China tourism law

Kimberly Kirkendall,  a CPA with a ton of China experience and the CFO of Cleveland’s China Chamber of Commerce — and just an overall China powerhouse  —  posted the following on Linkedin the other day:

I’m in Sanya – often called China’s Hawaii. Talking about the island’s development (they’re aiming for both resort and tech) got me thinking about competition in the region. Hainan is a major destination for Chinese – for holidays, for retirees and companies for retreats. But they don’t have the volume of foreign travelers you see in Thailand or Vietnam. Why? The answer foreigners give is “its still China” – what’s that mean? Thailand, to western ears their language is soft. The resort areas cater more to foreigners than Thai’s, and the culture seems gentle, more calm body language. It feels like a relaxing holiday. The visa requirements are simpler. But Vietnam doesn’t have those same “attractions” – visas are difficult, it’s a “hustle” culture like China, and the language sounds similar to western ears. But the resorts are mostly foreign owned with foreign visitors. So….is it fundamentally because foreign travelers want to feel at home, not too far out of their normal? The Chinese wealthy population has made Hainan its destination, does that keeps foreigners away? Mexico is similar, the biggest resort destinations are ones w/ mostly foreign (Cancun) more than local (Puerta Vallarta) guests. Me? I prefer local, PV is my destination. What do you think?

As soon as I saw it I knew I would need to post on it, so here goes.

I love visiting Vietnam with my family. It’s one of my favorite countries in the world. I love the “hustle” of Ho Chi Minh and the history of Hanoi and the beauty of Halong Bay and the food and the people and its beaches and….. Hoi An is one of my favorite places in the world and if I were capable of living in a place with less than 2 million people and less than 30 good sushi restaurants, Hoi An would probably be first on my list. I also love visiting Thailand with my family.  I love the hustle of Bangkok and the beauty of Chaing Mai and Chaing Rai and the food and the people. And my family and I obviously love Mexico because we go there all the time. To Mexico City, to Guanajuato, to San Miguel de Allende, to Merida, to Puerta Vallerta and to Cancun (where a very good friend of mine lives) and I can hardly wait to go to Oaxaca next month for ten days to eat and enjoy the amazing food and art. But China, sorry but no. My wife and youngest daughter once joined me there for a couple of weeks and they both enjoyed Beijing (the Forbidden City is amazing, of course) and Shanghai (who doesn’t love the Bund?) and Qingdao and Dalian, but nobody has mentioned going back.

My eldest daughter and her boyfriend (now husband) did a six month Asia trip after they graduated college. Two words about my daughter: Project Manager. That is her job and that is her. She is the world’s best planner, the world’s best researcher and the world’s most organized person. If you want to know what sheets to buy for your bed you should ask her because she will have thoroughly researched it. If you want to know where to scuba dive in Asia, ask her because she will have thoroughly researched it and done it. When her and her friends go anywhere, she plans the trip and assigns the tasks. Her six month trip included Vietnam, Taiwan, Indonesia, Malaysia, Singapore, Thailand (where I and my wife and my youngest daughter met up with them), Myanmar, and Japan. No China, even though she has never been there. I’ve never asked her why. I just assume her extensive research convinced her that all these other countries would be a better use of her limited time and money.

Why is China not a popular tourism destination for Westerners? The following 14 reasons immediately spring to mind:

  1. It’s really crowded.
  2. People push. I mean really push.
  3. People yell. I estimate I’ve seen more yelling matches in China than the rest of the world put together.
  4. People try to cheat you. Often.
  5. People don’t talk to you just to talk to you; they talk to you mostly just to “hustle” you.
  6. You will not be made to feel welcome, not even by hotel and restaurant staff.  See A Post In Which I Bitch (Yet Again) About China Hotels.
  7. It’s polluted. Like really polluted. Like incredibly polluted in some places.
  8. It has major food safety issues.
  9. Bathrooms. Need I say more?
  10. You need a visa before you go.
  11. So much of China’s physical history has been destroyed and what is left is often neither well presented for Westerners nor easily accessed.
  12. China is a difficult place for foreigners who do not speak Mandarin and who do not like group tours.
  13. China executes foreigners for drug offenses.
  14. Slow and blocked internet.

My law firm has offices in Barcelona, Spain (and we just opened an office in Madrid as well) and Beijing. Pretty much every week someone will longingly engage me in a conversation about Spain, wanting to tell me about their trip to Barcelona or to Seville or to Madrid or to San Sebastian or to Mallorca or to Valencia (where one of our lawyers will be going for his vacation next week). I don’t recall a single time anyone has done the same about China. Most of our lawyers have visited our Barcelona office, including those whose work has little to nothing to do with Spain. None of our lawyers outside our China law team have ever talked of going to Beijing.

Those of us who constantly go to China for business know both how to minimize and deal with the problems listed above, but can you not understand why most people prefer not to have to deal with these sorts of things on their two weeks off from work? Kimberly, would you really tell someone who has never been to China to go there? Do you dispute any of the above? And if even only 5-6 of the above are true — and with all the incredible places to go in the world — does it really make sense for people to spend their limited tourism time and money on China?

Is the tourism trouble/reward ratio far better than I’ve painted it above? Is China merely undiscovered and ready to go viral as a tourist destination once people realize how wonderful it really is? Or do you agree with the picture I’ve painted?

Let ‘er rip people.

China lawyersPotential clients often ask our China lawyers, “what’s the worst thing that can happen if I don’t do ________.” My usual response is I don’t know or you get sued or you get arrested or you will never be allowed to leave China.” See Doing Business in China with Deportation or Worse Hanging Over Your Head. Whenever I mention prison or getting stuck in China forever I can “hear” the eyes roll on the other end of the computer or the phone because few take this risk seriously.

Guess what people. Get over your First World rule of law biases and start dealing with the real world, or as a friend of mine who regularly deals with China hostage situations is always saying, “this is China.”

