Practical Tips for Doing Business with Chinese Partners

With Chinese companies becoming a growing source of business for many American companies, it is best for these companies and their counsel to learn some Chinese business etiquette.  Many Chinese companies are investing in assets located in the United States, both real estate and other businesses, so this is a worthwhile area to explore. 

Building Up Personal Relationships  

Building good personal relationships is a critical part of establishing good business relationships with Chinese partners. As China lacks a fully reliable and impartial legal system to correct and rein in unethical business behaviors, Chinese business people tend not to rely upon strangers in business dealings. Chinese companies are more comfortable doing business with companies when the principals and counsel maintain good personal relationships.

Here are some tips on how to build up personal relationships with your Chinese partners:

Respect

While American business people start a meeting by shaking hands, a Chinese business person starts by exchanging business cards. In China, cards are more important than handshakes. If you meet with a new business partner without offering your card, it would be regarded as rude and disrespectful. Therefore, when meeting with your Chinese partners you have not met previously, the first indication of your respect toward them is to offer your own card.  When you receive a card,  it is most appropriate to accept it with both hands and spent a few seconds studying the cards and clarifying pronunciation of the name on the card, even if you do not speak Chinese.  Do not hesitate to ask your Chinese partners how to pronounce their names; they will be happy to teach you, as most of the Chinese are proud of their home language and do not like having their names mispronounced.  Do not assume that first name usage is appropriate.  After names have been established, a handshake is appropriate.

Following up with the exchange cards and subsequent handshakes, but before starting business discussions, it is appropriate to take a little bit time to introduce yourself, your team and your company, even if this information are readily available on your company’s website. Please also encourage the Chinese team to introduce themselves as well. Brief personal history is also appropriate.  Knowing each other personally is a good start to building up longer term relationships. 

Communication

Both you and your Chinese counterparts may have already expected to encounter cultural differences. Communication is the key to bridge these differences. If you don’t speak Chinese, having a translator can be very helpful even if the Chinese people or their counsel speak English. If you have an American born Chinese person on your team, make sure to ask if they speak Chinese, because sometimes when your Chinese business partners meet a Chinese staff team member, they assume that this person also speaks Chinese. They will start talking in Chinese to this person, and feel embarrassed to find out this person actually does not speak Chinese.  Even if you do not speak Chinese, you should pick up a few Chinese words like “how are you” or “welcome” “please” and “thank you”.  This will prove to be a good ice-breaker because the Chinese business people will see that as a courtesy to them.   

Be aware that even if your Chinese counterparts speak fluent English, they may not fully understand and appreciate the cultural differences that they encounter in the United States. When you feel that the communication is not going well, slow down, back up and take extra time explaining background of the topics or issues you are discussing.

Hospitality

Food plays a very important role in building up relationship with your Chinese partners. In China, it is very common for the host to treat the guests with lunch or dinner. While not necessary here in the United States, you partners will expect this courtesy. It is an easy way to build up personal relationships with your Chinese partners over the dining table. The conversation topics may include anything except for the business discussion.  You will find that your Chinese partners become more relaxed and enthusiastic in participating in your conversation. They may start cracking jokes. Usually after lunch or dinner, the business discussion with your Chinese partners becomes smoother.  If you have time restraints, a token gift, perhaps related to the geographical area, such as a Maryland product, will be a good gesture of hospitality toward your Chinese partners and will be appreciated.

Contract Negotiation

While building up personal relationships is the first step to start business relationship, negotiation with your Chinese counterparts requires you to make certain adjustments to your normal negotiation approach.

Avoiding Aggressive  Style

Tough and aggressive negotiation is common  here and American business people will normally understand that it is just business and not personal. In contrast, an aggressive style of negotiation is generally not welcomed by the Chinese business people as they will likely regard the aggressiveness as disrespect toward them personally.  Using a courteous and patient approach will achieve better results when negotiating with a Chinese counterpart. When you disagree with your Chinese partner, simply saying “this is how we do it in the United States” will be of no assistance in advancing the dicussion. Instead, you must spend more time on explaining the reasons behind your disagreement and exploring how to reach a common goal.  Sometimes, spending certain amounts of time explaining exactly “how we do it in here” and why is necessary. For example, real estate transactions are handled quite differently in China. Unless they are experienced with business in the United States, your Chinese counterparts do not know anything about “title insurance” and may be unfamiliar with the concept of “forever” ownership.  Ground leases are much more common in China and what they call “ownership” may only last for a term of seventy (70) years.  It is important to take the time to make sure that all parties are operating under the same set of assumptions.

