Requirements for Starting a Company
When starting a business in China, prospective foreign entrepreneurs must understand the legal and bureaucratic frameworks that govern businesses in the country. The Chinese government’s investment environment is highly monitored and regulated, and it is essential to complete the necessary compliance and bureaucratic steps to reduce legal and regulatory compliance risks. Depending on a company’s business scope and perceived risk, different levels of registration are needed. Additionally, the Chinese language and political environment further add to the complexity of starting a company in China.
In order to open a business, foreign investors will require a business license and a Chinese business entity, be it a branch office, representative office or wholly foreign-owned enterprise (WFOE). The business registration documents must include the following: a clear business scope, a foreign exchange registration, a real estate certificate, public liability insurance and taxes paid.
There is also a list of prohibited businesses that foreign investors cannot engage in, including national security activities, financial services, and various industry and commercial operations. In cases of partnership, there are typically two different types: the foreign investor assumes control and majority ownership or there is a co-equal and co-ownership arrangement. In both cases, the foreigner contributes capital to the venture and the Chinese side provides intimate and detailed knowledge.
It can take several months and a good deal of paperwork to properly register a company in China and the best approach is through a reliable local law firm who follows professional compliance standards. This is the best way to ensure that the company is built to deal with local investment, tax and legal regulations. Failing to build a company properly can lead to compliance issues for years to come.
In addition to compliance and legal regulations, it is important to understand the financial aspects of starting a business in China. Working with a local accountant or tax adviser who is familiar with foreign trade and the local banking regulations and currency restrictions, can help protect investors from hidden costs. For example, most investors do not realize that there are customs duty tax exemptions for goods imported into China for producing products for the international market.
Market Size and Distribution
When selecting a market in China, it is important to understand the size of the market. China is the world’s largest consumer market, estimated at over $5.5 trillion and expected to reach $8.3 trillion by 2025, making it the largest consumer destination in the world. Also due to improved internet coverage, online shopping has taken off in the country. Online retail sales now account for approximately 25% of all retail sales, with the figure expected to continue to grow rapidly.
When selecting a market or city to expand into, consider the number of citizens and economic indicators such as Gross Domestic Product (GDP) and Human Development Index (HDI). Guangzhou, Shanghai, Beijing and Shenzhen continue to be the top four cities for foreign direct investment and development. In 2020, these four cities represented a total of 17.4% of the nation’s total exports of goods and services.
The focus for foreign startups and companies interested in doing business in China should focus on building a local presence. This includes setting up a physical presence in a target city or market, hiring local staff and creating a local distribution network. While local Chinese clients may initially not be familiar with foreign technology, they value secure, reliable and well-established providers.
E-commerce is another avenue for foreign companies to reach Chinese customers, as shown by the rapid growth of online shopping in the country. China is the biggest e-commerce market in the world and the largest online retail market in the world. Alibaba is the leading platform and accounts for over half of the online retail market in China.
Funding and Government Intention
Finding funding can be challenging. Chinese investors are typically less likely to invest in companies with an unknown track record or experience in their respective sector. To attract local investors and venture capital, startups and SMEs should consider building a track record, attending industry events and conferences, and formulating an attractive business plan.
It is important to be aware of conditions for foreign investors imposed by the Chinese government. The restrictions for foreign ownership are more lax for certain industries, for example, those related to technology transfer and innovation. However, there are requirements to be met before any investment can be made, such as setting up an entity in China, obtaining a business license, registering with the local government and paying taxes.
The Chinese government also has local stimulus initiatives and incentives, including grant programmes, technology transfer, regional tax incentives and preferential loans, that are designed to attract foreign direct investment. Furthermore, there are venture capital funds and loans specifically designed to help startups and SMEs.
Cultural Considerations
Having an understanding of the local culture and customs is essential when doing business in China. Familiarity with local etiquette, customs and expectations will help foster trust between the foreign company and their local stakeholders.
Furthermore, being a foreign company brings with it some advantages. Foreign companies and brands are viewed as having higher quality than their local counterparts. Additionally, there is also a recognition of the quality of products from abroad.
Local cultural and language barriers, however, can add complexity. China is a complex and diverse country and having a local partner, who understands the unique nuances of the local market, can be beneficial. Hiring local talent not only helps bridge the gap between local people and the foreign business, but also the team can provide valuable insights into local customs and customer behaviour.
Collaboration with local talent can also help to reduce friction, bridge communication gaps and improve understanding of local cultural norms. Additionally, as a foreign company it is important to actively engage with the Chinese tech industry and keep on top of the latest trends. This includes attending technology and industry exhibitions, conferences and other events.
Risks and Rewards
Starting a business in China does bring with it some risks. The most visible, and perhaps the most important, is the political risk. Companies are exposed to potential changes in Chinese law and policy that have a direct impact on their operations. Additionally, there is the ever-present risk of currency fluctuations.
When establishing a business, companies must ensure they comply with Chinese laws and regulations around data protection, modern slavery and other human rights-related issues. China is known to have weak intellectual property laws, so companies must ensure proprietary technologies and trademarks are properly protected.
However, the rewards of setting up a successful business in China are high. The nation is an attractive market to foreign investors as evidenced by a long-term goal to further open up the market to foreign investors. Meanwhile, businesses in China continue to benefit from a positive export climate and a favourable exchange rate. Additionally, given the scale of the Chinese economy, companies can gain significant market share if their products or services satisfy the needs of the Chinese consumer.
Growing Demand for High-Quality Services
The demand for high-quality products and services is growing in China. As the economy develops and becomes more sophisticated, consumers are increasingly seeking value-added services from international companies. For example, companies in the health, education, travel and hospitality industries have seen strong growth in recent years.
As a result, China presents many opportunities for foreign companies looking to establish a presence in the Chinese market. International companies have an advantage as they typically have higher brand awareness, greater resources and more advanced technologies. This presents an opportunity to provide value-added services that differentiate themselves from local competitors.
China is a market of immense potential, with a young, increasingly affluent and digitally-savvy population. The country also enjoys strong economic growth, a large domestic market and favourable government policies. This combination has created a favorable environment for foreign companies to expand into and set up operations in China.
Digital Ecosystems
Companies looking to enter the Chinese market should be aware of the increasing interconnectivity of the Chinese digital economy. By 2023, China is expected to have a connected population of 1.1 billion people and by 2021, it will be the largest e-commerce market in the world.
This presents a huge opportunity for international companies, who must establish an effective digital presence and build relationships with established platforms in order to reach customers. The key digital platforms in China include Baidu, Tencent and Weibo. Having a presence on these platforms gives companies access to the vast online population and the opportunity to connect with local customers.
The growth of mobile technology is also transforming the Chinese economy and the way Chinese consumers shop, with an increasing number of consumers now making purchases via mobile. As such, companies must ensure they have a mobile-first strategy when entering the Chinese market.
Conclusion
In summary, starting a business in China can be a challenge for foreign investors due to the country’s complex regulatory environment, cultural differences, and intense competition. However, the rewards for doing so correctly are great: access to a huge domestic market, favorable government policies and a host of digital platforms to reach Chinese customers. It is important to comply with the legal and regulatory compliance for setting up operations in the country and understand the financial impact of doing business. Finally, it is essential to understand the local culture and customs, and engage with the local tech industry to keep up with the latest trends.
