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The Chinese Market

The Chinese Market


Entry Methods & Investment Strategies

Danai Krokou
The Chinese Market: Entry Methods & Investment Strategies

Copyright © Business Expert Press, LLC, 2021.

Cover design by Danai Krokou

Interior design by Exeter Premedia Services Private Ltd., Chennai, India

All rights reserved. No part of this publication may be reproduced,


stored in a retrieval system, or transmitted in any form or by any
means—electronic, mechanical, photocopy, recording, or any other
except for brief quotations, not to exceed 400 words, without the prior
permission of the publisher.

First published in 2021 by


Business Expert Press, LLC
222 East 46th Street, New York, NY 10017
www.businessexpertpress.com

ISBN-13: 978-1-63742-032-4 (paperback)


ISBN-13: 978-1-63742-033-1 (e-book)

Business Expert Press International Business Collection

Collection ISSN: 1948-2752 (print)


Collection ISSN: 1948-2760 (electronic)

First edition: 2021

10 9 8 7 6 5 4 3 2 1
To all of you who dare and take risks. . .
China has telescoped in one generation what other countries took
centuries to achieve. No country has managed to accomplish so
­
much in such a short time. China’s unique attempt to complete two
­transitions at once—from a command to a market economy and from
a rural to an urban society, is without ­historical ­precedent.

—The World Bank, China 2020: Development and


Challenges in the New Century
Description
With its dual appeal as the world’s factory and the largest consumer
­market worldwide, China is about to become the preferred playing field
for American and European businesses with global ambitions. China’s
massive global development project, the Belt and Road Initiative (BRI),
now includes more than two-thirds of the world’s countries. In the com-
ing years, the most promising entrepreneurs and most ambitious compa-
nies will be growing in China, with China. Entering the Chinese Market
aims to assist Western businesses and entrepreneurs to understand and
effectively enter the Chinese market. An essential factor for the success
of investors and professionals engaging in business in or with China is
being able to understand and correctly set up a sustainable and effective
corporate structure. This book discusses different company structures,
their functions, and their respective liabilities and provides practical and
­operational observations.
The book details all applicable decision-making processes to help you
choose the most suitable structure based on your business scope, spe-
cific needs, and available capital when entering China. In addition, it
discusses all relevant rules, regulations, documentation, and management
issues related to the establishment of different types of structures such as
WFOEs (wholly foreign-owned enterprises), representative offices (ROs),
joint ventures (JVs), and other forms of investment. Topics covered in
Entering the Chinese Market also include tax, legal, intellectual property
rights, common pitfalls, and ways to address them.

Keywords
China investment; company structure; WFOE; U.S.–China joint
­ventures; U.S.–EU joint ventures China business; China investment;
Chinese market; China strategy; China corporate structure; entry
­
­methods; ­market entry
Contents
Author’s Statement��������������������������������������������������������������������������������1
Introduction������������������������������������������������������������������������������������������5
“Know before You Go”: Devising Your China Strategy������������������������11
Foreign Direct Investment (FDI) Inflows and
Outflows in Today’s China������������������������������������������������������������������15
China’s Belt and Road Initiative (BRI)������������������������������������������������21
Broad Methods of Market Entry���������������������������������������������������������27
Market Opportunities and Challenges�������������������������������������������������31
Industry Applications��������������������������������������������������������������������������41
Types of Companies with Easier Access to China��������������������������������47
Licensing and Franchising�������������������������������������������������������������������53
Representative Office (RO)�����������������������������������������������������������������55
Investment������������������������������������������������������������������������������������������59
Establishing and Running a Business in China������������������������������������77
How to Establish a Representative Office��������������������������������������������81
How to Establish a Wholly Foreign-Owned Enterprise (WFOE)��������89
How to Establish a Joint Venture (JV)�������������������������������������������������93
How to Establish a Trading Company (FICE) in China����������������������97
Shortcut Options: Third Jurisdictions as a Gateway to China������������101
Tax and Accounting��������������������������������������������������������������������������111
Location Options������������������������������������������������������������������������������123
Human Resources�����������������������������������������������������������������������������129
Intellectual Property Rights Protection����������������������������������������������139
Due Diligence�����������������������������������������������������������������������������������145

