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China lawyers
Because of this blog, our China lawyers get a fairly steady stream of China law questions from readers, mostly via emails but occasionally via blog comments as well. If we were to conduct research on all the questions we get asked and then comprehensively answer them, we would become overwhelmed. So what we usually do is provide a super fast general answer and, when it is easy to do so, a link or two to a blog post that may provide some additional guidance. We figure we might as well post some of these on here as well. On Fridays, like today.

Today’s question comes from a reader who sent me a link to a Wall Street Journal article, entitled,
China’s Tech Rules Make It Hard for U.S. Firms to Take Control along with the following core question/comment:

You are always talking on your blog about how foreign companies are better going it alone in China and not entering into joint ventures and not entering into VIE contract arrangements. Do you think HP, Microsoft, Qualcomm and Cisco don’t know any better?

I think HP, Microsoft, Qualcomm and Cisco know exactly what they are doing and we have never said that foreign companies should never enter joint ventures with Chinese companies. My sense/guess is that HP, Microsoft, Qualcomm and Cisco have conducted thorough cost-benefit reviews of these deals and determined the rewards outweigh the risks. Our position on joint ventures are something to be wary of and to be avoided if possible. But we fully realize that there are times where the best way (and even sometimes the only way) forward in China is via a joint venture or some other sort of tied-in relationship with a Chinese entity.

Negotiating with Chinese companies
Negotiating with a Chinese company? Think Game of Thrones.

If you have been reading the business news on China, two things ought to have jumped out at you. One, Chinese companies are looking to buy technology innovation. And, two, Chinese companies have a very annoying habit of backing out of their deals. For a news piece on the former, I give you this May 31 Wall Street Journal article: China’s Xiaomi to Buy 1,500 Patents From Microsoft, subtitled, “deal reflects smartphone maker’s efforts to acquire the intellectual property it needs to broaden its reach.” For the later, I give you this June 1 Wall Street Journal article: China’s Latest Export: Broken Deals.

For the last year or so, our China lawyers have been seeing the same thing. On both counts.

Let’s talk about innovation first. Can China innovate? That question has been asked countless times in the last ten or so years and this blog and our China attorneys have asked that question many times as well. Some of us have even been on seminar panels discussing that issue. But I have stopped asking that question ever since a friend of mine pointed out to me that it is no longer the salient innovation question to be asking about China. I his view (and mine now), the better question is a slightly broader one. The better question is whether China can secure innovation either by generating its own or by buying it. Truth be told, many in China, including at the highest levels of the government, have given up on China becoming a top-tier innovator and have therefore turned their attention to China becoming a top tier innovation acquirer. Add in the fears of a declining Yuan and you have all you need for a golden age (or period anyway) of China innovation acquisitions. And that is exactly what is happening and exactly what our China team has been seeing. Chinese companies are looking to acquire innovation/technology/IP any way they can, including by licensing, by purchasing (either the technology itself or the entire company) or by joint ventures.

Now let’s talk about why so many of these technology deals do not come to fruition and that naturally will lead us to why negotiating these deals is so incredibly difficult and why we subtitled this post “Buckle Up For Some Seriously Tough Negotiating.” The Chinese government is telling Chinese companies to acquire technologies and Chinese companies badly want to acquire technologies, but this does not mean they are not having a really really difficult time securing those technologies the way a company from, let’s say Spain or Germany, might go about acquiring such technologies.

Here is how our firm did a technology licensing deal for a Spanish company recently. This Spanish company wanted to buy a U.S. company with a cutting edge technology. The Spanish company spoke with the U.S. company and they negotiated a purchase price and generally discussed other key terms.  The Spanish company then did its due diligence on the U.S. company and that due diligence uncovered a few warts and raised a few issues. So the Spanish and the American company sat down again and negotiated on some of the new issues and renegotiated on some of the old issues, and within a week or so the deal was again ready to move forward. The whole process from start to finish took 3-4 months.

