The China Holiday Schedule 2015 infographic below comes from Ryan McLaughlin’s consistently excellent and important Lost Laowoi Blog. Use it and you will not have to wonder why so and so is not picking up the phone on such and such date in 2015 or why nobody can meet with you between February 18 and February 24.
Got an email the other day from the owner of a leading Northwest interior design firm. This person who has asked to remain anonymous, wanted to tell me about how he and his company had been scammed, so as to prevent others from suffering the same fate.
My response was to say that we have written about this very scam a few times previously but that it has been long enough since the last one that we would do it again.
I want to tell you about what happened to us for the sole purpose of allowing other small businesses the chance to find this thread when searching for information on business opportunities in China, specifically Kunming in my case.
In August, 2014 I was contacted by Mr Chen _________ with the opportunity to complete interior design drawings for 56 luxury villas in Kunming.
This is the official headquarters information the scammers are using on emails: [we are leaving out the specific identifiers on the off chance that the Chinese individual and alleged company have some explanation. I say alleged company because I would be that there is no company.]
Like many of our larger new jobs, we are expected to provide our own transportation to the first meeting. I did this by flying from San Francisco to Kunming to meet with the fraudulent company. Upon my arrival to Kunming, I was picked up by a driver and taken to my hotel, the next morning Mr Chen met with me to review the contract and the site plans. I was then taken to lunch and we discussed any changes that would need to be agreed upon with the extensive contract (written in english). At the end of lunch I was told there are some Chinese cultural differences that we must honor and one is providing gifts to the local authorities and banker. They suggested I buy 50-60 cartons of very high end cigarettes for this purpose.
At this point I had my first hint that something felt odd, but then the day was filled with a site visit, a presentation in a large conference room of my portfolio and their feedback on the likes/dislikes of the interior design. So I felt maybe they were trying to get some cigarettes from me but the project of designing 56 luxury villas in Kunming seemed legit.
The next day I met more members of the organization and we signed the contract, took celebratory photos and had a dinner with 5-6 other people that evening. I was never asked to pay for any transportation or meals/drinks while in Kunming as the host paid for these items.
Upon getting back to the US, I provided my banking information for the wire transfer of the first payment of 20% of the project before starting the work. The next few emails were from _________, Financial Manager of Yunnan ______Construction & Engineering and this is when I knew they had an elaborate scam going with interior designers. They wanted me to provide a remittance fee to ______ bank account, since this couldn’t be paid from their “corporate account.”
I had done extensive research before buying my plane ticket and I couldn’t find any negative or contrary information about the project, so I was optimistic about the project. But after receiving the emails where they are asking for large sums to be deposited to their private bank accounts I then began to search again and this new thread popped up.
I’m not sure what can be done to these people from so far away, but I’m hoping this post will help enlighten others of the scam and fraud that these people are doing in Kunming under the disguise of developers looking for interior design or interior decoration from foreign companies.
I then asked for information regarding exactly what this Northwest company had paid for and learned that they had also paid about $150 a night for hotel rooms while in Kunming. I noted that was probably three times what the hotel ordinarily charges and that these same people probably had a deal with the hotel to pocketed the difference. The Northwest company wrote back and agreed, after looking up the normal rate at the hotel at which they stayed.
There you have it. The classic China scam to get a service company to go to China, making hundreds of dollars a night on overpriced hotel rooms and with the potential to make much more on things like cigarettes and remittance fees.
Over the years, we have been asked to perform basic due diligence for many American and European service companies before they go to China. In most instances, we have relatively rapidly become convinced that our client is in fact caught up in a scam, without our client having to go to China at all. We do this by first determining whether our client is dealing with a real company — most of the time they are not. There are all sorts of other checks as well that can and should be done before you leave. In the story above, the company got off with losing money — sometimes worse happens.
You have been warned. Again.
For more on this particular scam, check out Ancient Chinese Business Scam With A New Hollywood Twist. It’s Baaaack. and Ancient China Business Scam With A New Hollywood Twist.
We received the book, Company Law in China: Regulation of Business Organizations in a Socialist Market Economy: by Jiangyu Wang, a few months ago, and our China lawyers have been using it ever since. It is that good. We find ourselves using it both as a “first look” at various aspects of Chinese company law and also for its 17 page bibliography. This is a really good, really serious, really well written, really comprehensive book on China company law.
