From “neighboring” Qingdao

On August 4, 2010, the Dalian Labor and Social Security Bureau (大连人力资源和社会保障局) posted on its website a new list of requirements for foreign nationals seeking employment in Chinese companies based in Dalian. The new requirements mandate that foreign individuals must prove that the registered capital of their employer is greater than 3.0 million RMB (about USD $440,000). This new requirement applies without distinction between foreign owned (WFOE) and Chinese owned companies. By the strict reading, even the founder of a WFOE would not be permitted to hire himself if the registered capital of his WFOE is less than the minimum. In the same way, a small Chinese research and development lab in Dalian would be prohibited from hiring foreign workers under this new requirement. It was this latter example that caused me to become aware of this new requirement.

When we contacted the staff at the Dalian Human Resources Bureau, they told us there is no supporting policy, rule or regulation for this new requirement; it is based merely on the oral instructions of the bureau chief and the only documentation is what the Bureau has posted on its website. When we asked about the requirement’s application to employment by an owner of a WFOE or employment by a small research and development company, the staff indicated that they fully intend to follow the requirements strictly and will refuse to allow any foreign employment in any company that does not meet the minimum capital requirement, regardless of the status of the company. When we commented on how this policy goes counter to Dalian’s stated goal to become a business outsourcing and software development center, the staff indicated that they don’t think about such things; they just do what their supervisor tells them to do.

Clearly this new rule is contrary to Chinese law. If enforced in the manner proposed by the staff of the Labor Bureau, it will have a negative impact on many small technology businesses in Dalian, both domestic and foreign owned, many of whom my firm represents due to Dalian’s closeness to my base in Qingdao. Frankly, this requirement seems so irrational I cannot even guess at the reason behind it. It is clearly bad for all Chinese companies, WFOE and domestic. No one is being protected, and everyone involved is being hurt.

Though I believe that this requirement will not be imitated by other cities, the issue is uncertain. Dalian has previously been considered to be a very open city to foreign workers. If Dalian does this, there is no reason to expect other cities will not follow suit. However, since the requirement is completely irrational, it is impossible say what will happen elsewhere.

The imposition of a threshold based on minimum capital does, however, illustrate that Chinese government authorities still do not understand the requirements of high tech companies operating in the research and consulting sector. We continually face the problem that Chinese offiicials judge companies solely on the size of their capital investment. Consulting and research companies often have very low capitalization since their resource is their staff and not their physical assets. Government officials often delay or even refuse to approve a consulting/research WFOE because the capital is low. This recent requirement by Dalian seems to be in that line. A manufacturing company with 3 million RMB in registered capital is a rather small operation. A consulting/research company with the same capitalization would be quite large.

However, none of the above explains why foreign workers are being targeted with this requirement (I do not call it a rule since it has no legal basis), so I still cannot think of any basis. No Chinese lawyer or official with whom I have discussed this matter has been able to provide any explanation either. The attitude here in Qingdao is: The requirement is clearly illegal. Good. Perhaps it will convince more people to invest in Qingdao. “We don’t behave that way down here.”

Other people have asked me: will the Dalian bureau really be able to get away with this? The answer is: yes. The Labor Bureau can pretty much do whatever it wants in their regulation of foreign workers and it is not unusual at all for local labor bureaus to have their own special requirements. Foreign workers have no power, so protests from the foreign workers have no impact. It is only in the case where an organized protest by Chinese companies is made that there would be changes. To date, this has not happened, since small Chinese companies do not make extensive use of foreign workers. Small WFOEs are more likely to make such use, but they have little power and are usually ignored by the labor bureau. This sort of arbitrary change in long established rules is a fact of life in China and adds to the uncertainty of doing business here.

The key takeaway from this is that now, more than ever, one has to be ever mindful of the differing requirements and even “attitude” of China’s cities before determining where to try to locate one’s business.

Qingdao anyone?

  • Guess I won’t be working in Dalian anytime soon.

  • Stratagem 13, “Beating the grass to startle the snakes”. Is there possibly–albeit speculative–another takeaway here? While China-laws are local, official promotions et al are driven by top-down pressures. Thus, is there the possibly of a camouflaged higher-up–who in turn is directed by an unseen official, who is turn is ruled by some mysterious force–directing the potentially hapless Dalian official? (Perhaps, I should stop reading Kafka before bedtime?)

  • Jay

    China is simply not a safe place to invest. It is unusually risky in every respect and has a shaky grasp on the rule of law.