The “this” about China hit me hard today via our China Law Blog Facebook page (go here to check that out where, purely coincidentally, my most recent post is how the portion of my Chinese TV interview from yesterday where I discussed hostages in China was completely deleted). Anyway, here is today’s story and it is filled with absolutely critical lessons for anyone doing business in China AND for anyone doing business with China who has any intention of ever going to China.

So I wake up this morning with a Facebook message from someone in trouble in China asking us to publicize his situation on our blog to help in a fundraising campaign. The fundraising campaign is here and it is titled, Being wrongfully sued and not allowed to leave China and rather than have me tell the story, I will pull it word for word from this campaign (see below) and then “unpack” it. Just as an aside, I visited the Getty museum in Los Angeles about a week ago and our tour guide used that word (unpack) before analyzing each and every painting and sculpture. The first time she used it I loved it but by the tenth or so time I hated it. This being your first time….

In 2013/2014, we started a personal training fitness gym in Shenzhen, China with 3 foreign partners. The initial agreement and plan between the partners was to grow the gym, however 2 years into operation, due to a variety of factors beyond our control, we could no longer afford to operate the business at the standard that we wanted. We had to pay high costs and find a way to close the business while respecting the staff and community.

The attempted transfer and closing process took many months while we interviewed potential investors and people who wanted to take it over. It ultimately came down to a young Chinese man who had spent many months in the gym, wanted to own his own gym and was getting to know the operations and the members. Unfortunately for us, this man’s intentions were not honest, and he manipulated the situation to his favour. Since we are foreigners in China, we were not knowledgable about certain legal processes and trusted him in this transfer. He devised a way to take over the business by paying the business’s then upcoming bills due, and some debts owed – amounting to RMB 217,000 (approx US$ 32,000). He then wrote up a pre-agreed contract stating that the RMB217k was a loan and that the business and equipment would serve as collateral should the loan not be paid back. Since we wanted to simply move on from the business, and were not able to handle the expensive monthly overhead, we agreed to this process, meaning we received nothing in the end for a business we had spent 3 years building, but would be free of the business liability.

This Chinese man is a loan shark, and once we had parted ways with him, believing everything was agreed to and wrapped up, we moved on with our lives.

Fast-forward two years, and unbeknownst to us, this man had filed a lawsuit, claiming that the business owed him the RMB 217k. The case was filed, and was ruled in his favor, since we had no knowledge of the case and thus never showed up to court to contest this man’s false version of events. It wasn’t until John tried to leave the country that we came to find out about its conclusion as he was told that he would not be allowed to leave China. In China the legal system greatly favours Chinese, and the entire case was processed and closed without our knowledge and thus no response from us, and as it stands now we are being ordered to pay a whopping RMB 250k ($40K).

We want to chance to set the record straight and show the court the documentation which shows the agreement we had and how this man has committed fraud. We want to re-open the case, and respond to the verdict that was passed without our knowledge. In order to fight the case we need to hire a lawyer and pay court costs and so are asking our family, friends and any citizens of the world who can support our cause and pursuit for the truth.

Initially we are trying to raise RMB 55K ($8K) to cover the legal and court fees, so we can do everything possible to clear our good name and release the government hold on John’s passport. This will be a long, difficult battle but we will keep you updated every step of the way and maintain full transparency throughout this process.

Thank you so much for taking the time to read this, and for your support, whether financial or just by sending positive energy and thoughts our way.

Now for the legal unpacking (that’s only by second time with that word) and an analysis of what likely went wrong and what probably should be done to try to solve it. The quotes from above are in normal font and our analysis is in italics.

  1. “He then wrote up a pre-agreed contract stating that the RMB217k was a loan and that the business and equipment would serve as collateral should the loan not be paid back. Since we wanted to simply move on from the business, and were not able to handle the expensive monthly overhead, we agreed to this process, meaning we received nothing in the end for a business we had spent 3 years building, but would be free of the business liability.”  Mistakes: Not using a lawyer with this contract. Based on the above, it very much appears that this was a loan contract for RMB217k and this person(s) did not fully realize that. Any competent lawyer could have told them that. I am guessing the contract was in Chinese — why wouldn’t it be as it was a Chinese transaction —  and that may also explain why it was not fully understood. Or maybe it was a situation where eagerness took precedence over common sense. Who knows? Bottom line is that you should never sign a contract without fully understanding it and you should virtually never sign a contract without the assistance of a qualified lawyer.
  2. Fast-forward two years, and unbeknownst to us, this man had filed a lawsuit, claiming that the business owed him the RMB 217k. The case was filed, and was ruled in his favor, since we had no knowledge of the case and thus never showed up to court to contest this man’s false version of events. Mistakes: Maybe none, or maybe this person received notice of the lawsuit but did not realize what it was. I say this because Chinese courts tend to be very good at getting their notices out and they also tend not to rule until it has been confirmed that notice was received.
  3. It wasn’t until John tried to leave the country that we came to find out about its conclusion as he was told that he would not be allowed to leave China. Mistakes: Chinese law allows the government to not allow people to leave who owe money. This is why our China lawyers are constantly telling people not to go to China if they MIGHT owe money and to get the hell out of China as quickly as possible if they are there. See Maybe Owe Money To China? Don’t Go There. 
  4. In China the legal system greatly favours Chinese, and the entire case was processed and closed without our knowledge and thus no response from us, and as it stands now we are being ordered to pay a whopping RMB 250k ($40K). Mistakes: I’m guessing a Chinese defendant would have had the same result as it sounds like a fairly garden variety loan agreement and this amount probably included interest and perhaps attorneys’ fees as well.
  5. We want to chance to set the record straight and show the court the documentation which shows the agreement we had and how this man has committed fraud. We want to re-open the case, and respond to the verdict that was passed without our knowledge. In order to fight the case we need to hire a lawyer and pay court costs and so are asking our family, friends and any citizens of the world who can support our cause and pursuit for the truth. Mistakes: Is it even possible to re-open the case at this point? I do not know but I doubt that it is. I could be wrong about this, but it seems to me that this person is doubling down on his mistakes by again not hiring a lawyer to figure out the best way to get out of this. Let’s just suppose it is not to late to try to “re-open” the case. In most countries of which I am aware, to be able to re-open a case like this you must not only show that you were not given notice of the case you also must show that if the case were to be re-opened that you have at least some chance of overturning the ruling on the merits. If this is a legal and valid and garden variety loan agreement, that chance may very well not be there. If re-opening the case is going to be impossible, no money should be spent on that route. It probably should instead be spent on trying to strike a deal with the lender and in return for whatever payment he accepts, a settlement agreement is signed (this settlement agreement should be in Chinese and pursuant to Chinese law) and then used to get the hold on leaving China lifted. 

