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China Law for Business

China Law Listservs, Blogs And Websites: The Harvard Law Library List

Posted in Legal News, Recommended Reading

Harvard Law School Librarian Carli Spina has compiled a research guide that “provides an overview of some of the best resources for Chinese legal research in both Chinese and English.” In turn, that guide provides the following list of China law listserves, blogs and websites “covering a variety of subjects and fields of Chinese legal study”:

  • China Law Discussion List. A discussion list hosted by Professor Donald C. Clarke at George Washington University Law School.
  • China Politics and Law ListServ. A listServ focusing on China’s civil society and law, hosted by Professor Karla Simon.
  • China Law ProfBlog. A Member of the Law Professor Blogs Network, edited by Professor Donald C. Clarke at George Washington University Law School.
  • Supreme People’s Court Monitor. A blog created by Susan Finder, observing the Supreme People’s Court.
  • China Law & Policy.  A blog created and edited by Elizabeth M. Lynch.
  • China File. A real time discussion on China news from Asia Society.
  • China Brief. A journal of analysis and information by Jamestown Foundation.
  • China Law Blog. A business law blog from the perspective of practice and edited by Dan Harris and Steve Dickinson.
  • CHINA IPR. An IP law blog published by Mark Allen Cohen, visiting professor at Fordham Law School.
  • China Copyright and Media. Provides insight on Chinese law and policy regarding public communication. Edited by Rogier Creemers.
  • Chinadialogue. (中外对话) A Chinese/English website by chinadialogue.net (NGO) discussing environmental issues in China.

We are honored to have made this list.

Anything you would add to it? Anything you would delete?

Four China Businesses To Avoid

Posted in China Business

Interesting South China Morning Post article by Jeffrey Towson, author of the incredibly popular One Hour China Book. The article is Keep away from the “unicorns”: Four Chinese businesses you should avoid. It starts out noting that “if something hasn’t happened yet, there are probably good reasons why” and then lists the following as “businesses everyone talks about but nobody has ever actually seen,” hence the term unicorn:

Senior living. Long predicted, but simply not profitable because the elderly in China do not have much money and because “separating families is not a great idea in a country with historic Confucian norms.”

Private hospitals. Difficult to compete with state owned hospitals and difficult to hire doctors and nurses.

Canned soup. “Hard to sell quality food in a can when the alternative is a fresh vegetable market down the street.”

Funeral and burial services. The regulatory environment and the limited availability of land for burial make it just too difficult.

Towson concludes his article by encouraging those looking to do business in China to let others tread the above paths first:

Basically my advice is: Never be first in and never be last out. If it looks like a unicorn, let someone else spend years knocking down all the barriers. Then if they actually succeed, you can follow them in.

Makes sense to me. What do you think?

Want Good China Product? Use A Good China Spec Sheet

Posted in Basics of China Business Law, China Business

There are all sorts of things you should be doing to increase your odds of securing good product from your Chinese manufacturer. When I speak on what it takes to successfully source product from China, I always emphasize the following four things:

  1. Good manufacturer (due diligence)
  2. Good OEM Agreement
  3. Good IP protection
  4. Good quality control

Years ago we did a China OEM Agreement for a really sophisticated client with a really sophisticated in-house lawyer. During one of our conversations this lawyer emphasized the importance of the specifications sheet for his company and talked about how it had instructions on drafting its spec sheets for securing product from China. I asked if he would send me those instructions for this blog. He did and I am just now finally getting around to running it, below.

We typically draft our China OEM Agreements to incorporate our clients’ spec sheets (a/k/a data sheets) as an Exhibit and when that is not possible or if the spec sheet were to change, they are to include the spec sheet as part of their PO, which in turn is specified as being incorporated into the OEM Agreement. So when I lecture on the importance of having a good OEM Agreement, that includes having a good spec sheet.

Note that the below spec sheet instructions are for one particular company and your requirements likely will vary enough from this company’s so as to make these instructions not perfect for you. But it should be a good start.

According to the instructions, all spec sheets should contain the following:

  1. Product description
  2. The SKU
  3. The specific materials for the product and the precise amount
  4. Product dimensions
  5. Product tolerances (if any)
  6. The Pantones (product colors)
  7. Testing requirements
  8. Price
  9. Order quantity
  10. Label specifications
  11. Packaging specifications
  12. Shipping specifications
  13. Special instructions
  14. Photographs of the product from multiple angles and with the dimensions indicated

The instructions also mandate listing “every appropriate detail not set forth above” and the requirement that everything be set out in “as much detail as possible” and “confirming with the manufacturer that you have not overlooked anything”and “that it [the Chinese manufacturer] has everything it needs to know exactly what to manufacture.”

