China scam lawyers

One of our oldest and most cherished traditions is to write about China scams at the end of every year. We do this because history shows this is the biggest month for them. It would seem that the scammers increase their activities at the end of the year, hoping to be less noticed/less examined due to the usual end of the season rush.  I was reminded of this tradition after reading my emails this morning and getting hit with what look like a couple new fraud matters. I do have to give the scammers credit in that the diversity and ingenuity and number of scams is way up as well.

We are seeing the following old scams in quantity this year:

1.  “The come to China to celebrate our deal scam”  In this scam an alleged Chinese company emails a foreign company to express a desire to buy a few million dollars of the foreign company’s product or service. The terms of the deal are quickly (too quickly!) resolved and the Chinese company suggests the foreign company come to China to sign the contract and celebrate the great cooperation and friendship the two parties have established. The foreigner(s) gets to China (usually some really out of the way city in China) and is “treated” to a super expensive meal at which the contract will be signed. After much food and drink the foreign company is then told that Chinese custom requires the foreigner pay for the dinner and buy the Chinese CEO an expensive gift and pay the notarization fee for the contract. The foreigner is then taken to purchase a nice piece of jade and requested to pay a couple of thousand dollars for the dinner and another $3,000 to $8,000 for the notarization fee. Oftentimes the foreigner just gives the Chinese company people cash to go buy the CEO gift on the foreign company’s behalf.

It isn’t until weeks later that the foreigner learns there is no deal and (most of the time) there is no Chinese company either. The big lure of this scam is that nobody wants to fly all the way to China, have a great meal at someone else’s expense, and then be too cheap to spend another $10,000 or so to seal the multi-million dollar deal.

Our China lawyers constantly get emails from people asking if “their” deal looks real.  Our answer is always the same: We do not know unless and until we do some basic research, but before getting on a plane, it is imperative that at least some due diligence is done on the China company AND if the company shows up as real, you should contact them to make sure they are really the ones with whom you are dealing.  Sometimes just one email to the company that is purportedly behind the deal is enough to determine that a scam is being perpetrated.

2.  “The new bank account to pay us scam.”  This is the scam on which we so often focus and that is because far too many smart companies fall for it. This scam is usually employed against a foreign company that has been making purchases from a Chinese company for an extended period. The foreign company has been making its payments pursuant to purchase orders that specify the company bank account to which payment should be made. Suddenly, the “Chinese company” (note the quote marks here) sends an email to the foreign company requesting funds for outstanding POs be made to a new bank account. Often, the name on the bank account is not the same as the name of the Chinese company. Often, the bank account is in a different city or even in a different country. Often the new bank account is in Hong Kong.

What’s the scam here?  Well, it is always possible the Chinese company has changed its bank account, but you should be quite certain of this before you switch your payment.  In the old days, the scheme was either that the Chinese company had hit hard times and was seeking a double payment or an employee at the Chinese company was seeking to get your payment instead of the company.  The Chinese company would get the money in Hong Kong and then claim you had never paid and you still owed them money because it was completely your fault for having made the payment to someone other than to them. Then if you don’t make the second payment they report you to Sinosure and that is never a good thing. See How to Conduct Business with Chinese Companies That See a Dark Future.

In the last couple of years, this scam has became even more sophisticated when computer hackers from all over the world started hacking into Chinese company’s computers and sending out invoices that purported to be on behalf of the Chinese company.

How can you avoid getting caught up in this type of fraud?  Take note of the following:

  • The computer networks of many Chinese companies are not secure. The networks are subject to abuse by employees of the Chinese company and by outsiders. This means that you can NEVER trust an email communication from a Chinese company. Email is inherently insecure in China and you never know with whom you are really dealing when engaging in electronic communication with Chinese companies.
  • Chinese companies tend to be very loyal to their banks and so you should view with extreme suspicion any request to make a change in the payment bank. You should not even consider following such a request unless the request is made in writing on a revised purchase order stamped with the company seal. Even in that case, it is important to contact someone you know in the company with supervisory authority to ensure that the request is valid. Email requests to make a change should be ignored, but the request should be forwarded to your trusted Chinese company contact for an explanation.
  • Carefully review all bank account information. Monitor both the name of the payee and the location of the bank. Where the payee is even slightly incorrect, do not pay. Where the location of the bank is in the wrong city or country, do not pay. I have seen cases where foreign buyers paid to bank accounts outside of China to payees with no connection to the seller. These cases were all obvious frauds and the buyers lost their entire payment. I have seen millions of dollars vanish into thin air with this sort of scam.  The Chinese parties committing the fraud will explain the need for this irregular payment as part of a plan to hold foreign currency outside of China. This kind of arrangement is no longer required in China. Explanations of this kind are indicia of fraud and should be ignored.

3.  “The fake company scam.’  This is an old scam that seems to morph into something slightly different every year. My personal favorite is the fake law firm or fake trademark/copyright/patent agent scam. Under that scam, a website appears proclaiming really cheap trademark, copyright and patent registrations in China. The foreign company sends some money and nothing ever gets filed.  There are two variations on this one, one much more sophisticated and harmful than the other.

The first and more simple version is for the fake China law firm or China IP agent to get a one-time payment and then do absolutely nothing further. Under this scenario, the foreign company quickly realizes it has been scammed and, more importantly, knows it still needs to register its IP in China.

Under the more sophisticated version, the fake Chinese law firm or IP agent keeps updating the foreign company and keeps requesting more money along the way. Many (probably even most) legitimate law firms and IP agents charge for registrations in stages so even savvy foreign companies see nothing wrong in this. The smartest of these sophisticated scammers even eventually send the foreign company a fake trademark registration certificate or copyright registration certificate. The foreign company is convinced its China IP registrations have been covered and it does not learn for many years that it is not. By that point, there are no traces that might lead to the scammers.

A recent addition to the panoply of fake company scams is fake freight forwarders.  See Forwarders put on alert over new Chinese freight scam.  The most common version of this scam is similar to the fake IP registration scam in that both involve gaining trust, getting money, and then disappearing:

Fraudulent forwarders pose as legitimate companies with spare capacity. They arrive on-time to collect loads and then disappear.

Another frequently seen scam involves organized gangs creating their own websites and advertising themselves as freight forwarders. These sites are characterized by very basic information, freemail accounts, and mobile phone or Skype contacts only, Mr Yarwood warned.

A third type of fraud commonly seen is where criminal organizations buy failing operators and continue to trade under their name in a state of virtual insolvency. They are able to identify and accept cargo which is subsequently stolen in transit.

