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China Law for Foreigners: Slip Sliding Away

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For the last few years, one of the main themes of this blog has been how China has and will continue to increase its enforcement of its commercial laws, particularly as they apply to foreigners. We have written about the increase in crackdowns on those in China without the proper visa, about closing of unregistered businesses, the need to comply with the Labor Contract Law, and a stepping up of environmental enforcement.

I’d like to take some of it back.

In the last three months or so, the law for foreigners has definitely shifted a bit in China. It has not changed on the books, but it has changed out in the field and foreigners doing business in China and those considering doing business in China need to be aware of these changes and how they might impact their business.

Without delving too deeply into legal philosophy, let me just state there is real value in having written laws that are consistently enforced. This is true for all kinds of reasons, many of which should spring quickly to mind. For the last few years, China was marching towards a more consistent and sustained enforcement of its written laws relating, most of which are really quite sensible. The last few months have seen a change in this march.

In determining how a country or a region will enforce its laws, one first has to figure out the determinative questions. In China, the questions I always ask are what is best for the Party’s maintaining its power and/or what is best for the local bureaucrat making the decision. The changes in China over the last few months are not so much due to a change in questions as to a change in answers.

Over the last few years, foreigners doing business in China often made the mistake of believing the Chinese government would not shut down their small business because their small business brought money to China. This was wrong because though the small business may have brought money to China, it also brought anti-foreigner sentiment, and foreigner hassles. As China’s economy continued to grow, the perceived value of small foreign businesses declined and their legal treatment worsened.

Now, as China’s economy is declining, the perceived value of foreign businesses has increased, but the perceived value of foreigners has actually declined. Let me explain this in simple and stark terms (which is how this sort of thing should be explained because this is how this sort of thing is usually viewed: businesses bring in jobs and money, but foreigners take jobs that would otherwise go to the Chinese. I am not saying these statements are true, but with this sort of thing, perception is what matters.

So what we have been seeing in China, in answer to the questions, is that approvals for registering foreign businesses seem to be getting easier, faster and cheaper. Employment law enforcement is on the decline (see some of our previous posts on this here and here), and the crackdown on unregistered businesses and visas is continuing apace.

What this means for foreign businesses in or seeking to get into China is the following:

1. If you are a foreigner in China illegally, watch out, but you probably already knew that.

2. If you are a foreign business doing business in China and want to keep doing business in China, you should register right away to get legal.

3. If you are a foreign business in China, now is a good time to seek to register your business, at least from a strictly bureaucratic perspective. Government concerns about minimum capital requirements and impact on the environment seem to be down as compared to the desire to bring in foreign companies to create jobs. The focus now is on job creation and if you can show that your business will create jobs, your chances of being welcomed into China have just increased.

4. If you are a foreign business doing business in China, you should still strive to follow the law to the letter. As tempting as it is to take advantage of this legal softening on, for example the employment law and environmental law fronts, there are huge risks in doing so. Local officials in China are notorious for telling foreign businesses X is okay and then the foreign business gets in trouble with Beijing for having done X. There is also the very real possibility that while one local official tells you X is okay, some other local official will penalize you for doing X, since X has always been prohibited by law.

It is easy being a lawyer when the laws are clearly written and always followed. In those circumstances, we just explain the law to our client and tell them what they must do to comply. When enforcement gets spotty, however, we must also aid in the more difficult and dicey task of assessing the risks and rewards of non-compliance.

What are you all seeing out there?

4 responses to “China Law for Foreigners: Slip Sliding Away”

  1. Sorry for my ignorance, but when you say “doing business in China” what does that mean? Plenty of companies “do business in China” i.e. buy goods, sell goods (if domestically this may be a bit more tricky) but without setting up an office here. Does this mean that they are doing it illegally? If you are a foreign company and you buy goods within China for export without registering a company in China are you “doing business” illegally? Foreign companies sign purchasing contracts, IPO agreements, confidentiality agreements when they trade in China, are these activities illegal without registration? It seems to me no, so what constitutes “business” that would require official registration of a Chinese company? Sorry for what might be a silly question, but this term seems improperly defined and absurdly broad. Thanks.

  2. Dan, thank you for that piece. Cogently written and well-argued. It supplied its own answer. I’m a mere salaryman working for a Chinese company, where orchestrated control of our options and daily obfuscation is usually pulling our strings. Probably nothing really illegal, but just not much that’s very nice at the moment. For example, the head office suddenly deciding they will retain our FECs, and if we buck at that, our paychecks will be withheld. On a bad day, it can be my own apprehension that some foreigners are tolerated here only for as long as they can be replaced. With what other kind of creature, I don’t date think. I hope I’m wrong. It’s a great country.

  3. I have decided to sett up a biz in China, marketing company, how should i go about doing so??
    I’m kinda messed up with the detail of what to do first or Second.. could u be kind enough to help me along??

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