Expecting Vague Terms

The Chinese (including many Chinese lawyers) have tendency to use vague terms. For example, “legal method” and “legitimate way” are commonly used phrases in a Contract drafted by a Chinese lawyer, because Chinese law regulates the contractual behaviors in a very specific way; while in the United States, common practice is only a supplement to an agreement in which the parties negotiate almost all the terms.

When you receive a draft of agreement proposed by a Chinese company that is full of vague terms, do not assume that your Chinese counterparts are not serious. They usually are but it is up to you to fill in the specific terms in the agreement and to explain why they are necessary.

If you are using certain terms like “good faith effort”, be sure to spend some extra time to explain to your Chinese business partners what will be customarily regarded as “good faith” in the United States because what is expected by “good faith effort” in the country might be quite different from what is expected in China.

Prompt Response

While patience is a traditional Chinese virtue, prompt responses between business counterparts has gradually become the norm in China. Do not be surprised if you receive emails from your Chinese partners during weekends, or if you are requested to respond on short notice. If you need more time, simply let your Chinese partners know. In addition, most Chinese business people are unaware of American holidays. If you are going to be on vacation during holidays, please give some advance notice to your Chinese partners.

In sum, dealing with Chinese companies can be very challenging but if the attorneys and companies can understand the cultural differences, they will be successful in doing business with the Chinese partners.  The reward for this patience and preparation is that you will have loyal partners and clients because they will appreciate your courtesy and be happy not to have to educate even more Americans about their ways of doing business. 

How to Start Your Business in China

Thinking about setting up an office in China? There are five things you should consider: business form, business scope, registered capital, application process and taxes.

A.  Business Form

There are five types of business forms for foreign investors to consider when setting up an office in China:

1.  Representative Office

A Representative Office is a foreign company’s branch office in China, it is not a separate legal entity from the parent company. It cannot conduct business operations in China, however, it can conduct marketing, customers service and liaison service for the parent company.

2.  Wholly Owned Foreign Enterprise (WOFE)

A Wholly Owned Foreign Enterprise, usually called a WOFE, is a legal entity formed by a foreign company in China and is owned 100% by the parent company. A WOFE is a limited liability company.  

3.  Joint Venture Enterprise (JV)

A Joint Venture Enterprise (JV)  is a company set up by 1 or more foreign companies or individuals with one or more Chinese companies or individuals.   It is a limited liability company, of which the foreign ownership shall not be less than 25%.  The profit of the JV will be shared by owners based on their ownership percentages.

4.  Joint Cooperative Enterprise (JCE)

A Joint Cooperative Enterprise (JCE) is also a company set up by 1 or more foreign companies or individuals with one or more Chinese companies or individuals.  It is very similar to a JV, except that the profit of the JCE will be shared by owners based on the Joint Cooperative Agreement, instead of their ownership percentages.

5.  Foreign Invested Partnership (FIP)

A Foreign Invested Partnership is a partnership formed by a foreign company or individual  with a Chinese company or induvial. A Foreign Invested Partnership can be a general partnership or a limited partnership.

B. Business Scope in China

In the US,   a company may conduct “any legal activities legally allowed”. However, this is not the case in China. Chinese government tends to keep the certain areas or sectors of business away from foreign companies.  This is called “Prohibited Business”.  In other areas, Chinese government will allow foreign companies to participate only after obtaining permission from a Approving Authority. This is called “Restricted Business”.  For all other areas, a company set up by a foreign entity can freely conduct business.   The Chinese government publishes a Catalogue for the Guidance of Foreign Investment Industries (the Catalogue) every year. The Catalogue will list all the “Prohibited Business” and “Restricted Business” so you will know whether you can conduct your business freely in China. Although the current trend is that Chinese government tend to keep the scope of “Prohibited Business” and “Restricted Business” very narrow and allow foreign companies to participate wider range of business in China.

C. Registered Capital Requirements

Except for Representative Offices (RO) and Foreign Invested Partnerships (FIP), the Chinese law requires you to inject a minimum amount of capital (registered capital) into your business entity in China.

The amount of the registered capital varies from city to city and will depend on which type of business you intend to conduct in China. For example, the required capital of a foreign trading company could easily fall between USD100,000 to USD200,000.

The good news is, you can inject the registered capital in installments. In case of a WOFE, you may pay the first installment of 20% and the pay off the remainder within 2 years.

D. The Application Process

Setting up a business entity in China is much more complicated than filling out a few forms and paying a small amount in registration fees.

There are six major steps for setting up a business in China

1.     Get permission from the local approval authorities, even if your business does not fall into the categories of “Prohibited Business” or “Restricted Business”.

