Header graphic for print

China Law Blog

China Law for Business

China Contracts and the Unknown Counterparty

Posted in Basics of China Business Law, Legal News

Whenever one of our China lawyers drafts an agreement for a client doing business in China, one of the first things we ask is the identity of the Chinese counterparty. It’s a deceptively simple question.

The typical Chinese manufacturer (for example) is composed of multiple entities, with complicated lines of ownership. One entity may run the factory, another entity may run the office, and a third entity may serve as a holding company – and is probably based in Hong Kong or Taiwan. Overseeing the entire operation is a controlling shareholder who could care less which entity is the contracting party. And every single person on the Chinese side ignores corporate formalities and behaves as if all the entities are interchangeable.

But the entities are not interchangeable, and the counterparty matters. How it matters depends on your goals and the Chinese side’s corporate structure.

One basic rule is that the counterparty should have financial resources. No rational company should sign an agreement with a counterparty that is effectively judgment-proof. But many holding companies, especially those in Taiwan and Hong Kong, conduct no business other than receiving payments, and their bank accounts are emptied every few days.

Another rule is that the counterparty should be the entity that you pay. In the face of a stack of wire transfer receipts and a signed contract, it’s hard to argue that a business relationship doesn’t exist. This rule is considerably less compelling, however, when the Chinese side insists that payments be made to its holding company.

Meanwhile, if you have any hope of stopping IP infringement, the counterparty should be the entity most likely to steal your IP – the factory. But the factory may be an otherwise impractical choice if it has neither financial resources nor English-speaking personnel.

Similarly, you will need to consider dispute resolution, especially if the holding company is a Hong Kong or Taiwan entity. Where do you want to litigate (or arbitrate)? And where do you need to enforce the judgment?

Regardless of the named counterparty, any contract should reflect the reality of your relationship with the Chinese side. If the factory handles manufacturing and shipping, the office handles communication and orders, and the holding company handles all payments, then the contract should make that clear. The ideal situation, of course, would be for one Chinese entity to handle everything. But reality rarely matches the ideal.

Determining what makes sense in your particular situation will require a combination of common sense and due diligence. And, increasingly, common sense when conducting due diligence.

Vietnam As China Replacement

Posted in China Business

You know how when you buy a particular kind of car you all of a sudden see that particular brand of car everywhere? A similar thing has been happening to our law firm with respect to Vietnam. As soon as we brought on a really experienced Vietnam lawyer, we started seeing Vietnam opportunities just about everywhere:

  • The high end shoe company client that was being threatened with a massive law suit in China by its China supplier for funds allegedly owed that supplier for shoes that our client literally could not sell? Start making the shoes in Vietnam.
  • The clothing company that paid its long-time China supplier right before that supplier shut down and disappeared with all of the money? Transfer manufacturing to Vietnam?
  • The American company whose China work force and China suppliers have combined to raise costs so much that it can no longer make a profit? A move to Vietnam is in order.

But what has recently really put the frosting on Vietnam’s cake has been the increased coziness between the U.S. and Vietnam governments. The New York Times did a story on this, entitled, In China’s Shadow, U.S. Courts Old Foe Vietnam, mostly focusing on the rapidly warming political relations between the two countries. But needless to say, with the warming political relations has come warming economic relations and what that means on the ground is that Vietnam is redoubling (if retripling were a word I would have used it) its efforts to bring in American businesses. I was in Vietnam during the riots against Chinese businesses and the word everywhere was that declining Vietnam-China relations meant that Vietnam would need to buff up its welcome mat for American companies and it has unrelentingly done so pretty much ever since.

Two days ago, in Foreign Executives in China. Worry Me Yes or Worry Me No? we wrote about how American executives that have acted within the law in China need not panic due to what is happening there with the onslaught of anti-corruption and anti-trust claims being brought against foreign companies. But that does not mean that American companies should not be looking at their China businesses holistically and making the tough decisions as to whether to stay or go or maybe just supplement.

For more on Vietnam as a China replacement, check out the following:

China’s SaaS Market: WFOEs Need Not Apply

Posted in Basics of China Business Law, Legal News

A major trend in the business software business is provision of software not through installation on a customer’s computer but rather through online access using the Internet. This approach is known as software as a service (SaaS). Though SaaS is a major trend in the U.S. and Europe, SaaS in China by a foreign company or a WFOE is not possible. This poses major issues for foreign software companies seeking to enter the China market.

