10-Point Checklist for Foreign Businesses in China

Table of Contents

A China Legal Checklist for Foreign Businesses

This post examines ten key legal areas that often present hurdles for foreign companies in China. Most importantly, it provides basic and concrete recommendations on how to deal with China’s legal landscape and avoid costly missteps. Mastering compliance across the following ten critical domains is essential for foreign entities seeking to mitigate their China risk exposure:

Business Licensing and Approvals
Contracts
Intellectual Property Protection
Anti-Bribery and Anti-Corruption
Import/Export Regulations
Product Liability
Dispute Resolution
Employment and Labor Laws
Data Protection and Cybersecurity Laws
Geopolitical Considerations

Make no mistake: China is risky and constantly getting riskier. This guide aims to provide businesses with actionable strategies and best practices gleaned from lessons learned by foreign companies in China. Its goal is to give you a better understanding of your China risks and how to reduce them.

1. Legal Operation in China: Business Licensing and Approvals

Obtaining proper business licensing and approvals in China can be tricky for foreign companies, since requirements are often complex, stringent, and prone to change.

China enforces rigorous standards for foreign companies aiming to operate within its borders. If you plan to do business in China, you must do so with a legal entity. This entity can be a WFOE, a JV, or a representative office. Each comes with distinct tax ramifications, liability considerations, and operational guidelines.

Your China business operations must adhere to the scope approved by the Chinese government, and overstepping these boundaries can lead to fines or the halting of operations. Ensuring that your China business operations have the necessary permissions and operate in sync with its registered scope is essential, as any discrepancies usually lead to serious legal consequences.

Recommendations for China Business Structures

Strategically select an entry structure that aligns with China’s laws and your business’s objectives.
Secure all necessary licenses for your chosen location, sector, and business plans.
Periodically revisit your compliance status in light of China’s always evolving regulations.
Expand the scope of your business operations only after first obtaining explicit approval from the Chinese government.

2. Effective Contracts in China: Making Them Enforceable

Forming enforceable contracts in China poses risks for foreign parties, as Chinese contract law differs fundamentally from Western contract law.

It almost always pays to have a written contract, and it is usually best to have that contract be in Chinese. If there are inconsistencies between the Chinese version and a foreign language version of your contract, Chinese courts will almost always rely on the Chinese version.

Chinese contract law is fundamentally different from Western contract law. In the West, much in a contract is implied. In China, if it isn’t explicitly written in an old-style contract (not just in emails or POs or Invoices), there is a good chance the Chinese court will ignore it. It’s essential that you know exactly how your contract will be enforced in China. before you sign it. See Drafting China Contracts that Work.

Guidelines for Chinese Contracts

Use bilingual contracts but designate only one language (usually Chinese) as the authoritative/official text.
Define all terms explicitly; don’t rely on implied assumptions.
Engage experienced bilingual attorneys to draft and vet your China contracts.
Periodically evaluate your existing contracts to ensure they comply with China’s constantly changing laws.

3. Intellectual Property in China: Safeguarding Your IP Assets

China’s first-to-file trademark system and challenging IP enforcement environment make protecting intellectual property highly difficult for foreign companies.

Robust IP protection is challenging but vital in China. Trademarks and patents registered elsewhere have little to no force in China. IP Theft and infringement are persistent (and increasing) threats.

You must not only register your patents and trademarks in China, you also must monitor their use and enforce your rights. China has a “first-to-file” system, which means the first person to file for a particular trademark will usually get it, regardless of who used it first. As a result, “trademark squatting,” where local entities register foreign trademarks before the original owners can, is a common issue. Beyond trademarks and patents, consider non-disclosure agreements and non-compete clauses for employees and business partners, especially when sharing sensitive information. See, The Five Keys to Protecting Your IP from China.

China IP Protection Strategies

Prioritize early IP registrations in China, especially trademarks.
Diligently scout for infringements and assertively defend your rights.
Be judicious in information sharing until you have comprehensive IP safeguards in place.
Liberally use non-disclosure agreements (like China NNN Agreements) for employees, partners, and pretty much any company with which you do business in China.

4. Anti-Bribery and Anti-Corruption: Navigating Payments Legally

Navigating China’s strict anti-graft laws and enforcement poses compliance challenges for foreign firms accustomed to different norms regarding gifts, hospitality and acceptable business practices.

Foreign entities are required to adhere to China’s stringent anti-corruption measures, in tandem with their native anti-bribery and anti-corruption laws, exemplified by statutes like the FCPA.