Here is what typically happens when we represent an American company seeking to do a technology deal with a Chinese company:

  1. The American company and the Chinese company reach what sounds like a perfectly reasonable deal.
  2. We draft up the perfectly reasonable deal and the Chinese company then completely changes it.
  3. Our American company tells the Chinese company that it cannot do the new deal the Chinese company has just proposed.
  4. The Chinese company comes up with some really bizarre explanation for why the new deal it is proposing is absolutely essential and explains why the deal our client thought it had can never work.
  5. We then spend weeks explaining why the old deal is just fine, while the Chinese company alternately acts like it will do the old deal with just a few small changes or hints very strongly to our client that it should take the new deal or the Chinese company will just walk away.

I could go on and on, but you get the point. The point is that Chinese companies like to draw in American and European companies with what looks like a really good deal and then go back on that deal. Chinese companies negotiate like this because they realize that once an American company commits to a deal, it wants to close the deal. Once five people in an American company have told their fellow employees that “we have a deal with XYZ Chinese company,” those five employees do not want to have to keep negotiating that deal for another 5-6 months or just walk away from it. Chinese companies know all this and they seek to wear down the other side, plain and simple.

Chinese companies will change the deal not just monetarily, but in even bigger ways as well. Have a deal where you don’t turn over anything about your technology unless and until you get a large upfront payment? Prepare for an explanation from the Chinese company weeks into the deal why that is no longer possible. Have a deal where the Chinese company is supposed to get your three year old technology? Prepare for an explanation months into the deal as to why you now need to replace that with your newest technology, and all at the same price. Again, I could go on and on.

So how should an American or a European company handle this sort of negotiating. By remaining firm and resolute. Not kidding. In subsequent posts, we will go into greater depth on how to negotiate with Chinese companies. So stay tuned….



Forming a China WFOEForming a China WFOE can range from routine to complicated. As lawyers, we seldom take on the routine WFOE formation, preferring instead to refer those out to high quality entity formation companies that are able to handle those at a lower rate. We probably refer out about half of the companies that come to one of our China lawyers to form a WFOE.

But others are so complicated and involve so many new or unusual issues that we do them ourselves to better serve the client.

I thought of this today after getting cc’ed on a couple of emails involving WFOE formations we have been working on for (in both cases) European clients. The below is an amalgamation of various emails showing how difficult even one small point can be when it comes to forming a complicated WFOE. This amalgamated email reflects one of our lawyers working to secure more financial information so as to improve the likelihood of our clients’ proposed WFOE passing muster with the Chinese governmental authorities and eventually getting approved. All identifiers have been changed or deleted:

The financials included in this spreadsheet do not address the key questions that need to be answered as part of the WFOE formation process. The main problems are: (1) the spreadsheet treats Company A and the as-yet-unformed WFOE as a single entity (and does not explain how the WFOE will be funded and operated), and (2) the spreadsheet suggests that the WFOE will be largely funded WFOE via debt financing, which is not allowed.

1. What is the cash and equipment capital budget for the WFOE for the first two years? Please clearly distinguish between contributed cash, contributed equipment, shareholder loans and loans from banks/financial institutions. Please also clearly distinguish between the U.S. LLC and the WFOE.

This spreadsheet conflates Company A (the “investor”) and the WFOE. To be clear: for this stage, we are not concerned with how the investor is funded. We are only concerned with how the WFOE will be funded. This spreadsheet must be revised so that it only contains numbers relevant to the WFOE.

Two key numbers are relevant to funding the WFOE: (1) registered capital and (2) total investment. Registered capital is the most important number. The proper amount of registered capital depends on your projected financials, but also on your projected business scope and the location of your WFOE. The latter two are important because that’s what the officials in ______ will largely consider when deciding whether to approve your WFOE. Accordingly, we will need to work closely with______ to determine the proper amount of registered capital. But _____ will not be able to give you an informed answer until they understand exactly what it is your WFOE proposes to do, and until they have reviewed your financials. A general rule of thumb, however, is that your amount of registered capital must be at least the amount of expenses for the WFOE’s first year of operation. In other words, the Chinese authorities want to make sure that you are at least depositing enough money in the WFOE’s bank account to pay the bills for the first year.

This spreadsheet proposes to fund the WFOE in large part by loans. This will not be acceptable. As discussed previously, ALL of the registered capital must be contributed as either cash or contributed equipment. We will need to check with the local authorities to determine how much of the registered capital can be contributed equipment.