  • Twofish

    Pet peeve time. If you are arguing that a regulation is against Chinese law, then you need to point out the law or regulation you think is being violated.
    > Clearly this new rule is contrary to Chinese law.
    How is this new rule contrary to Chinese law? The Company Law and Securities Law imposes minimum capital requirements and regulations for company formation, but there isn’t anything that obviously prohibits local officials from imposing stricter regulations, and in fact local officials routinely do so.
    > However, none of the above explains why foreign workers are being targeted with this requirement (I do not call it a rule since it has no legal basis).
    Chinese law is structured such that merely not finding a legal basis for a regulation is not enough. In order to show that a regulation is contrary to law, you have to find some stronger law or regulation that *clearly* and *explicitly* prohibits the regulation you find objectionable. Once you find that, then you are in good shape, but there isn’t anything here that I can think of that obviously sets this up.
    Effectively Chinese law maintains a split between private and public spheres. In private law, what is not allowed is prohibited. When dealing with administrative agencies, what is not prohibited is allowed.
    > The key takeaway from this is that now, more than ever, one has to be ever mindful of the differing requirements and even “attitude” of China’s cities before determining where to try to locate one’s business.
    True, and that’s a good thing.
    Also, I think that way things are structured, people *are* thinking very carefully about the law. Dalian can’t pass regulations that explicitly prevent foreign companies setting up because of WTO. However WTO doesn’t cover immigration and labor so putting something through immigration and labor gets around the WTO rules for national treatment.
    > However, since the requirement is completely irrational, it is impossible say what will happen elsewhere.
    I don’t think the requirement is irrational. It’s obviously a way of forcing companies to hire local people. You have tons of university students that are out of work, and this regulation forces companies to hire local. Hiring local is important, because if you put a foreign software company out of work, they get mad and go home. If you have lots of unemployed local people, then they protest in front of Party headquarters.
    Also size of capital investment *is* important. If the company goes under, then the local government will be responsible for the social benefits of the unemployed workers, and so the local government wants companies to have enough capital reserve to make sure that they don’t go under. This *kills* American-style high-tech outsourcing companies, but there are other ways of structuring high tech development (i.e. the chaebol model).
    Having capital in China allows the government to hold a foreign company “hostage” so to speak. If things suddenly go bad and you have no money and plant in China, you can pull out. If you have $X million invested, you can’t. Now whether or not you want that deal is something you need to think carefully about before you go into China, but that’s another topic.
    Also, “let’s copy the US economy” is not something that you’ll find popular in China right now.
    The problem with finding another city is that the pressures and legal situation you find in Dalian isn’t unique there, and for that matter, it’s not unique to China. If you go to India or even the US, you’ll find similar pressures.
    > To date, this has not happened, since small Chinese companies do not make extensive use of foreign workers
    Hmmmm…. So if you are a small Chinese company that wants to kill your foreign competitors without hitting WTO constraints, then what should you do…….
    One reason screaming “this is against the law” without being clear as to why, is that you are dealing with people that may understand the law quite well.

  • Twofish

    Also one thing that I have found is that commercial lawyers often get into trouble when they deal with Chinese administrative law. Chinese commercial law is similar enough to US commercial law so that you are on the same planet, but when you go into administrative law, you are on very different planets.
    The other thing that causes issues is that in commercial law, China often either implicitly or explicitly uses foreign law. One that has causes a lot of lawyers problems is the fact that for a while China had two sets of rules, one for foreigners and one for locals. This situation is rapidly changing, and the rules are being unified and what you end up with is more local law than foreign law.
    The fact that an agency has no legal basis to issue a regulation is sufficient under US law to make that regulation invalid both in theory and in fact. This isn’t true at all in Chinese administrative law. In order to quash a Chinese regulation, you have to show that it is *explicitly* and *clearly* against some higher level law, at which point instead of going to court, you make an appeal to the people that wrote the higher level law.
    Now if you can find a higher law that kills the lower law, we have another discussion, but I’m 90% sure that you can’t. Also when you find a higher law, there is the question of interpretation, and what matters is not how you would interpret, but what something means in the context of Chinese law.
    For example, if you find a NPCSC law that says that the minimum requirement for something is $X, then it means that local governments can impose $3X as a requirement.
    Mao: . Thus, is there the possibly of a camouflaged higher-up–who in turn is directed by an unseen official, who is turn is ruled by some mysterious force–directing the potentially hapless Dalian official?
    No need to talk about mysterious forces. It’s usually blindingly obvious where the order comes from and why it was given. People aren’t shy about this sort of thing.
    Also, as with a lot of things, you are going to get hit by both US and China. Right now China is doing what it can to generate jobs for local people at the expense of foreigners, but the US is doing the same thing. For some things, you can go to the US government to put pressure on the Chinese government through WTO, however in this situation it’s not going to work.
    If you complain to the US government that China is making life very difficult for outsourcing companies, and making it difficult to move jobs to China, the US government is going to say GREAT!!!!! I guess this means that you’ll have to pull out of China, and hire people in California. If you complain that the US that China is making life difficult for foreign workers, the US government is likely also to say “and making life tough for foreigners so that you can reserve jobs for locals is bad because ????”
    These new regulations are bad for business, but they strike me as neither irrational nor illegal.
    Again, things will change if you point to an higher level law that the local regulation *explicitly* and *clearly* conflicts with, but I leave that to you since you can charge billable hours on this and I can’t.
    If you find something, I can tell you want I think about it since I’ve found that commercial lawyers often strongly misinterpret what a Chinese administrative regulations *means*. If you find nothing, then the regulation is legal since we are in China, and “no rational basis” or “arbitrary and capricious” doesn’t count.