China recognizes the SaaS method of providing software. However, use of the Internet requires that the provider acquire a commercial ICP license. Since SaaS by definition makes use of the Internet, all SaaS systems in China require the provider obtain a commercial ICP license.

Here is where the problem arises. A WFOE or other foreign owned entity cannot obtain a commercial ICP license in China. There are no exceptions to the rule. Accordingly, if a WFOE or foreign entity wants to offer its software in China though a SaaS system, it must do using an indirect method such as licensing the software to a licensed Chinese entity through a method often called an “Internet portal”.

China’s Ministry of Industry and Telecommunications (MIIT) is in charge of Internet licensing. The MIIT has become even clearer on the SaaS rule as it confronts the growth of software business in China. In particular, its position on foreign software providers has hardened over the past several months as China responds to Snowden’s NSA revelations and the cyber espionage claims of the U.S. against the Chinese military. In the past, many U.S. software providers argued that the commercial registration rule did not apply to their business because no e-commerce was conducted on the SaaS site. Others argued that a Ministry of Commerce exception applied to their SaaS offerings. These arguments have been forcefully rejected by both the Beijing and Shanghai offices of the MIIT and they cannot be relied on for future SaaS business in China by foreign companies.

Accordingly, a WFOE has available the following two methods for selling its software in China:

  • Direct sales to customers. Software is installed on the client server and all data is housed on the client server as well. If the client wants to make the data available to the general public, the client does this on its own Internet site, under its own license. The WFOE would in no way be involved in this process. The WFOE could of course be engaged to manage the entire process, including creating an intranet available only within the client’s premises or as an Internet site available to the general public. The licensing (commercial or non-commercial) for such a public website depends on how the service is constructed.
  • SasS offered through a service/license agreement with a 100% Chinese owned Internet ”portal.” As noted above, provision of software through SaaS cannot be done directly by the WFOE because the provision of SaaS services in China by ANY entity requires a commercial ICP license. That is, if a 100% Chinese owned company wants to provide its software through SaaS, that Chinese entity must obtain a commercial ICP license. Note that it is not relevant what the customer will do with the software. All that is relevant is that 1) the customer is paying for the software and 2) access to the software is delivered through the Internet. Thus, the argument that SaaS software is not commercial because no e-commerce is done on the providing website fails. If the WFOE is paid for the software the whole transaction is commercial and it is therefore subject to the commercial ICP license requirement that applies to all SaaS activities in China.

To use a SaaS approach, the WFOE will be required to offer the software through a Chinese owned company that owns a commercial ICP license. Such an entity is referred to as an Internet portal. Under an agreement with a portal, the WFOE would contractually engage the portal to offer the SaaS software package, using the portal’s license as the applicable commercial ICP license. Because the portal approach is new in China, there is currently no standard portal agreement or portal structure.

Though the portal approach is a new concept, the MIIT officials in both Beijing and Shanghai have in just the last few months told our attorneys on multiple occasions and without hesitation the following:

  • SaaS CANNOT be done directly by a WFOE. There are NO exceptions.
  • Indirect provision of foreign software services through a portal arrangement is acceptable because the portal entity will be entirely responsible for complying with Chinese law. All MIIT offices we have contacted have affirmatively recommended the portal approach without any prompting from us.

To summarize: there are two ways a WFOE can sell software in China: Direct sales through the WFOE or indirect sales through an Internet portal. There is no intermediate method that allows for direct sales using the SaaS approach.

Many of our clients are contacted by ISPs, cloud service providers and related entities in China who claim to offer just such an intermediate method. Such offers should be viewed with caution. In our experience, these offers are coming from two kinds of companies: 1) companies that do not understand the law and 2) companies whose business model is built around evading/violating the law. Given China’s current legal environment regarding foreign companies, it makes little sense to operate in a way that claims to exploit a loophole or grey area.

Foreign Executives in China. Worry Me Yes or Worry Me No?

Posted in Basics of China Business Law, China Business

With the media recently paying so much attention to foreign businesspeople getting in trouble in China, the phones of our firm’s China lawyers have been ringing off the hook from worried Americans based in China. We are getting the following kinds of questions and we are giving the following kinds of short answers (needless to say, our long answers are much more nuanced):

1.  Should I leave China? Not unless you or your company have violated Chinese law in such a way that you are at risk for going to jail.