But in the end, this person does need money to hire a Chinese lawyer (probably ideally based in whatever city in which the lawsuit was brought) to figure out how to figure out the situation and help this person get out of China.

China visas

Are you aware that nearly all of China’s major commercial centers allow you (or at least most of you) to visit visa-free for up to six days? Be honest, did you really know this? I ask because it seems like the China lawyers at my firm often have to explain this to our clients, including to those who go to China often and even to those with a China WFOE, Joint Venture, or Representative office. This 6-day visa free travel is relatively new (for most cities and provinces) and it has not gotten much publicity.

But since the start of this year you can enter into and stay in the following Chinese cities for 144 hours:

  • Beijing
  • Chengdu
  • Kunming
  • Qingdao
  • Shanghai
  • Tianjin
  • Wuhan
  • Xiamen
  • Hebei Province
  • Jiangsu Province
  • Zehjiang Province

To do this you will need a valid passport from any of the 24 Schengen treaty EU countries or one of the following countries along with transport tickets showing you will be leaving China (the PRC) within six days to a country (or is it just a city?) different from the country from which you are entering China:

  • Albania
  • Argentina
  • Australia
  • Bosnia and Herzegovina
  • Brazil
  • Brunei
  • Bulgaria
  • Canada
  • Chile
  • Cyprus
  • Croatia
  • Ireland
  • Japan
  • Korea (South)
  • Macedonia
  • Mexico
  • Montenegro
  • New Zealand
  • Qatar
  • Romania
  • Russia
  • Serbia
  • Singapore
  • UAE
  • Ukraine
  • United Kingdom,
  • United States

China criminal law

Yesterday we wrote on how our China attorneys were hearing (mostly by email) of increasing arrests of foreigners in China and of how clients and readers were writing asking if they should go to China or not. Yesterday’s post, Five Things to do to Avoid Getting Arrested in China, was an effort to address those issues. At the end of that post, we pointedly solicited reader help on what more people can do to avoid arrest in China. We have received a number of emails from people, most of which said little more than “just don’t go.”

But we also received a very thoughtful comment here, expertly detailing the risks of working in China without dotting all of the i’s and crossing all of the t’s.

As someone who has lived and worked in China for a number of years, I do not think that being American or Canadian escalates the situation. We have seen recently a number of South Africans and people of other nationalities get caught too.

It is important to remind people that they are subject to Chinese law while in China and that the authorities can impose consequences including that of having issues for one to leave the country if the consequences are not served. The officer usually has control as to the consequences given. The embassy or consulate can just make sure that you have not been harmed physically but do not have any other power to remove you from the situation.

While the working illegally issue commonly happens to teachers, it is not limited to them, but also people in other professions. This comes in the form that you mentioned regarding not holding a work permit and residence permit, but also in the form of working for a company that is not the one tied with such documents (such as an agent puts you under their books).

I would add the caution regarding contracts that mention that the individual can come on any visa and that it can be converted to be allowed to work because that is a huge red flag. These days most non-“Z visa”s cannot be converted within China to a work permit and residence permit type of visa, the only one that allows working legally.

In addition, the job title is important as it regards to teachers. Many people have started English language companies which is basically a consulting or a culture company and will hire a teacher in another position because of not being able to legally employ them as a teacher and if the company is inspected, then this can create an issue for them.

There is also some basic information I would recommend that people keep in mind, besides those that you mentioned –

(a) Binding language is Chinese. English is a convenience.
(b) Only their employer can assist with cancellation of work permit receipt and release documents for the employee to move on to another job in the future. Leaving the country and starting again isn’t necessarily an option anymore because often times these release documents are still required.
(c) Implementation of many laws differs down to the city and/or district level.
(d) In your text when you say “the wrong visa” this is supposed to mean a visa that is different from the purpose of your visit

If one has set up a company and has a company to company agreement with another firm and they are the subject of providing the service to the client, I would say that this is usually a suitable method of working with multiple companies, BUT if there are special provisions for the industry then it is VERY risky (e.g. teaching related). It’s important to note here that freelancing is not allowed in China.

To summarize this comment from a China lawyer’s perspective: your China employment relationship is very complicated and done wrong you can end up in jail. The only relevant portion of your employment contract is the Chinese portion and if you do not speak Chinese you have no clue what it says and, most importantly, you have no clue whether the English language portion accurately translates the Chinese portion (I can tell you right now that the odds are about 100 to 1 that it doesn’t). And even if you are able to read the Chinese portion, unless you have a comprehensive knowledge of China’s employment laws and the employment and employment related laws that relate specifically to your potential new employer and to the specific locale in which you are working, you really do not know what you are doing and you should seek out qualified assistance in the form of a China employment lawyer fluent in both Chinese and in whatever language in which you are comfortable communicating.

I will now respond below to specific portions of this comment, all of which I have italicized.