It describes itself as follows, 100% accurately:
This accessible book offers a comprehensive and critical introduction to the law on business organizations in the People’s Republic of China. The coverage focuses on the 2005-adopted PRC Company Law and the most recent legislative and regulatory developments in the company law landscape in China. The book covers a wide range of topics including the definitions of companies as compared with other forms of business organizations, incorporation, shareholders rights and legal remedies, corporate governance (including the fiduciary and other duties and liabilities of directors, supervisors and managers), corporate finance (including capital and shares offering), fundamental corporate changes (including mergers & acquisitions, and takeovers), and corporate liquidation and bankruptcy. In addition to presenting strong doctrinal analysis, the author also considers China’s unique social, political and economic contexts.
The book is made up of the following eleven chapters:
- An Overview of the Company Law Regime In China
- Types of Companies in the Diverse World of Business Organizations in China
- Corporate Legal Personality and Limited Liability
- Formation of Companies and the Rules of Capital Maintenance
- Shareholders and their Rights
- The General Corporate Governance and Management Structure
- Fiduciary Duties of the Directors, Supervisors and Management Executives
- Shareholder Litigation
- Offering and Trading of Shares in Joint Stock Limited Companies
- Financial Affairs, Accounting and Profit Distribution
- Mergers, Acquisitions, and Takeovers 12. Corporate Liquidation and Bankruptcy Index
We highly recommend Company Law in China for lawyers, academics and even investors interested in understanding Chinese company law.
Read this amazing article entitled, How Wal-Mart Made Its Crumbling China Business Look So Good for So Long. Then please answer some or all of the following questions:
1. Is this a China issue?
2. To what extent is this Wal-Mart’s fault and to what extent was it unpreventable?
3. Are the issues Wal-Mart faced here similar to those faced by OSI Group earlier this year relating to the meat it supplied to McDonald’s in China?
3. Can Western companies succeed in China retail beyond a really small scale?
4. What Western companies have succeeded in China retail beyond a really small scale? Please name names.
I can tell you that from my vantage point and that of my firm’s China lawyers, American companies’ succeeding in China retail by having stores and locations in China are few and far between. Starbucks, KFC, Carrefour, and Pizza Hut immediately spring to mind. How do these companies succeed and why do so many others fail?
There is a story co-blogger Steve Dickinson loves to tell. He had an Australian friend who managed a high end health club in Shanghai. This friend would constantly complain to Steve about how he could not get the Chinese employees to provide even middling customer service to health club members. One day, Steve was at the club and his friend was instructing an employee not to answer her cell phone in front of a guest waiting to check in (live). Seconds after he explained that to her, a guest came in and she answered her phone. Steve’s friend quit on the spot and went back to Australia. Is this story even relevant to the above? Why or why not? Do you know people who spent years doing business in China who are now convinced that it is “impossible?” Did they just burn out or is there some wisdom there?
I am asking these questions because I would love to see a discussion on the above because I think it important. Do you?
If you have not played around with the Geert-Hofstede country comparison tool, you should. It seems accurate to me (but what do I know), but even if it isn’t, it sure is great fun.
It examines more than 100 countries on the following cultural traits:
- Power Distance
- Uncertainty Avoidance
China scores off the charts on pragmatism. Have fun with it and please let us know what you think.
China is continually tightening its requirements for proper usage of workers through third party hiring agencies and this is causing all sorts of confusion for foreign companies doing business in China or seeking to do business there. With this post we seek to clarify the current rules.
China permits only the following three categories of “dispatched” employees to be hired by a third party hiring agency:
- Temporary employees with a term of no longer than 6 months.
- Auxiliary employees who provide supporting services that are not central to the employer’s core business.
- Substitute employees who perform tasks in replacement of permanent employees during a period when permanent employees are unable to work due to off-the-job training, vacation, maternity leave, etc.
A company cannot have more than 10% of its workforce be made up of dispatched employees. The denominator for calculating this 10% figure shall be all employees who have a labor contract directly with the employer and all dispatched employees. If your dispatched employees make up more than 10% of your workforce, you have until March 1, 2016 (two years from the date on which the Interim Provisions on Labor Dispatch were enacted) to get the percentage to 10% or lower. During this two year transition period you cannot take on more dispatched workers if your current number of dispatched workers exceeds 10%. There is no grace period for the other rules.