2. But isn’t China arresting innocent foreigners?  Not as far as we can tell. We obviously do not have all of the facts or even close to the facts we need to answer this question with any sort of certainty, but it appears that China is going after foreigners it honestly believes have violated Chinese law. We see so many foreign companies operating in violation of Chinese law that we almost have to believe that no matter what the reason is for China’s increased crackdown against foreigners, there is no need for China to start arresting people for no legal basis at all.

3. What about my D&O insurance, that will cover me won’t it? Not exactly. It will may prevent you from having to pay for your own defense but it sure as heck isn’t going to keep you out of a Chinese jail.

4. But if they come after me, I’ll have time to just leave on an airplane right? Very doubtful.

5. Is this crackdown really any worse than it’s always been? We are not sure. It feels like it is but that is always hard to gauge.

6. What should I do to avoid going to a Chinese jail? Don’t violate the law. More importantly, make sure nobody else in your company is violating the law.

7. Am I crazy to be worried? Absolutely not. You’d be crazy not to be worried. Your worry will lead to you and your company taking necessary steps for protection, so it’s a good thing. Just don’t worry too much and don’t let it paralyze you. Again, it just does not seem that China is acting randomly here.

8. But what about Chinese companies, aren’t they all doing what these foreigners are getting arrested for? Yes, but so what? How will that help you?

7. Should I leave China right now?  See #1 above.

I am going to conclude this post with a really really long list of the posts we have done over the years relating to criminal liability for foreigners. I am providing this long list to show that this issue goes all the way back to the inception of this blog in 2006, to show the panoply of criminal issues that can impact a foreign business in China, and mostly just to show that China has not and probably is not going after people without any legal basis for doing so.

China Product Counterfeiting: Using UDRP To Shut Down The Website

Posted in Legal News

Our law firm has in the last year had probably twice as many counterfeit matters as in any prior year. Not sure if this is because counterfeiting is on the increase or if it is just because American companies are getting so sick of it that they are becoming more likely to take action. Most of these matters involve Chinese companies shipping counterfeit product into the United States.

There are all sorts of ways to try to shut down Chinese counterfeiters but today’s post focuses on only one of those: trying to shut down the counterfeiter’s domain name. In a subsequent post we will talk about using a Section 337 action before the International Trade Commission.

Chinese companies are quick to register domain names similar to those of the foreign companies they see. We frequently see the following sorts of domain name thefts by Chinese companies seeking to sell counterfeit products:

  • Domain names that contain a common typo of a known trademark.
  • Domain names that take a known trademark and attach a generic word like “outlet” or a word descriptive of the product, such as “shoes.”
  • Domain names that are exactly the same as a known trademark’s domain name, but with a different extension.  For example, abc.net, instead of abc.com.

It is usually relatively easy to shut down the domain usage by companies selling counterfeit products, even when it is a Chinese company with the domain name. The Internet Corporation for Assigned Names and Numbers (“ICANN”) developed The Uniform Domain Name Resolution Policy (“UDRP”) to resolve domain name disputes, and international arbitration of disputes under UDRP is administered by a list of ICANN approved dispute resolution service providers.

Anyone who registers a domain name has agreed to the registrar’s terms and conditions and that includes committing to be bound by the UDRP.  he UDRP’s purpose is to prevent cybersquatting, which is defined “as registering, trafficking in, or using, a domain name with bad faith intent to profit from the goodwill of a trademark belonging to someone else.” Tenneco Automotive Operating Company Inc. v. Naushad Dhukka / SoftDot Technologies, LLC,NAF, FA1104001384326 (May 31, 2011).

When a complainant can show that another party is using a domain name in “bad faith,” the UDRP will either transfer or cancel the offending domain name at the request of the complainant. We usually recommend that the domain name be transferred to our clients so nobody else can grab it at some later date and then force our client to go through another UDRP domain name arbitration.

Companies need to be proactive in locating and excising “bad faith” websites as soon as they are discovered because those offending sites can not only damage a company’s online presence, they infringe upon and can ultimately dilute legitimate trademark rights. Of course, this only shuts down those domain names that are already in existence; it does little to prevent new ones.