2.     Get a business license from the local bureau of Industry and Commerce.

3.     Register with the local branch of the State Administration of Foreign Exchange (SAFE).

4.     Register with the local tax bureau.

5.     Register with the customs authority.

6.     Register with the local labor department

E. Taxes

A business entity in China will generally pay three types of taxes:

1.      Value-added tax (VAT tax)  

The value-added tax is levied on the value that you added to the commodities you sold. The general VAT tax rate is 17%. For example, you bought a coffee cup for $5.00 and sold it for $7.00, the VAT tax you need to pay is (7-5)X17%  = $0.34.  If you export your products that are made in China to other countries,  China, you may get a VAT tax refund.

2.     Business tax

The business tax is levied on the value of the service you provided. The general business tax is between 3%-5%.

3.     Profit tax (or income tax)  

The profit tax is based on the value of the profit that you earn. The profit tax rate in China is 25%. You may get a reduced tax rate of 15% if you are a qualified high-tech company.

These three types of taxes count for the majority of the tax dollars your business needs to pay in China. There are also other categories of taxes which will count for small percentage of your tax dollars.  

Different cities in China have slightly difference in terms of the percentage of tax rates. It is very important to have a local CPA to assist you to keep the record straight and to keep you informed of exactly how much taxes you need to pay.  

Dispute Resolution in China

If you are doing business in China, chances are you may encounter a dispute sooner or later. Or if you have a dispute with your Chinese partner you have business agreement with, and theagreement require the dispute to be resolved in China, you will like to know some basic characteristics about the Chinese legal system.

Chinese Court System

China is a civil law country. A case in China is tried by a judge or a three-judge panel. Judges will decide cases based on the code of law, not the case law precedence. The Supreme Court of China issues the interpretations of law on some important issues that the lower courts encountered, but still, there is a lot of room left for judges’ discretion.

Judges from different courts could have different interpretations of the law, and even different judges from the same court may hold different views. Because there is no requirement to follow the precedence, the result of litigation in China is usually more unpredictable than in a common law country such as the United States.

Choose a proper forum

Being a stranger of the Chinese court system, many foreigners tend to choose a familiar forum to resolve the disputes. For example, they like to put such terms in the contract: “New York court will have exclusive jurisdiction over any dispute arising from or in relation to this contract.”

The problem is, you may obtain a more predictable and favorable judgment, but enforcing a foreign judgment in China is very difficult and almost impossible in some cases.

If you want a relatively predictable and enforceable verdict, you may consider arbitration as an alternative forum to resolve the disputes.

All Chinese courts will recognize the arbitration in Hong Kong.  Hong Kong is a common law region, and arbitrators are very familiar with both Chinese law and its applications to foreigners who come from a common law country like USA.

Chinese courts routinely  honor an arbitration decree by an  arbitration institution   in Hong Kong.  In order to choose arbitration, you must put an arbitration clause in your contract.

Rule of Thumb - Choose a proper local counsel

Unlike US attorneys who can only practice law in the states where they are admitted, a Chinese attorney can practice law nationwide.

For litigation cases in China, it is preferable to choose a local lawyer who is familiar with the local procedural rules as well as the local judicial interpretations on substantive issues.

Prevent a dispute in advance

Dispute resolution in China can be complicated and frustrating in some cases. However, there are ways to prevent a dispute from happening. The following are some of the common types of disputes you are likely to encounter when you run your business in China:

IP dispute

Most foreign companies have owned trademarks or patents before entering into China market. Before they conduct any serious business in China, the first thing they should do is to register their trademarks or patents with the Trademark Office or the Patent office in China.

There may be similar or identical trademarks or patents already existing in China. Some disputes arise from the registration process due to pre-existing trademarks or patents. Other disputes arise from trademark and patent infringement activities. If you have not registered your trademarks or patents, your IP rights is vulnerable to infringement and reverse engineering.  IP disputes may also arise from licensing or distribution agreements, or work products created by employees during the employment.

Shareholder Dispute

This is another common type of dispute when you set up a business entity in China with one or more Chinese partners, such as a joint venture or joint cooperative entity.

The rights and obligations of a shareholder in China are usually defined by laws and regulations, joint venture contracts, and articles of association.

The local approval authorities in China usually require the joint venture contracts and articles of association to be in conformity with an official template. In many cases, the official template is written in general terms and does not reflect the detailed arrangement among the shareholders.

You need an experienced lawyer to advise you which parts of the official format is mandatory and which parts can be modified to suit your specific needs. Any ambiguity in the shareholder agreements or articles of association can trigger future disputes among the shareholders, especially considering the language and cultural differences among shareholders.