Seems like good instructions to me. What do you think?

Seven China Manufacturing Red Flags

Posted in China Business

Interesting and helpful post by Jacob Yount, entitled, Be Aware of these Red Flags in China Manufacturing. The post lists out and explains the following seven red flags that should alert you to the potential for problems down the road:

1.  Unbelievably good pricing. If a manufacturer is quoting you prices considerably lower than other potential suppliers, you have “found a supplier who has misunderstood the inquiry or who doesn’t know how to quote.”

2.  Quick agreement to tight delivery time.  See number 5 below.

3.  “We’ve never done this before.” Yount rightly describes this as “a typical answer in China whether in manufacturing or if you’re in a restaurant ordering a dish without heavy garlic.” This is really another way of warning you to watch out.

4. “It’s difficult. ” Yount describes “It’s difficult” as worse than “we’ve never done this before” as it usually starts “after the sampling is underway or worse, after mass production commences” and he remind that “the Chinese way of breaking bad news isn’t to directly tell you but it’s to give foggy hints and hope you proactively fill in the blank.”

5. No questions asked and no arguing. According to Yount, a supplier who does not have questions is usually “a supplier who is not thinking about the project. This leads to incorrect quotes and a lot of invested time going down the wrong path.” I really like this one because my firm’s China lawyers are always saying the same thing about Chinese companies that sign whatever OEM Agreement we give them. Our concern when that happens is that Chinese company is either not very savvy or simply does not care much about violating agreements. We like Chinese companies that come back to us with thoughtful proposed changes to the OEM Agreement we sent them.

6. Keeps ignoring a specific request. “If you keep asking the supplier to confirm a specific request and they are confirming and commenting on everything but that specific request, that is not a good sign. They see what you are asking, but they either do not understand it or they understand and cannot do it. A non-confirmation is not a confirmation.”

7. Updates are few and far between. Usually this means “there is some bad news they are saving up to give you at the end.”

Any other ones?

How To Handle China’s Economic Slowdown

Posted in Recommended Reading

I did an article for Forbes Magazine the other day, entitled, How American Businesses Should Deal With China’s Economic Slowdown. I’d love to just re-run it here, but I worry that doing so might violate the agreement I signed with them, and if I wait too long, it may no longer be topical or it will be too late to be of much help.

I sum up the article in the following concluding paragraph:

The key is to be proactive. If you find yourself in a bad situation with a Chinese company going under, there usually is no remedy after the fact. Bankruptcy in China generally consists of a company shutting down in the middle of the night and its owner fleeing to another town. The key to weathering China’s slowdown will be for American companies to go back to basics. Think afresh about what your company contributes to China’s economy and how that is likely to shape policy makers’ opinions. Focus on scrupulous regulatory compliance and renew your focus on due diligence at a company-to-company level. Above all, no American company doing business in China should blithely assume that a slowdown won’t affect it.

I think it is worth a read and I recommend you go here to do so.

China: Stop Complaining About “Selective Enforcement” And Start Obeying The Law

Posted in Basics of China Business Law, China Business, Good People, Legal News

So I got this email way back in May and I loved it and so I immediately used it to create a draft blog post. And then I forgot about it. In fact, now I cannot even remember from whom it came, though I think it came from a good friend of mine and a veteran China hand, who has been living and working in China for the last twenty years and with whom some of our China lawyers are working on a matter.

Anyway, now that I have “found” it again, I just have to run it, so here goes:

Dan,

1. Please tell Chris that I loved his WSJ article on China corruption. You guys are right to always be talking of how foreign companies need to stop bitching about selective enforcement and just start obeying the law. People do not like that message though because they want to be able to blame their own f—ups on some bigger more intractable force.

2. You should send it to _______ [I deleted the name of the company when I threw up the draft] since they are doing everything the exact opposite of what this article recommends.

3. It is like we are always saying about Hong Kong and how in the 1970′s it was one of the most corrupt economies in the world. But then they realized how corruption was corroding their society and their economy and so they created a corruption commission with real power, and now HK is one of the cleanest countries in the world and this clean economy is now a large reason for its prosperity. The same goes for Singapore. Xi Jinping has stated many times that his goal is to run China on the Singapore/HK model.