Forming A China WFOE: The Agony and the Ecstasy

Posted in Basics of China Business Law, Legal News

At least once a month, one of our China lawyers will get a call from someone asking us to form a “China company” for them before they start doing business in China “next month.” Half the time when we get this sort of call, the better solution is not to form a China entity at all. The other half of the time, the problem is that forming a China company typically takes at least four months and after you finish reading this post you will understand why.

American lawyers often take on domestic company formations as a loss leader because the work tends to be fast and easy and they expect that the firm will get additional legal work once the company is formed. With China company formation, I often joke that the process is so onerous that our client never wants to speak with us again after we finish.

This post focuses on forming a Wholly Foreign Owned Entity (WFOE) in China because this is by far the most common entity formed for foreign companies doing business in China. I would estimate that of the last 200 companies my law firm has formed for American companies in China, 180 have been WFOEs, 18 have been joint ventures, and two have been representative offices. (And the joint venture numbers are only that high because one of our China lawyers is so well known for his joint venture expertise.)

The steps for forming a WFOE in China typically initially consist of the following:

1.  Determining if the proposed WFOE will conduct a business approved by the Chinese government for foreign investment. China remains closed to foreign companies engaging in certain types of business, and regularly issues a catalog detailing which industries are open to foreign investors, and under what constraints. For some industries, foreign investment is only allowed via joint venture.

2. Determining if the foreign investor is an approved investor. In theory, any legally formed foreign business entity is authorized to invest in a WFOE in China. The investor must provide documentation from its home country proving it is a duly formed and validly existing corporation, along with documentary evidence identifying the person from the investor authorized to execute documents on behalf of the investor. The investor also must provide documentation demonstrating its capital adequacy in its country of incorporation.

To meet these requirements, the following documents are normally needed from the investing business entity:

  • A copy of a Certificate of Good Standing (or equivalent document) that has been certified by the issuing Secretary of State (or equivalent), authenticated by the Department of State, and then authenticated by the Chinese Embassy.
  • A copy of a Business License (or equivalent document identifying the investor’s directors and officers) that has been certified by the issuing Secretary of State (or equivalent), authenticated by the Department of State, and then authenticated by the Chinese Embassy.
  • An original bank letter attesting to the investor’s sound banking relationship and account status.
  • A copy of the passport of the investor’s signatory.
  • A description of the investor’s business activities, the most recent annual audit, and supporting materials such as documentary proof of the investor’s involvement in the selected industry for at least three years.

Depending on the Chinese city of incorporation, some or all of the above needs to be translated into Chinese or summarized in Chinese.

Many investors create special purpose subsidiaries (often in Hong Kong) to serve as the investor in China. Though the Chinese regulators have become accustomed to this process, they will still seek to trace the ownership of the foreign investor back to a viable, operating business enterprise; investor secrecy is not an option in China. However, the corporate register for the Chinese company will merely state the name of the foreign, special entity investing company as the owner. In that sense, as far as public disclosure is concerned, investor privacy can be maintained.

3. Chinese government approval for the project — that is, the work which the WFOE proposes to undertake. In China, unlike in most countries with which Western companies tend to be familiar, approval of the project by the relevant government authority is an integral part of the incorporation process. If the project is not approved, no incorporation is permitted. The two are inextricably linked.

The following documents must be prepared for incorporation/project approval:

  • Articles of Association. This document should set out all details of management and capitalization of the WFOE. Nothing can be left for future determination. All basic company and project issues must be determined in advance and incorporated in the Articles. This includes identifying directors, local management, local address, special rules on scope of authority of local managers, and the amount of registered capital.
  • Feasibility Study. The WFOE will not be approved unless the local authorities are convinced it is feasible. This usually requires a basic first-year business plan and budget. We typically use a client-produced business plan and budget as a model for drafting a feasibility study (in Chinese) that will satisfy the requirements of the Chinese approval authority.
  • Lease. Most Chinese cities require the investor provide an executed agreement for all required leases. This means an office lease as well as (depending on the industry) a warehouse/factory lease. It is customary in China to pay rent one year in advance and this must be taken into account in planning a budget because the governmental authorities will be expecting this. Moreover, each lease must be for a space that is suitable for the proposed industry and approved for use by a foreign-invested entity. The investor must also provide documentary proof that the landlord owns or controls the property and has a business scope enabling it to rent out the space. We oftentimes spend weeks confirming that our client’s proposed space can work for a WFOE.
  • Proposed personnel salary and benefit budget. If the specific people who will work for the company have not yet been identified, one must at least specify the positions and proposed salaries/benefit package. Benefits for employees in China typically range from 35% to 40% of the employee base salary, depending on the location of the business. Foreign employers are held to a strict standard in paying these benefit amounts. The required initial investment includes an amount sufficient to pay salaries for a reasonable period of time during the start up phase of the Chinese company.
  • Passport, photos, and résumé of the WFOE’s legal representative, and sometimes of other named directors and officers.
  • The Chinese name of the WFOE. This must include the WFOE’s business scope.
  • Any other documentation required for the specific business proposed. The more complex the project, the more documentation that will be required.

