Would the Last Foreign Company in China Please Turn Off the Lights: Part 2

International lawyers

Oh, baby this town rips the bones from your back
It’s a death trap, it’s a suicide rap
We gotta get out while we’re young
Cause tramps like us, baby we were born to run

    From Born to Run, by Bruce Springsteen

About a month ago, I wrote Would the Last Company Manufacturing in China Please Turn Off the Lights. After reading the Wall Street Journal article,American Entrepreneurs Who Flocked to China Are Heading Home, Disillusioned, I feel compelled to write part 2.

The gist of Areddy’s article is that American entrepreneurs are tired of China and leaving in droves and it cites a boatload of statistics backing this up. According to Areddy, “disillusion” has set in among expats in China, “fed by soaring costs, creeping taxation, tightening political control and capricious regulation that makes it ever tougher to maneuver the market and fend off new domestic competitors. All these signal to expat business owners their best days were in the past.”

Yes, but this is just the half of it. The other half is the more visceral feelings of those who are fleeing and Areddy nicely captures that too, as reflected in the following quotes from the article:

1. “He lost the feeling ‘it’s all happening’ in Shanghai and will try Thailand.”

2.  “It’s harder for them [foreign entrepreneurs] to live here now.”

3. “How can it be that those who know China best, work there, do business there, make money there, and have advocated for productive relations in the past, are among those now arguing for more confrontation?” former U.S. Treasury Secretary Henry Paulson asked at a November conference in Singapore.

4. “The label of ‘foreigner’ is always on your forehead.

5. “China started to become less clear about what the endgame was for foreigners.”

The article notes how the climate for foreign businesses took a downward turn in around 2012 when Chinese government authorities “stepped up scrutiny of visas. . . ., reinforced China’s Great Firewall of internet controls. . . and [set up a situation where] big domestic tech firms thrived while laws excluded foreign rivals or pressured them to share technology.”

The international lawyers at my firm have heard some variation of all of the above countless times from our own clients, and not just Americans; we hear it from our Canadian and our European and our Australian clients in roughly the same proportion.

And yet, most of the China complaints we hear are from companies that intend to STAY in China because the economics for doing so are still there. These companies are calling us seeking help to stay in China. Some of them are downsizing and seeking help in dealing with China’s complex employee laws. Some are looking for employment benefit advice in an effort to keep their foreign employees who want to leave. Most are calling for advice on how to make things better/safer for them in China. I alone have gotten more than a dozen calls/emails since China threatened “grave consequences” against Canada over Meng Wanzhou’s arrest.

What will China do against Canadian and U.S. companies and personnel? Hard to say, but if past history is any predictor of future performance (and we all know that it is), you should expect China to (at minimum) continue to step up enforcement of its existing laws against all foreigners, but particularly against Americans and Canadians. If you are a regular reader of this blog, you know this sort of thing isn’t new as China has been stepping up its enforcement against foreign companies pretty much since we started this blog more than a decade ago. Way back in 2012, in an article I wrote [link no longer exists], entitled China’s Business Law Trends for 2013, I listed the following as the top three of four things to expect for 2013:

1. China will step up even further its crackdown on foreigners in China violating its visa/immigration laws. If you lack an employee visa, you are  at risk. Yes, this is more likely to impact you if you are from Africa or the Middle East, but we are definitely hearing of increased problems for Americans and Europeans too.

2. China will increase its efforts to root out and shut down illegal and unregistered foreign businesses. China has especially stepped up its enforcement against American and European companies that operate in China but have an entity in Hong Kong without one in the PRC.  We have seen such an increase in this over the last six months that we are wondering if maybe the PRC is using a Hong Kong list.  Providing jobs to Chinese citizens does not let you off the hook on this one. Trust me on that.

3. China will increase its tax collection efforts. This has been going on for years now and if you are doing business in China already I am guessing that your response to this is “yeah, so.” In particular, China has stepped up its transfer pricing efforts and so if your China operations are not making a healthy profit, be prepared for the government to impute healthy profits to it. If you do not already have a good China accountant, get one.  Now.

In response to Meng Wanzhou’s arrest China’s foreign ministry has said: “China always protects the legitimate rights and interests of foreigners in China. But they should also abide by all Chinese laws and regulations.” See this Financial Times article, Chinese and US executives worry after Huawei CFO’s arrest. Right now anyway, I pretty much take them at their word, but this is a double-edged sword. This means that if you are abiding by Chinese law you should be fine, but it also very likely means that if you are not, you are at great risk.

If you are a regular reader you know that our perpetual advice to avoid China’s stepped up enforcement against foreigners is to do whatever you can to make sure neither you nor your company become low hanging fruit for such enforcement. What does that mean for right now? It means the following, in a way that has become more pressing than ever before:

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