How to negotiate with Chinese companiesIn this series of posts I am looking at themes explored by Lucian Pye in his work Chinese Commercial Negotiating Style. Pye concludes that the way most Sino-Foreign negotiations are conducted helps the Chinese side apply its preferred strategies and tactics. My first post looked at how Chinese companies tend to control the preliminaries during what I have called the “courtship” phase. The second post considered what Pye has to say about the Chinese tendency to prefer agreements on generalities. In this third post I examine what he has to say about specific Chinese negotiating tactics.

According to Pye, Chinese negotiators tend to use the following tactics:

Open with flattery — In response to flattering remarks the foreigner feels compelled to give an enthusiastic affirmation. The foreigner is then called on to give an emphatic denial of a feigned, self-deprecating remark. This puts the foreigner on the back foot from the outset.

Operate on two levels — There is the manifest level of bargaining about the concrete and there is also the latent level at which attempts are made to strike emotional bargains based on dependency. Chinese negotiators seek relations in which the foreigner will feel solicitous toward China, thus implicitly becoming a protector and more a superior than an equal.

Focus on mutual interests — Westerners like to think of themselves as conciliators. The Chinese tend to reject the principle of compromise and prefer instead to stress mutual interests. When mutual interests have been established it is easier to ask the foreign party to bear a heavier burden without protest.

Use meetings as seminars — Negotiations are seen partly as information-gathering operations. Foreign competitors are played off against against one another to extract maximum technical intelligence from presentations. Negotiating sessions are used frequently for training purposes. The foreigner is encouraged to perform so as to impress the passive Chinese host. The obliging guest entertains in repayment for hospitality and brings “gifts of knowledge”. Put simply, Chinese companies often claim to want to do a deal with you when all they really want is to get access to your technology or know-how. I cannot stress enough how often our China lawyers see this sort of situation.

Blur the lines of authority — You can’t tell who reports to whom or where the apparent leader fits in the hierarchy of the Chinese company. Negotiating teams tend to be large but the lines of authority are diffuse and vague. Chinese negotiators are often unsure of their mandates and of the probable decisions of their superiors. They therefore tend to give inaccurate signals about the state of negotiations. Foreigners persist in trying to find a particular person who has command authority at each level. In China it cannot be assumed that power is tied to responsibility. Proof of a person’s importance often lies precisely in their being shielded from accountability.

Never say “no” — Chinese negotiators will frequently seem to be agreeing when they say something is “possible” but often this is an ambiguous way of saying “no”. They will often respond with silence to a proposal and then at a much later date suddenly return with interest.

Never telegraph their next move — Chinese negotiators don’t telegraph their next moves through displays of emotion. The level of friendliness or impersonality remains the same whether negotiations are heading for success or failure. This brings surprises. Warm and progressively friendly meetings can lead to disappointing outcomes. Chinese negotiators are quite prepared to end meetings or negotiations on a negative note. As negotiators often have little authority they often find it prudent to maintain a negative attitude. At the same time, apparently disinterested negotiators can suddenly announce that a positive agreement is possible.

Exploit Chinese members of the foreign team — Ethnic Chinese associated with the foreign team will be sought out in the belief that they are naturally sympathetic to China. Our China attorneys have also seen many instances where an Ethnic Chinese person on the foreign side is accused of disloyalty for not siding with the Chinese side in the negotiations — always in Chinese, of course.

Use “shaming” — Chinese negotiators may be quick to point out “mistakes” in an effort to put the foreign party on the defensive. There is a deep belief that people will be shattered by the shame of their faults so there is a tendency to make an issue over trivial slip-ups and misstatements.

Make big asks — Chinese negotiators often have no hesitation in presenting what they must understand are unacceptable demands. These demands are often accompanied by a hint that they will be withdrawn in return for only modest or symbolic concessions. Extreme language is often used to obtain symbolic victories.

Stall — Chinese negotiators are masters of creative use of fatigue. They have, according to Pye, great staying power and almost no capacity for boredom. These traits keep foreigners’ hopes alive. This approach may also reflect lack of experience, bureaucratic problems or a subordinate’s fear of criticism from above. Conversely, when agreement reached it is often the Chinese who become impatient for deliveries by the foreigners. For more on this tactic, see Doing Business In China Requires Patience. Don’t Just Be Leaving On That China Jet Plane.