So what should foreign companies doing business in China take away from what has been happening here of late? The following:

a. “Chinese” can run a clean economy. They can also appreciate the benefit. I have discussed corruption with hundreds of Chinese businesspeople and friends over the years (in Chinese) and most of them hate it and want it to end. I am not saying that my discussions are a representative sample of China, but I do think that they are a representative sample of something even better than China as a whole: they represent China’s business class and since they are the ones doing well, I can only imagine how the peasants must feel about this.

b. The PRC government is serious about the anti corruption campaign and this is NOT because it has suddenly become moral. It is because they believe that they need to do this so that they can maintain their position within China. They see how pervasive corruption can destroy the legitimacy of both the party and the central government. In an unelected government system, some form of legitimacy is required to maintain the power to rule. The fact that they are serious does not mean that they will succeed, but it shows the direction they are taking and will continue to take. Foreign companies do not have networks of patronage, so foreign businesses are obvious targets. But it is simply untrue that foreign businesses are the only target. The current move against Zhou Yongkang and the petroleum cartel group is an indicator that the central government is willing to take the battle up to the highest levels.

4. We can already see the effect here [in China]. I am now working out in ______ [I deleted this identifier months ago as well] with a government operated industrial park. The government officials are quite open about the situation. “We used to be able to act this way (corrupt), now we cannot. We have to be very careful or we will be busted.” In the old days, they would take us out to dinner in a fancy restaurant with copious amounts of baijiu. Now we eat in the office cafeteria. It is serious stuff.

5. And yet, most foreigners are saying, “no, there is no change. It is just a political battle that has nothing to do with normal life in China.” They are echoing what they are picking up at the expat bars or what their Chinese staff back in the United States are telling them. But deep inside they know we are correct and we just need to keep pushing on the right people.

6. The problem we will have is an old one. Many of the local staff (both Chinese and foreign) are invested in doing things the old way. They will work very hard to try to neutralize firms like yours. Those guys don’t know anything about China, those guys do not know how we have to work in this business, and so on. My strategy is to tell the client up front that they should expect to get this push back from the locals. I tell them that this is what the local staff will say. If you are going to believe them, then let’s save money and time and abandon the effort right now. When the locals come back and say exactly what we predict, it enhances our [the email writer's own company] credibility.

7. This all applies to and you should take this into account. [Not sure whether the you is a mutual client or my law firm]

Wow.

China Contract Dispute Resolution Clauses: They Are Complicated

Posted in Legal News
Got an email the other day from a very savvy client of ours for whom we are working on a China product distribution agreement. The client wanted to know whether it would make sense to have a dispute resolution provision that included an additional sentence stating that both parties agreed that the Chinese courts would be able to enforce any foreign court judgment. Client wanted to know whether we thought the Chinese courts would enforce the “agreement to enforce” portion of this.

One of our China lawyers responded as follows:

Very interesting idea, we simply do not know whether this additional language would increase the odds of a Chinese court enforcing a foreign country court judgment. On one hand, it seems like it would/should, since it is just a contract and Chinese courts generally do abide by freedom of contract by enforcing contract provisions. But I really have my doubts because the Chinese court would also likely be concerned about relinquishing some aspects of China’s sovereignty to a foreign court. There was a short period where we wrote contracts calling for arbitration in Singapore/HK/NYC of monetary disputes but litigation of IP disputes in Chinese courts. By doing this we were choosing one of the best methods for resolving monetary disputes (foreign arbitration) while also leaving it open for our clients to be able to stop IP infringement via the Chinese courts — usually the best method for stopping China IP infringement as quickly as possible. But we started hearing about and reading Chinese cases where Chinese courts were rejecting such dual-venue provisions and just ruling that everything needed to be arbitrated. Chinese courts are not terribly flexible.

The other concern I have about your contracts is that one of the main reasons to have a Chinese court be the venue for disputes is to be able to stop the Chinese company from using your IP. When drafting our contracts, we typically try to figure out the worst thing that can happen to our client and then figure out the best place to deal with that worst thing. Most of the time, the worst thing that can happen to our clients is the Chinese company running away with our client’s IP, in which case a China court is almost always the best place to deal with it. If you have a liquidated damages provision in your China contract, you can effect a pre-judgment seizure of the Chinese company’s assets relatively quickly and easily and that tends to almost instantly get Chinese companies to stop messing with someone else’s IP.

So though I find your idea interesting, I have my doubts as to its ovverall efficacy. Let’s talk more about your goals and your concerns on this particular contract and then we will talk more about the venue specifics that will make sense for it.

China WFOE Formation And Minimum Capital Requirements

Posted in Basics of China Business Law

China has liberalized its minimum capital requirements for a WFOE and the amounts required have been reduced in many Chinese cities/districts. But even if the Chinese government is going to let you get away with a very small amount of registered capital, you may want to pay more.