Final Thoughts�����������������������������������������������������������������������������������149
Useful Links���������������������������������������������������������������������������������������151
About the Author��������������������������������������������������������������������������������155
Index�������������������������������������������������������������������������������������������������157
Broad Methods
of Market Entry
Since China’s entry into the WTO back in 2001, the Chinese government
has continued to fulfill its WTO engagements by gradually opening up
various sectors to foreign investors. Along these lines, the government’s
stated goal is to further improve the foreign investment structure espe-
cially by encouraging foreign investment in the high-end manufactur-
ing industry as well as the strategic and modern service industries with
subsidies, administrative convenience, as well as tax and tariff incentives.
Despite the current tumultuous global financial environment, recent data
published by MOFCOM, the Chinese Ministry of Commerce, shows
that China is continuing to attract impressive amounts of FDI. Foreign
investment into China comes in several foreign-invested entity forms.
Choosing the appropriate structure depends on a number of factors,
including business scope, industry sector, and investment size.
Despite certain challenges, China is a great place for many compa-
nies. Foreign companies have the possibility to manufacture in China,
to sell into China, or to source their goods from China. Exporting your
products is one way to enter the Chinese market and it is the least risky
one, in terms of both operational cost and invested capital. While each
mode of entry presents its strengths and weaknesses, the great majority
of companies usually prefer to develop a gradual approach based on their
­available resources and time. When deciding which method of entry is
the most suitable for your business it is necessary to consider the size of
your c­ ompany, the time and resources available, the nature of the prod-
ucts or services you want to sell, the business conditions and regulations
applying to the particular industry your products belong to, and whether
there  is need for on-the-ground representation (e.g., marketing and
­after-sales service).
28 The Chinese Market

The export of products to China involves engagement of a company


which has an import–export license in accordance with Chinese laws.
Therefore, such a company must be registered in China, in which case
the term “importer” in Chinese trade terminology refers to China-based
companies possessing an import–export license. Although exporting
generally requires considerable time investment, it is a good option for
companies that want to avoid the costs of setting up in China but are
still attracted by the profit potential of the Chinese market. From a prac-
tical perspective, direct export is suitable for services or technology or for
unique products of smaller quantities where an established distribution
network is not necessary. Another major advantage is the cutting out of
middlemen such as agents and other intermediaries.
The downside is that such companies will have to be responsible
for conducting their own market research as well as carrying out all the
required administrative procedures such as ensuring that their products,
services, or technology can enter the Chinese market and that relevant
standards and licensing and labeling requirements are met. Additionally,

Wholly forelgn-
owned enterprise

Joint Venture
INCREASE IN TIME AND RESOURCES NEEDED

INVESTMENT

Partnership
ENTRY MODES

Representative
Office

Direct Selling/
Exporting

Overseas Agent or
Distributor
EXPORTING

Franchising

Licensing/
Technology Transfer
Broad Methods of Market Entry 29

companies will have to handle relations with financial institutions, freight


forwarders, and customs procedures if those are not handled by a ­Chinese
importer. It might be very time consuming at the early stages but in the
long run the result will be that companies will develop a much deeper
understanding of the Chinese market, their customers, and the processes
of trading in China. To find out more about exporting strategies to China
available to Western businesses, you may refer to the book Trading with
China: Exporting Goods, Services and Technology to the Chinese Market.

800
700
600
500
400
300
200
100
0

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
China Indonesia Malaysia Mexico
Philippines Thailand Vietnam
Index
ABC Consulting (Shanghai) LTD, 90 structure, 72, 90, 106, 108
Annual cooperative examination, trading, 47
121–122 Compensation, 134–135
Approval Certificate and Business Competitive threat, 26
License, 94–95 Consulting services company, 47
Articles of association, 79–80 Consumer pull, 25
Association of South East Asian Consumption, 37–38
Nations (ASEAN), 107 growth, 10
Consumption tax (CT), 118
BeiDou, 51 Contracts, 132
Belt and Road Initiative (BRI), 1, Cooperative/contractual joint venture
21–26, 49–51 (CJV), 66–67
Branch office, 108 Corporate income tax (CIT),
Bureaucracy, 126 111–112, 115
Business tax (BT), 117 Costs, 127
COVID-19, 2, 3, 8, 18–20, 33, 49
Catalogue for the Guidance of Custom duties (CD), 118–119
Foreign Investment Industries,
41, 43 Decision-making, 150
Catalogue of Priority Industries for Demographics, 38–39
Foreign Investment, 41, 43 Deng Xiaoping, 17
Central-Western Region, 43 Digital Silk Road, 50
Certified Public Accountant Documents, 78–79, 83–87, 91–92,
(CPA), 65 94–95, 98–99
Chen Zhaoxiong, 50 Domain names, 142
China, 5–10, 123–124, 129–130 Due diligence, 145–147
investment, 16, 112
location choice, 124–127 Employee handbook, 133–134
major cities, 124 Encouraged industry, 41, 42, 44
strategy, 11–13 Entry methods, 3, 55
China Securities Regulatory Environmental Impact Report, 94
Commission (CSRC), 74 Environmental Protection Evaluation
Chinese Labor Law, 133 Report, 80
Chinese law, 28, 59–61, 84, 111 EO intelligence, 42
Circular economy, 36 Equity joint venture (EJV), 64–66
Climate, 126 Establishment process
Closer Economic Partnership articles of association, 79–80
Arrangement (CEPA), 102 documents, 78–79
Communist Party of China, 6 feasibility study, 79
Company FICE, 97–99
consulting services, 47 joint venture, 93–96
manufacturing, 48 preparation, 77–78
158 Index

