I am about to heartily recommend a book that I have not read, nor even seen.
The book is The Big Four and the Development of the Accounting Profession in China (Studies in the Development of Accounting Thought, by Paul Gilles. And despite not having read the book, I am quite certain it will make for a helpful read. I am certain of this because Paul Gilles knows as much about the big picture China accounting issues as any other English language speaker out there. Paul has written extensively and well (both on his blog and elsewhere) about the Big Four in China and about China big picture accounting issues and if his book were nothing but a compilation of previous writings (which it is not), it would still be well worth the read. Paul is to whom I refer journalists and others seeking answers to China accounting questions because he is the guy with the answers.
So if China accounting is your thing, read the book.
For a pretty comprehensive list of recommended English language books on China (with a slant towards those that are instructive for doing business in China or practicing China law) check out A New China Book List.
If you are like me, you are constantly getting waylaid by China’s confusing and often changing holiday schedule. If you are like me, you fully realize it is a holiday on the day it starts. To help you (and me) avoid that, I recommend that you check out the China Real Time post, China’s 2014 Holiday Schedule: Still Complicated, which, among other things, provides the below calendar nicely setting out the holiday schedule.
Good luck with that.
When it comes to enforcing US court judgments in China, the law has been clear and remains clear. China won’t do it. Not now. Not later. Maybe not ever. For more on this, check out the following.
But what about taking a Chinese court judgment and getting that enforced outside of China? The clear answer on whether that can be done is maybe.
I thought of this the other day when I read an article on how a Singapore court — maybe for the first time — had enforced a China judgment. The Straits Times noted that this enforcement of a Chinese judgment by a Singapore court was “believed to be a first.” Singapore does not have any agreement with China to enforce Chinese court judgments, but, presumably, the courts there can choose to do so on a case by case basis.
In this instance, the Singapore court heard testimony from both sides on the merits of the case and then enforced the judgment. In other words, it did not semi-automatically enforce the judgment simply through registration; it instead made its own (presumably expedited) factual determination that the China judgment was worth enforcing.
I mention this Singapore case as a segue to writing about a case that my firm handled a few years ago and to at least somewhat refute the prevailing view out there that “US courts will never enforce a Chinese judgment.” United States courts — with or without a treaty — may enforce foreign judgments.
Generally, if someone has a legitimate foreign court judgment based on the merits (as opposed to having been granted due to the failure of a party to show up), the holder of a foreign judgment may bring an action in a US court seeking to have that foreign judgment given effect in the United States. Almost all US states look to the Uniform Foreign Money Judgments Recognition Act to determine how to treat a foreign judgement. Just by way of a quick and dirty example, here is Washington State’s statute incorporating this act. There are a whole slew of possible reasons for a US Court to reject the enforcement of a foreign judgment, but generally, in my experience they usually will be enforced.
But for some reason, there is the view that US courts will not enforce China court judgments because China does not enforce US judgments and because China courts are just not well respected. I half disagree and I have a case to support the disagreement part.
A few years ago, a US company came to us with a Chinese judgment it had received against a Chinese company. This US company wanted us to domesticate the Chinese judgment (convert it to an American judgment) so that they could try seizing US assets of the Chinese company. The US company had not been successful in seizing assets of the Chinese company in China and it figured that it should try in the United States. We were successful in convincing a California State Court judge to enforce the Chinese judgment.
Here’s the half part though. Our California case was against a Chinese company and I have to believe that had it been a Chinese company seeking to enforce a Chinese judgment against an American company, the American company would have been well positioned to argue about the unfairness of Chinese courts.
Not saying that one Singapore case and one California case a make a trend, but I am saying that it is wrong to just assume that Chinese judgments have no value in countries without judgment enforcement agreements with China. Rather, it would seem that enforcement of China judgments is on a case by case basis.
Anyone have their own China judgment enforcement story?
The Wall Street Journal did a story by Wei Gu on the spending habits of Chinese tourists when overseas. No surprise, they are buying tons of luxury goods. As Wei Gu so aptly puts it:
When Chinese go abroad, they are transformed from obsessive savers and bargain hunters into serious shoppers, much to the joy of retailers. Although conspicuous consumption is now frowned upon at home, total spending abroad by Chinese travelers jumped by 58% in 2012, according to Global Blue, which processes tax refunds for tourists. More than two-thirds of Chinese purchases of luxury goods take place abroad, and overseas sales to Chinese tourists are also growing at a faster clip than sales inside China.