  • Twofish

    > Chinese government authorities still do not understand the requirements of high tech companies operating in the research and consulting sector.
    There is a difference between not understanding and not caring.
    There is absolutely no interest that China has in attracting foreign capital. There is still some interest in attracting foreign technology and know-how, although the value of American financial and management know-how has taken a huge hit with the financial crisis.
    So looking at this from Dalian’s point of view, yes they do seem to want to be a high tech center, but how exactly does foreign outsourcing help that? China is getting flooded with returnees from US companies and they are looking for jobs. Killing off small foreign companies leaves more room for home grown companies.
    Also one danger with claiming “illegality” and “irrationality” when it doesn’t exist is that you get smashed when it turns out that the local officials are acting legally and rationally. I suspect that the authorities would like to just issue an order that bans foreign companies in this area, but they can’t do that because of WTO commitments. What they *can* do is to tighten up on immigration and labor since restrictions on immigration and labor are not (and probably will never be) subject to WTO rules.

  • Anthony

    Anything to have to do with the recent oil spill in Dalian? Environmental insecurity?

  • Roy J Biv

    Why have you chosen to focus on this one particular stupid law when there are hundreds of these throughout China. The Dalian authorities are just too stupid to realize that all they are doing is driving foreign businesses away from Dalian and to other cities in China. I kid you not, but before I saw this i had narrowed my list of Chinese cities in which to locate a new tech company I am starting (my fourth in China) to three cities, with Dalian being one of them. Dalian’s stupidity has reduced my list to two.
    If I had taken my business to Dalian, my first hire would have been a foreigner, but I would have used and paid for local services and this foreigner would have done the same. More importantly, we are planning to hire at least five Chinese nationals within the first six months and now those tech jobs will be going somewhere else.
    Two Fish: Why when these sorts of stupid things are done in the United States, all of us with IQs over 80 instantly recognize they are being done for political reasons yet when these same sort of stupid things are being done for political reasons, you feel compelled to rush in and defend the great Chinese motherland as though it is a personal attack on you and as though if anyone were for a moment to believe that anyone in China could do something stupid it might somehow reflect badly on you, who I understand are Chinese? Please answer.