You should think about the registered capital you should be paying by considering how much money you will need to sustain your China WFOE until it can generate enough revenues from its own cash flow in China to sustain itself. If you inject less than you need in registered capital to sustain your WFOE until it generates enough in revenues to sustain itself, your WFOE will need a cash injection from somewhere. If you transfer money to your WFOE from overseas but you do not go through the correct process of re-registering your registered capital (which typically takes at least six weeks and involves having to get a new business license issued) the funds that you (or anyone else) send to your WFOE will count as income to your WFOE and will be taxed accordingly.

We often get calls from fairly new WFOEs seeking our help in figuring out how they can problem here is that quick-buck China lawyers and China consultants are interested in securing their fees to stay in business, not in your long term well-being. Getting you a WFOE as fast and as cheaply as possible in the short term is their goal because by the time you get hit with the tax bill they have already moved on to their next victim.

A while back, we did a similar post, entitled, China Company Formation Law Is Clear — WFOEs Are Easy, in which we discussed three companies my law firm’s China lawyers were in the midst of forming and noted how China’s minimum registered capital requirement was the biggest source of confusion for all three of these companies. All three companies contacted us after having become confused about registered capital after talking with various company formation consultants. We blamed the consultants for the confusion, insisting that the law itself is clear:

The law on minimum registered capital is clear, but the amount of capital that will be required does vary, depending mostly on the nature of the business of the company to be formed and on the city in which it is going to be registered.

Every company in China must have a stated registered capital. The registered capital includes all of the components of the initial investment in the company, including its start up cash, contributed property, and transferred intellectual property.

Where the registered capital is small, the entire amount must be contributed immediately upon formation of the company. If the amount is large, it may be contributed in installments. There are a number of schedules for the percentage and timing of large amounts of registered capital.

It is a crime to state a registered capital amount and then fail to contribute. It is also a crime to withdraw registered capital after it has been contributed.

The purpose of registered capital is to provide some notice to creditors of the capital adequacy of the company. Because of this, Chinese regulators take very seriously the rules regarding registered capital.

Registered capital is an initial investment that is intended to be immediately used in the operation of the company. It is not a deposit that must just sit in a bank and never be touched. It can be used to pay salaries and rent, to purchase product, or for any other normal start up operating expense. Registered capital may include contributed real and personal property used in operating the business. Many foreign investors think registered capital is some sort of security deposit that they can never utilize. This is not true.

On the other hand, some foreign enterprises believe they can simply withdraw their registered capital to their home country after the Chinese company begins normal business operations. This also is not true. The only way to get funds from the Chinese company out of China is by repatriating profits or by liquidating the Chinese company. Both of these methods will work, but they both require paying Chinese taxes and meeting other requirements under Chinese law.

Investors should also note that the RMB is not a freely convertible currency. For companies that will earn RMB income, the issue of conversion to U.S. dollars or other foreign currency should be carefully considered.

Chinese law is quite clear regarding minimum capital requirements for a WFOE but the statute’s prescriptions on this are essentially meaningless in actual practice. Under Chinese Company Law, the minimum capital requirement is either 30,000 RMB (less than $4,000 US) or 100,000 RMB (a bit over $12,000 US) depending on whether it is a multiple or single shareholder company. However, these numbers have no real meaning for forming a WFOE in China.

The real question is what the Chinese authorities will consider as adequate capitalization for the specific project and that always depends on the type of business and its location. For example, it is very expensive to operate a business in Shanghai. On the other hand, it can be very inexpensive to operate the same business in a rural part of China. It is expensive to operate a capital intensive business like manufacturing, but relatively inexpensive to operate a knowledge based consulting business. Finally, some Chinese cities just seem to want WFOEs more than others.

The Chinese regulators usually consider all of these issues. To complicate matters, each local regulator has its own basic standards on what constitutes adequate capital for certain types of business activities. These numbers are not published, but when asked they will almost always be provided. They can only be determined through direct contact with the regulator but only after providing a clear explanation of the project.

The local regulator virtually never considers the statutory minimum in making a determination regarding adequacy of capital. Rather, the local regulator will determine what it believes is an adequate amount of capital based on all the circumstances. Once the investor has a clear idea of the outlines of a project, it is usually a good idea to engage a China attorney to contact the local regulator to see what their response will be to the proposed amount of investment. This initial screening can save a lot of time if the investor’s idea of the proper amount of capitalization is dramatically different from that of the local regulator.

My firm’s China attorneys always go to the local regulators to get this amount before we get very far along in the application process. Almost without exception, our experience has been that after we explain the nature of our client’s business to the regulator, the regulator’s decision on the minimum capital required has been a very workable one for our clients.