As an international law firm focused on representing American companies doing business with China, we are seeing rapid growth in the following areas related to China’s consumers:
- Ultra-high end services. China’s super-rich are hiring Americans and American companies to tutor their kids and prepare them for college. China’s super-rich are hiring Americans and American companies to help them put on their big events like weddings and parties. China’s super-rich are hiring Americans and American companies to design their houses and their interiors. China’s super-rich are hiring Americans and American companies to design and produce their custom-made clothes. China’s super-rich are hiring Americans and American companies to plan out their international travel. China’s super-rich are hiring Americans and American companies to help manage their money (although near as I can tell, this isn’t happening as much as one would think). China’s super-rich are hiring Americans and American companies to run their households. China’s super-rich are hiring Americans and American companies to help them find homes in the United States and in other countries around the world. China’s super-rich are hiring Americans and American companies to take care of their health care needs.
- Companies that help other companies cater to China’s super-rich. I am aware of two companies, Affinity China and China Luxury Network involved with this. It is my understanding that Affinity China brings China’s super-rich to the United States and then partners with American companies in terms of what the Chinese tourists see and do while in the United States. China Luxury Network provides business advice to luxury goods companies on how to cater to incoming Chinese tourists and students.
- Realtors that focus on Chinese buying real estate in the United States.
- Private elementary schools on up to graduate schools that are focusing on increasing their numbers of Chinese students, especially the sons and daughters of China’s super-rich.
What have we missed? What else?
Many years ago, a number of people (china consultants, in particular) were applying the concept of quality fade to China. The idea was that once a foreign buyer became comfortable with its Chinese manufacturer, it could expect that manufacturer to start skimping on quality to save money. In other words, your product might go from being 10% copper to 5% copper without your Chinese manufacturer telling you of the change. Or your laptop bag handles might go from being strong enough to hold a laptop to not being strong enough to hold a laptop. Nearly everyone, it seemed (including me) bought into the idea of quality fade.
I no longer do.
And not only am I not sure it is a persistent phenomenon, I am also not even sure that the concept is relevant even if it is.
First though, I am going to discuss what it is that has caused me to re-access “quality fade” so many years after I (or it seems anyone else) has used (or even thought of) that term.
The Wall Street Journal ran a story, entitled, Chinese Asbestos in Australia? Blame ‘Quality Fade, in which it talked of how ”two leading Chinese car companies, Great Wall Motor and Chery Automobile, confirmed that they are recalling 23,000 cars and trucks they’ve sold in Australia because asbestos was discovered in their engine and exhaust gaskets.” The article (wrongly I think) describes these mistakes as defying explanation. Greg Anderson, a very thoughtful and knowledgeable China consultant (with a focus on automobiles) asks on his Facebook page whether “Chery and Great Wall are the victims or perpetrators of ‘quality fade.’” [Note that this post was set to run years ago, but has been sitting in the "draft" folder ever since]
Who cares? And is the entire “quality fade” concept simply another way of trying to make China look bad? Is it racist even?
I do not think it racist, but I also have come not to believe it fair either.
Let me explain.
I just got back from speaking at a massive consumer products fair in Las Vegas on sourcing product from China successfully. As you can imagine, I talked a lot about preventing quality problems. I did not bring up a statistic I was once told by a higher up at the US Consumer Protection Agency on how China has product safety/recall problems at a rate of at least six times that of any country every single year. And this is per product made, not overall. I am not going to dispute that China is probably the worst country on earth in terms of making products “right.”
But something one of my audience members told me after my speech has really stuck in my head. After the show and by way of small talk, I asked an audience member what he thought of the products show. I expected him to say something like “it’s huge” and then move on. Instead, he launched into a very sophisticated and thoughtful discussion on how almost everything at the show was junk and on how he had always thought that as we became wealthier and as our technology advanced, product quality would improve. Instead, he said that people just don’t care about quality any more. I told him of how Nordstrom was thriving and his response to that was because they are becoming somewhat of a bastion of quality and so they are getting people from other stores because of this and of how most Americans have become focused on price to the exclusion of quality.