And as we always stress when it comes to China labor and employment laws, you must always be mindful of local rules. For example, in Shanghai, employers must file with the relevant labor bureau a plan detailing how they intend to get their percentage of dispatched workers to 10% or less.
There is one exception to the above. Employment agreements executed before December 28, 2012 (when the Standing Committee of the National People’s Congress issued the decision to amend China’s Labor Contract Law can be carried out to their full terms and even beyond March 1, 2016.
Bottom line: If you have not already done so, you need to start bringing your business into compliance with the applicable labor dispatch rules. For many WFOEs operating in China, this will mean terminating labor dispatch agreements and contracting directly with your employees. This also will mean many WFOEs cannot make any new hires unless and until they start complying with the 10% rule.
Back in 2011, Richard Wagner, a Chicago-based Baker & McKenzie international arbitration and litigation lawyer, wrote an article entitled, Permission denied: The curious case of exit restrictions in Chinese commercial litigation. The article explains why personnel of foreign companies involved in Chinese litigation are often denied permission to leave China. Most importantly, that article details why denying a foreigner permission to leave can be completely legal.
Wagner’s article details how China’s Supreme People’s Court has made clear that foreigners who work for a foreign company involved in a China commercial case may be blocked from leaving China, by stating the following:
When foreign-related commercial disputes are handled by people’s courts, the courts may adopt exit restriction measures if all of the following conditions are met:
(1) the foreign-related commercial case has not yet been concluded;
(2) the person against whom the restriction would be levied is a party to the case, the legal representative of a party to the case or a responsible person with a party to the case;
(3) there exists the possibility that the party with whom the person is affiliated would evade the litigation or the performance of a statutory obligation;
(4) if the person in question left China the court might have difficulty conducting the trial or enforcing the judgment if levied against the party with whom the person was affiliated.
Richard goes on to explain how the term “Legal Representative” is a “term of art under Chinese law and easily determined from a company’s business license,” but the meaning of the term “responsible person” is “far more elusive” and “ultimately subject to court discretion.” According to the article, a foreigner need not be a senior executive to be stopped from leaving China; they need merely “be perceived by the court to have a high enough or important enough position in the company to be able to have some impact on the case (for example, some knowledge about the case or some influence on decisions concerning settlement.”
I completely agree with Richard’s assessment but raise him one. In our experience, the courts can and will hold someone hostage in China if they believe that doing so will speed up resolution/settlement. And since most American companies will settle cases rather quickly when any of their employees are being prevented from leaving a particular Chinese city, China’s courts are willing to hold just about any foreigner in China.
On top of that, it is not at all uncommon for foreigners to be held in China over a debt without a court order. Our China lawyers have handled a number of instances where foreigners were being held over a debt and there was no court order. These people were being held by private parties, usually with local government and/or local police acquiescence. In other words, though it can be legal to prohibit a foreigner to leave China over a debt, much of the time, the alleged creditors (the Chinese parties claiming to be owed money) take the law into their own hands.
Bottom Line: If you or your company are being sued in China or if a Chinese company or individual is threatening to sue you or your company in China or if someone in China is merely claiming that you or your company owe money, you should think long and hard about whether to go to China until that issue is resolved.
For more on China hostage taking, check out the following:
- The Single Best Way To Avoid Being Taken Hostage In China.
- How Not To Get Kidnapped In China
- China Hostage Situation. Now IS A Good Time To Pay Your Debts
- How To Avoid Getting Kidnapped In China. Plan In Advance Or Go Home
Last week, China government news agency Xinhua announced that the government would be cracking down on foreign company tax avoidance. To anyone familiar with doing business in China, the Chinese government singling out foreign businesses should come as no surprise; the only surprise should be that it would announce that openly.
Foreign companies doing business in China are under a government and media microscope. Both the Chinese government and the Chinese media hold foreign companies to a higher standard than their Chinese competitors. Behaving badly in China just because the local competition does so is not an acceptable defense.
American companies generally approach compliance issues in China in one of the following three ways, going from worst to best:
1. On the bottom rung are companies with the attitude that “it is so fun to ignore the laws in China and to act like I am a Chinese company, and I pity the naive foreign companies that don’t realize how things ‘are really done’ in China.” This sort of company typically gets shut down in a year or two.
