A number of our clients have been calling us nearly weekly of late for what they usually call “China briefings” or “China updates.” They mostly want to know what our China lawyers are hearing is happening to foreign companies in China. These calls usually consist of one of our China lawyers listing out the most recent things our firm is hearing about China (we have an entire Slack channel essentially dedicated to this) and then our client asking questions regarding some of the things they are hearing.
The below is a listing of many of the things we have recently been discussing:
1. a couple of clients have heard that Chinese police (from Beijing?) are going into foreign company offices (especially in Shanghai) and testing everyone for drug usage. They are cutting hair and sampling that and those who test positive are being immediately deported and told never to return to China. Cannabis stays in your hair for up to 90 days and many are getting booted out of the country for testing positive for weed. I keep hearing this is happening yet I have never been able to confirm it. I hear this one a lot from Americans who once lived in China and they are hearing it from their American friends who still live in China, but none of our clients have ever mentioned it and I have never heard it directly from anyone who was involved in such a raid. Anyone else know anything about this.
2. Will China kick out American companies that are doing business in China? My answer to this is always no. If China were going to kick out American companies doing business in China it likely would have done that a long time ago and it hasn’t, largely because it does not want to kick out the jobs and the technology those companies contribute to China. I am always getting asked this question but I have not heard of one instance where it has happened.
3. What is going on with the trade talks? My response is that everyone keeps talking about the upcoming meeting between Presidents Xi and Trump as though their meeting is a done deal. In my view, there is only about a 50% chance there will be a meeting and then well under a 50% chance that meeting will result in anything at all. We are telling our clients now what we have been telling them pretty much since the US-China trade war started: this is more than a trade war. If it were just a trade war, China would have ordered more soybeans and we would be done with it. It is a technological war and it is a geopolitical war and therefore the odds of their being resolution are not good. On top of that, even if there is some resolution on tariffs, many other things (like the Huawei ban and various trade duties) will keep happening. Companies should be planning accordingly.
4. Are foreign companies leaving China? Foreign companies are not leaving China, at least as far as we can tell. I am not aware of a single client of ours who has left China and, in fact, we are busier than we’ve ever been in helping clients form WFOEs to go into China. Why NOW Is a Good Time to Double Down on Doing Business in China.
5. Are foreign companies moving their production outside China? Absolutely they are. All sorts of companies are and all sorts of our clients are. Some are telling their Chinese manufacturers that they need to set up factories elsewhere and some of these Chinese manufacturers have done so — mostly in Vietnam, Thailand, Malaysia, and the Philipines. Some are planning to reduce production in their China factories as they work to set up new factories outside China — mostly in Thailand and Mexico. Some have simply shifted their contract manufacturing from China to Vietnam or Thailand or Malaysia.
6. What about product pricing? What are Chinese manufacturers doing on this? We are seeing everything. We have some clients who are being refused any discount whatsoever from their Chinese suppliers and we have other clients who are getting big discounts from their suppliers and we have everything in between. Most are in between. See US-China Tariff Updates: What You Can (and Should NOT) do NOW.
6. What is happening on the tech side? Everyone is super cautious, which is exactly how the Trump administration wants it. The deals have dried up. Plain and simple. Last year our M&A lawyers must have handled a half dozen transactions (that closed) involving Chinese companies buying American or European companies or investing in them. This year I cannot think of even one. Chinese foreign investment into the United States and Europe has plunged. Technology licensing deals are way down as well.
7. Is China cracking down on foreign companies? What about China’s list of unreliable companies? Whenever China has problems with a foreign country or with its own economy (both of which are happening in spades right now), it starts cracking down on foreign companies. That is happening right now and we are seeing it with all the foreign companies that are coming to us with major compliance problems. Again though, this sort of thing is nothing new and this sort of thing can almost always be avoided by making sure both you and your company are in full compliance with Chinese laws. See Want to Keep Your Business in China? Do These Things NOW. A number of our clients have asked us to audit what they are doing in China to “make sure they are doing what they should be doing.” We typically suggest they have us do some or all of the following:
- Make sure their WFOE actually exists and is licensed to do what it is actually doing.
- Make sure they have the proper entities and licenses to do business in every city in which it is doing business.
- Make sure its trademarks and other IP have been filed in China.
- Have us conduct an employer audit to make sure it is doing everything right on the employee side.
- Make sure it is current with its taxes.
- Review lease agreements.
- Review contracts signed by the WFOE or by the parent company relating to China operations.
- Due diligence on suppliers/manufacturers and distributors, retailers, and e-commerce platforms to make sure that those relationships do not violate home country (US or EU or Australian) laws and to make sure that those companies are financially sound.
What are you seeing out there?