How to Calculate Your China Legal Risks

As the Chinese government continues to expand its power and get more concerned about its slowing economy and how it is viewed by its citizens, it just keeps getting tougher on foreign businesses that are not 100% abiding by its laws.

China is right now in one of its perpetual crackdowns on foreign companies doing business in China. This makes now a good time for foreign companies doing business in China or with China to determine their China risks.

The following questions are a good starting point for making that calculation.

1. How does the Chinese government view your industry?

If your China business is in a restricted industry (such as mining or publishing or education) or one in which China’s citizenry has major concerns (such as food and medicine), your risks are likely high. If your China business is in an industry that requires you joint venture with a Chinese entity, your risks are also high. If your business is in an industry the Chinese government views as its own province, such as SAAS, cloud computing, the internet, or telecom, your risks are high. On the flip side, there are certain businesses (like the Internet of Things) China wants to encourage and so if your business is within that sort of category, your risks will be reduced.

2. Does your company make money from China or spend money in China?

If it is the former, you are at increased risk. Does your company have 20 foreign employees for every one Chinese employee? Your risk just went up. Does your company have 300 Chinese employees for every one foreign employee? Your risk just went down.

3. Is your company based in the United States or exporting products to the United States?

Your risk just went up. China is not happy with the United States thanks to the US-China trade war. You now need to make sure that any products you send to the United States truly come from the country from which you say they come. United States’ customs is checking almost everything coming from Asia these days and failing to properly label the products you are sending to the United States can bring huge penalties and jail time. See China Tariffs and What to do Now. See also Vietnam v. China for Product Sourcing.

4. Are your China contracts written in Chinese for China?

If so, your risks are lower. Or are you using English language template contracts written for a Western legal system (like the United States, Canada, Australia, or the EU)? If so, your risks are higher. See China Contracts: Make Them Enforceable Or Don’t Bother.

5. Do you know what your Chinese staff are doing?

Chinese staff often fail to realize foreign companies are treated considerably differently in China than domestic companies, and they fail to act accordingly. Your Chinese staff will usually want to do things the “China way,” but the Chinese government and courts will judge you with the “foreign standard.” Do you think you can do whatever your Chinese competitors are doing? Your risk just went up. Do you believe that as a foreign company you will be more closely scrutinized and that the laws will be likely be enforced against you? Your risk just went down.

6. Are your employment contracts and employer rules and regulations in Chinese and English?

If yes, good for you; you have lowered your risks. See China Employee Warning Signs. Do you constantly update and audit your employment documents and procedures to make sure you are complying with all national and local employment laws and regulations? If so, you’ve lowered your risks.

7. Have you protected your IP from China?

If you have the right contracts and the right IP registrations, you have reduced your risks. If you do not, you have increased your risks. See Protect Your IP from China Now not Later. Do you sometimes show your trade secrets to Chinese companies without first making them sign a China-specific NNN Agreement? If you do, your IP is probably already gone.

8. What is the culture of your China business?

If you are relying on “strategic” relationships to get around the letter or intent of China’s laws, you are at greater risk. If you do not know those with whom you are doing business in China, you are at greater risk. If things are happening that make you uncomfortable, you are at greater risk. If you believe things are happening at your company behind your back, you are at greater risk. If you know your company did not pay every RMB it should have paid in China taxes, you are at greater risk. See China Tax Audits: The Day The Music Died.

9. Are you doing business in China without a Chinese legal entity?

If you are operating in China via a WFOE, Joint Venture or Representative Office, you have reduced your risks. If you are operating in China without such an entity, you are so off the charts on risk that you and your other personnel should leave China today or tomorrow. See Doing Business in China Without a WFOE: Will the Defendant Please Rise.

China’s government is surprisingly tolerant of problems a foreign company has already fixed, and even of problems a foreign company is truly trying to fix. But it rarely tolerates a problem it discovers and about which the foreign company has done nothing. If you check out clean for the above list, congratulations. But if you do not, start making changes now.