2. In the middle rung are the American companies that believe that “we can just leave it up to our Chinese partner or our Chinese employees on how to handle things in China because they have to know better than us how to deal with things there.” This sort of company seems to believe that everyone in China knows everything there is to know about what foreign companies must do in China to remain in legal compliance. This sort of company typically gets shut down in a few years, or gets smart and changes and survives.
3. At the top rung are the American companies that do all that they can to handle China without self-immolating. These companies are the majority, and the percentage of these companies seems to increase every year.
To remain on top of your compliance and ethical issues, you should constantly be asking the following four questions
1. What do our local competitors do to get business and what of that should we — as a foreign company — not be doing?
2. What would this particular employee or that particular Chinese counterparty do if they had to choose between compliance and doing the deal?
3. What can we do better to ensure compliance?
4. Is there any way we can use our strict compliance standards to our competitive advantage?
You must constantly make your compliance principles clear to your employees, both in writing and with live presentations. You need to always be emphasizing that compliance is essential to your company’s health and reputation. Your employees must know — really know – that if they are ever forced to choose between compliance and doing a deal, they should choose compliance.
If your profits in China depend on your operating on the compliance margins, you should figure out now how to change or you should start formulating your exit strategy. As China’s economy continues to slow, the pressure on foreign companies will continue to accelerate.
You just have to read the paper for proof of this.
I spent much of May in Vietnam on business. While I was there, anti-Chinese riots broke out and I saw first hand in both Hanoi and in Ho Chi Minh how the government responded to them. More importantly, during my time there, I spoke with U.S. and Vietnamese government personnel and private practice lawyers and all of those things caused me to write an article, entitled, China Plus One: How Vietnam’s Riots Help American Businesses. I wrote that article from Vietnam, in May, and I am referring to that article now because virtually everything I said in that article has since been borne out.
I started that article talking about how Vietnam had risen to the top for most American companies looking to diversify or expand beyond China:
I am writing this from Hanoi, Vietnam, where I have been for the last week, working on legal matters for American companies doing business in Vietnam. Viewing firsthand how Vietnam has responded to this week’s anti-Chinese riots has prompted me to write on the impact those riots and the sentiments that led to them might have for American businesses in Vietnam.
Many American companies doing business in China have what is commonly referred to as a “China plus one strategy.” Such companies will have the bulk of their Asian operations in China, but will also be active in at least one other Asian country to hold down costs or reduce over-dependence on China. The increasing cost of labor (and other inputs) in China has accelerated the number of companies considering this strategy.
If you do a Google search for “China plus one,” Vietnam is listed one, two and three as the “plus one” that specifically mentions another country. It is also the country my law firm’s clients most often mention when considering where to go outside China.
I then discussed why I (and so many others) see Vietnam as the ideal plus one country?
It is a safe (for Americans anyway) and beautiful country. It has great food (sorry, but that matters to me). It is a relatively inexpensive place to live well and its wages are low. Its people generally like Americans, and English is by far the leading foreign language in its schools. Vietnam (not China) is a member of ASEAN and Vietnam (not China) will be a member of the Trans-Pacific Partnership. All of these things are plusses for business.
Its main minuses are that its electrical and transportation are relatively undeveloped and it is certainly no less corrupt than China.
I then confronted the rioting and its potential repercussions, but argued that would actually lead to increased investment by American companies:
But what about the rioting and the fact that the Vietnamese government has felt compelled to post 3-6 police or army personnel on virtually every street corner in both Ho Chi Minh City (where I was earlier today) and Hanoi to quell protests? Though thousands of Chinese have fled Vietnam — fearing for their lives — none of the riots nor any of the violence has been directed at any American or American company. Though there was initially some speculation among the expat business community here that the riots may have been a manifestation of worker discontent, the rioters have, when interviewed, made it a point to stress that their actions were for “patriotic” reasons, and did not stem from labor grievances.
The Vietnamese with whom I have met on this trip and heard on the news are uniformly emphasizing that Vietnam wants American investment, and that the riots should not be viewed otherwise. Both through official and unofficial channels, the government has made clear that it values the Americans here and it badly wants their businesses to stay. The Vietnamese lawyers and businesspeople are all telling me the same thing.
