COVID-19 has been the biggest talk of the town, or more appropriately the world, for the past two years. It has impacted almost every country in the world – national economies and businesses plummeted while governments struggled to tackle the spread of the virus. In 2020, the global economy was estimated to have shrunk by 4.4% and it was described as the worst decline since the infamous Great Depression in the 1930s.
Amidst the bleak situation of 2020, China stood out, leading the charge in the opposite direction with an economic growth of 2.3%. Even as the global economy started to bounce back in 2021, China once again performed phenomenally with a record 18.3% in the first quarter compared to the same quarter last year. While these numbers are not the most accurate, since China’s economy was also in decline in the first quarter of 2020, they are indicative of the country’s resilience and potential for future continual growth. Evidently, this is the best time to expand or start a business in China. In this article, we will be covering some things to know before jumping in.
1. There are many ways to build a local presence in China
Understanding the various types of company structures will help you make informed decisions with regards to your choice of business partner. This is a key step to starting a business in China and these are just a few options available:
– Wholly Foreign-Owned Enterprise (WFOE)
– Contractual or Cooperative Joint Venture (CJV)
– Equity Joint Venture (EJV)
– Representative Office (RO)
– Foreign Invested Partnership Enterprise (FIPE)
To give you an idea of some of the differences, we have provided a short synopsis to introduce two favoured options.
• Wholly Foreign Owned Enterprise (WFOE)
This limited liability company is completely owned by a foreign individual or company. It can generate profit, invoice clients and hire local and foreign employees in China. Since a WFOE does not require the direct involvement of a Chinese investor, it offers flexibility and control over operations, making it a popular business structure for foreign companies entering China.
• Joint Ventures
Formed when two or more entities agree to pool resources for a common goal, a joint venture is a separate entity created apart from the rest of the parties’ interests. Foreign companies looking to establish a presence in China can choose to enter into a joint venture with a mainland Chinese entity. Joint ventures are losing out in popularity to WFOEs since companies do not get full control over the entity and have to find a reputable Chinese company to partner with. However, in some industries such as the media, joint ventures remain as the only option for a foreign company to establish presence.
2. Location is not just about geography but economic strategy
Since 2008, China has revoked preferential tax rates for investments of foreign companies. Nonetheless, some areas still offer location-specific preferential policies for foreign investors when it comes to land leasing/procurement, recruitment and management and local tax.
There are also economic zones called China Free Trade Zones where companies can operate under specially defined regulations to gain benefits such as preferential customs handling and initial import without having to pay duties.
3. Understand your responsibilities as an employer
Starting a business or expanding into China means that you are likely to hire local employees. Hiring in a foreign country comes with several different challenges, including compliance with the Chinese Labour Law, handling the employees’ employment contracts, payroll and statutory benefits. Moreover, there are different policies to adhere to in the different cities in China.
To avoid the stress and confusion, many companies choose to partner with an experienced and a licensed service provider such as a Global Employer-of-Record (EOR) to manage this process in the best way. Global EORs help companies hire internationally and onboard new staff seamlessly so that companies can focus on expanding or building market presence.
4. Build an extensive employee management system
As you expand and build your team overseas, an employee management system will help greatly in managing your employees. Building blocks of such a system includes communications and workflow policies, training, performance assessments, career management and employee management manuals. This will keep employees engaged and even boost retention rates.
5. Verify business partners
Doing business comes with risks. To safeguard from falling prey to illegitimate business partners, make sure to do thorough background checks on the credibility and financial strength of potential business partners. It would be disastrous if the partner ended up to be a fraud in financial debt.
6. Learn about the local culture
Every country has its own unique culture and way of doing things. It will be especially helpful to pick up cultural practices and traditions so that you can build strong business relationships in China. Furthermore, knowing the various holidays and special occasions observed will help you create a good benefits package for local employees.
All in all, human resources poses one of the most challenging functions when it comes to starting or expanding a business in China. The country’s labour law can be very strict in certain areas such as hiring, overtime and employee termination. It will be wise to consult and work in tandem with a Global EOR service provider who has expertise in China’s HR requirements. A Global EOR takes on the human capital management functions to make employee leasing a seamless process. Full compliance with local labour laws is also ensured so that you will have minimal exposure to liabilities and risks.
A great choice of a Global EOR would be FSG TG. Driven by a focus on compliance and risk mitigation, TG has a proven track record in solving diverse HR issues. It has strong in-country expertise across over 50 markets around the world and has amassed over 100 years of HR experience, making it a strong partner for business of all calibre, especially multi-national corporations.
Having gone through the 6 things to know before starting a business in China, do you think it is a viable business option? Let us know in the comments below!
If you are looking to expand or start a business in China and have HR-related questions, please contact us at peo@tg-hr.com for a free consultation.