  • Tim

    @TwoFish
    “I don’t think the requirement is irrational. It’s obviously a way of forcing companies to hire local people. You have tons of university students that are out of work, and this regulation forces companies to hire local.”
    It may not be irrational but it certainly is myopic. I am not convinced that restricting foreign employment in Dalian is obviously a way to ensure higher local employment. One of the main reasons most foreign investors eye the China market is for the relatively cheap and skilled labor. I have not looked at the figures, but I would assume the foreign workforce in Dalian has not reached proportions where the local government should be concerned about FIE’s over reliance upon foreign labor.
    “Also size of capital investment *is* important. If the company goes under, then the local government will be responsible for the social benefits of the unemployed workers, and so the local government wants companies to have enough capital reserve to make sure that they don’t go under….”
    If local labor is not being hired because of stringent requirements for establishing in Dalian, then the local government will still be burden with high unemployment anyway. Bankruptcy is a burden on all countries but I hardly see how this justifies requiring a company to arbitrarily increase their investment if the funds are not required for their operations. And in many cases, other ministries discourage high investment amounts.
    “This *kills* American-style high-tech outsourcing companies, but there are other ways of structuring high tech development (i.e. the chaebol model).”
    And the Chaebol model also intrinsically has it’s problems as Korea has already witnessed.
    “Having capital in China allows the government to hold a foreign company “hostage” so to speak. If things suddenly go bad and you have no money and plant in China, you can pull out. If you have $X million invested, you can’t.”
    Agreed that this is one way to perceive capital, but registered capital is not generally treated this way in China. In fact, it is not uncommon for MofCom to require justification for registered capital amounts that they deem to be unusually high, requiring investors to itemize how they will spend this investment. Instead, companies are required to establish a reserve fund with after-tax profit as a means to ensure liquidity within the firm to cover unforeseen liabilities.
    “There is absolutely no interest that China has in attracting foreign capital.”
    This, by your very statements, is untrue. If a local government body is arbitrarily requiring a minimum capital amount to allow foreign investment to go forward (because let’s face it, most high-tech and outsourcing firms will need to place expats on site for a period of time just to establish their operations), then China absolutely has an interest in attracting foreign capital. Even if, as you say, this capital amount is to ensure that the firm has enough funds so to protect the firm from going under. This is an insidious way to attract or rather force foreign firms to increase their capital if they want to invest in the city.
    If you are talking to local or provincial level development zone officials who still often work on a quota system they are indeed concerned about attracting foreign capital. Just because Beijing is flush with foreign reserves does not mean that at the provincial level they have suddenly decided they are no longer interested in foreign capital.
    “There is still some interest in attracting foreign technology and know-how, although the value of American financial and management know-how has taken a huge hit with the financial crisis.”
    Some interest? This plays to local hubris that because China has weathered the financial crisis better than many Western economies that they have little else to learn from these markets. And let’s not forget that foreign technology and management does not equal American or Western for that matter. China still faces its own serious concerns in terms of its financial sector. Although it is certainly true that the financial crisis has exposed flaws in the global economic model as well as in Western economies, I do not see the government or even local privately owned companies loosing interest in foreign technology or know-how.
    “So looking at this from Dalian’s point of view, yes they do seem to want to be a high tech center, but how exactly does foreign outsourcing help that?”
    Because not all of those returnees that are ‘flooding’ the market are all entrepreneurs or necessarily have the skill sets to develop a business just because they studied or worked abroad. Why would you rely solely on returnees to develop your economy when you have others who are interested in investing as well? You appear to be falling into the trap of ‘us’ vs ‘them’ that always seems to pervade discussions on China’s development. Lest we forget, China did not rise on its own; it has been its uncanny ability to adapt foreign laws, technology, management and financial markets while attracting foreign investment that has contributed significantly to its rise.
    And by the way, those foreign companies the Chinese should be killing off are in fact foreign-invested local companies predominately employing locals and most likely contributing more per capita in tax revenues to Dalian’s coffers than locally-invested companies.

  • Twofish

    Biv: it is a personal attack on you and as though if anyone were for a moment to believe that anyone in China could do something stupid it might somehow reflect badly on you, who I understand are Chinese?
    It might have something to do with that fact that this is a blog on Chinese law, and not US immigration policy.
    I really don’t know whether or not what Dalian is doing is stupid or not. But what I am arguing is that as far as I can tell it is not illegal nor is it irrational. As far as the legalities of the situation, that’s a technical issue, and I’ve already stated my view that nothing that Dalian has done is illegal under Chinese law.
    As far as the rationality. If Dalian were doing rain dances to encourage space aliens, that would be crazy. Whether what Dalian is doing is bad in the long run remains to be seen, but it’s not a totally crazy thing to do.

