How to Handle China’s Rising Risks

Way back in 2012, I wrote an article for the Wall Street Journal, entitled, China’s Slowdown and American Business: Hardly a week goes by without complaints about payment problems or bankrupt debtors.

I wrote a similar article for Forbes Magazine in 2014, entitled, How Businesses Should Deal With China’s Economic Slowdown. I summed up that article in the following concluding paragraph:

The key is to be proactive. If you find yourself in a bad situation with a Chinese company going under, there usually is no remedy after the fact. Bankruptcy in China generally consists of a company shutting down in the middle of the night and its owner fleeing to another town. The key to weathering China’s slowdown will be for companies to go back to basics. Think afresh about what your company contributes to China’s economy and how that is likely to shape policy makers’ opinions. Focus on scrupulous regulatory compliance and renew your focus on due diligence at a company-to-company level. Above all, no company doing business in China should blithely assume that a slowdown won’t affect it.

Why am I discussing those two articles here, when China’s economy is doing okay, at least for now? Because our China lawyers are increasingly hearing of client problems with their Chinese counterparts. These problems may or may not be due to a declining economy in China, but they are happening and it feels like they are happening — as they usually do — for what comes down to economic reasons. I mean, let’s face it, many Chinese companies are going through tough times these days, what with having to navigate an increasingly harsh and intrusive government, a resurgence of COVID that is greatly impacting logistics in much of the country, and a strong post-COVID push by foreign companies (especially those that ship their products to the United States) to diversify their supply chains away from China.

All of these things are impacting China businesses in a way that feels like previous China economic slowdowns, making those previous slowdowns a good roadmap both for what we can expect from what is happening today and for how companies should react. The best assumption is that the Chinese government will respond to the current slowdown by attempting to improve social harmony more even than trying to improve micro and macro economic numbers.

And what we are seeing and hearing bears this out, especially with how the Chinese government is focusing much more on trying to quash the Coronavirus than it is on trying to remedy COVID-caused logistics problems.

The corollary to China’s prioritization of its citizens’ contentment is that China is going to get tougher on foreign companies doing business in China, just as it (and nearly every other country) has always done when times are tough. Everything foreign businesses and foreigners do will be under heightened scrutiny. It has never been easier for well-funded, nonpolluting foreign companies to secure approval to operate in China. Conversely, it has never been tougher for foreign companies that pollute, pay low wages, or have no plans to hire Chinese employees to get their foot in the door. It has also never been tougher for foreigners that work for Chinese companies. Our China lawyers have never before received so many emails from foreigners asking for legal advice after having been terminated or looking to quit.

On the manufacturing front, the odds of you having problems with your Chinese factory will considerably higher if your factory makes products that compete with Thailand, Vietnam, Taiwan or Mexico, as opposed to a factory that faces little to no competition outside China. Foreign companies that do business with Chinese companies in low-tech, low-wage industries such as textiles, clothing, shoes and low-end electronics and toys should be very much on their guard and if they have not already started looking elsewhere for their products, now is time to start. See On the IMMEDIATE Importance of China Manufacturer Due Diligence, written by one of our China manufacturing lawyers earlier this week.

Our international litigators are also getting an increase in inquiries from companies that paid for a product and the company it paid no longer exists. Sometimes the Chinese company still exists but it needs “more money” from the American company to buy raw materials for the product it already promised to produce. Substandard product complaints are also way up.

If you are doing business in China, it is imperative that you understand what is happening within your own industry within China. This might mean sending someone you trust to visit your Chinese factory, warehouse or office to look for warning signs of a company in distress. I realize that with COVID it is borderline impossible to get into China, but if you have your own people in China, now is a good time to deploy them, and if you don’t, find someone you trust who is already there. Or it might mean taking out insurance to cover your China business or transaction.

The key is to be proactive. If you find yourself in a bad situation with a Chinese company going under, there usually is no remedy after the fact. Above all, no company doing business in or with China should blithely assume that they will not be impacted.

UPDATE: I already recieved an email from a client this morning, attaching this Wall Street Journal article: China’s Economy Flashes Hints of Weakness: Expansion in the factory sector slowed in June, while the services sector softened as Covid-19 outbreaks dampened consumer sentiment. The email stated that when this person first read the above post, he thought I was being too gloomy about “the situation in China”, but just since he read this post, he saw this WSJ article talking about China’s current economic weakness/risks and he learned that his company’s latest “big order” had been delayed for “as yet unknown reasons.”

What are you seeing out there?

Read More

China Business