The total investment amount is the amount of registered capital + some amount of (optional) loans to the WFOE. Generally speaking, those loans must be from the investor and we will need to confirm with local authorities regarding the rules in ______. The maximum amount of those loans will be some proportion of the amount of registered capital. Setting a total investment amount that is higher than the amount of registered capital allows some flexibility in financing your WFOE’s operations via loans. Otherwise, every time you send money to the WFOE it will be treated as income and taxed accordingly.

In preparing this capitalization plan, please consider the following:

2. What is the source of that capital? Please consider in particular:
a. How many machines will be acquired by the WFOE and at what invoice price?
b. How will the acquisition of the machines by the WFOE be financed? There are two alternatives:
i. The shareholder LLC acquires the machines in the U.S. and then contributes the machines to the WFOE as part of its capital contribution, or
ii. The shareholder LLC contributes cash to the WFOE and the WFOE purchases the machines directly from _______.

The spreadsheet you gave us does not answer these questions. Only question 2a is addressed in part. To be clear, the issue is: what is the source of the WFOE’s registered capital?

c. What other equipment will be acquired by the WFOE? How will that acquisition be financed?
The spreadsheet does include details on equipment that will be acquired, but does not explain how the acquisition will be financed.

d. The WFOE will have substantial start up costs: build out, supplies, rent, salary. Have these costs been clearly determined? How will these costs be financed?
The spreadsheet does have details on these costs, but does not explain how they will be financed.

3. You should note that the capital budget of the WFOE must come from either a) a cash payment from the shareholder or b) contributions of new equipment from the shareholder. It is possible for a small amount of the contribution from the shareholder to be treated as a loan. There are a number of restrictions a) the loan must be documented, b) the terms must be “arms length”, c) loan treatment applies only to cash from the shareholder, not to contribution of equipment and d) the amount of loan vs. capital is severely restricted, with the ratio for a project of this size usually limited to a maximum of 15% debt.
See comments under question 1.

As you can see, the use of loans for a WFOE project is quite complex. The rules on this vary from district to district and there have been recent changes to the regulations that have been interpreted differently from district to district.

4. To be clear, you will be required to state 1) total investment and 2) registered capital. In most cases, registered capital must be at least 85% of the total investment. The remainder can be a shareholder loan, subject to the restrictions of 3. above.

5. In reviewing the financials you provided, there is reference to substantial debt payments. Please provide a clear explanation, taking into account the restrictions on use of debt noted at 3. above.

For more on what it takes to register a WFOE in China, check out Forming a China WFOE: Ten Things To Consider and Forming a China WFOE: The Method and the Madness and if you are particularly ambitious, How to Form a China WFOE in China, Part 13 (and the 12 parts that preceded it).

China trademarksJack Weinberg, a student activist at UC Berkeley during the 60s, is famous for coining the phrase “Don’t trust anyone over 30.” He’d be singing a different tune today if his work involved protecting his client’s trademarks in China.

Recently, a Chinese trademark lawyer and I were bemoaning the nonsense coming out of the China Trademark Office (CTMO) over the past several months. Delays because the computer system is down. Delays because the CTMO ran out of the right kind of paper. Delays because the CTMO hired hundreds of inexperienced employees. Rejections that don’t make any sense.

It’s funny (ironic, not ha ha) how China’s newish Trademark Law, which came into effect on May 1, 2014, included a number of “hard” deadlines for trademark-related work. For example, the CTMO is now required to examine all trademark applications within 9 months, and decide all non-use cancellations within 9 months. Has this happened? Of course not. If anything, the delays are worse than before, and the statutory deadlines seem to be encouraging trademark examiners to make a decision – any decision – just to avoid being late.

Lately, the decisions don’t seem to be so much random as maniacally conservative. Examiners seem so afraid of approving a trademark incorrectly that they are erring on the side of rejecting applications, even if for the most specious grounds. The CTMO is rumored to have moved all of its experienced trademark examiners to handle appeals, leaving only recent hires to handle the trademark applications. Rather than risk making the wrong “yes” decision, these examiners are far too often just saying “no.”