Many years ago, a company came to us after its multi-million dollar cargo had disappeared. Our 15 minute check of the shipper’s (fake) business license told us the company was a complete fake.

What is the best way to prevent falling victim to this scam? Pretty much the same as with most other scams. Make sure you know with whom you are doing business. Do your due diligence and if you do not know how to do even basic due diligence in a foreign country, pay someone who does. For more on what that means, check out the following:

What have you seen this year?

China trademark lawyer

In marked contrast to the overall tone of hostility coming out of official Washington and beyond, there is a belief within some circles that things are on the up and up in China when it comes to intellectual property rights (IPR) protection. Xi Jinping has been named as one of the year’s “50 most influential people in IP” by Managing IP, a well-regarded IP industry publication, and Foreign Policy recently declared that China’s IPR record “is getting better and better”. What problems exist are explained away by pointing the finger at the usual suspects, venal local officials:

The problem of enforcing IP rights in China can best be understood as a problem of central-local relations. Since the founding of the People’s Republic, China’s central leadership has always kept a tight grasp on political power. However, even as the CCP central leadership sets the policy agenda, it still relies on local authorities to implement and enforce it. While this decentralized system helped promote reform and competition during China’s economic transition, it also left sufficient space for local authorities to pursue their own objectives or avoid compliance with central initiatives deemed to be at odds with local interests.

To be fair, IPR protection in China has improved over time. The number of raids that takes place against counterfeiters these days would have been unimaginable back in 2005, when I first started working on China IPR matters. It would have likewise been hard to contemplate that foreign brands would one day regularly win favorable judgments in IPR infringement actions, as they do now. We have reached the point where my law firm’s China IP lawyers often say that getting a China trademark to protect your brand is “the only China law no-brainer.” (See for example China Trademarks: Register Yours BEFORE You Do ANYTHING Else). Registering your China trademarks with China customs has also become an effective way of preventing counterfeits of your product from leaving China.

We shouldn’t, however, heap too much praise on China for its IPR efforts because it still has a long way to go and is making little to no progress at all in some key respects.

Let’s consider the issue of raids, first looking at the transcript of an interview of IPR investigator Bill Mansfield by reporter Ailsa Chang:

CHANG: Mansfield has found that in China, local authorities have a ton of power. So what he does now is set up lots and lots of meetings with the lowest-level officials who can conduct raids and arrest counterfeiters.

 How do you reward these local authorities after a raid goes down? Do you take them out to dinner?

 MANSFIELD: I award them with the key currency all bureaucrats love, which is a thank you and often a small plaque, a small plaque they can put in their office that they send pictures to people and everything .

 CHANG: A plaque? You really think that excites them, a plaque that they can hang up in their office? That’s really why they’re helping you?

 MANSFIELD: The people I’m working with, yes. I spend a lot of time…

 CHANG: Are you sure you never bribe people, Bill?

 MANSFIELD: No, never.

 CHANG: Mansfield says in the last decade, he’s gotten a dozen counterfeiters around the world arrested and millions of dollars of counterfeit goods destroyed. And he says what he’s learned in this whole process is that China does care about protecting American intellectual property. You just got to show up.

I believe Mansfield when he says he’s never bribed people, just as I never bribed anyone, though I also handed out plaques on occasion. Though the reporter here seems to take the issue lightly, bribes are no laughing matter for Americans or anyone subject to the provisions of the Foreign Corrupt Practices Act (FCPA) (or equivalent legislation such as the UK Bribery Act). But, let’s not be naive: Many “lowest-level officials” in China (and elsewhere) couldn’t give a hoot about a thank you, but certainly care about paying their bills or, if they’re more ambitious, buying mansions in Vancouver. And I doubt there is a single counterfeiter concerned about FCPA liability.

What does this mean in practice? Well, imagine your investigators have found a warehouse where thousands of counterfeits of your product are being stashed. If the cop who can give the go-ahead to raid the warehouse is an honest broker—just like you are—that’s great. But if the guy in charge is a bad apple, in the pocket of counterfeiters and/or on the lookout for baksheesh, then you’re out of luck.

At this point, you might think there may be something to the idea that IPR and counterfeiting problems are caused by rogue local officials who ignore diktats from Beijing. After all, “the mountains are high, and the emperor is far away“. And in fairness there is something to that. Local interests, such as the owners of factories that make counterfeits, are often better placed to influence low-level law enforcement than brass in the provincial capital or Beijing. Sometimes this is due more to the unwillingness of local officials to shut down counterfeiting factories that provide local jobs (and perhaps even taxes) than to bribes. But when we look at China’s great, speedy accomplishments in other regards, one can’t help but conclude that it’s just not much of a priority to get the Chinese police out into the streets and markets to look for fake products—or to monitor which factors are driving target selection.

For their part, Chinese courts are certainly not immune from corruption, but perhaps a greater problem is their susceptibility to political pressures. In our post China Litigation: Not the Same but Different, we extensively cited a piece by two Chinese lawyers, Meng Yu and Guodong Du, clearly explaining how this works. According to Yu and Du, “Consideration of social effects has led judges to sometimes care more about the public’s perception of justice, rather than the parties’ perception of justice in a particular case”. Furthermore, the Supreme People’s Court “emphasizes that the court should provide judicial guarantees for certain political goals” and “maintain social order and economic order”.

These are not theoretical concerns. In a previous post, I discussed a case in which a court refused to hold a counterfeiter liable because she was pregnant. More recently, I discussed the case at length in the Washington State Bar Association’s magazine. Regarding the point at hand, I explained:

[Judges] can be counted upon to administer justice in a way that furthers the objectives of the ruling Communist Party—which includes maintaining “social harmony”. Making a pregnant woman of limited economic means pay damages to a well-known multinational corporation could anger the local populace.

There is no indication that courts in China are about to start prioritizing other objectives over those of the CCP. What this means in terms of IPR protection is that your company’s legitimate interests will always be subordinate to those of the Party, as defined by the Party. And if that means that a pregnant woman or a one-armed man can copy your product with impunity, so be it. One of our international litigators uses a PowerPoint slide that says “Harmony is not just a word from the ’60s” in the speeches he gives on Chinese litigation

Given the current state of U.S.-China relations, risks are of course greater for U.S. companies. Even if a court is inclined as a legal matter to rule in favor of a plaintiff bringing an IPR infringement claim, it may decide that “social and political effects” justify denying relief if the plaintiff is a foreign company, especially an American one.