Guidelines for Anti-Bribery Compliance in China

Establish a comprehensive compliance policy complemented by a transparent code of conduct.
Provide anti-bribery educational sessions to your staff.
Implement robust financial governance mechanisms and conduct routine audits.
Conduct thorough due diligence on intermediaries, collaborators, and prospective acquisitions, and any other Chinese company with which you will be or are doing business. This is a must.

5. Navigating China Imports and Exports: China Customs and Duties

Frequent changes to China’s import and export regulations, product classifications, and port-specific procedures make compliance complex for foreign companies.

Understanding China’s import/export regulations, along with its customs and tariff structures, is becoming more challenging, both because of geopolitics, and because the Chinese government no longer hesitates to use these to help fund itself or to go after foreign companies/countries it does not like.

The frequent changes in product categories, assessments, and protocols—and even variations by port—demand agility. Failing to adhere to China’s import and export laws can (and increasingly does) result in severe consequences.

Guidelines for China Import/Export Compliance

Regularly monitor amendments to product classifications, lists of restricted items, and tariff rates.
Cultivate your relationships with certified customs brokers and foster good relations with Chinese customs officials.
Leverage the benefits of free trade pacts and capitalize on tariff exemption schemes, when applicable.
In the face of customs-related inquiries or issues, immediately seek legal counsel. See China Customs Problem? Keep Your Mouth Shut!

6. China Product Liability: Protecting Your Business

China’s stringent product liability laws and consumer safety expectations create extensive risks around defects and quality control issues that foreign companies need to manage.

Defective or unsafe products made in or imported into China face hefty penalties both from the Chinese government and from Chinese consumers. Whether you’re importing goods from China or selling within the country, understanding your potential liabilities is crucial. This extends beyond just the manufacturing process. Are you sure your entire supply chain adheres to safety and quality standards? Comprehensive liability coverage and supply chain quality control can be essential safeguards.

Guidelines for China Product Liability Assurance

Diligently assess potential liability across your entire supply and distribution frameworks.
Establish robust safety and quality assurance measures.
Seek international compliance certifications from the suppliers in your chain.
Secure comprehensive product liability insurance, emphasizing especially high-risk goods.

7. China Dispute Resolution: Approaches and Mechanisms in China

Resolving business disputes in China can be challenging for foreign parties, given systemic issues around local protectionism, arbitrary rulings, and enforcement obstacles.

In China, business disagreements and contract violations are incredibly common. Multiple paths such as litigation, arbitration, and mediation exist, each with its own advantages and drawbacks for international businesses.

The real value of a favorable judgment or decision lies in its ability to be enforced. Grasping the intricacies of executing judgments, whether they originate from a domestic court or an arbitration body, is fundamental to formulating a sound dispute strategy and drafting a contract that can work for you.

Guidelines for China Dispute Management

Ensure all your contracts incorporate well-articulated dispute resolution provisions.
Select the most appropriate venue for your conflicts.
Familiarize yourself with the timelines, protocols, and enforceability associated with various dispute resolution methods.
Consider the benefits and challenges of domestic versus international arbitration centers.
Establish preemptive strategies for potential litigation defenses.

8. Understanding China Employment Law: Upholding HR Conformity

China’s extensive HR compliance obligations around benefits, work hours, unions and termination impose burdens and risks for foreign employers.

China’s employment framework has specific mandates on benefits, social welfare payments, union affiliations, and strict termination protocols, among other things. Breaching China HR standards can result in severe consequences. Distinctive aspects of Chinese employment include a maximum weekly work limit, typically at 44 hours, obligatory perks such as social insurance and housing fund allocations, and explicit directives on overtime and holidays. See A China Employment Best Practices Guide.

Guidelines for China Employment Compliance

Engage with labor law experts to thoroughly grasp applicable salary regulations, working hour constraints, and leave entitlements specific to your industry and region.
Punctually fulfill all mandated social insurance and housing fund obligations.
Implement rigorous processes for recruitment, dismissal, organizational changes, and maintaining employee documentation.
Regularly update and educate your HR personnel on evolving Chinese employment directives.

9. China Data and Cybersecurity Standards: Aligning with China’s Norms

China’s data localization mandates, privacy laws, and cybersecurity rules create compliance challenges for foreign companies transferring data cross-border.

China’s Cybersecurity Law emphasizes the imperative of housing critical data domestically, combined with rigorous stipulations for data access and manipulation. The Personal Information Protection Law (PIPL) in China offers individuals profound control over their data, demanding rigorous consent prerequisites for collecting and processing the data of Chinese nationals. The relatively recent and intricate rules on data localization and trans-border transfers present compliance challenges for companies that transfer Chinese user data beyond borders.