It’s hard to say whether this is poor management by the CTMO (my guess) or a devious form of rent-seeking. Either way, anyone seeking a China trademark is now far more likely than ever before to have to pay for an appeal to “win” their trademark. Fortunately, the examiners handling the appeals are veterans and legitimate trademarks are typically going through at this stage. But with delays becoming routine and appeals becoming all too common, the expected time to receive a trademark registration has become significantly longer. If you’ve got a trademark that you want to protect in China, get your application in now, before it gets even worse.

China Lawyers

Saw the following comment today and thought it would make sense to respond via this blog post, rather than directly:

I never seem to have any luck getting a response on Facebook so I’ll repeat a query here: is it legal to pay the standard 13th month bonus without specifying it in the labour contract? My understanding was that the annual bonus is discretionary, unless you make it otherwise.

We have written 3,865 posts and almost all of them get some comments. Some get a lot of comments. Some get more than 200 comments. Many of those comments are questions. We review the comments to determine whether they are spam or not and if they are not we post them — with a few very rare other exceptions. See China Law Blog Commenting Policies.

Our China lawyers simply do not have the time to read and respond to all of the comments. Sorry.

We are always going to be reluctant to respond to comments that seek from us what is essentially a legal opinion, like the one above. In large part because there is seldom an easy answer for legal questions. Why do you think lawyers charge by the hour?

First off, what is meant by “without specifying it in the labour contract”? Specifying that the 13th payment is discretionary? Specifying that any 13th payment is discretionary? Or not saying anything at all about a 13th payment. These three things can be very different.

If the contract mentions a 13th payment but says it is discretionary but the employer has made the 13th payment for the last 20 years and has on many occasions told its employees that they can expect it every year, how discretionary is it? Has it now de facto become mandatory? Can you see why this situation might be different from a situation where the contract makes very clear that the employer may from time to time make a 13th payment but that doing so expressly does not waive its right not to make a 13th payment and that employer only makes a 13th payment every few years? Can you see why both of these might be different from a situation where the contract is completely silent about a 13th payment but the employer has made one every year for twenty years or has made one only every few years? The comment itself implicitly seems to recognize this, by stating the belief that the 13th month is discretionary, unless the employer makes it otherwise. Our job as attorneys is to determine whether the employer has “made it otherwise.”

Many times our clients tell us their contracts say one thing when they actually say the opposite. Many times our clients are working with an English language contract that says one thing when the official Chinese language version says another. Many times our clients think they have an enforceable contract when under Chinese law they really don’t. See How to Draft a Contract for China. Many times our clients think they don’t have an enforceable contract under Chinese law when they really do. See China LOI and MOU: Don’t Let Them Happen to You. Does this commenter have enforceable written labour contracts with his employees or not? Are those contracts in just English or just Chinese? If they are in both languages, are they clear about the official language or are they explicitly dual-language contracts? All of this could influence both what this commenter wrote to us and, more importantly, the legal reality.

And then there is the fact that so much of China’s employment laws are local. See China Employment Law: Local and Not So Simple. Maybe Shanghai treats this situation (and again, we do not even know what the situation really is) completely differently than Qingdao. Even if we did know where this person is located, we could not answer unless we had that very week answered the very same question with the very same relevant facts in the very same city, unless we were to spend hours reading the local rules for this person’s particular city and then spend more time trying to reach the appropriate government official and then speaking with that official to confirm our legal research.

I wrote this post in less than 20 minutes. If I had spent more time on it and if I had circulated it to some of the other China attorneys in my office (especially if I had sent it to Grace Yang, our lead China employment lawyer), I am certain we together easily could have written at least another ten paragraphs as to why we cannot give any real answer to the above comment without knowing more and without doing our research.

Last week, Grace wrote a post (DIY China Employment Law. Really?) on the problems she sees with foreign companies trying to handle their China employment law matters without a lawyer. Our giving knee-jerk answers to China legal questions would be the China lawyers equivalent.

So for future questions regarding your specific legal issues, please consider the below to be our answer:

We do not know enough to be able to answer your question. For us to be able to answer your question we would need to know a lot more facts and then we would need to conduct legal research into the written laws for wherever it is that you are located and then we would probably want to discuss your situation and our legal findings with the relevant government officials as well. Until we do these things, we simply cannot give you an answer that would be helpful to you.