He then went off on how it is America’s fault that China produces “crap” and it is our fault because we buy it. He analogized it to our blaming foreign countries for our own cocaine problem. He then talked of how he had sought to have a product well made by a Chinese company and the Chinese company said that it was making similar products for ten or so other American companies and that none of them were requiring that it make the product at the standards required by this guy and so no matter what the price, “it would be too difficult and they were not interested.” This guy insisted to me that his quality standards were not all that high and that they were pretty much the same as the quality standards at which he made the product in the United States years ago.
Why then is “quality fade” irrelevant. It is irrelevant because in the final analysis you will get the quality you demand and if you don’t get that quality, it is up to you to go elsewhere to attain it.
What do you think?
For more on sourcing product from China, check out the following:
There is some truth to an old expression about China employees, “once hired, never fired.” Terminating a Chinese employee is rarely going to be easy, but if that employee is on probation, you do have a better chance of not getting sued for doing so.
China does allow probationary periods for Chinese employees, but only if done right. The maximum term of the probationary period depends on the term of the employment contract. If the employment contract is for between three months and one year, the probationary period can be for up to one month. If the employment contract is for between one year and three years, the probationary period can be for up to two months. For fixed-term employment contracts of three years or more, and for employment contracts with no fixed term, the probationary period can be for up to six months.
If the employment contract terminates upon completion of an agreed assignment or if the employment contract is for less than three months, there can be no probationary period.
An employee may be subject to only one probationary period with the same employer and this holds true even if the employee leaves that employer and then rejoins it.
Any probationary period must be set forth in the employment contract. If an employer enters into a separate agreement with its employee for a probationary period, the probationary agreement will be void and there will be no probationary period and the employer will be deemed to have entered into a fixed-term contract with the employee. This is done to prevent an employer who becomes unhappy with its employee from putting that employee on probation after the hiring.
My firm’s China lawyers draft all China employment contracts in Chinese as the official language (and in English as a translation for our clients) because we have heard instances of Chinese courts refusing to recognize English language employment contracts after finding that the Chinese employee did not fully understand them. We consider English language employment contracts in China to be the equivalent of a Chinese language employment contract in the United States; they make no sense at all.
In the last couple of years, we have seen a tremendous increase in cases involving U.S. companies (and lawyers) wanting to sue Chinese companies for Chinese manufactured product that has injured someone. These cases coming to us typically involve one of the following scenarios:
- A US retailer or importer is being sued by someone injured by a product sold or distributed by the American company. The injured party has sued the retailer/importer/distributor because suing and collecting from the Chinese manufacturer will be so difficult. The retailer/importer/distributor (or its subrogated insurance company) wants our assistance in figuring out who to sue in China and how to go about doing so.
- A US lawyer representing an injured consumer wants our assistance in figuring out who to sue in China and how to do so in a way that will actually lead to the injured consumer receiving real money.
- A US company or US lawyer just secured a judgment against a Chinese manufacturer and wants our assistance in figuring out how to collect on that judgment.
So what do we usually suggest?
Suing Chinese companies in either the United States or China is difficult.
If you sue the Chinese company in the United States, it will likely claim that the United States lacks personal jurisdiction over it. This can be very effective for the Chinese company that does business only in China and that has been smart enough to set up an intermediary company in Hong Kong (usually) that ships the product to the United States. Here’s the scenario: China company manufactures widget and sells it to Hong Kong company. Hong Kong company then sells the widget to American company and China company then claims it never did any business with the United States and thus cannot be subject to personal jurisdiction there. The trick then becomes trying to show that the Hong Kong company is essentially the China company. This is not going to be easy.
Even assuming that you can convince a US court to assert jurisdiction over the Chinese company, the Chinese company may not even bother fighting against your getting a judgment against it. The problem is that Chinese courts do not enforce US judgments and so for your US judgment to have any value, you must be able to use it to collect from the Chinese company outside of China, in a country that will enforce your US judgment.