The US-China Trade War is and will be the new normal. Relations between the EU and China are soomewhat better, but those are quickly getting worse as well.

If you are doing business in China or with China you should at least once every day look in a mirror and say this: Relations between China and the West are not getting any better and they will only get worse. I say this not to make a political statement or to offend anyone. I say this as a matter of fact and because I badly want Western companies to succeed.

My law firm is financially neutral on all of this. We make money from companies that go to China and stay in China. And we make money from companies that leave China entirely or diversify away from China or simply set up in countries other than China. We are an international law firm not a China law firm. Our slogan is “Tough Markets Bold Lawyers” not Tough Market Bold Lawyers. We have more lawyers in Europe than we do in China. Our financial neutrality frees us to focus on the truth about China and Hong Kong. Most who rabidly criticize our take on China and Hong Kong or insist that little to nothing has changed with China/Hong Kong have tied themselves exclusively to China/Hong Kong.

Since October, 2018 we have been clear on how decoupling between the West and China is inevitable. I set out the below timeline not so much to show that we have been right all along, but to try to convince you that we are right when we now say decoupling is inevitable and the sooner you recognize this and act on this the better off your company will be.

  • On October, 6, 2018, In China, the United States and the New Normal we called the US-China trade war as the “New Normal” and we predicted a “diminished future for foreign companies” manufacturing in China. We alsoo said that “since pretty much the inception of the US-China trade war we have been saying that we do not see its end because we have always seen it as more than a trade war.”
  • On October 30, 2018, in Would the Last Company Manufacturing in China Please Turn Off the Lights, we recommended companies move their manufacturing out of China (if reasonably possible) and we have relentlessly done so ever since.
  • OnJanuary 30, 2019, in The Huawei Indictments are the New Normal, we wrote how what was happening between the US and Canada and Huawei would negatively impact the West’s relations with China even further.
  • On April 21, 2019, the Wall Street Journal quoted me in a cover story, Trade Deal Alone Won’t Fix Strained U.S.-China Business Relations, on how “There is no way any deal between China and the U.S. will cause everyone on both sides to say, ‘We were just kidding,’ and on how the tariffs, the arrests, the threats, and the heightened risk have impacted companies and that reality will not go away.”
  • On May 1, in Yet Another International Trade (AD/CVD) Petition Against China, we wrote of how the United States was upping duties (retroactively and sometimes by more than 200%) against Chinese products as a way of conducting its anti-China foreign policy on the sly.
  • On May 4 — the day before President Trump’s by now infamous tariff tweet — in The US-China Trade War: Winter is Coming we wrote how neither the United States nor China wanted relations to improve and we should therefore expect relations between those two countries to worsen. We said “the United States is aggressively and unabashedly doing what it can to isolate China and to remove it from the world of international trade” and shutting out China will become a regular thing in all new U.S. trade agreements.
  • On May 8, in The US-China Cold War Starts Now: What You Must do to Prepare,  we proclaimed the start of the US-China cold war.
  • On June 20, in Has Sourcing Product From China Become TOO Risky? we laid out the many growing and unpredictable risks inherent in having products made in China and we posited that China was becoming too risky for many who make their products there.
  • On June 21, in Does China WANT a Second Decoupling? The Chinese Texts Say That it Does we wrote of how China wants to decouple from the West. We used Chinese government writings (in Chinese) to reach this conclusion.
  • On August 12, in The Top 14 China Wild Cards/Future Risks, we set ou the 14 biggest risks for Western companies doing business with China and promised to monitor the extent of those risks (and new ones) going forward.
  • On August 24, in Repeat After Me: There Will be No US-China Trade Deal we wrote how President Trump had intentionally “made it all but impossible for China to make a trade deal with the United States” and of how he U.S. plan has always been to force a slow decoupling of the U.S. and China and then work to convince the rest of the democratic world (the EU, Australia, Canada, Latin America, Japan, etc.) to decouple from China as well. And then we said that this means you “must stop believing there will be a solution to the trade war that will allow you to go back to doing business with China the way you used to do business with China. You need to instead recognize that this situation is the New Normal as between the United States and China and that, if anything, things are way more likely to get worse than they are to get better.”
  • On September 4, in China’s New Company Tracking System: Comply, Comply, Comply we wrote how China’s new company tracking system would be used to bring foreign companies doing business in China to heel and/or to push them out of China.
  • On October 9, in Can Your Business Afford/Stomach the China Risks? We looked again at the 14 key risks involved in doing business with China and concluded that “the risk of doing business with China has gone up substantially in just the last two months — heck, it’s gone up substantially in just the last two days. Many are no longer asking whether China is too risky; they’ve already decided that it is.”
  • On October 17, in China Detains 2 Americans Amid Growing Scrutiny of Foreigners, the New York Times wrote the following: “China has become a risky place,” Dan Harris, a lawyer at Harris Bricken . . . . says. “If you are going to do business there you had better know what the laws are and you had better follow them, because China is not going to let anyone slide, especially not an American or a Canadian. Little things that were virtually ignored for years are leading to foreigners going to jail.” I would now put Swedes in the higher risk category. See today’s SCMP article, on China’s threats against Sweden.
  • On October 20, 2019, in How to Avoid China Prisons: Know YOUR China Risks, we wrote how “every foreigner and foreign company is at risk in China; it’s just a question of how much” and then we laid out how to reduce your risks.

During this entire period I have (on this blog and on Facebook and on Linkedin and on Twitter) been vociferously touting the benefits of manufacturing and doing business with countries other than China, and providing examples of clients that have moved out of China and are loving it. We perpetually tout other Asian countries like Thailand, Malaysia, Vietnam, Indonesia, the Phillipines, Pakistan, and India for manufacturing. We are also big believers in Mexico and many other countries in Latin America. Ditto for Poland and other countries in Eastern Europe and for Spain (where we have offices) and Portugal and other countries in the EU. Last but not least, our United States foreign direct investment lawyers are increasingly working with companies moving their China/Hong Kong operations to North America.

The media tends to focus on manufacturing leaving China for elsewhere because that is easiest to measure. But with Hong Kong in an political-economic freefall, plenty of companies are moving some or all of their operations from Hong Kong and Mainland China to Singapore, North America, Latin America and Europe. Western companies are moving out of China and for every one that has already moved out, there are probably three or four looking to do so and about half of those will do so within the next year. Please do mark my words on this.

Why We Are Writing This Now? What Will the Future Hold?