China lawyers

Because of this blog, our China lawyers get a fairly steady stream of China law questions from readers, mostly via emails but occasionally via blog comments or phone calls as well. If we were to conduct research on all the questions we get asked and then comprehensively answer them, we would become overwhelmed. So what we usually do is provide a super fast general answer and, when it is easy to do so, a link or two to a blog post that provides some additional guidance. We figure we might as well post some of these on here as well. On Fridays, like today.

Probably the most common question we get is some variant of the following:

I ordered ____ number of widgets from _____ company in China and I paid them _____ dollars. They never sent me anything [or they sent me a fake or they sent me bad quality] and now they are not answering my emails? Can you help?

Pretty much 100 times out of 100, our answer (sometimes after we have gathered up more information) is something like the following:

I’m sorry, but we  are not interested in taking on your case on a contingency fee basis and I cannot in good conscience ask you to pay us to handle it.

Our lack of interest in your case stems from the following:

1. Your contract [this probably wrongly assumes that the English language PO sent to us qualifies as a contract under Chinese law] is in English. Many courts in China will not hear a case with an English language contract. This is even more likely to be the case in a place like _____. For more on the importance of your contract being in Chinese, check out China OEM Agreements. Why Ours Are in Chinese.

2. You never paid the Chinese company to whom you issued the PO and from whom you received the bad product. You instead paid some other company based in Hong Kong. This is a classic China ploy. If you sue the Chinese company it will say that you never paid them because you didn’t. Not sure if it will win on this, but it is yet another hoop you will have to jump through.

3. Your PO says that you will inspect the product before it ships. The Chinese manufacturer will contend that you either did inspect and were fine with the shipment or that you chose not to inspect and thereby relinquished your right to complain about product quality. Either way, it should make for a pretty good defense. If you are not going to inspect product before it gets sent to you, you should not have this sort of provision.

4. You say that the product you received is of bad quality but your PO nowhere mentions the quality you would be requiring. When it comes to China, if you want your product to be of a particular quality, you need to set out in great detail every single specification that will get it to that quality. China has incredibly low quality levels that are just fine for Chinese commerce and for Chinese courts. From what you have provided me, there is nothing to indicate that your Chinese manufacturer failed to give you exactly what you ordered. You say that what you received is of bad quality and I am sure that is true, but that is under US standards. Under Chinese standards you asked for 5,000 widgets and that is exactly what you got and that is probably all that is going to matter to a Chinese court. For more on why this matters and for how you should handle this the next time you have product manufactured in China, check out How To Get Good Product From China.

You might want to try to interest a Chinese lawyer in pursuing your case in China. Suing the Chinese company in the United States will probably be a waste of your time and money unless this Chinese manufacturer has assets in the United States, and very few do. I very briefly researched the Chinese company to whom you issued the purchase order and it is not even a manufacturer; it appears to be a broker of some sort and Chinese brokers usually do not have much in the way of assets in China, much less in the United States. China courts do not enforce U.S. judgments so even if you win over here, it will be of no value in collecting money from your Chinese manufacturer in China.

If you are going to continue buying product from China, you should have a contract that will work. I suggest that you read the links within this email [now this post] to help prevent this same sort of thing from happening to you again. Again, I am sorry that we cannot be of more help on this.

Maybe 10 out of 100 times, we get a response asking us whether they should pursue their case via the U.S. Embassy or the U.S. Consulate or through their own embassy or consulate (for some reason we seem to get a disproportionate number of these from Australians) may be. To which we always respond as follows:

You can try to pursue this with your embassy or consulate but they generally do not seem interested in these sorts of commercial law matters and we have never heard of a single person getting their money back using this route. This is not to say it isn’t possible, but we are not aware of it ever working. If you do go this route and it does work, please let us know.

So now a question for you, our loyal readers. Have you ever heard of anyone getting their money back on a China product purchase by going through their embassy or consulate?