“As someone who has lived and worked in China for a number of years, I do not think that being American or Canadian escalates the situation. We have seen recently a number of South Africans and people of other nationalities get caught too.” I 100% agree that the risks apply to foreigners of all nationalities in China. I only highlighted Canadians and Americans because of the recent spat of people from these countries being arrested for what many view as retaliation for the US-China Trade War and for the Huawei arrests. If your country is in China’s disfavor, you are at increased risk.

“It is important to remind people that they are subject to Chinese law while in China and that the authorities can impose consequences including that of having issues for one to leave the country if the consequences are not served. It is very important to remind people that they are subject to Chinese law while in China and I would also mention that Chinese criminal law is very different from US or EU or Canada or Australia criminal law. Last month I guest lectured for two days (and had a blast) at Warsaw University Law School. My second day lecture (4.0 hours!) was on Chinese laws that differ Western laws and how those differences impact foreign companies doing business in China. One of the things I briefly discussed was how China criminalizes certain things that are not crimes in the West. The following slides provide three examples of this.

 

If you are going to be living and working and doing business in China, you must know the laws and you must not violate the laws. I would also add that it can be relatively easy to face criminal charges as an individual for the wrongdoing of your company. We most often see foreign businesses get into criminal trouble in China is for violating China’s customs laws (See China’s Detention Of Foreigner For Alleged Customs Violation Should Be A Strong Warning), doing business in China without a legal entity (See Doing Business in China Without a WFOE: Will the Defendant Please Rise). For foreign individuals, it is undoubtedly for not having a proper employment visa.

“While the working illegally issue commonly happens to teachers, it is not limited to them, but also people in other professions. This comes in the form that you mentioned regarding not holding a work permit and residence permit, but also in the form of working for a company that is not the one tied with such documents (such as an agent puts you under their books).” I 100% agree. The only reason I highlighted foreign English language teachers is because they are so susceptible to being duped into working illegally in China, either because they do not even realize they are doing so or because they buy into the idea that they are somehow safe because “everyone else is doing it.”

“I would add the caution regarding contracts that mention that the individual can come on any visa and that it can be converted to be allowed to work because that is a huge red flag. These days most non-Z visas cannot be converted within China to a work permit and residence permit type of visa, the only one that allows working legally.” Very true. Our China employment lawyers constantly receive emails from foreigners planning to go to China to work and then, if it works out, their employer will help them get a Z visa. Our advice is that you should generally not go to China as an employee unless and until you are certain that you will be working there legally from day one. Many Chinese companies LOVE bringing on illegal employees because this gives them tremendous power over these employees. I explained how this can play out in Trust Your China Employer. Just Kidding:

Our China employment lawyers often get requests from individuals looking for help negotiating an employment contract with a Chinese domestic company. The first thing we like to do in this sort of situation is to make sure hiring our client by the Chinese company can and will be done legally. But when we suggest the necessity of our making sure of this, the response is often that we have nothing to worry about because the Chinese company would not be doing this illegally.

WRONG.

Truth is many Chinese companies prefer to hire foreigners illegally to legally because doing so can save them a ton of money and is usually pretty low risk — at least for them.

I thought of this when I read a very thoughtful and well-written article today, entitled, The detention of two Irish women who were working side jobs at an unlicensed school in Beijing shines a spotlight on the illegal English education market in China. The article (as you probably have guessed from its very long and descriptive title, is about two teachers from Ireland who were detained in prison for more than a week for working illegally in China. Both these teachers had visas that allowed them to work full-time in China, but only with their one employer who secured these visas for them. These two teachers had taken lucrative part-time teaching jobs on the side and it was those jobs that got them arrested.

The big takeaway for anyone looking to take a job in China though should be the sections entitled, “Illegal employers have no qualms about hiring foreigners illegally” and “when the illegality is discovered, it is the foreign worker who gets the blame.”

The article talks about someone who “ran an experiment” by applying for every English language teaching job listed in Beijinger Magazine and clearly stating he could not qualify for a work visa. Only one out of the twenty potential employers declined his application! In other words, 19 out of 20 were happy to have this foreigner work for them illegally. The article notes that under  China’s immigration law, foreigners who work illegally in China can be fined 5,000 to 20,000 yuan and detained for between 5-15 days and then deported. “A lot of the burden and blame falls” on the employee who works illegally in China and therefore, as the US Embassy website makes clear, “it is up to each individual to evaluate potential employers before signing a contract.”

Binding language is Chinese. English is a convenience. Correct. The binding/official language of a dual language contract will almost always be the Chinese portion, no matter what the English language portion of your contract might say. We discussed this in Dual Language China Contracts: Don’t Get Fooled!

Can’t believe this is still happening, but it does, and in numbers that would likely surprise many people. The “this” to which I am referring is foreign companies signing dual language contracts without knowing exactly what the Chinese language portion of their contract says. This is really risky dangerous and below I explain why.

Many dual language Chinese-English contracts are silent on which language controls. For some unknown reason, foreign companies far too often just assume that the English language portion controls or they just assume that it does not matter because the meaning of both the English and the Chinese portions is exactly the same. Wrong, wrong, wrong.

What language controls when you have a dual-language contract?  If both languages say the same one language controls, that one language will control. If both the English language and the Chinese language portions say the Chinese language portion controls, the Chinese language portion will control. Similarly, if both the Chinese language and the English language portions say the English language portion controls, the English language portion will control. These are the easy and safe examples.

It is everything else that so often cause problems for American and European and Australian companies in  trouble.

If both your English language and your Chinese language portions are silent as to which portion controls, the Chinese language portion will control in Chinese courts and in China arbitrations. In real life this means that if the English language portion of your joint venture contract says that you get 10 percent of the joint venture’s revenue  but the Chinese portion says you get 10 percent of the profits (which will of course be way less than revenues) you will have no legal basis for claiming anything more than 10 percent of the profits. Not surprisingly it is joint venture contracts and licensing agreements where our China lawyers most often see this sort of meaningful dichotomy between the English and the Chinese portions of the contract.