This post is coming out now because I am tired of seeing companies tie their global plans to every possible upward tick in the US-China trade war. Too many companies keep holding off on moving out of China based on news reports that this deal or that deal will soon be made between the United States and China. This is happening again with the so-called Phase One deal that has been perpetually touted as being on the verge. See Millimeters’ separate U.S., China from phase one trade deal.

This post is intended to burst that bubble.

First off, I put the odds at less than 50 percent of even a very limited Phase One happening. Financial analysts and economists keep saying that deal will happen, but that is because they view things from an economic perspective and they are convinced that such a deal makes economic sense. But as we have been saying since day one, if the US-China trade war were based on economics, China would have been able to end it by buying more soybeans and Boeing airplanes. Also, the longer the U.S. economy continues roaring ahead, the less economic need for any deal at all.

Second, even if the Phase One deal does happen, it will be so limited as to be meaningless for most companies and nothing but a short-term pause in the decoupling. Look at all that has happened between the United States (and the West) and China over China’s treatment of Hong Kong and the Uighurs and tell me that the US and China are millimeters away from patching things up. Look at what is going on between Australia and China and between the EU and China and between Sweden and China and tell me that relations between the West and China will get better. Look at how “Beijing orders state offices to replace foreign PCs and software” and tell me who you think will stop the straight line detoriation in relations between the West and China.

Decoupling is happening and will continue happening and you and your business need to act accordingly. 

Full disclosure: the following books greatly inform my view of where things will be going between China and the West:

  1. Khrushchev’s Cold War: The Inside Story of an American Adversary.
  2. The Cold War: A New History
  3. Origins of the Cold War
  4. The Tragedy of American Diplomacy
  5. Destined for War: Can America and China Escape Thucydides’s Trap?
  6. Dragons Entangled: Indochina and the China-Vietnam War
  7. The Best and the Brightest

Western-China relations are not the same as Western-Soviet relations and what happened then need not necessarily happen now. But the past does inform the present and by explaining so well how relations between countries can and do rapidly deteriorate the above books make for important reading today.

What are you seeing out there? What do you see for a year from now?

China employment law compliance

If you have employees in China, you must have a written employment contract with each and every one of your employees. Employing anyone (Chinese citizen or expat) in China without a current, enforceable, China-centric employment contract puts you at massive risk for financial penalties and worse. Late last month, China’s Ministry of Human Resources and Social Security issued a few (Chinese-language) employment and dispatch sample forms for reference for both employers and employees, emphasizing again the importance of having an appropriate agreement setting forth the respective rights and obligations of both employers and employees in an employment/dispatch relationship.

These government forms are good to have as guidelines but simply copying and pasting or translating them into English for use in China is not advisable because they are just templates that do not account for either the employer’s or employee’s specific situation. Among other things, they have not been localized, they do not work well at all for expats or for high-level employees and they fail to sufficiently protect the employer as they were written with just the employee’s interests in mind.

Perhaps most importantly, these government forms are in Chinese only and that does not work for foreign companies because they should have all of their employment documents in both Chinese and in whatever language all of its managers and HR people completely understand. I say this based on the countless (and expensive) cases our China employment lawyers have seen where a foreign company manager or HR person made a bad employment decision because they did not fully understand their company’s rights or responsibilities because they either had no translation of the Chinese language employment documents or a bad translation.

Our China employment lawyers draft every China-related employment document in both English (or in some other language) and Chinese, even though the Chinese language version will control. We do this so our clients fully understand their employment contracts, company rules and regulations, employee non-compete agreementsemployee trade secret agreements, and whatever other agreements they may have with their employees. It is critical the employer understand each and every agreement it has with its employees so it can be sure to abide by them. Employer-employee disputes are incredibly common in China, particularly for foreign companies doing business in China. Having clearly written employment documents in both Chinese and in English goes a long way towards reducing both the number and the severity of those disputes.

In China, current written employment contracts are required not just for the first year or first employment term but throughout the employment, regardless of whether an employee is on a fixed term or open term. Making sure your employees have an up-to-date employment contract means you need to start thinking about whether to renew an employee’s contract before its current term expires, even if that contract has an automatic renewal provision. If you have an employee with ongoing problems that do not warrant an immediate dismissal per your employer rules and regulations, you should consider proceeding with a non-renewal for that employee (assuming it is legal to do so). Our China employment lawyers are sometimes called in to assist companies with a problematic employee very soon after the employee just signed on for another employment term. This makes things more complicated but it oftentimes may still be resolved with the right approach.

The key is to use an employment contract that works for your specific locale in China. Using a “China” employment contract that has not been localized for your specific China city can get you in trouble, as will using the same employment agreement for all of your China offices. Even worse is using the same employment documents for both mainland China and some other legal jurisdiction, including Hong Kong, Taiwan or Macao. Non-China-centric employment documents invariably contain provisions that violate Chinese employment law and are unworkable for China.

Do you really want to present your employees with an employment contract or other employment document that instantly tells them you do not know how things work in China? What happens is not that the employee will not sign the agreement; rather, they will be happy to sign it and then they will be also be happy to use or threaten to use these bad or illegal documents against you if you try to discipline or terminate them. The employee will not get in trouble for signing an unenforceable employment contract nor will they get in trouble for reporting their employer’s illegal activity to the authorities. This is generally true even when the employee will also be implicated in any wrongdoing. The Chinese authorities are more than willing to let Chinese employees walk away scot-free in return for being able to go after a foreign employer for monetary penalties and more.

With China cracking down hard on foreign companies these days — especially American companies, our China employment lawyers have had a busy year reviewing and advising on employment contracts for legal compliance and for better employer protection. If you are not 100% certain your China employment contracts and your entire China employment program are in great shape you should have a comprehensive document-based employer audit before China’s new company tracking/social credit system goes into full gear. See China’s New Company Tracking System: Comply, Comply, Comply.

To help you gage the strengths and weaknesses of your existing China employment program, I urge you to check out the following:

 

Doing Business In China

No sooner than President Trump signed the Hong Kong human rights and democracy act into law, China announced retaliatory measures, banning U.S. warships from Hong Kong and restricting the work of American NGOs. These responses were narrowly tailored—perhaps in part because China is wary of rocking the boat too much, in a way that could lead to additional economic pain, at a time when it’s feeling the economic strain of tariffs and other pressures. It’s worth pointing out though that there is a lot China can—and probably prefers to do—quietly. In this post, I will focus on possible actions that could be taken against the U.S. diplomatic mission in China: a perfect target for sub rosa retaliation. In a follow-up post, I will focus on what our China lawyers have been seeing by way of retaliation against Western businesses and what we see coming on that front in the next few months. Small hint: a lot.