China IP seminarOn April 27, I and my friend Randall Lewis, Vice President and International Counsel for ConAgra Foods, will be sharing a virtual podium for a free webinar. This webinar is being put on by LexisNexis and in it we will together be discussing the following:

  • How to choose a good Chinese partner
  • How to identify the IP assets you need to protect
  • How to structure your deal to protect your IP
  • How to conducting China due diligence
  • How to drafting China contracts to protect your IP
  • How to choose how your dispute resolution forum

LexisNexis describes it as follows:

Too many American companies go into China or start doing business with Chinese companies, without really knowing the varied risks China poses to their valuable intellectual property and trade secrets,” said Dan Harris, author of the China Law Blog. “These risks should be of utmost concern to anyone whose interests intersect with China. We will show you how to prepare your deals, avoid costly thefts and litigation and defend your IP.

Join Dan Harris of Harris Moure and Randall Lewis, Vice President, International Counsel at ConAgra Foods, as they share strategies and real-life tales that will help government agencies craft regulations and oversight provisions and in-house and outside counsel protect IP and deal with the litigation that results when things go south.

It  will begin at 2 p.m. Eastern time and go for about 90 minutes. Go here for more information and go here to register. Not only will this webinar be free, but it also qualifies for 1.5 CLE credits!

China Lawyers

I have always found it fascinating how macroeconomic issues can have such widely varying microeconomic impacts. When an economy declines, let’s say 10%, the impact on individual businesses can be all over the map.

I became starkly aware of this during the 1997 Asian crisis, as I spent large swaths of time in Seoul and Busan, Korea that year. One of the Korean newspapers did a story on the drop in imported goods coming into Korea. I do not remember the numbers terribly well, but I think it said that imports into Korea had declined about 20%. But the really interesting part was how unevenly this fall in imports was spread out among various products. The one that stands out for me is that some fruit (I am 99% sure it was either kumquats or quinces) had gone from $20 million in imports the year before to absolutely zero. Zero. The reason given for this was that it was a luxury and that such luxuries were no longer in demand. Some staple food products had seen virtually no decline and some domestically grown foods had actually seen an increase in consumption.

I have a lawyer friend who represents a huge number of medical practices. Long ago, he told me of how one of his surgeon clients had been decimated when insurance companies reduced payments and stiffened physician reviews. Giving my best guess to the numbers again, this lawyer told me of how surgery rates had declined about 5% across the board in Washington State, but this one surgeon’s income had gone from something like $450,000 a year to around $50,000. There were various reasons this had happened, but obviously this particular surgeon contributed a lot more than most of the others to the overall 5% decline in surgeon payments.

I mention all this because I have seen very little written about how China’s decline has impacted businesses differently, but it most emphatically has.

I thought of this today after receiving an email from a China consultant friend of mine who had this to say:

Over the last ~6 months I’ve found an increasingly difficult business environment in China, in large part due to the challenges in getting money out of China. Whether it’s getting paid from a customer (claiming stricter controls on invoicing details by the banks) or dealing with tighter currency controls placed on Chinese nationals moving money to the US for investment or immigration purposes, it’s been really difficult.

Yes, we have absolutely been seeing this and writing about it as well. See Getting Money Out of China: The Reality Has ChangedGetting Money Out of China: What The Heck is Happening? and Getting Money Out of China, Part 2: Don’t Fall for the Scams.

But here’s the weird thing. Our law firm has been incredibly busy of late documenting deals, mostly in industries that are flat out booming in China. So much so that we hardly even think about any economic downturns, other than in how we are now careful to structure certain deals so as to be sure to make getting money out of China easier.

It’s not that my firm’s China lawyers never hear about the negatives stemming from China’s economy, because we do, but that is mostly from non-client companies dependent on receiving money from China. We are getting a number of calls from Western companies in industries negatively impacted by the downturn (like real estate) or in industries the Chinese government most wants to see doing their buying domestically. But on the flip side, we are also seeing a number of segments going crazy with growth, including the following:

1. Specialized manufacturing. Though China’s manufacturing is down overall, we are seeing a pronounced growth for Shenzhen companies that manufacture products for Internet of Things (IoT) companies. I will scream this from the rooftops, but the Internet of Things industry is growing at a spectacular rate and it has come from nowhere to having become a big part of my law firm’s revenues. Shenzhen is by far THE center of this industry and with IoT growth expected to continue for many years, Shenzhen IoT manufacturers ought to do just fine. For more on China and the Internet of things, check out China and the Internet of Things: A Love Story (where I rhapsodize about how much our China lawyers love this relatively new industry) and yesterday’s post, China and the Internet of Things and How to Destroy Your Own Company (where I warn of how so many companies in this new industry are making huge mistakes in China).

