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By Milly Barker, PhD
Updated July 29, 2024

Doing Business in China

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The Chinese market environment has undergone a remarkable transformation over the past 20 years, turning and refining into a global economic power hub and an attraction for foreign investments and potential business opportunities. Understanding the dynamics of doing business in China requires a keen insight into its economic journey and the history of doing business in China, the implications for foreign investors, and practical strategies for non-Chinese entrepreneurs to establish their presence in this thriving market.

In the previous two decades, China has seen an unprecedented economic uplift, with its GDP (Gross Domestic Product) increasing to $17.52 trillion in 2023. This establishes the success of various policies implemented to increase business output and encourage foreign investors. This remarkable success has been fueled by a combination of factors, including government-led reforms, massive infrastructure development, a hard-working middle class, and integration into the global economy.

Foreign Direct Investment (FDI) inflows into China have been a key reason for the Chinese market’s substantial impact on the world economy; FDI sunk to $33 billion in 2023.

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Economic Evolution

We can view the economic evolution of China through the following lenses:

Government Reforms: Instead of economic considerations, China began trekking on a path of liberal reforms and acceptance of foreign investments. This paved the road for the establishment of Special Economic Zones (SEZs), increased state control over industries, and encouraged private ownership of businesses and enterprises. These policies laid the groundwork for China’s rapid China’sc growth in the contemporary years.

Infrastructure: Infrastructure plays quite an important role in the development of a country’s potential success as a business-driven state. If investors are presented with leisure and comfort within the country, they would be more inclined towards adding value to infrastructure. This can be achieved by more investments in transportation, telecommunications, energy, and urban development to facilitate economic expansion, improved connectivity, and enhanced productivity. Modern airports improve traveling and connectivity among investors and visitors.

Manufacturing & Exports: China is often regarded as the workhorse of the entire world, as it is widely known that all, if not most, tech and high-end companies have manufacturing plants in China due to their meager labor cost and abundance of workforce. China uses the benefits of its competitive wages and favorable business environment to become a global manufacturing hub. This has resulted in an export boom of domestic products, which adds to the country’s overseas presence through taxes and other levies.

The Working Class: The transformation of China into the world’s manufaworld hub has also solved one of the biggest problems of the Chinese state, and that is creating work opportunities for its ever-increasing population while increasing the purchasing power of the commoner or the “working class.” This paradigm” m shift in the overall demographic of China has influenced domestic consumption of goods and increased demand for services from all parts of the industries currently operating within China.

Tech-Orientation: The country’s technological manufacturing hub is impeccable. It is most widely known for its improvements and advancements in the fields of tech, such as development, administration, IT, and telecommunications. Local tech giants like Huawei and Tencent have become globally accepted now that they are challenging their Western counterparts and driving innovation across industries.

Shift towards Services: Manufacturing has been the defining feature of the Chinese economy for decades, and even in the past, China was known for inventing various technologies. However, essential services such as finance, healthcare, education, and entertainment are required as much as manufacturing and exporting goods to stabilize an economy. Hence, China has been at the forefront of delivering impeccable experiences and unmatched quality of services in the mentioned domains.

Global Integration: Exports are useless without trade routes to different countries and good bilateral relations with neighbors and other potential foreign powers. China’s foreign government takes care of the latter by imposing policies and relief schemes for its allied countries, allowing it to establish spheres of trade influence and secure a powerful trading circle in various parts of the world. A good example is the Belt and Road Initiative (BRI), launched in 2013. BRI aims to enhance connectivity and promote economic cooperation across Asia, Africa, and Europe, further strengthening China’s role asfinanciall economic giant.

Starting a Business in China as a Foreigner/Off-Shore Entity

It has been made relatively easy and accessible for foreign entities to start a firm/LLC/business in China while being located offshore. This goes for both on-shore and offshore foreign investments. Due to the relaxation of Chinese business policies and strategic reliefs provided to improve business and international economic output, the government allows several benefits to global investors and businessmen. However, here are all the things that must be considered before entering the Chinese market.

1. Thorough Market Research

One of the first and foremost steps to establishing a business is to understand the surroundings and environment along with the market that a company might be targeting; for this purpose, conducting extensive market research is the most crucial step before entering the Chinese market. Understanding preferences, market trends, landscape, and regulatory requirements specific to your area and industry is paramount. A feasibility study can help encompass the viability of your business concept and identify potential challenges and opportunities that may arise during the business tenure.