There are already reports that U.S. diplomats in China “are now required to inform the foreign ministry five days ahead of meetings with local [governments] and academic institutions”. Mind you, having served as a U.S. diplomat in China, I never experienced a time when it was easy to set up meetings, but the point is that it can quickly become much harder to do so. In fact, I hear from former State Department colleagues that meetings with officials below the central level have been rare for some time now. These limitations affect diplomatic work more broadly. The same obfuscation and slow walking that prevent a meeting with an official can just as easily be used to kibosh a planned cultural event or trip by the ambassador to the provinces.

Not only can China (or any host country) do a lot to make life difficult for foreign diplomats, it can often do so under the cloak of good intentions. Take for instance the issue of access to diplomatic facilities, including residences in some cases. If you’ve ever walked through one of Beijing’s embassy quarters, you might’ve noticed that the Chinese take their diplomatic security obligations very seriously, fencing in buildings and posting People’s Armed Police (PAP) guards. Not only do they want to guard against North Korean defectors and random crazies (such as one who crashed a car into Consulate Guangzhou’s gates while I was posted there, briefly gaining access into the premises), but also keep tabs on who and what is going into the missions. And this is perfectly reasonable, given diplomatic premises’ special status under international law.

At the same time, I can tell you from experience that there is a fine line between legitimate oversight and harassment. PAP guards may not be able to do much more than scowl when a diplomatic identity card is thrust in their face, but it’s a different story with non-diplomatic visitors, including family members and local friends. Moreover, diplomats themselves are only human, and sometimes forget (or lose) their IDs. These situations present an opportunity to mistreat U.S. diplomats, particularly—in the case of China—those of Asian descent (“How could we have known she was an American when she looked Chinese and spoke perfect Mandarin?”). This is not conjecture.

Host governments (again, not just China) can also mess around with foreign missions’ communications. Article 27 of the Vienna Convention protects diplomatic correspondence, but host governments can—and in fact do—impose limitations on how it can be transported and protected. Back when I was working at Consulate Guangzhou, regular officers took turns escorting the diplomatic pouch to and from Hong Kong on the through train, following strict procedures; most of the time, dedicated couriers handle the work. In his book In Our Dreamtime, diplomatic courier James Burrill Angell describes the restrictions on the size and weight of pouches during his time, and how they were “strictly enforced on disembarkation”:

After the 1400-mile journey north through the heart of China the international train’s arrival in Beijing was where things got interesting, as customs and immigration officials would wait the diplomatic couriers with a scale, measuring tape and attitude… If any of the Chinese restrictions were violated the diplomatic pouches would remain at the train station with cleared American guards for forty-eight hours until the international train returned to Hong Kong.

Additional restrictions, even seemingly minor ones, could have a serious impact on a mission’s ability to operate properly. As Wired puts it:

Though most communication is digital in the 21st century diplomatic world, physical objects—vital supplies of all sorts—still have to move by secure channels. (Though in fact, with the ever-present threat of hacking, very rare communications might indeed still be delivered via orange pouch.) Employing 103 couriers at 12 hubs around the world, the [Diplomatic Courier Service] boasts a delivery success rate that would be the envy of FedEx and UPS. [In 2017], the service transported 116,351 items weighing approximately 5,353,000 pounds.

As Angell puts it, pouch runs are a lifeline to embassies and consulates—and unfortunately easy ones to disrupt. For instance, through trains between Hong Kong and the Mainland are operated either by Chinese state railways or Hong Kong’s MTR, which has been accused “of colluding with the police” by pro-democracy protesters, who “playing on the system’s Chinese name, scathingly call it ‘Communist Rail'”. How easy do you think it would be for these entities to change their rules governing the transport of bulky freight?

Of course, regular mail is an easier target. All a host government needs to do is slow-walk customs clearances or the delivery of postal services to create inconveniences for foreign diplomats. Again, not conjecture. And lest you think this just means Christmas cards arrive in January, keep in mind that not all work-related material is sent via pouch. For instance, immigrant visa petitions were not sent by pouch back in my day (and probably aren’t these days either). This means the family members of Americans—spouses, parents, adopted children—could experience delays when applying for U.S. visas. And given the numbers involved, it’s not as if a consulate can catch up easily. (You’ll only see Guangzhou on the list because it handles all immigrant visa applications in China.)

Host governments can also exert pressure on foreign diplomats through surveillance. If you’ve never had the experience of being overtly tailed, I can assure you it’s not fun. Foreign diplomats and visiting government officials must assume that their hotel rooms are fair game, as are residences (unless they’re within a secure compound; even then, there are vulnerabilities). However, there is a huge difference between conceptually accepting that your belongings are being rifled through, and having concrete evidence of it. One anecdote that made the rounds at the State Department involved agents in a Latin American country using the toilet at a U.S. diplomat’s residence and not flushing—could you blame the diplomat if he or she is a little less aggressive going forward when covering their human rights beat? To make things more interesting, a host government may allow agents from other countries to conduct surveillance, meaning that the local expat pub is not the oasis a Western diplomat might think it is. Conversely, the harassment activities of a government might not be limited to its territory.

With the potential for further tension very much present, it’s worth thinking about what else China has in its toolbox, especially targeting regular Western businesses and citizens. (See e.g. China’s recent threat to bring Sweden to its knees in response to Sweden complaining about China human rights violations). We’ll be looking at that in more detail in future posts, but the recent denial of entry to  AmCham officials by Macau authorities gives a preview of what’s to come, both for diplomats and for everyone else.