2. Health Care. Many China health care sectors are doing just fine and some are booming. To quote Health Intel Asia (written by people I know well and greatly respect), Investing in the China Hospital Market: Is Now a Good or Bad Time?, money is flowing into this sector from other industry sectors that are in decline:

As several reports have showed, the economy of China is slowing and is likely to keep facing headwinds over the coming few years. It is true that as the economy in China slows further, the healthcare system as experienced by individuals and operators is going to come under strain. However, during this slow down capital is leaving traditional industries like mining industry or construction at the same time capital is jumping into the healthcare industry, especially the China hospital market. Chinese property and investment company Wanda Group signed a MOU with Britain’s International Hospital Group (IHG) on Jan 6th, 2015 for the investment of 15 billion RMB to build three high level private hospitals in Shanghai, Chengdu and Qingdao. Columbia Pacific Management, a Seattle-based health care company, also has begun to emphasize investment in China’s hospitals rather than senior care facilities since 2014. When we analyze some of the key news over the last several months, we start to get a clearer understanding on why capital is chasing the opportunities of hospital investment in China as of late and what the possible opportunity for profit is in the future.

3. Technology Licensing. For probably the same reasons money is flowing into China health care, it is also flowing into certain technology sectors and, most prominently for our law firm, into technology licensing deals. The Chinese government is actively encouraging Chinese companies to do more licensing of foreign technology and Chinese companies with money are doing exactly that. What started as a trickle years ago has grown into a flood. Chinese companies are seeking good technologies and good patents and they are prepared to pay what it takes to get those, and in all the hot industries, like batteries and chips and 3D printing and medical devices and artificial intelligence and IoT, just to name a few. See China Licensing Agreements: The Extreme Basics, for background on what it takes to play in this now booming field.

4. Service and Entertainment and Gaming Companies. This one is hit and miss. On the hit side, Our China attorneys are seeing a lot more high end computer and environmental services and education companies striking large deals to help out large Chinese companies and/or just thriving in China. See Service exports to China and India could be the next boom. On the flip side, we are also getting an increasing number of contacts from service companies with problems getting paid. China movie and gaming related companies are also doing just fine.

5. Food, skin care and cosmetics companies and anything e-commerce. An increasing number of foreign companies in these industries are going into China (either directly or via e-commerce) to sell their products and many of them are thriving, especially those with a “healthy” bent.

Now that I’ve talked about the sorts of businesses that are still thriving in China, I would be remiss as a lawyer not to mention the increased risks we are seeing and what you should be doing to reduce yours. But that will have to wait for part two, which will come tomorrow.

What are you seeing out there? Where’s the slowdown?

China Lawyers


China has become quite adept at spotting and hunting down foreign companies that are doing business in China without a required Chinese entity. What exactly constitutes doing business in China at a level requiring a Chinese corporate entity ? That is a question far too complicated to answer in a blog post, but suffice it to say that the Chinese government has a very expansive definition of that simply because such a definition increases its tax coffers.

I bring this up because as China continues/accelerates its crackdown on foreign companies doing business in China without a Chinese entity, our China lawyers are seeing a concomitant rise in foreign companies setting up companies in Hong Kong and paying taxes there will bring them into compliance with Chinese law even though 9999 out of 10,000 it doesn’t.

In fact, whenever a client asks whether their setting up a company in Hong Kong will solve the problem of their operating on the Mainland without a company, I respond by saying: “Think of Hong Kong as New York. Having a Hong Kong company will no more help you get legal in China than setting up a new company in New York. When it comes to business law, you need to think of Hong Kong as a completely different country than the PRC.”

We most often see the Hong Kong company problem with foreign companies that have Chinese “employees” in China but no company there. This is 100% illegal in China. Yet this is also very common and it is also very common for the Chinese government to catch foreign companies that do this and then come down on those companies like a ton of bricks. For a more complete explanation of this, check out my Forbes article, China’s Tax Authorities Want You. The reason companies with employees in China so much want to avoid having a China entity is because China employer taxes and required benefit payments are really high and if you have can keep your China employees off the grid, you can avoid paying those taxes and benefits.