Representative Office, 81–88 legislation, 44–45


WFOE/WOFE, 89–92 permitted and encouraged, 41, 42,
44
Feasibility study, 79 restricted and prohibited, 41–44
FESCO, 132 Intellectual property rights (IPR), 53,
FIJSC, 71–72 139–143
Financial documents, 145 International trading companies, 105
Five-Year Plan (FYP), 32–35, 37 Investment, 59
Foreign direct investment (FDI), cooperative/contractual joint
15–18 ventures, 66–67
COVID-19 and, 18–20 equity joint ventures, 64–66
Foreign Enterprises (FE), 113 foreign-invested commercial
Foreign individuals, 113 enterprise, 68–69
Foreign-invested commercial foreign-invested partnership, 69–71
enterprise (FICE), 26, 47, 60, joint stock company, 71–72
61, 68–69 joint ventures, 62–64
establishment process, 97–99 mergers and acquisitions, 74–76
Foreign-invested enterprises (FIEs), structures, 72–73
16, 112–113 WOFE, 60–62
Foreign-invested partnership (FIP),
69–71 Joint stock company, 71–72
Foreign Investment Industrial Joint venture (JV), 62–64, 67
Guidance Catalogue, 26 establishment process, 93–96
Foreign nationals, 87
Foreign trading company, 47 Labor costs, 32
Form for Establishing a Wholly Laozhu, 149
Owned Foreign Enterprise, Legal documents, 145
91–92 Limited Liability Partnership (LLP),
110
Gross domestic product (GDP), 7–9, Limited Partnership (LP), 109–110
19, 20 Local bank, 86
Logistics, 126
High-tech industry, 48–51
High-Tech Zones, 49 Manufacturing company, 48
Hiring expats, 130–131 Manufacturing production, 19
Hong Kong, 101–103, 110 Mao Zedong, 32
advantages, 103–104 Market
to international trading companies, attractiveness, 25
105 entry, 27–29, 55, 59, 63
taxation, 104–105 size, 125
See also Singapore Market opportunity, 31–32
Human resources, 129–138 circular economy, 36
Five-Year Plan, 32–35, 37
Incentives, 127 robotics industry, 35–36
Individual income tax (IIT), 135–137 Minimum wage, 135
Industry, 41 Ministry of Commerce (MOFCOM),
approval authority, 43 60, 65, 74, 77
high-tech, 48–51 Ministry of Finance (MOF), 111
Index 159

Name Preapproval, 93–94 State Administration of Industry and


National Bureau of Statistics of Commerce (SAIC), 57
China, 103 State Administration of Taxation
(SAT), 111
Office chops, 85 State Development and Reform
Operational efficiencies, 25 Commission (SDRC), 74
State Owned Assets Supervision and
Partnership, 109 Administration Commission
Patents, 140–142 (SASAC), 74
Payroll, 146–147 State-owned enterprises (SOEs), 8, 15
Permitted industry, 41 Supply chain, 147
Personal interview, 130 Sustainable development, 37
Post-setup registration procedure, 84,
95–96 Tax, 113–114
Preinvestment, 25–26 bureau, 86–87
Priority industry, 43 business, 117
Private limited company (PTE Ltd), 108 consumption, 118
Probation period, 132–133 corporate, 115
Profit repatriation, 121–122 custom duties, 118–119
Prohibited industry, 41–44 incentives, 119
Public security bureau (PSB), 84 profit repatriation, 121–122
rates, 112
Registered capital, 60 value-added tax, 116–117, 120,
Representative Office (RO), 55–58 121
establishment process, 81–88 withholding, 115–116
Singapore, 109 Taxation, 104–105, 111
Restricted industry, 41–44 Taxpayer, 120–121
Retail company, 47 Technical supervision vision
Robotics industry, 35–36 (TSB), 85
Technological revolution, 39
Sales, 147 Trade and currency issues, 38
Shanghai, 117 Trademarks, 140–142
Silk Road e-commerce, 22 Trade secrets, 142–143
Singapore, 106–108 Trading company, 47
branch office, 108
Limited Partnership, 109–110 Value-added tax (VAT), 77, 114,
LLP, 110 116–117, 120, 121
partnership, 109
private limited company, 108 Wages, 31, 135
Representative Office, 109 Wholesale company, 47
sole proprietorship, 109 Wholly Foreign-Owned Enterprise
Social insurance, 137–138 (WFOE/WOFE), 26, 47,
Social issues, 38 60–62, 67, 77, 89, 93–94
Sole proprietorship, 109 establishment process, 89–92
Special Administrative Region (SAR), Withholding tax, 115–116, 135–137
101 World Trade Organization (WTO),
Stakeholder engagement, 26 7, 27
State Administration of Foreign
Exchange (SAFE), 85–86 Xi Jinping, 35, 50

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