China Lawyers

Had lunch yesterday with two long-time friends, both international lawyers who have spent many years living and working in China. During a discussion about an international real estate matter on which one of the lawyers was working, someone asked if we remembered back when foreigners were able to freely buy real estate in China. We all said yes, and then we ended up talking about how when the laws on that changed, so many people tried to get around it and ended up losing money. Then one of the lawyers talked about how when he was living in China he became good friends with the local police chief and the police chief offered to allow the lawyer to purchase a condo in the police chief’s name. The lawyer talked about how though he was certain the police chief had only the best of intentions, he never seriously considered the offer. We then told war stories that highlighted the risks of “handshake deals,” including the following:

  1. U.S. company works beautifully with a Chinese factory for nearly 20 years based entirely on oral agreements. The CEO of the U.S. company was great friends with the owner of the Chinese factory and because of that he had always refused all suggestions that the company document the terms of the two company’s manufacturing relationship just as it had done with its other factories. The US CEO insisted that to do so was not only unnecessary, but would be “an insult to his friendship with the factory owner.” The Chinese factory owner ended up dying young and his son takes over and in less than 30 days terminates the relationship between the two companies. The U.S. company had to scramble for a new supplier and it loses millions in sales and many customers by being unable to provide product during the transition time. A written contract requiring sufficient notice of termination would almost certainly have prevented this.
  2. Local government allows an Italian company to set up a factory even though the Italian company’s WFOE scope did not cover this. See Forming a China WFOE: Scope is Key. All is great for two or so years but then Beijing audits all of the WFOEs in this city and it shuts down the factory.
  3. Local government seeks to convince an American company to set up in their city with all sorts of improper tax incentives. American company — against the advice of its lawyers — sets up its China business in this city based almost exclusively on these tax incentives. Less than six months later, the local government regime gets booted out for corruption and the new regime very quickly removes every single illegitimate tax incentive given. American company’s costs soar so high that it ends up moving to the city it should have picked in the first place. The move cost them hundreds of thousands of dollars.

The moral of these stories is that what isn’t legal and in writing is ephemeral.

At another point in the lunch one of the lawyers talked about artificial intelligence software for high volume contract review. Companies use this AI software quickly and cheaply review large volumes of relatively small contracts. The software calls out “red flags” in the contracts so the in-house lawyers or contract specialists know what contract changes to seek. An example would be a contract that in one place calls for disputes to be resolved via arbitration and in another place calls for disputes to be resolved via the local court. The software will highlight a contradiction like this.

From this we started talking about how so many of the red flags we see in Chinese contracts are not so simple because they so often involve things entirely outside the contract. As an example, we talked about how it is common in the West for a buyer of products to require the product seller to have product liability insurance that protects the buyer should the product prove defective and injure people. But a provision like this in a Chinese manufacturing contract should be red flagged because this sort of provision almost certainly will not provide any real protection and yet it also very likely will be used by the Chinese factory to increase its prices. See The China Price and Product Liability Insurance: Never the Twain Shall Meet.

At the very end of our lunch, one of the lawyers talked about how he had been talking with a client earlier that same day who was just incredulous about how its Chinese counter-party had so blatantly and blithely violated a guarantee in their contract. We concluded that the only guarantee when doing business with China is that there are no guarantees.

 

China JV lawyer

This is Part Four of our new series laying out the issues companies typically face and the steps our China company lawyers typically go through when forming a China Joint Venture. In Part One, we talked about how despite the increasing difficulties with doing business in China (or perhaps because of those difficulties), our China corporate lawyers are seeing an increase in foreign companies looking to do joint ventures in China. We then discussed how the first thing we do is try to determine whether going into China via a joint venture makes both business and legal sense for the foreign company that has retained us.

In Part Two, we discussed how once both our lawyers and and our client are satisfied that doing a China Joint Venture actually makes sense generally, we see our next task as helping our client determine whether the Chinese company with which they are looking to form the joint venture is the right company for a China joint venture. In that post, we set out the questions to pose to your potential Chinese JV partner to tease out an answer to this.

In Part Three, we talked about what our China corporate lawyers do to try to determine early whether the Chinese side is truly interested in doing a Joint Venture deal with our client, or just feigning interest as a way of gaining access to our client’s intellectual property.

In this Part Four we talk about why it virtually never makes sense to do a Joint Venture with anything other than a Chinese domestic company.

Not sure why, but our China corporate lawyers have been seeing an uptick in Western companies looking to do joint ventures with WFOEs — Chinese companies wholly owned by a foreign company.  This almost never makes sense and is usually a sign of a deal that should be restructured or a flat-out scam. When a scam, the WFOE is usually owned by a Hong Kong company. This makes sense because many people do not realize that Hong Kong companies are not legally PRC companies. See The Legal Relationship Between China and Hong Kong and Why This Matters to You and Your Business, where we describe Hong Kong’s legal business relationship to China as follows:
When I would get asked this, I would usually start by telling American clients to think of Hong Kong’s relationship to China as being similar to New York’s relationship to China. For our European clients I would use London or Madrid or Frankfurt or some other European city as the example and for our Australian clients I would use Sydney. I would then say that for businesses, Hong Kong is essentially a foreign country when it comes to China.
It does not make sense for a foreign company to create a separate Sino Foreign Joint Venture Company in China in a situation where the Chinese-side owner of the joint venture will be a WFOE owned by a Hong Kong company or any other foreign country. Though legally possible under Chinese law, there are two reasons why this sort of deal does not make sense and is virtually never done:
1. The basic reason for doing a China joint venture is to allow a foreign entity to partner with a Chinese owned entity. The goal of the foreign entity is usually to benefit from the Chinese ownership, which will allow the JV to enter into businesses where some form of Chinese ownership is required. For example, Chinese medical institutions oftentimes do not like working with foreign entities and so joint ventures are often used in the medical field to deal with this “Chinese ownership required” issue. But a JV with a foreign entity does not address this issue.
2. The more important reason for why this sort of joint venture deal is virtually never done is because if the Chinese entity is a WFOE, a joint venture structure is simply not necessary. If a joint operation is desired, a foreign entity can simply purchase an ownership in the WFOE directly. Creation of a separate joint venture entity is not required and will invariably take longer to accomplish and cost more than simply taking part ownership in the foreign company that owns the WFOE or in the WFOE directly.
Joint ventures with China 0WFOEs. Very strange. Are you seeing these?

Moving Out Of ChinaCNN Business did a story today, entitled Mid-sized American companies are already moving away from China. The story is based on an Umpqua Bank survey of 550 executives at companies with between $10 and $500 million in annual sales. The survey was released today and it revealed the following:

1. “Midsized US companies are realizing that they need to diversify away from China and have already begun to take action.”

2. “Middle-market companies have started to shift their supply chains to other parts of Asia and are selling more to other countries to make up what they can’t sell to China.”

3. “More than half said they are looking to diversify their supply chains — both domestically and to other international markets.”

4. “Nearly 20% . . . are searching for new customers in other markets., primarily in Europe, and other parts of Asia, Latin America and the United States.”

5. “The decision to diversify beyond China is less about politics and the trade war and related more to diminishing advantages of making products in China.”

6. “There have been more hurdles in place with China. It has taken longer to get paid, too. China had already made things more complicated, but now the trade war is heightening things.”

7.  “Many mid-size companies said they are eager to embrace Europe as a bigger customer to help offset lost sales from China.”