Oftentimes, the “Hong Kong excuse” is actually generated by the Chinese employee who very much wants its foreign “employer” to stay off China’s grid as well. The employee likes its foreign employer to operate illegally in China because the employee’s pay can be higher (because there are no employer taxes) and its take home percentage is also higher (because he or she is not paying income taxes). So the employee convinces its foreign employer that forming a Hong Kong company will be both cheaper and equally effective as forming a PRC company.

But it isn’t. Sorry. If you have employees in China or if you are otherwise doing business in China at a level that requires an entity  (there’s that vague line again) and you don’t have a registered PRC entity, you have a legal and a tax problem and there are no two ways about it. All of the above is true of Macau and Taiwan as well.

For more on the China-Hong Kong distinction when it comes to corporate entities, check out How to Form a China WFOE: What’s Hong Kong Got to Do with It?

And while we are discussing how Hong Kong entities do not satisfy PRC entity requirements, I might as well remind you that having a trademark in Hong Kong or Taiwan or Macau does not give you any trademark rights in the PRC and vice-versa. Again, you must think of these jurisdictions as being legally separate as that is the case when it comes to trademark rights as well. For more on this, check out China Legal. Not Hong Kong Legal. Not Taiwan Legal. Not Macau Legal and China And Hong Kong Trademarks. Think Puerto Rico.

One last area where we often have to deal with the differences between Hong Kong and China is on all of our contracts relating to manufacturing, such as NNN Agreements and Product Development Agreements. Many Chinese manufacturing companies want their agreements with their foreign customers to be with the manufacturer’s Hong Kong entity, not its China entity. This creates all sorts of complicated ownership and liability and jurisdictional and venue issues that must be resolved correctly to prevent a legally nonsensical or invalid agreement or equally bad, an agreement that makes perfect legal sense, but provides no protections to the foreign buyer. Again the key issue here is that Hong Kong and the PRC are legally separate when it comes to commercial transactions.

Just curious. How many of you were aware of the above and for how many of you is this above a revelation?



Help me to figure out what is happening in terms of getting money out of China.
Help me figure out what is happening with getting money out of China.

Regular readers of our blog probably know that our basic mantra about getting money out of China is that if you have consistently follow all of China’s laws, it ought to be no problem. Not true lately.

In the last week or so, our China lawyers have probably received more “money problem” calls than in the year before that. And unlike most of these sorts of calls, the problems are brand new to us. It has reached the point that yesterday I told an American company (waiting for a large sum in investment funds to arrive from China) that two weeks ago I would have quickly told him that the Chinese company’s excuse for being unable to send the money was a ruse, but with all that has been going on lately, I have no idea whether that is the case or not.

So what has been going on lately?

Well if there is a common theme, it is that China banks seem to be doing whatever they can to avoid paying anyone in dollars. We are hearing the following:

1. Chinese investors that have secured all necessary approvals to invest in American companies are not being allowed to actually make that investment. I mentioned this to a China attorney friend who says he has been hearing the same thing. Never heard this one until this month.

2. Chinese citizens who are supposed to be allowed to send up to $50,000 a year out of China, pretty much on questions asked, are not getting that money sent. I feel like every realtor in the United States has called us on this one. The Wall Street Journal wrote on this yesterday. Never heard this one until this month.

3. Money will not be sent to certain countries deemed at high risk for fake transactions unless there is conclusive proof that the transaction is real — in other words a lot more proof than required months ago. We heard this one last week regarding transactions with Indonesia, from a client with a subsidiary there. Never heard this one until this month.

4. Money will not be sent for certain types of transactions, especially services, which are often used to disguise moving money out of China illegally. This is not exactly new, but it appears China is cracking down on this. For what is ordinarily necessary to get money out of China for a services transaction, check out Want to Get Paid by a Chinese Company? Do These Three Things.

5. Get this one: Money will not be sent to any company on a services transaction unless that company can show that it does not have any Chinese owners. The alleged purpose behind this “rule” is again to prevent the sort of transactions ordinarily used to illegally move money out of China. Never heard this one until this month.

What are you seeing out there? No really, what are you seeing out there? Let’s make this a forum for trying to figure out what is happening.