You can usually sue the Chinese manufacturer in China, but this approach has its own set of difficulties, ranging from the difficulty in securing evidence to enforcing any judgment (which will probably be a lot less than the judgment would be in the United States).
But there options beyond suing in the US and China. Many countries enforce US judgments and so US companies must start “thinking globally” in deciding what actions to pursue against Chinese manufacturers.
When we are brought on to assist in seeking compensation from Chinese manufacturers, the first thing we do is to seek to locate where the Chinese company has assets. We then research whether the country (or countries) where the Chinese company has assets will enforce a US judgment.
For example, assume the Chinese company has assets in Korea, Canada or England. If you can get a money judgment against the Chinese company in the United States, you likely will be able to “convert” that US judgment to a Korean or a Canadian or an English judgment and then use that judgment to collect on the Chinese company’s assets in the particular country.
As Chinese companies continue going global, you can expect it to become easier to collect on judgments against them, so long as you realize what must be done to accomplish that.
For more on what it takes to sue a Chinese company, check out the following:
One of the tougher issues we as China lawyers face is what we call the Home Office/China Office tension. These situations are tough for us because we are so often put smack dab in the middle.
Let me explain.
On the one side you have the US home office, often replete with well trained in-house attorneys and accountants and businesspeople. On the other side you have the China office, often replete with foreign and Chinese employees who have been hired based on their knowledge about doing business in China and for their ability to figure out how to get things done in China. The US home office has very little knowledge about China and the China office has very little desire to follow every rule in China when doing so will lead to increased costs and/or decreased sales/profits.
That puts us in the uncomfortable position of being the buffer between the two offices, explaining to the US office why it must do xy and z in China and then having to fight off the China office who does not think xy and z are really necessary.
One of our China attorneys wrote me the following email regarding one of these situations and because it is so typical, I thought it would be good to share, with all identifiers stripped from it:
In case you have any doubts, Mr. Y. [the American who heads up the China office] will get along perfectly with ____________ [a China consultant whom we believe to be corrupt]. They see the world in the same way.
However, CleanCo [the made up name for our client] has told me that it wants to obtain venture funding from real people in the United States. You can imagine what a connection with ________ [corrupt China consultant] would do to that plan. Mr. Y runs the China office in the way that is typical of _______[the China city in which it is located]. In that sense, Mr. Y. is right that we don’t understand how China works.
However, he is wrong. We understand very well how China works because we know full well that the way China works is not going to be acceptable to any legitimate VC group.
This is the problem in CleanCo. Mr. Y says this is the way it is done in China and when he says that, he is absolutely correct. That is probably what the advisors to GSK said to them and look what happened there. The same will happen to CleanCo if it keeps relying on a guy like Mr. Y. to determine how it conducts business in China.
When I talked to _______ [at CleanCo's US office], he said: I want a China operation that will pass muster according under Wall Street due diligence standards. This is what we are tying to give them. However, Mr. Y. does not understand that and he has no intention at all of delivering that. So, at this time, CleanCo needs to decide what kind of China operation it wants.
No matter what, CleanCo needs to realize that if you run a crooked ship in China, you can be run out of town in just one day. That is their risk and that risk is very real.
However, this is a classic case where their ENTIRE China operation rests on Mr. Y. So they cannot easily get rid of him. It is a very difficult situation. This is a serious matter and it requires careful consideration by CleanCo. Considering what anybody can read on the web in about one hour as to what is happening these days to American companies, it is quite incredible that we are even having this conversation. At any rate, I will say it again that the issue is how CleanCo intends to operate in China. As long as it works through Mr. Y, the straight way will never work and he seems incapable of understanding that the China in which he did business twenty years ago has changed drastically. More troubling, he may be right that the [key] product cannot be manufactured in China “the straight way”. It’s a big deal and it cannot be swept under the rug at this point.
I am quite sure that many of you are quite familiar with the above tensions and we would love to hear what you think.
A while back we brought on a fully qualified Chinese attorney as a paralegal in our law firm. This person was working on obtaining her paralegal certificate at a local university. I asked her why she was pursuing a paralegal certificate, rather than going for an LLM degree (an advanced law degree), as is commonly done by China licensed lawyers in the United States. Her response was that she knew many Chinese lawyers who had obtained an LLM degree in the United States and not a single one of them had been offered a lawyer job in the United States. I told her that I too was not aware of any foreign lawyer who had obtained a US lawyer job.