Of the hundreds of dual language contracts proposed by Chinese companies and reviewed by one of my firm’s China attorneys, we’ve never seen a single one where the Chinese portion was less favorable to the Chinese company than the English portion. But we’ve seen plenty where the Chinese portion is better or much better for the Chinese company than the English portion. Chinese companies love using a contract with an English portion that is more favorable to the foreign company than the Chinese portion and then relying on the English speaking company to assume that the English language portion will control.

But what if the English language portion explicitly states that it will control? This works right? Not necessarily. If the Chinese language portion also explicitly states that it will control, the Chinese language portion will control under Chinese law. If the Chinese language portion is silent or says that the English language portion controls, the English language portion will control.

As we noted in China Contracts: Make Them Enforceable Or Don’t Bother, it usually makes sense to draft contracts with Chinese companies in Chinese with an English language translation. But this also requires that if that contract is going to be enforced in China (as should usually be the case), you absolutely positively need to be certain that you know exactly what the Chinese language portion of that contract actually says. No matter what the English language portion of your contract says, it behooves you to know exactly what the Chinese language portion says as well.

In other words, if you are not truly able to read and understand Chinese, you probably do not know what your contact says. And if it is an employment contract that you do not fully understand, you could be putting yourself at serious risk.

“Implementation of many laws differs down to the city and/or district level.” Again, correct. And this is particularly true of China’s employment laws. See China Employment Law: Local and Not So Simple.

Bottom Line: Living and working and doing business in China is way more legally complicated than ten years ago. This means that the likelihood of you going astray of Chinese law is considerably higher as well. When you then add in that China’s ability and desire to catch foreign companies and foreigners operating illegally in China is higher now than it has ever been, you can see why it is so critical that you make sure that both your company and you are operating in China within the law. If you are not already operating legally, you need to start doing so now and if you cannot, you probably should leave China or not go there at all.

What are you seeing out there?

 

 

 

Yesterday, in Would the Last Foreign Company in China Please Turn Off the Lights: A Sort of Part 2, I wrote about a Wall Street Journal article on foreigners are leaving China. In that post, I discussed the recent arrest of Meng Wanzhou and Chinese government threats by the Chinese government against the United States and Canada for that arrest. A lot has been written about how China may retaliate against US and Canadian businesspeople should Ms. Wanzhou not be released and soon.

I noted China’s foreign ministry’s response to Meng Wanzhou’s arrest, assuring foreigners that if they abide by China’s laws they will be fine:

China’s foreign ministry has said: “China always protects the legitimate rights and interests of foreigners in China. But they should also abide by all Chinese laws and regulations.” See this Financial Times article, Chinese and US executives worry after Huawei CFO’s arrest. Right now anyway, I pretty much take them at their word, but this is a double-edged sword. This means that if you are abiding by Chinese law you should be fine, but it also very likely means that if you are not, you are likely at great risk.

I then listed the following seven things which foreign companies should do to avoid finding themselves at cross-purposes with the Chinese government:

  1. If you are doing business in China without a Chinese company (and by China, I most emphatically do not mean a Hong Kong or a Taiwan company), you had better be damn sure you do not need a company, especially since the odds are that you do. Doing Business in China Without a WFOE: Will the Defendant Please Rise.
  2. It means paying whatever taxes you or your company might owe. See China Taxes, Getting Legal, and Some Good News.
  3. It means having your visa and the visas of all of your employees in good order. See China Visa FAQs.
  4. It means not deciding you are operating legally in China based on some crap you’ve read on the Internet that feeds into your desire to believe that you are. See China Law Online: It’s All Wrong.
  5. It means protecting your company from your China employees because the odds are good it will be one of your China employees who leads to your downfall either by reporting you to the authorities or by suing you and thereby exposing something you are doing that you should not be doing. Trust us on this one. Please. See China Employer Audits: The FAQs.
  6. It means that if you are not 99.99% certain you are operating in China completely legally you either immediately do something to change that or you immediately leave the country and you take all of your foreign employees with you. And if for some reason you don’t care about one or more of your foreign employees getting into big trouble in China, note that people who go to jail for something that their company do have a tendency to sue their company.
  7. If you are in a dispute with anyone in China regarding money, you should consider paying it and getting a valid and legally sound  release in Chinese making clear that you paid it. See Maybe Owe Money To China? Don’t Go There. Or you should consider immediately leaving China.

I then promised we would today “discuss some specific factors our China lawyers look at to determine the level of risk people and companies face in China.” More specifically, I am going to address what to do to avoid being detained in China, like this person here who is seeking funding to get out.

Let me start by noting that one of the things our international lawyers have long done is provide companies and individuals an assessment on their risks on going to China or staying in China. We have taken to calling this our “China detention risk assessment package.” What we do as part of that assessment package is gather up as many facts as we can about why the person is going to China, what the person has done that might increase or decrease their risk of being held in China, and where exactly that person will be going in China and with whom they will be meeting and why. We tell them right up front that we will never tell them there is no risk in going or staying in China because there is some risk in whatever we do, including just crossing the street. And yet, even the risk of crossing the street can vary based on a number of factors, including (as you can see by the video on crossing the street in Vietnam), the country. We have done these sort of risk assessments for a whole host of countries, but in the last fifteen years, I estimate about 90% of them have been for China or for Russia.