All of the above documents must be prepared in Chinese.

It usually takes two to five months for governmental approval, depending on the location of the project and its size and scope. On large and/or complex projects, the approval process often involves extensive negotiations with various regulatory authorities whose approval is required. For example, a large factory may have serious land use or environmental issues. Thus, the time frame for approval of incorporation is never certain. It depends on the type of project and the location. Foreign investors must be prepared for this uncertainty from the outset.

All of the above documents must be submitted to the authorities in the specific district in the city in which the WFOE will be located. This means that the investor must find office/warehouse space and sign any required leases before it can even begin the application process.

The above is the agony. The ecstasy is when the company is finally approved, which, believe it or not, happens pretty much every time so long as the American company does all of the above correctly.

US-China Legal Summit in San Francisco on October 9

Posted in Events

ALM, publisher of The American Lawyer, The Recorder, Corporate Counsel and The Asian Lawyer magazines, will be hosting the inaugural US-China Legal Summit in San Francisco on Thursday, October 9, 2014. Registration is free for in-house counsel and we have managed to secure a 50% discount for China Law Blog readers.

This event will present best practices for companies seeking to make the additional of Sino-American commerce while minimizing risk and meeting compliance requirements.  Topics will include:

  • Anticipating, Preparing for and Navigating Arbitration & Litigation in China
  • How to Respond to and Manage Anti-Trust Investigations in China
  • Managing FCPA Risks in China

“Don’t miss your chance to discuss your challenges and strategies related to business and legal relations in China with peers from companies such as ConAgra, John Deere, Google Inc., Whirlpool Corporation, McKesson Corporation, and more.”

I will be co-chairing this event, along with Randall Lewis, Vice President and International Counsel at ConAgra Foods Inc.

To get your 50% off registration discount, use Promotion Code CLBVIP when registering and for additional. details on the agenda and to register, please visit the Summit website here.

We hope to see you there.

Hit Us Where It Hurts: China’s Ban on U.S. Agricultural Products Grows

Posted in China Business

By Lucas Blaustein*

U.S. agricultural exports to China have increased by 120% since 2008, to nearly 28.9 billion dollars in 2013. Agriculture now accounts for nearly 24% of US-China trade .

Since China’s admittance to the World Trade Organization (WTO), China and the United States have increasingly traded their comparative advantages. Daily, Chinese made iPads, Lenovo computers, Nike sneakers, and other material trappings of American consumerism arrive in U.S. ports, where they are unloaded and then returned filled with U.S. grain products like soybeans and corn. But in November 2013 the system began to break down, as corn exports to China came to a halt.

What caused this halt was the discovery by China’s Inspection and Quarantine Services (CIQS) of an unapproved genetically modified corn varietal called MIR-162 in imported shipments. Import permits began to be denied, and US corn exports to China gradually decreased to nothing. Grain merchandisers and U.S. farmers were horrified, as the fastest growing market for U.S. corn closed its doors.

Agribusiness companies and Chinese importers were quick to react, replacing corn grain as the number one U.S. export to China with a corn based ethanol byproduct called distiller dried grain with solubles (DDGs). For a time it seemed that American grain merchandisers had found a solution to China’s ban on U.S. corn with DDGs, but this “solution” was short-lived. In the spring of this year China stopped returning import permits for DDGs.  After months of confusion, the U.S. Embassy in Beijing on July 24 received a short message stating that “U.S. DDGs imports must now be tested at origination for the unapproved gene MIR-162.” In the space of a day, traded corn prices dropped by more than half.

