago would probably have been required to put up $500,000 in minimum capital, are now being hit with a $300,000 assessment. Businesses that formerly might have taken months for approval are getting approved in weeks. Businesses that might have been told to clean up their act environmentally are now being allowed into China without comment. Tiny foreign businesses that might have been treated with disdain a year ago are now being welcomed and sometimes even subsidized.

China is most definitely open for foreign business again, just like 2007.

But, and this requires emphasis, this welcoming is not reflected in a change of laws so much as it is reflected in changes of attitude by the various bureaucracies towards law abiding foreign companies. We have seen no evidence that once in the country, there will be any increased tolerance towards foreign companies violating Chinese laws. On the contrary, we have seen a straight line towards increasing intolerance of foreign companies that violate China’s laws.

Bottom Line
It is easier to get your (legal) business into China than it has been for years, but, once in, you absolutely should abide by the law.

2 responses to “China Business: Turns Out it is Easy After All”

  1. Exactly – the incentives being offered today will eventually dry up and the ability of the local authorities to honor these agreements will, I suspect, become tenuous. Although discussing the incentives with local authorities is recommended, a legal entity along with the right location should take priority.

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