In determining what constitutes adequate capital, one needs to consider the peculiar situation in China that all rents are paid in advance, that payment for products for sale are usually paid in advance, and that a reasonable advance reserve for salaries is also required. Thus, the initial start up cost is going to be higher than for a comparable company in the United States, where credit and time payments are much more common. Chinese regulators will not approve a project that looks risky or under-funded.

For more on forming WFOEs in China and the minimum capital required to do so, check out Chinese Company Formation, Part II — WFOE Minimum Capital Requirements and Chinese Company Formation — Forming a Wholly Foreign Owned Entity (WFOE) in China.

Negotiating With Chinese Companies During The Economic Slowdown

Posted in China Business

China negotiating guru Andrew Hupert’s new post, Negotiating in a Slowing China, discusses how China’s economic slowdown is going to impact negotiations with Chinese companies. According to Hupert, the slowdown is not going to have all that much impact, for the following three reasons :

  • There’s a filter bubble.  Chinese bureaucrats and SOE bosses don’t see reality the same way American and European MNC managers do.  Within China the official party line is that everything is going according to plan. It’s rebalancing and the expected results of a successful anti-corruption campaign. Everything is fine. Don’t assume that your Chinese counterparty is as nervous or anxious as you would be at the start of a sustained recession. He may still feel that time is on his side.
  • It’s your fault. Official Chinese media has a stock response to any and all bad news in the Middle Kingdom – blame outside agents. From the protests in HK to border disputes with neighbors to generalized economic trends, it’s a safe bet that foreigners are being pinned with responsibility for anything that goes wrong. Even if your direct counterparty doesn’t blame you personally, he is subjected to persistent official whispers that Westerners are responsible for his problems. Don’t position yourself as a white knight when he’s hearing that you are a black hand.
  • Fundamentals haven’t changed that much. Unless you are dealing with a Tier 3 property developer or one of the big state-owned banks, the chances are your counterparty isn’t feeling too much pain yet. That may change in the long run – but it may not. Let’s be honest – the Western business press loves the China bear story. The headlines you are reading sometimes make it seem like the Chinese economy is in a lot worse shape than it is.  The dour mainstream view is something along the lines of 4% growth by 2020. That’s not bad by international standards, and most Chinese managers still like their odds in the domestic market. The Beijing bureaucracy is as difficult as it’s ever been. Few people in Chinese business or the Party see global integration as a solution – more often it’s considered part of the problem.

For two reasons, I think he’s exactly right. One, his analysis makes complete sense. Two, we too have seen no change.

What are you seeing out there?

China Brands. What China Brands?

Posted in China Business

In the post, Can Chinese Firms Build Globally Competitive Brands? author Joel Backaler talks of how Chinese companies are generally unwilling to do what it takes to create a global brand. And Backaler, who wrote a truly excellent book, China Goes West: Everything You Need to Know About Chinese Companies Going Global on Chinese companies expanding internationally, knows these things.

Backaler starts off his post by saying how he likes to start his talks on Chinese companies going overseas by borrowing the following joke from China public relations veteran David Wolf:

For many Chinese firms, “branding” means designing a new logo, “marketing” is the equivalent of purchasing ads on China Central Television (CCTV), and “P.R.” does not stand for “public relations” but rather “pay the reporter.”

Though conceding that this joke is a “generalization,” Backaler sees this joke as illustrating how for many Chinese companies, “marketing is still considered to be an expendable expense:”

Rather than a series of strategic activities that strike the right balance between driving short-term sales today while building a brand that’s a long-term strategic asset for the future, it is all too often focused on the next product launch. This is in part due to the fact that China’s business environment has historically rewarded a singular focus on short-term sales without needing to concentrate on the intangible aspects of branding and marketing. The result is a series of firms that are very large – 95 companies on the Fortune Global 500 ranking originate from China – yet relatively unknown outside of China.

But Backaler sees this changing and he notes how in his book he dedicates “an entire chapter to Chinese firms building globally competitive brands, either through their own efforts or by acquiring long-established brand names from the West.”  He then declares himself “optimistic that Chinese firms will build global brands through their own efforts.”

A couple of weeks ago, I attended a book opening for China’s Superconsumers: What 1 Billion Customers Want and How to Sell it to Them, by Michael Zakkour and Savio Chan (another excellent book, BTW), at which these two authors noted how no Mainland Chinese company is among top 500 international brands.

When will a Chinese company break the top 500. One year? Three years? Five years? Ten years? Never? I’m thinking at least ten.

What say you? What do you see as the factors militating against China developing top brands? What do you see as the factors that will lead its companies to do so?