Guidelines for China Data Protection

– Assure that your data management adheres to China’s statutory mandates, spanning data collection, storage, processing, and deletion.
– Construct and enforce powerful cybersecurity methodologies and safeguards to mitigate your risks of breaches that could lead to legal repercussions and a tarnished reputation.
– Regularly revamp your compliance mechanisms to remain synchronized with China’s rapidly evolving data regulations.

10. Navigating Geopolitics: Understanding China’s Global Stance

Your business cannot ignore the geopolitical landscape. The interplay between China and the West is fueled by politics, economics, and territorial ambitions, and these things will continue to profoundly impact foreign companies that do business in or with China. Trade wars, tech bans, reputation backlash, and other geopolitically induced issues require strategic planning.

A senior executive from a leading international risk consultancy recently told me that the difference between China and virtually every other country in the world in which Western companies commonly operate is that China has many risks that are so arbitrary and so political, that they are virtually impossible to protect against. An example he gave is that everyone talks about crime in Mexico, but foreign businesses can easily avoid that. Nobody talks about crime in China because China will not release statistics, but with China’s growing unemployment, there have been tons of reports about crime increasing, but foreign businesses are not allowed to bring in foreign (or in most cases use Chinese) security to protect against this.

For example, escalating US-China tensions have led to tariff volleys, impacting industries like agriculture, automotive and consumer goods. Certain Chinese technology firms have been banned or restricted from operating in Western markets over data privacy and national security concerns. Scrutiny and delays for foreign investments in sectors like infrastructure and communications have also intensified during periods of strained China relations. And all sorts of businesspeople are being “detained” and “arrested” for seemingly no reason at all. See e.g., Chinese Government Raids and Shuts Down a Well-Known American Business. This is a REALLY BIG Deal.

Geopolitical Challenges to Consider

Trade tariffs and barriers between China and significant players like the US and EU can disrupt or shut down supply chains and businesses.
Counteractions from China in response to technological bans or restrictions by other nations can also disrupt or shut down your supply chains or your business.
Reputation risks loom large, especially for entities perceived as too closely aligned with China, or too closely aligned to companies or countries China does not like. See Your China Supply Chain is a Bet Against the House.
Individuals may face detainment in China based on nationality or industry affiliation. See China Exit Bans: You Can Check Out Any Time You Want, But You Can’t Ever Leave.

Strategies to Counteract China’s Geopolitical Risks

Continually observe the shifts in China’s global trade and political ties for potential ramifications on your operations.
Work to diversify your supply chain to diminish the fallout from bilateral trade spats. See e.g., Moving Manufacturing to Mexico from China: The Questions We Got
Maintain contingency strategies that will allow you and your company to swiftly adjust to novel compliance mandates tied to exports, investments, and the like. My law firm has seen a massive uptick in work from companies seeking our help in lightening their China footprint, “just in case something happens.”
Ensure that your corporate stance on geopolitical themes aligns seamlessly with your company’s core values, and make sure that your employees understand what it is.

It is prudent for management teams to engage regularly with legal and geopolitical experts to stress test their China business plans. This can help model scenarios and minimize blindsides from sudden regulatory shifts or bilateral tensions. Building flexible supply chains, fostering strong local relationships, and planning for contingency are crucial damage control strategies. It is also essential that companies cease sending anyone to China without first having an expert conduct a personal risk assessment regarding each such person heading to China. See How to Assess Your Personal China Risks for some of the things our law firm uses to assess the risks for each individual going to China.

Conclusion

Navigating China is a formidable task for foreign companies, and missteps in critical areas like licensing, IP, contracts, data privacy, and HR can lead to setbacks ranging from IP loss to abrupt termination of Chinese operations.

The above highlights ten key legal domains that frequently trip up foreign players in China. Mastering compliance across these spheres demands a multi-pronged strategy that should, at minimum, include the following:

Partnering with experienced and bilingual legal counsel who understand China’s regulatory environment.
Conducting in-depth due diligence on potential partners, investments, and business operations to uncover red flags early.
Implementing internal compliance systems and providing regular legal training to employees, especially for high-risk areas like anti-bribery and data privacy.
Closely tracking China’s regulatory updates across pertinent industries and regions.
Diversifying supply chains and maintaining contingency plans to mitigate fallout from geopolitical tensions.
Ensuring your corporate values align with stances on sensitive issues like China relations and human rights.

What are you seeing out there? Are there any issues you wish we had covered in this post but did not? If so, please let us kn0w in the comments and we will do our best to write about those.