Shortly thereafter the USDA issued a statement asserting that there is no reliable, affordable method of testing for MIR-162 in DDGs, nor is there even a regulatory body in the United States with the manpower or funding to conduct such a test, even if one existed. In other words, what China did on July 24 was to ban importation of all U.S. corn based products.

Why did China do this?

Sino-U.S. relations are at one of their lowest points since before China’s period of great opening up. In light of recent events involving Apple, Microsoft, GSK, Cisco, KFC, Starbucks and many other American businesses in China, it would not be out of bounds to view China’s ban on U.S. corn imports as punishment for worsening relations. The National Grain and Feed Association (NGFA) estimates that China’s ban has cost U.S. farmers and agribusiness firms nearly three billion dollars. U.S. farmers could be hit especially hard during the upcoming year, with larger than average corn yields anticipated, and more new unapproved GMO varietals in the ground.

But what is often lost from the punitive argument is the Chinese side of this story.

In 2,500 years of historical records, famines were observed in at least one Chinese province every year up until the mid-20th century. While in modern times greetings like, “你吃饭了吗”?, or “have you eaten?” have become a signal of a person’s rural upbringing, they are still indicative of the powerful impact of food insecurity on Chinese psychology. It is this history that leads China continue to emphasize food security in its annual No. 1 Document, which this year made clear that “China should take good control of its own bowl,” by “intensifying support and protection for [domestic] agriculture.”  There are three parts to China’s food security policy: 1) invest in modern agricultural practices and grain storage capacity; 2) develop local GMO varietals to increase crop yields; and 3) protect local grain farmers.

Through investments in modern agricultural practices, total corn production in China has risen rapidly from 165 to 205 million metric tons, a near a 25% increase from 2008 to 2012. China has also built an enormous network of modern computerized grain storage facilities, with nearly 300 million metric tons of storage available. China was a net corn exporter from 2002 to 2006.

China knows GMO technology is critical to increasing crop yields, so investment in GMO technology has surged, despite public fears over negative health effects. Chinese officials are wary of becoming overly reliant on genetically modified seeds from the Western world. Within the last six months eight Chinese Americans and nationals have been arrested on accusations of corporate espionage and theft of American seeds. MIR-162 grain imports may not be allowed into China, but China desperately wants access to the technology that produced the MIR-162 strain.

With lower input costs and better technology, world corn prices have been lower than China’s domestic corn prices for years. For this reason, Chinese companies have imported significant amounts of corn. The easiest way for China to protect local farmers is to force the purchasing of Chinese corn by limiting the amount of foreign corn that enters the Chinese market.

Protection for local farmers, fear of reliance on foreign GMOs, and investments in agriculture are all part of China’s broader food security strategy. Banning U.S. corn for food security reasons is probably as strong an argument for why China banned U.S. corn as punishment for worsening relations.

With Sino-U.S. relations still very poor, another record corn crop this year in China, as well as Ukrainian, Brazilian, and Argentinian corn imports approved, no matter which reason you favor for the ban on American corn products, there is little reason to believe China will lift that import ban any time soon Every day it becomes more likely that only a significant and public response from the United States government, or litigation in the World Trade Organization, will open China back up to US corn product imports.

* Lucas Blaustein is the Container/Feed Ingredient Sales and Marketing Manager for CGB Enterprises. He has a Masters of Agribusiness degree from Texas A&M, and a Bachelors of Economics and Chinese Studies from the University of Houston. Lucas has worked in business and academia domestically and in China with major agribusiness companies like PepsiCo and John Deere and he is fluent in spoken and written Mandarin.

China’s Forty Hour Work Week Is Mandatory. Except When It’s Not. Part III.

Posted in Basics of China Business Law, Legal News

In parts one and two of this series, I wrote about the “flexible” working hours system as an exception to China’s standard working hours system. China’s labor law and relevant regulations also provide for a second exception: the “comprehensive” working hours system. The latter system applies to three categories of employees who work longer hours because of their particular industries, as follows:

(1)   employees required to work extended hours in the transportation, aviation, railway, shipping, fishing, postal and telecommunications service industries;

(2)  employees subject to seasonal and natural constraints in the resource exploration, construction, salt production, sugar production, and travel industries; and

(3)   other employees in positions that may be suitable for the implementation of the comprehensive working hours system.