The American businesspeople here are saying the riots are irrelevant to their Vietnam plans. They view the riots as having been against China and against Taiwanese factory owners whom the Vietnamese view as in league with China. Some are even saying that Vietnam’s “China problem” will better position American companies seeking to do business in Vietnam. They see the possibility of increased sales of American goods and services and Vietnamese more likely to choose employment with American companies. To a person, all are convinced that the Vietnamese government takes the rioting seriously and will make every effort to prevent any recurrence.
They also talked of how the extent of the rioting, destruction and even deaths have exceeded that written about by Western media. Some mused about what this might mean for treatment of foreigners generally (to include Americans) but none saw it as presaging any threat. Some expressed concerns about what the closure of so many Chinese factories might mean for the supply chain needs of various American companies and some insisted that at least some American companies would experience problems.
I even predicted that Vietnam’s problems with China would actually jump-start its opening up more to American companies:
Many businesspeople here view Vietnam’s dispute with China as what Vietnam needs to jump-start its efforts to increase trade with the United States and facilitate U.S. companies doing business here. One person even mentioned how he thought that Chinese companies leaving would reduce corruption.
Though virtually all expats here side with Vietnam in its dispute with China, none made any effort to justify the violence, though quite a few seemed to enjoy analogizing it to China violence against Japanese businesses when disputes between those two countries heat up.
Last month, Barron’s did a cover story on Vietnam, calling it “The New China” and extolling its rapidly surging export base and the clothing and shoe trade press seems to have taken to writing about Vietnam pretty much every week. In our business, it has reached the point where many of our China clients in certain industries (shoes, clothing, fashion, cosmetics, kitchen utensils, ceramics, food, and small appliances and electronics) are considering Vietnam in addition to China or instead of China. Our lead Vietnam lawyer, Greg Buhyoff is there right now on behalf of clients and he will upon his return in a few weeks be writing on his trip.
Vietnam’s growth and relevance have led me and some of our other China lawyers to add this question to many of our conversations with clients and potential clients: What’s your Vietnam strategy?
Our China lawyers sometimes get “simple” questions from our WFOE clients regarding China’s labor law. One such question is whether they must use Chinese as the prevailing language for their labor contracts with their employees, especially with their expat employees. This question is not as simple as it may first appear.
First off, there is little national guidance on this other than an “ancient” 1995 document with the long title of Letter of the General Office of the Ministry of Labor on Implementation of the Regulation on the Labor Administration of Enterprises with Foreign Investment (the “Letter”). The Letter explicitly requires that the language of a China labor contract be in Chinese. However, the authority of this document is questionable because its underlying regulation is no longer in effect, having been replaced in 2007 by the PRC Labor Law and other relevant laws and regulations. So just as is the case with so much of employment law in China, it is important to look into how each locale deals with this issue.
In Shanghai, you must have a Chinese version for your labor contract. Though you may have an English language translation of your contract, Chinese must be the controlling language. Shanghai (more so than many other Chinese cities) generally takes a liberal view on freedom of contract and when it comes to labor contracts between Shanghai employers and their expat employees, Shanghai generally will respect the parties’ own arrangement so long as those terms do not contradict matters covered in the relevant laws. Notwithstanding Shanghai’s general approach, if there is a conflict between a Chinese language employment contract and an English language version, the Chinese version will control.
Similarly, Jiangsu Province explicitly states in its provincial Labor Contract Regulations that in the event of a dispute involving an employment contract written in a foreign language and in Chinese, the Chinese language will prevail.
What happens in legal disputes where the employment contract is in just English? The courts will sometimes have the contract translated but other times, they will simply rule that there is no valid employment contract and penalize the employer accordingly.
Bottom line: We recommend inserting a provision into your labor contract making it clear that the Chinese language will control. We make this recommendation because the Chinese language version almost certainly will be the one that applies anyway, but also because this lets everyone know exactly what will happen if there is any dispute regarding the applicable language — which disputes happen more often than you would think.
For our clients, we virtually always write their employment contracts in both English and Chinese, even though the Chinese will control. We do this because it is critical that our clients fully understand their employment contracts (and with that, the company rules and regulations relating to their employees) so that they can be sure to abide by them. Employer-employee disputes are incredibly common in China, particularly for foreign companies doing business in China. Having clearly written employment contracts in both Chinese and in English can go a long way towards reducing those disputes.
You might also want to check out this post (from way back in 2009),China OEM Agreements. Why Ours Are In Chinese. Flat Out. on why — for similar reasons — we typically write our OEM manufacturing agreements in Chinese as well.