This survey essentially vindicates what we have been saying on here for more than a year regarding both what we have been seeing among our own client base (which is largely mid-market companies), what we have done by growing our footprint in Europe and in Asian countries beyond China, and with what we have been recommending companies do.Since the beginning of US-China trade negotiations, we have been relentlessly negative about relations between the United States and China and also as between the EU and China (more on that below). We have consistently described relations between China and the West as being on a “straight line decline.” In our October 2018 piece, China, the United States and the New Normal, we started calling the bad relations between China and the United States the “new normal.” That same month, we titled a post Would the Last Company Manufacturing in China Please Turn Off the Lights, in which we mentioned “it does sometimes feel as though within three years nobody will be making widgets in China anymore.”

In April of this year, the Wall Street Journal quoted me in their cover story, Trade Deal Alone Won’t Fix Strained US-China Business Relations, saying the following:

“There is no way any deal between China and the US will cause everyone on both sides to say, ‘We were just kidding,’” said Dan Harris, managing partner at Harris Bricken, a law firm that specializes in investment with China. “The tariffs and the arrests and the threats and the heightened risk have impacted companies and that will not go away.”

Then on May 4, 2019 (one day before President Trump’s May 5 tariff tweet that changed everything), we wrote The US-China Trade War: Winter is Coming, on how no matter what happens in the US-China trade war, things will NOT revert back to the way they had been for foreign companies:

The above is but an introduction to what we see as China’s diminished future for foreign companies. Since pretty much the inception of the US-China trade war we have been saying that we do not see its end because we have always seen it as more than a trade war. At first, we saw the US tariffs as an effort by the United States to get China to “open up” and “act right” on things like the internet and IP. But because we did not see China changing on these things, we did not see the trade war ending. Vice-President Pence’s speech on China earlier this week has only reinforced for me that the trade war between China and the US will not be ending any time soon, if ever. The New York Times has called that speech the Portent of a New Cold War between the United States and China and China’s own Global Times wrote an article entitled, Pence speech shows Washington’s tougher policy on China. Don’t blame us. We are just the messengers. Things are getting very tough between China and the United States right now and the trade war is just a symptom of that, not the disease.

The United States is aggressively and unabashedly is doing what it can to isolate China and to remove it from the world of international trade. The new free trade agreement between the United States and Canada is further proof of this as it essentially blocks Canada and Mexico from engaging in free trade with China. See What Trump’s new trade pact signals about China. Word is that shutting out China is going to become a regular thing in all new US trade agreements. See US Commerce’s Ross eyes anti-China ‘poison pill’ for new trade deals. Will the EU and Japan and Latin America play ball on this? I predict that most if not all of them will.

Since we wrote the above — heck, just in the last month, things have gone from bad to worse to really terrible. First there was the US Senate voting unanimously to condemn China over Hong Kong and the House of Representatives passing that bill 412 to 1. Trump signed it and China has begun to retaliate by attacking NGOs in China and threatening to make the lives of US diplomats miserable. Then just yesterday, in an event that has already made China far far angrier, the US Congress condemned China for its treatment of its Uighur minority population. The EU is slowly but surely turning on China as well. See What’s ahead for the new EU commission as it addresses the imbalances in China ties and New EU chief Ursula von der Leyen takes helm amid growing European suspicion of China. Our EU clients are decoupling from China nearly as fast as our American clients.

And yet, many Western companies — indeed, many of our own clients — continue to take a “wait and see” approach to China, as though things may get better. They won’t and you need to start acting accordingly. We recognize that for some, acting accordingly will mean no changes to their China footprint. For others, it will mean cutting all ties as quickly as possible. For most, it will be something in between those two poles .

In future posts, we will discuss how we see China stepping up its retaliation against Western companies and what we think Western companies should do to reduce their reliance on China as what constitutes the New Normal continues to worsen.

Stay tuned.

International data privacy lawyersA lawyer’s job is to discern their clients’ risks and help them avoid them. We are both trained and paid to be paranoid.

Years ago, when I was in Tokyo on a particularly sensitive international law matter, I left my hotel room as I had done pretty much every day for the last 7-8 days and began walking to my subway stop. Then, for some reason I got a strange feeling about having left my laptop in my hotel room and I decided to return. When I did, there were two men wearing black suits and ties looking at my turned on laptop. I immediately asked them (in English) what they were doing in my room and one of them responded in shockingly good English that they were with the hotel and just checking on my Internet. To this day, I have no doubt they were Japanese Secret Service.

With all that has been going on in China lately regarding data theft and with the accelerating decline in relations between China and the West, our international lawyers are getting a raft of questions from clients and readers wanting to know what they should be doing to protect their data when traveling to China.

Here is our most recent list.

  • Tell as few people as possible that you will be going to China and tell those few people as late as possible. But assume that once you enter China, if someone really wants to know if you are there, they have probably bought off someone at China customs to get that information. Also assume that the government knows pretty much everywhere you go.
  • If you are going to China from Hong Kong, be prepared for triple strength scrutiny.
  • Password and/or fingerprint and/or facial recognition and/or two factor authentication protect your laptop, tablet, mobile phone, USB drive, or other removable media. Needless to say, use really good passwords. Use encryption. But recognize that if a Chinese government official pressures you for your password or your finger or your encryption key, you will face jail time if you don’t turn it over.
  • Do not have sensitive data on whatever laptop, tablet, mobile phone, USB drive, or other removable media you bring into China. Keep that on your devices at home or in the cloud.
  • Delete any cloud apps with sensitive data before you go to China. Most cloud access is either terrible or non-existent in China anyway, but should it be available and you truly need it while there, you likely can re-download it and use it. Needless to say, you had better have a good password for this. Note though that if the Chinese police demand you give them the password, you pretty much must do so or face jail time. See China’s New Cybersecurity Program: NO Place to Hide and China’s New Cybersecurity System: There is NO Place to Hide.
  • Never let yourself be separated from your laptop, tablet, mobile phone, USB drive or other removable media. By this I mean, never put these things in a car trunk or leave them unattended on a plane or train. I’ve heard of many instances were taxi drivers drove away with a briefcase in the trunk, only to return it the next day, possibly relieved of key data. If you don’t think taxi drivers or hotel workers in China can and do sell data, I am here to tell you that they do.
  • If you must leave one of your devices in your hotel room, hide it in such a way that you will be able to tell if someone messed with it while you were gone. Note that your hotel as access to your room safe and if the Chinese government were to ask anyone at your hotel to open it, their response would be to run (not walk) to your room to do so.
  • China is damn good at hacking so you should have your IT people look at your laptop right before and right after you get back from China.
  • Use your VPN connection to access your company information and not free wifi. Note though that it is becoming increasingly difficult to use VPNs in China.
  • Frequently update your virus and firewall protections.
  • Just assume your hotel room and any phone on which you talk while in China (including your own cell phone) is bugged and that your Internet usage will be monitored. Assume the worst and take every measure you can to be careful.

