Less than a month ago, we wrote a post, entitled, How To Form A China Company (WFOE or JV). Hong Kong Entities. They’re Baaaaack. The gist of that post was that my law firm was now favoring the forming of Special Purpose Entities in Hong Kong to hold the soon to be formed Mainland China Wholly Foreign Owned Enterprise (WFOE) or Joint Venture (JV).  We wrote on how our position on this had changed due to China’s having recently become increasingly tough on company formations involving non-Hong Kong companies:

It is relatively easy to prove the existence and organizational structure of a Hong Kong company. The process is straightforward and the Chinese investment authorities understand the documents and readily accept them. This is not true for corporate documents from other countries. The Chinese authorities want documents that are similar to their own. They do not understand foreign company systems, and will often challenge perfectly standard documents from foreign jurisdictions that do not accord with the way they think the world should work. For example, the Chinese authorities will often demand notarized documents. When the notary is from a common law jurisdiction like the United States or England, they will object to the form of the notarization because it does not look like a Chinese or civil law country notarization.

In other cases, we have had Chinese authorities object to United States limited liability company documents because the officers’ titles do not match the equivalent terms in Chinese. For example, in most U.S. jurisdictions, a limited liability company (LLC) does not have directors and officers. Instead, the LLC is either member managed or manager managed. We have had Chinese authorities object to both forms of management because they do not understand the U.S. system. Of course, the issues can be even worse when the investor company is based in a system even more different from China, such as the Middle East, Central Europe or Africa.

All of these sorts of problems are solved if the foreign investor sets up a Hong Kong company and specifies the Hong Kong company as the shareholder of the Chinese WFOE or Joint Venture. For this reason, many of our clients will almost automatically plan to form a Hong Kong company as the first step in the China company formation process.

We received a not surprising amount of blowback to that post, both in the form of comments and in the form of a fairly large number of angry emails.  As I have written many times previously, virtually whenever we say anything that might lead anyone to believe that doing business in China involves little more than just walking in, we get push back, mostly from those whose incomes depend entirely on a smooth flow of China business. Anyway, we received plenty of communications saying or hinting that absolutely nothing had changed in China and that it was either all in our heads or due to our inability to negotiate China’s bureaucracy.

This is the “I told you so” follow-up post.

I just read a Financial Times article, entitled,  “China, India and Russia less business friendly,” on how “executives around the world” think China has become “less friendly towards business over the past three months,” as based on an FT/Economist Global Business Barometers Survey.  This survey is conducted every three months of 1,500 global senior executives.  According to the survey, of the four largest emerging market economies, only Brazil has eased up on business; China, Russia and India have gotten tougher. “The survey comes amid concerns that growth in Brazil, Russia, India and China – together known as the Brics – is slowing.” Brazil was the only one of the four Brics that more consider friendly than unfriendly towards foreign business.

I yearn for the day when China views getting “friendlier” towards foreign business as its best reaction to a slowing economy, rather than getting more “unfriendly.”

What are you seeing out there?


Not quite sure why, but I have been writing a lot lately about the risks of operating a business in China. A few months ago, I did a post entitled China Is The Risk. I See Clouds and a few weeks ago I did a post entitled Secure And Insecure Countries. In Light Of Egypt. An Open Thread. Both of these posts talked of the risks of being in China and sought to compare that risk to other countries.

In response to the Egypt post, a loyal reader sent me a link to a super-cool interactive country by country risk map compiled by Aon Corporation, a leading “provider of risk management services.” The map ranks countries from Low Risk to Very High Risk, with Medium-Low Risk, Medium Risk, Medium-High Risk, and High Risk in between those two extremes. The rankings are based on the following:

  • Exchange Transfer
  • War/Civil War
  • Strike, Riot, Civil Commotion, Terrorism
  • Sovereign Non-Payment
  • Political Interference
  • Supply Chain Disruption
  • Legal & Regulatory

Here are how various countries fared:

  • China —  Medium Risk
  • India —  Medium-Low Risk
  • Vietnam —  Medium Risk
  • Bangladesh —  Medium-High Risk
  • Thailand —  Medium-High Risk
  • Singapore —  Low Risk
  • Cambodia —  Medium-High Risk
  • Laos —  Medium-High Risk
  • Hong Kong —  Low Risk
  • Taiwan —  Medium-Low Risk
  • Japan —  Low Risk
  • Russia —  Medium Risk
  • Malaysia —  Medium-Low Risk
  • Indonesia —  Medium Risk
  • Egypt (before the street demonstrations) —  Medium Risk
  • Brazil Medium —  Low Risk
  • Mexico —  Medium-Low Risk
  • South Korea —  Medium-Low Risk
  • North Korea —  Very High Risk

Interesting. What do you think?

Just watched a ten minute or so movie on Goldman Sach’s website, entitled, “The BRICS Dream” [link no longer exists] (h/t to the Cal Poly MBA Trip Blog).  BRIC is an acronym for Brazil, Russia, India, and China and the movie, “led” by Jim O’Neill, Goldman Sach’s Head of Global Economic Research, notes it was Mr. O’Neill who created the BRIC acronym way back in 2001.

The thesis of this fascinating movie is that over the next 50 years, Brazil, Russia, India and China — the BRIC economies — are likely to become a much larger force in the world economy.  The movie maps out GDP growth, income per capita and currency movements in the BRICs economies until 2050:

The results are startling. At the projected pace, in less than 40 years, the BRICs economies together could be larger than the G6 in US dollar terms. By 2025, they could account for more than half the size of the G6. Of the current G6, only the US and Japan may be among the six largest economies in US dollar terms in 2050. The list of the world’s ten largest economies may look quite different in 2050. The largest economies in the world (by GDP) may no longer be the richest (by income per capita), making strategic choices for firms more complex.

The movie predicts a huge increase in the middle class of these four countries and, interestingly, sees Russia having the highest per capita income among the four, based in large part on its diminishing population.  O’Neill believes this rising middle class of the four BRIC countries will lead to massive car buying, and he forecasts China becoming the largest purchaser of cars by 2050.  The growth of the BRICs will lead to energy consumption worldwide increasing by 2.5% per year, in contrast to the 1.5% increases in the past.  O’Neill sees the stock markets of these four countries doing well even if they institute few structural changes, but becoming “fantastic” if they evolve in terms of their transparency.  O’Neill sees the currency of all four nations rising considerably between now and 2050, with China’s Yuan rising the most, at 289% between now and 2050.

All of these predictions are prefaced by many “ifs” and, as excited as I am about the economies of all four of these countries, (as well as many of the countries Goldman Sach’s calls the “next eleven,” particularly Turkey, Vietnam, Indonesia, Korea, and the Philippines), I recognize that so much can happen between now and 2050 that it is virtually impossible to make economic and investment predictions for 2050 with any real degree of accuracy.  This is even more true of the BRIC countries whose political stability is not rock solid — yes, I know Brazil, India, and, nominally Russia, are democracies.

Does make for great viewing though.