2. Legal Compliance

Each state, not limited to China, has different legal regulations that a business must comply with to be called and labeled as “legitimate” or “state-worthy.” In China, an appropriate legal structure for a business must be adopted out of the three:

Wholly Foreign-Owned Enterprise (WFOE). Foreign individuals or businesses wholly own this limited liability company in China.
Joint Venture (JV). This is a business collaboration between both local China-based investors/businesses and foreign businesses.
Representative Office (RO). An RO allows international businesses in China to conduct limited activities, such as market research.

Each of these legal structures caters to a different business need and type. All factors related to the business must be considered, such as ownership restrictions, liabilities, and tax implications. Any potential business owner should ensure legal counsel to avoid breaking any hidden laws before entering the Chinese market.

A China Employer of Record (EOR) solution may be sufficient for companies looking simply to hire employees in China.

3. Payment Gateways & Financing

Another important aspect of starting a business is sorting out the financial element, which is quite important in China as the state does not take financial discrepancies lightly and has strict measures in place to tackle such occurrences. To avoid such events, a business owner must be able to establish good banking relations with a reputable bank within the state to facilitate banking needs, loans, transfers, and capital arrangements for the initial startup of the business.

4. Licensing

Every business type or industry that deals with sensitive areas of production or material requires a specific license to continue their dealings. In China, all businesses must register themselves with the State Administration for Market Regulation (SAMR) for the business and the State Administration of Taxation (SAT) for the implication of taxes and returns. All other industry-specific licensing must be researched and obtained before entering the field/industry.

5. Local Trust & Relationships

As a new entrée in the Chinese market, the business must establish working relations with its local competitors, agencies, and other facilitators, with whose guidance it can easily navigate the local parameters of the Chinese environment. It can help with cultural elements, facilitate market entry, and access local networks and resources, which are sometimes more valuable than those obtained fromitional sources. Conducting a proper survey and identifying which specific partners can help shape the business for a better tomorrow is important.

6. Private Ownership & IP

Since China is quite overpopulated, and business, e-commerce, and traditional trading remain the most significant sources of income for most of its population, competition is soaring at its peak in every possible industry that is allowed to operate in China. Intellectual properties of a business, such as the legal name and other branding, must be protected by obtaining proper trademarks, copyrights, and patents and registering them with the official governing entity, the China National Intellectual Property Administration (CNIPA). CNIPA takes responsibility and action on infringements of copyrights and accusations of name pirating.

7. Digital Security

Ensuring your digital footprint is secured with the proper security measures is paramount. A Business owner needs to ensure appropriate cyber security in their digital dealings in China to safeguard the success of their business.

Geopolitical Considerations

These considerations are essential to note by aspiring investors who are looking to start a business in China or any other part of the world. These geopolitical elements and factors can heavily impact a foreign investor or an off-shore business person based in China.

1. Diplomacy & Bilateral Ties

It is not rare in the contemporary era for countries to have deteriorating bilateral ties and bad diplomatic relations that can result in sanctions and trade cut-offs between countries. In such a situation, if the foreign investor’s home country does not have good ties with China in terms of trade and or other domains of business, it is unwise to invest any amount until those ties are repaired or both countries mutually reach specific points of agreement.

2. Tariffs & Taxes

Tensions and disputes among China and its Western counterparts, such as the United States of America, Europe & others, can result in the imposition of tariffs, trade barriers, and other retaliatory measures, which can heavily impact the trade and business field of potential and aspiring foreign investors. These trade policies can dissolve supply chains, maximize operating costs, and affect foreign investors and locals’ market access. Ensuring that evolving trade dynamics and varied supply chains can help reduce the impact of trade tensions on business operations in China.

4. National Security Concerns

China is notorious for taking decisive and accurate measures to safeguard its national interests and security. This paradigm constantly reshapes the national policies regarding telecommunication, IT, cyber-presence, and other sensitive business areas and industries that may be prone to or could induce national security risks. This factor makes it difficult for businesses operating in the latter’s domains to adapt to various dynamic policies and settle for what interests the state.

5. Supply Chains & Global Trade Routes

As a hub of manufacturing and exports, the security of the supply chain in China is crucial. This means the potential effect of natural disasters, political turmoil, sanctions, pandemics, and other possible root causes of disruption in supply chains must be considered. A large-scale business should have multiple supply chains to substitute for one another in case one fails or breaks down.

Doing Business in China — Our Take

Conducting business in Chinese states requires a multi-modal approach that includes economic, regulatory, cultural, and geopolitical and legal considerations.

China has risen as a powerful hub for manufacturing and the world’s labor giant, allowing world giants and small SMCs alike to cut costs and expand their business to the entire world from a central point of control. However, many factors and elements must be considered before entering the Chinese market such as market trends, local culture & geopolitical implications that can be levied on the business. Registering legally and going hand-in-hand with legal compliance and authorities is necessary to run a successful business in China.