I love telling the following stories of random data sloppiness I personally have encountered.

  1. Many years ago, I got on a “common” computer at a hotel in Korea (to read the news) and the first thing that popped up was a letter written by a Seattle company revealing information I know they would not have wanted me (or anyone else) to see. Someone from this company had written this letter on the computer (in Word format) and simply left it there. Not smart.
  2. Many times I have gotten on the Internet at an airport computer and been let right into someone’s webmail account. Not smart.
  3. I know this isn’t company data, but what percent of the time do you delete your Netflix or Hulu or HBO Go information from your hotel television before you check out?
  4. I have on more than one occasion found USB sticks filled with company data left in my hotel room. Not smart.

If people do these sorts of things….

Many years ago, in Traveling Light in a Time of Digital Thievery, the New York Times detailed the steps Kenneth Lieberthal takes before going to China:

He leaves his cellphone and laptop at home and instead brings “loaner” devices, which he erases before he leaves the United States and wipes clean the minute he returns. In China, he disables Bluetooth and Wi-Fi, never lets his phone out of his sight and, in meetings, not only turns off his phone but also removes the battery, for fear his microphone could be turned on remotely. He connects to the Internet only through an encrypted, password-protected channel, and copies and pastes his password from a USB thumb drive. He never types in a password directly, because, he said, “the Chinese are very good at installing key-logging software on your laptop.”

There you have it.

What do you do to protect your data from China?

China Entertainment Lawyer

The numbers coming out of China continue to amaze. There are 855 million digital consumers in China and they have more than twice as many internet users as the US has people. The Chinese are spending an average of 358 minutes per day online. They spend 8% of their online time streaming video content. A further 11% of online time is spent watching short videos, something that 800 million Chinese now do regularly.

Despite these big numbers, China’s internet penetration rate is still only 60%, online video growth has plateaued, and regulatory control is tightening.  Things have changed a bit since we last touched on streaming trends, so let’s look at the outlook for 2020

1. Production has slowed down. Contributing factors include a crackdown on entertainment industry taxation in the wake of the Fan Bingbing tax evasion scandal and subdued economic conditions generally — China’s economic growth is at a 27 year low and, according to some reports, nearly 2,000 Chinese film and TV companies have gone bust this year. The trade war is also contributing to reducing cooperation between Hollywood and Chinese production companies. All of this means fewer co-productions and collaborations, replaced by a lot of reviewing, reconsidering and waiting to see.

2.  Production has become more difficult. More and more subjects are off-limits, for both domestic Chinese and foreign content owners. Look what happened with The Eight Hundred. Even a reputable, major Chinese company like H Bros. couldn’t read the tea leaves. On the foreign side, several leading TV production companies have recently pulled out of China, giving local production difficulties as a reason.

3.  There’s no longer any market for foreign formats. China is no longer the biggest international market for foreign format owners. For many foreign companies, China is now one of the smallest markets for their formats. This is the result of 2016 regulations targeting foreign TV formats and specious co-productions. Challenges for foreign formats have been cited by UK trade body PACT in connection with its suspending its activities in China.

4.  There’s less foreign content but Chinese viewers don’t care. Recent regulatory intervention has resulted in less foreign content being bought for streaming in China. While the changes were working their way through the system there was conjecture about the impact. It’s now clear that China streamers and audiences seem quite comfortable with fewer foreign TV series. iQiyi, which has the second highest number of subscribers,  estimates that only 10% of its subscribers prefer US TV series, although the proportion is higher for foreign films

5.  Production focus has shifted to original content. Most content is now original as opposed to acquired or licensed. This original content is mostly local-language Chinese. There is now far less demand for production of foreign or foreign-invested content.

6.  Adaptations and remakes of foreign programs are out. This has put scripted foreign content under pressure. Foreign content libraries can no longer be mined so easily for Chinese adaptations. Adaptations and remakes are subject to a de facto ban.

7.  Foreign animation is now caught by the quota. In the past, foreign animation was exempt but, as part of changes introduced in 2018, it now comes within the 30% streaming quota applicable to foreign content.

8.  US streamers are not getting in. Despite frequent rumors and reports to the contrary, there is no reason to expect US streamers will be allowed to operate their own channels or do anything other than license their content for China within the 30% streaming quota.

9.  AVOD is down. Ad-supported revenue is shrinking. Tencent, which has the highest number of subscribers in China, disclosed in its Q3 filing a 28% decrease in advertising revenues. Unpredictability and uncertainty in scheduling releases were cited as the reasons. iQyi has also been hit by decreasing advertising revenue.

10.  SVOD is up. Subscription revenue is up relative to AVOD. It is now nearly the same as, if not more than, ad-supported revenue. The Chinese are now willing and able to pay for premium content or pay to avoid ads. This, together with improvements in IPR enforcement in China, has driven online piracy down to the point that it is no longer a major problem. But as indicated above, growth has slowed.

11.  China streamers are paying less and buying non-exclusively. This applies to both foreign and domestic content owners. Co-operation among streamers is up as they share quota spots and help each other with content license fees.

12.  No, China’s film “market” won’t eclipse North America’s in the near term. Despite the growth in digital distribution, ancillaries are mostly VOD and they still only account for about 25% of the market. Box office is still the biggest revenue source. It makes up around 75% of the market. Note that in North America the opposite applies — ancillaries are the greater part of that market. Reports predicting China’s “market” will soon eclipse North America’s can be misleading if they compare box office takings without considering the more substantial ancillaries in North America.

13.  Caution and uncertainty will continue during these “red” years. This year was the 70th anniversary of the founding of the People’s Republic. 2021 will be the 100th anniversary of the establishment of the Party. Regulatory caution and industry uncertainty will likely continue in the near term. Whether you’re a Chinese regulator, a Chinese producer, or a foreign studio executive, it won’t be a good time to be taking risks or pushing boundaries.

Here’s the thing: China may be getting harder for foreign business but it’s just too big to ignore. Foreign companies with a serious commitment and a realistic business model can still make it in these conditions and we are working with some that are. Generally, in the current climate, licensing-led approaches will be more advantageous than focusing on local production.