China Visas. I'm Getting Deja Vu Olympic Feelings, Part II, The Now I Know I Am Right Edition.

Three days ago, I did a post entitled, "China Visas. I'm Getting Deja Vu Olympic Feelings," in which I talked about having heard from clients of difficulties in getting their China visas:

One of the great things a about being a lawyer is that we hear all kinds of things from our clients and potential clients. And then when we start hearing those same things on the blogs, we know something is up. I am hearing a lot of things about the difficulty of getting anything but a three month visa.

I actually got a call from a potential (very broadly defined) client the other day wanting our help in getting him a one year visa. He "owns" a business in China and it is "absolutely critical to the point of it being do or die" that he be in China at the end of May. He had applied for a business visa (an F Visa) and been turned down cold and essentially told not to bother coming back until 2010 to try again. We talked a bit about what he was doing in China and it turned out he had set up an internet business with a Chinese "partner" where, on the books, his Chinese partner owns the business entirely, but this American has an oral agreement with the "100% trusted"Chinese partner that the business is really owned 50-50.

Yesterday, the mainstream media and the Chinese government essentially confirmed the crackdown. A Vancouver Sun article, entitled, "China to begin security crackdown," writes on how the goal of providing a "harmonious environment" leading up to China's 60th anniversary celebration is causing the brakes to go on the issuance of visas. Like me, the writer of this article sees this visa tightening as similar to what happened with the Olympics:

It is a move reminiscent of the ramped-up security ahead of last summer's Beijing Olympic Games in which hundreds of "dissidents" were detained and such tight visa restrictions enforced that hotels in Beijing, which expected to reap windfall profits from increased tourism, found they had rooms going begging.

It bears repeating my "bottom line" from my previous post on this:

Bottom Line. There are three very important things that should be taken away from all this. One, if you need certainty in terms of being able to get into China, you cannot rely on either an F visa (business) or an L visa (tourist) for that. Two, if you need certainty in terms of being able to get into China, the solution is usually to legitimately set up your own company so you can get a Z visa (employee). Three, and probably most important, is that the Chinese government will nearly always place politics and stability over economics.

Update: The Financial Times just came out with an article pretty much confirming all of the above.

Comments

Quote: "where, on the books, his Chinese partner owns the business entirely, but this American has an oral agreement with the "100% trusted"Chinese partner that the business is really owned 50-50."

Train wreck waiting to happen..

Actually, the lesson from this one is that he's going to wake up one day and find his business not his. As his "lawyer" I would probably advise him that his visa issue is the least of his problems.

Posted by: L. | April 30, 2009 7:06 PM

It's already not his business. Was never his to begin with. Oral agreements amount to a pile of nothing in China. People have a hard enough time suing with written contracts these days. Americans need to really wise up and realize they're dealing with a completely different culture, government, people, etc.

Posted by: Yiu-Chun | May 1, 2009 9:38 AM

I agree with the above comment.

As a Chinese qualified lawyer specializing in FDI and M&A, I think there are some reasons why your client did not set up a wholly foreign owned enterprise ("WFOE") or a joint venture ("JV") in China but cooperated with his Chinese partner through setting up a Chinese owned company by his Chinese partner. Among them, the most important reason is that internet business is restricted for foreign investors to engage in by PRC laws on foreign investment. Therefore, a lot of foreign investors planning to engage in such restricted businesses often ask Chinese individual(s) or enterprise(s) to set up a Chinese owned company by using the foreign investor's capitals. And most of them often sign a partnership or cooperation agreement with the Chinese partner. However, there are existing potential legal risks and credit risks for the foreign investors if only a partnership or cooperation agreement, and an oral agreement will bring more risks.

In fact, in China, some lawyers specializing FDI and M & A often design a workable arrangement structure for such transaction, and the structure often consists of several agreements and other legal documents such as a loan agreement, share pledge agreement, share option agreement, consulting services agreement, power of attorney, etc. Of course, for different transactions, different agreements are used according to their respective features. For some big deals such as a deal handled by me in 2008 which involved up to USD 50 million, all the above mentioned agreements together with others have been adopted. By such arrangements, the risks in all respects have been minimized and most important of all, Chinese government actually recognized such arrangements, that is to say, such arrangements are valid and effective in China.

The above is my brief comments from my practice experience in FDI and M&A.

Posted by: Jeffrey | May 1, 2009 10:36 AM

Your very last sentence bears a lot of truth: "Three, and probably most important, is that the Chinese government will nearly always place politics and stability over economics."

So true. We have to be careful not to underestimate the risk of doing business in China.

Posted by: AF | May 1, 2009 11:40 AM

Jeffrey wrote: "By such arrangements, the risks in all respects have been minimized and most important of all, Chinese government actually recognized such arrangements, that is to say, such arrangements are valid and effective in China."

One might want to re-visit your notes from Contracts Law 101: Illegal contracts are void from the "git-go".

Long Live THE GREAT LEADER!

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Posted by: Kim Jong IL | May 1, 2009 10:00 PM