In doing these risk assessments we look at the following, among other things (For various reasons, I do not want to reveal everything):

1. What has our client done? Who might it have angered?
2. Who exactly is our client? What exactly does our client do? Is what it does overall good or bad for China to which he or she will be going? To what countries is he or she tied?
3. Where in Greater China will our client be going? Some cities in the PRC are riskier than others. We’ve dealt with Hong Kong, Macau and Taiwan? We’ve looked at the odds of someone getting seized in Cambodia for problems in China.
4. What about having the meeting somewhere near China? Is that possible, and if it is, where will the risk be lowest of China exerting its authority? How can we minimize the risk of our client inadvertently finding him or herself in China? We once had a client concerned about China, but badly needed to go to Vietnam. We researched airlines and routes to try to determine the one least likely to divert to China in an emergency.
5. What can our client do to reduce its chances of being detained in China before going there? Oftentimes there is quite a lot that can be done.

Whenever we write about China detentions or China hostage situations, we get a slew of emails from people saying that we are exaggerating this risk. In this post we have been as careful as we can be not to quantify anything so as to avoid such a claim. But if you think this is rare we urge you to Google “China hostage” and “detained in China” and read for about an hour. That way it will be you to estimate the frequency and not us.

What though do you do if you are already in China and you have a problem? Generally, you get out as quickly and quietly as you can and you enlist qualified help in doing so.

The bottom line is be careful out there, even when just crossing the street.

 

China product defect lawyersAs most of you already know, getting defective products from China manufacturers is almost always a possibility. In many cases, foreign buyers frustrated by bad product simply refuse to pay their Chinese factory. Often the unpaid amount is substantial. The foreign buyer then moves on to a new factory. This new factory is often located in the same general region as the former factory. The Chinese factory virtually never files a lawsuit in this situation. So the foreign buyer then starts believing it is off the hook. But in China, matters like this are almost never that simple.

Most factories in China work with a network of subcontractors. So an unpaid invoice to a single factory usually will impact a large number of smaller businesses. Sometimes even an entire village will be impacted by one failure to pay. When the nonpayment is in a significant amount, the failure to pay can mean the salaries of many (sometimes most) of the local residents do not get paid. This leads to social unrest, which is a major concern of the local authorities, who then seek to work with the factory to try to secure payment. The legal issues (like the defective product) are not of concern. The factory and the local authorities will simply seek funds required to calm down the local unrest. These matters are not usually viewed as a business dispute and the court system is seldom used to try to resolve it. The factory never tells anyone the reason for non-payment was defective product; it instead almost always blames nonpayment on an unjustified default by the foreign buyer.

So long as the foreign buyer remains outside of China, there is little the factory and the local authorities can or will do. However, if the foreign buyer or an employee of a foreign buyer travels in China, the risk of some form of non-court or openly illegal action being taken against the foreign buyer is high. For this reason, we advise our clients to take great care when traveling in China if there is any dispute about their having failed to make a payment of a substantial claim to a Chinese factory. This is particularly important when the factory is a major employer in a specific district. The risk level rises exponentially if the foreign buyer travels in any area close to the district where the factory is located.

So what can happen?

a. Hostage taking. The Chinese side will arrange a meeting to take place at the factory or in a hotel that cooperates with the factory. The factory staff will obtain the passport of the foreign buyer. After the passport is obtained (stolen or taken by force), the factory holds the buyer captive either in a factory dormitory or in the cooperating hotel. The Chinese call this a “soft kidnapping” because no physical threats are made. The factory simply states: we won’t let you leave until after you pay the bill. If the police are contacted, the police will usually say: “It’s none of our business. You should pay the bill.” If the local authorities are contacted, they will usually say “It’s none of our business. You should pay the bill.” Resolving the matter without making payment is nearly impossible.

b. Exit ban. Because of the potential for social unrest, the Chinese authorities usually will work to assist the Chinese factory in getting paid. One way they do this is through an exit ban. The foreign buyer is permitted to enter China, but when the buyer seeks to exit China, permission will be refused. The foreign buyer is told: “You will not be permitted to leave until after you have resolved your payment dispute with the factory.” Exit bans are only approved at the national level and a factory that makes a false claim will be penalized. This is why hostage taking is more common.

So what is to be done?

The easy way to resolve the matter is to pay the entire claim in full. In the alternative, the foreign buyer can avoid being taken hostage or an exit ban by staying out of China. Often neither of these solutions is practical.

So what happens most often is that a partial payment is made pursuant to a settlement of claims agreement. For a settlement to work well, the basic rules are as follows:

  1. The agreement must be in Chinese and enforceable in China. Chinese authorities typically ignore English language agreements enforceable outside of China.
  2. It is normal to include in such an agreement standard settlement language: the creditor takes payment in full settlement of all claims; the creditor agrees not to file a legal action anywhere in the world; the creditor agrees to maintain confidentiality; the creditor agrees not to contact any PRC government authority.

If you have a settlement agreement that meets these above rules the local police and the exit authorities will normally take the side of the foreign buyer and you should be safe from being held hostage or blocked from leaving China. If the payment settlement agreement does not comply with the above rules, it is a waste of time and paper and money.

In general, in the case where there is payment in full or the case of a partial payment under an enforceable written settlement agreement, the risks I write about above will be resolved. I have never experienced an instance where a Chinese entity took anyone hostage or pressed for an exit ban after getting paid and signing an enforceable written settlement agreement. For this reason, even though our China lawyers we have drafted dozens of these settlement agreements, none of us have any experience in having to provide one of these settlement agreements to PRC authorities to try to convince them to free a hostage or lift an exit ban after a formal settlement has been reached.

But on the flip side we also have a lot of experience with companies that have either made a partial payment to their Chinese factory without getting a written settlement agreement or getting a written settlement agreement that does not comply with the two rules set forth above. Our experience in these situations has been uniformly bad and in most instances our clients have had to pay the full amount allegedly owed (and fast) to resolve their crisis situation.

