More and more companies are setting up their own presence in China in order to source products/services directly from China, in order to enter the Chinese market, or in order to attract Chinese investment.

However, the Chinese regulatory and business environment is complex and therefore it is critical to understand the process and develop a strategy in advance.

Here are some “must-knows” at the time of planning your market entry into China:

1. Define the business scope of your China presence
Chinese laws and regulations may prohibit, restrict, permit or encourage your business set-up based on your business categorization and scope. Hence it is critical to carefully define your business scope so as to be permitted or encouraged to set up such a presence.

2. Understand the Alternatives
You have more than one legal structure for a local presence in China. Your China presence may be in the form of a wholly owned foreign enterprise, a contractual joint venture, an equity joint venture, a representative office or a local representation by a third party (local secretary/representation service companies). There are also other alternatives that can be tailor made to your needs, especially in those highly regulated areas of business.

3. Select Location and Find and Know your Allies or Partners
Select the right location for your China operation. China abandoned its preferential tax rate for investments of foreign companies from January 1st 2008. However, some areas still offer local preferential policies for foreign investors in terms of land leasing/procurement, staff recruitment and management, local tax, etc.

Also you need to carefully determine the allies or partners you will cooperate with. A basic due diligence of those allies or partners will be critical. Your partners may  be something very different from what they claim to be. China has a business culture to show off wealth and status. However, your Chinese business partners may look financially viable and well connected but, as a matter of fact, live on bank loans and personal debts.

4. Clarify the Basic Requirements of the Vehicle you choose
Confirm the minimum registered capital for your China operation. The Chinese government requires certain minimum registered capital for various types of businesses. However, local Industry and Commerce Administrations may decide on your minimum registered capital based on their judgement of your business scope and operation scale.

5. Plan the repatriation of Profits and your Exit
Integrate commercial clauses in the Articles of Association to maximize profit repatriation into Australia. You may have commercial arrangements between your Head Office in Australia and the subsidiary in China in order to guarantee maximum profit repatriation. However, some arrangements must be included as part of the Articles of Association to be valid. The Articles of Association is to be submitted to local government agencies for approval and filing during business license registration. Hence, you must incorporate necessary clauses in the Articles of Association in the first instance.

6. Protect your Intangibles
Define a strategy to protect your trademarks, patents, industrial secrets and all your IP assets before coming into China.

7. Understand Employers Responsibilities and Risks
Fully understand employers’ responsibilities and liabilities in China. China issued the new Law of Labour in 2007 which specified issues on employment contract, redundancy, etc.

Without preliminary knowledge of this law, you may end up spending a huge amount of time and money terminating the contract with under performing employees, as the structure of the contract was wrong. You also need to be aware of the mandatory employee welfare and benefits so as to include such cost in the budget. 

8. Develop a comprehensive employee management system
In China, the hardest task is to find the right human resources. A well thought out employee management system will encourage the engagement and commitment of local staff and avoid potential risks. You may include reporting and communication policies, staff training, performance assessment, remuneration, career management and employee management manual in the system.

9. Find the Right Counsel with Local and International Experience
It is essential to indentify a competent agent to manage this complex market entry process. This will be a cost and time effective way to avoid potential pitfalls. Local Chinese agents with no international exposure may not look into the risks in the same way an internationally seasoned attorney will do.