I then went on to tell her that our firm does not hire LLM graduates for three reasons. The first is that we have no idea how qualified they are for practicing law in the United States because the LLM programs vary so much in what they teach. The second is that we have no idea how qualified they are for practicing law in the United States because it seems that just about everyone graduates from US LLM programs with a 3.8 G.P.A or higher, leading us to believe that LLM grading is neither rigorous nor meaningful. Third, and oftentimes most importantly, most US states (at least as far as we know) do not allow LLM graduates to sit for their bar exam.
Which is why our lawyer hires have US (or US equivalent) J.D. degrees.
And this is NOT to criticize LLM degrees. Rather, it is to highlight how much they have changed in the last twenty years, without really having changed at all. Twenty years ago, foreign lawyers came to US law schools for LLM degrees and then they returned to their home countries. Their reason for securing a US LLM degree was to improve their English language skills, increase their understanding of American culture, and make connections with American lawyers and potential clients. All of these reasons made (and still make) complete sense and for that reason, a number of the top international lawyers in Asian countries like China, Vietnam, and Korea, have US LLM degrees.
But maybe around ten years ago, there was a large influx of China attorneys seeking US LLMs with the idea of securing jobs in the United States. US law schools — who make small fortunes off each foreign LLM — generally do nothing to dissuade these students from coming. And so they keep coming with the hope of American lawyer jobs that seem pretty unattainable. What then happens to these LLM graduates from China? It is my understanding that many (Most?) return to China and some get non-legal jobs.
What are you seeing out there and what do you think?
Had a great discussion with a bunch of our China lawyers the other day regarding how so many of our clients are expanding in Asia beyond China and of how so many of them have an Asia strategy, of which China is just one large part and usually initial part.
We then talked of how this has changed the work we do as their lawyers, especially in IP.
Five years ago, our typical manufacturing client would call us for legal help in starting a factory in China or for outsourcing their product manufacturing to a Chinese factory. With the former, we would help them set up a Chinese entity (either a WFOE or a Joint Venture) and with the later, we would draft an OEM Agreement. In both cases, we would discuss their intellectual property and typically help them file for a trademark or a patent in China, occasionally a copyright. Most of these companies were new to Asia, though some had operations in Europe.
Things are very different these days.
Many of our manufacturing clients have been making product in China for years and they are now calling us to add some other Asian country (usually Vietnam or Indonesia) to their manufacturing mix or because they now want to sell their China-manufactured product in China and/or somewhere else in Asia. These companies either have an Asia strategy or are seeking our help in formulating one. Whereas five years ago, a common question for us was “Shenzhen or Suzhou,” today we equally often hear “Hanoi or Jakarta?” Five years ago, we would get asked what we knew about “exotic” places like Yantai. Today it is exotic places like Da Nang.
Needless to say, it is not just manufactuing companies that need to guard their IP in China. Software companies, gaming companies, food and beverage companies, and consumer goods companies are registering their IP in Asia at what feels like a record pace. Balancing all the talk of a China manufacturing slowdown is the year by year increases in disposable income.
The “China-plus” strategies of our clients means that our IP discussions need to go well beyond China to include pretty much all of Asia. Five years ago, only around twenty percent of our clients needed to consider trademark or patent or copyright registrations in a country other than China. They were new to doing business in China and so they needed IP protection there. We would ask about their IP needs for the US and for Europe, but they had been in both places for so long that they were invariably covered.
Today, about half of our clients need IP protection in an Asian country other than China. Fortunately, most Asian countries (Japan, Korea, Vietnam included) have IP regimes quite similar to China’s. The real key for foreign companies expanding beyond China with their products is to be sure to recognize that whatever IP you registered in China probably provides you with little to no protection outside of China. In other words, in most cases, you must register your IP in whatever Asian country in which you are doing business. Also note that in your IP analysis, you must treat Macau and Taiwan and Hong Kong as countries completely separate from the PRC.