Before implementing the comprehensive working hours system, an employer must obtain written permission from the local labor bureau on two fronts: general permission to implement the system, and specific permission for each specific employee designated to work under the system. Once implemented, the designated employees’ working hours will be accumulated over a given period (i.e., a week, month, quarter or year), called a “comprehensive calculation period.” During each such period, the employee’s hours for a month may exceed by up to 36 hours what would have been allowed under the standard working hours system. (In practice, the overtime calculation is even more employer-friendly, as labor bureaus typically define the maximum allowable hours as the employee’s average hours for a month.) Employers who disregard overtime rules risk significant penalties: 150% of an employee’s normal wages for any time exceeding the legal maximum, and 300% of normal wages for such time occurring on a Chinese legal holiday.

The above rules leave several details open to interpretation, and to help clarify matters, in May 2012 China’s Ministry of Human Resources and Social Security issued Draft Regulations on Management of Special Working Hours for public comments. The Draft Regulations introduced the following revisions:

  • Categories (1) and (2) above would be expanded to include the electric power, petroleum, petrochemical, and finance industries.
  • Category (3) above would instead read: “in accordance with the industry policies issued by the State Council with respect to encouraged or promoted industries, the positions that the PRC Ministry of Human Resources and Social Security deems eligible for implementation of the Comprehensive Working Hours System.”
  • The amount of allowable overtime would depend on the length of the comprehensive calculation period. For a period of one week, the maximum overtime permitted per period would be 15 hours (with an additional cap of 36 hours per month). For a period of one month, the maximum overtime permitted per period would be 36 hours. For a period of one quarter, the maximum overtime permitted per period would be 108 hours. For a period of one year, the maximum overtime permitted per period would be 360 hours. In addition, regardless of the period length, an employee could not work more than 11 hours per day, and would be required to have 24 continuous hours of rest every other week.

However, the Draft Regulations are still out for comment, with no end in sight. Unless and until they take effect, the comprehensive working hours system may only be used for employees who fit into one of the three categories listed at the beginning of this post.

China Due Diligence. The Most Basic Things To Do.

Posted in Uncategorized

Succeeding at doing business in China typically requires a good partner. The odds of having problems with a Chinese company will be substantially lower if you are dealing with a “legitimate” Chinese company. That means it makes sense for you to ascertain that you are dealing with a legitimate Chinese company.

But how do you go about doing that? How can you distinguish between a Chinese company that is legitimate and one that is not?

The following are the basics for making that determination:

  • The first thing you do is ask the Chinese company to send you a copy of its business license. Do not be afraid to do this. Chinese companies do this all the time. If the Chinese company refuses to send this to you, walk away.
  • You then have someone fluent in Chinese and with knowledge about Chinese business licenses examine the one that you have been sent. Our China attorneys typically look for the following:
    • To determine whether it is real or not. This is done by comparing the information on the business license provided with the corresponding information on the relevant Chinese government website — usually the local State Administration for Industry and Commerce (SAIC). If the business license you have been provided is fake, you walk away.
    • To see when the company was formed. We like to compare what the real business license says against what we were told (by email or whatever) and also what the Chinese company says on its English language and  its Chinese language website. If different years are given in different places, we get suspicious and we ask more questions.
    • To see where the company is located. We like to compare this against both what we were told (by email or whatever) and also against what the Chinese company says its English language and its Chinese language website. If there are different addresses in different places, we get suspicious and we ask more questions.
    • To see what the scope of the Chinese business is, as listed on its registration. If the scope is “consulting” and our client thinks it will be ordering five million dollars of widgets from a factory, we get really suspicious. Looking at the scope is a good (though not always fool-proof) way to determine whether you are dealing with a manufacturer or a broker.
    • To see the amount of registered capital. If the amount is too low, the odds are good that it is not a manufacturer. If the amount is really high, the odds are good that this is a big company. Note that this information is not going to be as commonly listed in the future.

Lastly, you should go visit the Chinese company or send someone you truly trust to do so.

Doing the above is not going to be nearly enough due diligence for big deals, but it is usually a relatively fast, relatively cheap way to get a good sense about the Chinese company with whom you are thinking of doing business. The above will not guarantee you a good long-term relationship, but it oftentimes will be enough to let you know whether or not you even wish to attempt to form any relationship at all.