Even in those cases where the reason for non-payment is because of product defects, no authority in the PRC will accept a simple claim from the buyer on this issue. The only way to be sure the PRC authorities will take any notice of the defect claim is by the buyer filing a lawsuit in its home country or (even better) in China making a claim for the defect. Anything short of that will simply be ignored. You can show the Chinese authorities a pile of emails 10 centimeters thick and they will be ignored. You can show them an inspection report and that will be ignored. The only thing they will get their attention is a formal lawsuit with service pursuant to the Hague Convention brought by you against your China supplier. We have done many kidnapping negotiations where our buyer-clients believed they could make the claim that nothing was owed due to defect. This claim never works. The police just laugh and walk away. The local government officials just hang up the phone. On the other hand, presenting evidence of formal legal proceedings where service was properly provided has always worked.

As they say on the cop shows, “Let’s be careful out there.”

For more on dealing with defective products from China check out the following:

China LawyersI often internally cringe when listening to someone back from their first two week trip to China. Those people virtually always come back raving about the place and talking as though it is flawless. Some amazing combination of Paris and Fiji or something.  That’s fine, but what too few seem to realize — and which I am going to have to write about somewhat elliptically for this to stay up on the net — is that at its heart, China can be a risky country. I am not telling anyone to be afraid or not to go there, but I am saying that it ain’t Kansas.

Directly and indirectly from people who call the China lawyers at my firm and from friends who live in China and from what I read, I am sensing there has been an increase in foreigners getting into legal trouble in China. Criminal trouble. Yes, in nearly all of these cases these foreigners did something stupid . . . but still.

Let’s ignore fault and blame for now and get straight to practicalities. Do not contest your cab fare and then get into a an argument with your taxi driver in China. Because if you end up coming to blows, there is a decent chance you will end up in jail and there is even some chance you will end up in jail merely for not paying. I do not know what the odds are in either situation but I do know that it happens more than most people realize.

The same is true of bar fights. In many countries the police will take both inebriated fighters to jail and release them a day or two later. But in China it is not unheard of for the foreigner to face years of prison time.

What should you do to prevent these sorts of problems? One, let it go. You’ve been scammed out of ten dollars? Put that in perspective and move on. You’ve been dissed by some loser at a bar? Walk away. Disarm that person with humor. Be the rabbit. Two, if you are arrested and given an offer that will involve you quickly getting freedom, consider taking it, because it probably will be the last offer you get. And whatever you do, don’t believe it will all just eventually pass over, because if anything it will get worse. Your Embassy or Consulate will usually do whatever they can to help you, but that oftentimes consists of little more than alerting your relatives and giving you a candy bar or two. It’s not that they don’t want to help or are unwilling to help, it’s just that legally there is very little they can do to help.

Whenever we write posts like this we get comments and/or emails accusing us of deliberately scaring off people so as to pad our own pockets. Wrong. Our pockets get padded the more people go to China, not the less. No, we write posts like this because we do not want to see foreigners (mostly young foreigners) get into trouble in China. So don’t. Please.

There are all sorts of other ways foreigners can and do find themselves behind bars for doing things they never realized could lead to criminal prosecution, and the below posts detail some of them:

Your thoughts?

UPDATE: On a somewhat related topic, Foreign Policy Magazine just came out with a hard hitting article on hostage taking to ensure debt repayment, entitled, Hostage Taking Is China’s Small-Claims Court: Everyone in China — including the police — treats kidnapping as just the price of doing business. Wow.

Sinosure debt lawyersEvery month or so, one of our China lawyers will get an email from someone who is worried about going to China for some reason or another. Sometimes it is because the person has a criminal record somewhere else in the world. Sometimes it is because the person had some sort of problem in China the last time they were there. Most commonly, it is because the person was with a company that owes money to someone in China or was with a China WFOE that blew out of town, leaving debt in its wake. See A China WFOE Shutdown, Baltimore Colts Style.

The below is an amalgamation of the typical emails our China attorneys keep getting, along with our by now fairly standard response.

I am the general manager of an American based company which defaulted on its debts to Chinese suppliers. I signed my name in the sale contracts which were for the most part simple one page contracts.
I have been contacted directly by suppliers as well as by Sinosure lawyers stateside.
Although I am not an owner officer director shareholder legal representative I worry my name could be in a computer system for detention if I were to go to china then try to fly home from a major airport.  I am mostly concerned about this because Sinosure has my name as do suppliers.
I should have always used the owner’s signature stamp on the contracts but unfortunately I sometimes signed my name to them. I knew using my name could be an issue if the company later defaulted I could be listed as someone to detain.
I am now being hired by a completely unrelated company and they want me to travel to China. I am very worried.  Although I may not be an officer, my name is on those contracts and I know how it can “get confusing” in China when they just want to detain a debtor whether the correct one or not.
Can you advise?
Am I at high risk for being detained when Sinosure is sending me e mails and letters?
I refer them to the company lawyers and frankly it’s been over ten months and several Sinosure lawyers have given up because the company is insolvent.
I need this new job but need your opinion on my risk. I will pay your fees to talk with me.
Thank you
And the below is our typical response.
You are at some risk of being detained, more likely by a company owed money than by the government. How great is that risk? That will depend on the company(ies) to whom the debt(s) are owed, your exact role with the companies that owe the money, the cities you will be visiting and the amount of the debt.
About all we can do is review your factual situation and all relevant documents and then give you a very general risk assessment. The problem is that there is a 90+ percent chance our assessment will say that you are at some risk and it will set forth various ways you can try to minimize that risk, but in the end, I doubt it will say you are at no risk and I doubt it will say you will almost certainly be detained if you go. In other words, it will essentially just tell you what you probably already know.
What have you seen out there?

China LawyersLet me start with the following two propositions:

  1. I have zero inside information about Uber in China and about all I know about Uber’s business anywhere is that I love Uber and use it all around the world and I order my lunch from Uber Eats probably twice a week.
  2. I think Uber did the absolute right thing by selling most of its China operations to Didi. I base this less on what I know about Uber’s business and more on what I know about doing business in China.