  • Twofish

    Tim: I am not convinced that restricting foreign employment in Dalian is obviously a way to ensure higher local employment.
    I’m not convinced of this either, but I’m also not convinced that restricting foreign employment in Dalian is a stupid thing to do either politically or economically. Also presumably the Dalian municipal government has taken a look on those figures, and so I’m not at this point prepared to write this off as “totally idiotic.” What the Chinese central government usually does in these situations is to follow different policies in different areas and see what happens.
    Tim: If local labor is not being hired because of stringent requirements for establishing in Dalian, then the local government will still be burden with high unemployment anyway.
    Which is a balance that the local government has to deal with. Again, it’s not obvious to me that they are being idiotic right now, and unless someone can come up with a better legal argument, it’s certainly not illegal.
    Tim: Bankruptcy is a burden on all countries but I hardly see how this justifies requiring a company to arbitrarily increase their investment if the funds are not required for their operations.
    It’s not so much bankruptcy but rather that China has a very patchy social safety net, and so you want to be able to shut down a company while it still has some cash in the bank that you can use to wind down the company and pay workers.
    Tim: And the Chaebol model also intrinsically has it’s problems as Korea has already witnessed.
    Absolutely. That’s why China rejected it in the 1990’s.
    Tim: This plays to local hubris that because China has weathered the financial crisis better than many Western economies that they have little else to learn from these markets.
    I think that China does have a lot to learn from the United States, but a lot of it has to do with what not to do rather than what to do. In any case, the type of lessons that China has to learn don’t require foreigners starting businesses in China.
    Tim: I do not see the government or even local privately owned companies loosing interest in foreign technology or know-how.
    Nor do I, but the trouble with business process outsourcing is that it really doesn’t leave that much in the way of new technology or business know-how.
    Part of the reason I tend to be a little negative toward BPO shops, is that in talking to these people it seems pretty obvious that the second wages started to rise in China, that they were going to close shop and move to Bangledesh. Putting these restrictions just pushes up the movement earlier.
    Tim: Because not all of those returnees that are ‘flooding’ the market are all entrepreneurs or necessarily have the skill sets to develop a business just because they studied or worked abroad.
    But enough of them do so that you have a lot of talent that you can deploy locally.
    Tim: Why would you rely solely on returnees to develop your economy when you have others who are interested in investing as well?
    Because at the end of the day, returnees have an emotional attachment to the motherland that foreigners don’t have. Someone that returns to China expects to be buried there and to have their kids grow up in the world that they create. Your average Westerner doesn’t have this sort of emotional attachment or commitment.
    BPO wants to invest in China because for non-emotional commercial reasons. There is nothing wrong with that, but it really doesn’t matter to them whether they invest in Dalian, California or Bangledesh.
    Tim: t. Lest we forget, China did not rise on its own; it has been its uncanny ability to adapt foreign laws, technology, management and financial markets while attracting foreign investment that has contributed significantly to its rise.
    Absolutely, but things change. There was a time in the 1980’s, when China could develop its economy by just copying the United States. Sure there were a few local adaptations, but much of the commercial infrastructure of China was copied wholesale from the United States. Much of the reason that China was able to avoid a lot of the problems of the US banking system was because China listened to foreign experts more closely than the United States did.
    But China has moved out of the era in which it could more or less just copy the United States. China can’t copy the United States because the US can’t copy the US. The whole US financial and economic structure has been changed, and there are no models to follow.
    It’s 2010, you just can’t run an economy like it was 1995 or 2005. History moves along. I figure that at some point, China will get too arrogant, and things will blow up. It will happen. Whether it happens next year or 200 years from now I don’t know.
    Tim: And by the way, those foreign companies the Chinese should be killing off are in fact foreign-invested local companies predominately employing locals and most likely contributing more per capita in tax revenues to Dalian’s coffers than locally-invested companies.
    Have you checked? On what basis are you making this statement? I don’t know about the local economics of Dalian, and if it does turn out that making life harder for small foreign local companies does hit tax revenues, you have leverage to change the policy. However, it’s a weak argument if it turns out that this is not the situation.
    Also, I really don’t know if what Dalian is doing is a good thing or not. What I am arguing is that it’s not “obviously irrational.”
    The fact local officials do have a lot of freedom to undertake local policy does help things. It could turn out that what Dalian is stupid, at which point you have foreign businesses move to other centers which are nicer. Dalian loses and after a few years it will reverse policy. On the other hand, maybe it is a good thing, in which case everyone will be copying Dalian in a few years.

  • TM

    Hi-Tech manufacturing plants and BPO/software companies apart this also affects other FIWOs – particularly those in service industries such as education and training. I’m not convinced that returnees can fill any gap created in this market, not least for many students going overseas live in Chinese enclaves and generally don’t embrace the new culture they find themselves in. As such, they don’t have the knowledge they could reasonably have been expected to gain from studying abroad. As such, they have a ‘warped’ perspective to relay to others perhaps considering studying abroad or wanting to learn ‘native’ American/British/Australian English etc.
    As to the perceived problem with this new rule…..could several service companies band together under one banner to meet the investment requirement but continue to operate as separate business units with profits being shared based on income and profit contribution? In otherwords if you make no profit you are not subsidised but can continue operating? I realise depending on which companies banded together they might actually achieve economies of scale efficiencies that would costs jobs, but that isn’t there concern.
    Also, it would seem if I have an existing business with less capital investment than the new level, I can get visa renewals up to age 65 whereby I would have to leave China and hope someone else (probably Chinese) doesn’t run my business into the ground or steals my customers. Hardly a good basis on which to contemplate growing a business if you are an existing business foreign owner.
    Finally, if what two-fish says is accurate then there would be nothing preventing Dalian in future from increasing the minimum to 5x, 7x or any other number it decides it needs to achieve its objective. Perhaps the real message is unless you’re business needs a lot of plant and machinery, and can be assured to create LOTS of local employment then please go elsewhere for we don’t want you