The Washington Post, in its article, Why Didi Chuxing is buying Uber in China, has this to say about the deal:

Didi Chuxing, Uber’s archrival in China and the largest ride-hailing service in the country, is buying Uber’s China operations.

The deal has a lot of advantages for Uber, which is privately valued at $68 billion. The San Francisco company will receive a $1 billion investment from Didi, according to individuals familiar with the agreement. Uber, which will maintain its brand in China under Didi’s ownership, will receive a 17.7 percent stake in Didi, according to a press release sent from Didi. The terms are evidence that Uber put up a strong fight and that both sides had a lot to gain from a partnership.

It then gives us the obligatory company quotes about how the two companies working together will be able to achieve so much more than had they remained apart and how their deal will set the “mobile transportation industry on a healthier, more sustainable path of growth at a higher level.”

Yada, yada, yada.

Many years ago, I spoke at a high level conference in Hong Kong for a particular industry. My talk was on what these companies needed to do from a strictly legal perspective to get into China. I talked about the logistics of going into China as a joint venture, as a WFOE, and by staying outside of China and simply licensing their brand names and technology to Chinese companies. I was originally supposed to speak for around 45 minutes and I prepared my talk accordingly. But about an hour before my talk, the organizer asked me to do whatever I could to “stretch it out to 75 minutes” because one of the speakers scheduled for later that day had fallen ill. I had no problem agreeing as I speak without notes and always adjust the length as I go by adding or subtracting examples or by riffing more or less on a point.

So this day I would obviously need to riff more and I did. Oh how I did. Whoops.

At one point, I started riffing on the differences between joint ventures that work and those that don’t and on how joint ventures tend to fail as soon as the Chinese side believes it no longer needs the foreign side. Then after I said that, I decided I would use this particular industry as an example and as I started doing that I starting musing out loud on how I did not understand what it was that Western companies in this industry had to offer Chinese companies and that when I had asked Western companies what would allow them to to outcompete their Chinese competitors, their answers were vague at best.

This did not make the audience very happy at all, and after my talk a handful of participants rushed me to give me the same weak explanations I had already heard — all given with near religious zeal. As far as I know, no Western company has succeeded in this industry in China yet and it is looking like one never will.

Why do I bring up that event in this post? Because Chinese companies will almost always (though not always) be able to maintain lower cost operations in China than a Western company and so Western companies without other advantages generally don’t succeed in China. For some of the reasons why this is so, check out Buying A Chinese Company? Why China Deals DON’T Get Done.

Is this what happened with Uber?

Uber founder Travis Kalanick pursued the China market fiercely, and has made dominance in China a top priority. He visits the country frequently — attempting to woo everyone from local government officials to city police forces, which had cracked down on ride-hailing services (China legalized ride-hailing services in July). His first call in the morning was to his colleagues in China, the individuals said. The company entered the China market in 2014.

But the battle with Didi was costing both companies huge sums of money. Uber reportedly spent $1 billion last year. In China, they were neck-in-neck in a race to the bottom, frequently lowering their prices to lure consumers and constantly raising money to outdo the other. In the end, neither company was profitable in China.

At some point, it looks as if reality set in.

If true, Uber’s sale was both brilliant and timely. Uber gets a stake in China’s ride hailing service without taking on massive risk. Equally importantly, Uber gets to contribute and profit from its core expertise, without having to so much get into the muck:

Selling itself to Didi was a way for the company to stay competitive in China without burning through its cash. The merger will tie the fates of the two companies, both of which have global ambitions, together. As part of the deal, Baidu and other Chinese shareholders of Uber will also receive a 2.3% economic interest in Didi Chuxing. Under the agreement, Didi Chuxing will also obtain a minority equity interest in Uber. Cheng Wei, founder and chairman of Didi Chuxing, will join the board of Uber. Kalanick will join the board of Didi Chuxing.

One big benefit Didi may get from the deal are software algorithms that Uber has developed. For far longer than the four-year-old Didi, Uber has invested in hiring data scientists and engineers who write code to match drivers with passengers, essentially triangulating people’s locations in real-time and then predicting supply and demand. Top talent in data science is still hard to come by, said Didi Vice President Stephen Zhu, in a recent interview with The Washington Post. To help identify and recruit talent, the company announced a $100,000 prize in machine learning — a branch of computer science associated with artificial intelligence, prediction, and data mining — in the U.S. earlier this year.

In the long term, Didi’s success will depend on its artificial intelligence algorithms, Zhu said. “Every user and driver have their own preferences and patterns — and we have to match them all in a second,”he said. “The core is artificial intelligence, in essence, the pattern of how people move around in big cities.”

I guess all I am saying is that companies — especially SMEs — should not be so quick to demand “full control” over what they do in China (via a WFOE or a Joint Venture), and should think longer and harder about how they can stick their toes into China via licensing deals and distributorships. See Negotiating with Chinese Companies: Distribution Agreements with no Joint Venture Required.

Our China lawyers get calls all the time from America, Australian, and European companies seeking our help in getting them out of China by extricating them from their joint venture or by helping them close down their WFOE. But I truly cannot remember an instance where we have been called to help a company get out of a well crafted China licensing agreement or China distributor relationship. Of course, the lack of these calls may be due in equal parts to the fact that getting out of a contract — especially one at the end of its duration — is usually a piece of cake, but still.

Just something to consider….

Chinese Tourists

I just this weekend returned from a one week Tokyo bizcation (business and pleasure), where I got my fill of great food, great temples, great cherry blossoms and Chinese tourists. But rather than me go off and tell you what I saw of the Chinese tourists, I will instead discuss how the Japanese are reacting to them, starting with this article from The Nanfang entitled Chinese Tourists Rampage Through Japan’s Cherry Blossoms.

Continue Reading Chinese Tourists and China-Japan Relations