As I have said before, Pye never moralizes or suggests there is anything wrong with the Chinese approach. He merely points out how different it is from the typical Western approach, leaving readers to conclude that foreigners ignore or disregard Chinese negotiating tactics at their own peril. This is certainly consistent with our view that one should not rush to blame the Chinese when things go wrong.

In my final post in this series I will outline Pye’s tips for foreigners when negotiating with Chinese companies.

As China’s economy continues to contract, our China lawyers are getting an increasing number of inquiries from companies seeking to sell their China WFOEs. In fact, we are aware of the following currently on the market:

  • A Shanghai consulting WFOE
  • A Beijing consulting WFOE
  • A Dalian manufacturing WFOE

Back in May, in Buying And Selling China WFOE Shell Companies. Not In My Lifetime? we wrote about the difficulties inherent in selling/buying a China WFOE:

The thing about off the shelf WFOEs is exactly that: they are off the shelf and not customized. And that is where all of the problems arise. Let’s take as an example a WFOE that someone tried to interest me in many months ago. That company was in the IT outsourcing business in a second tier city. So right there, its only real potential buyer is someone who is interested in doing IT outsourcing in that second tier city. Because if the buyer of that WFOE is interested in doing anything other than IT outsourcing, it will need to petition the government to expand or change its business scope. Similarly, if the buyer is interested in doing IT outsourcing in some other city, it will need to petition the government to move its WFOE or it will need to set up a branch in that other city, and thereby have to maintain two offices. When you throw in the fact that anyone buying a WFOE will need to conduct due diligence on it to make sure that it truly does have no liabilities of any kind (including, tax, employee, environmental, tort, etc.) and you can quickly see why forming a WFOE is going to be safer and probably equally as fast and cheap. The biggest benefit in buying a shell WFOE would be speed, but it is going to be the rare instance where saving a few months will warrant the extra risk.

In WFOE Shell Company? You’re Kidding! The China Business Hand Blog nicely sets out how difficult it can be to sell a China WFOE, and this from someone who actually did it!

The China Business Hand blogger, Steve Barru, formed a WFOE in China in 1993 but when he took a job in 2005 he sought to get out from under that WFOE. As he puts it, he “could close the business and walk away or try to sell it, [but] …. it turned out that neither option was simple or straightforward.”

At first Barru thought that closing it down would be easy, but it being China, he was wrong about that:

Closing down the business and moving on seemed the easiest way out. Until I discovered that terminating a WFOE license involved getting approval to do so from the long list of government agencies that had approved the license in the first place. To make matters worse, shuttering the business would cost me around $2,000 in fees of one kind or another.

If I had been leaving China altogether in 2005, I would have settled up with my two employees, gone to Hong Kong to convert the company’s remaining Chinese funds to US dollars, and gotten on a plane home, letting Chinese government officials sort out what to do with an abandoned WFOE. Alas, my new job was in Beijing, so this was not an option.

I went to the primary licensing authority, the Bureau of Industry and Commerce, to ask if there was a formal procedure of some kind to make the company inactive (aka: a shell company). Nope. As long as the company existed, I would have to file monthly tax reports, complete the statutory annual audit and license renewal procedures, and meet all of the many reporting requirements of other agencies. The fact that the company would not be engaged in any business activity made no difference whatsoever.

It being so difficult and expensive to shut down his WFOE, Barru then sought to sell it, which too proved difficult:

Selling the company, even for next to nothing, quickly moved to the head of the line. But transferring the business license and my legal person status to the wannabe new owner involved far more than filling out a couple of forms.

It was the buyer who had to jump through the bureaucratic hoops. For all intents and purposes he went through the same process one goes through to establish a WFOE. With one key difference – he did not have to invest new capital in the company. The original US $70,000 in registered capital (that I had put in and had later managed, for the most part, to take out) was all that was required. Since registered capital for a WFOE had increased to US $200k by 2005, there were demands for additional investment, but rather convoluted negotiations eventually got around this obstacle. Fortunately, the buyer was located in Nanjing. The need to move the WFOE to a new locale would have been a deal breaker.

Eventually, after several months of discussions and chopping forms, all the questions about registered capital, business scope of the company, the good character of the new owner, and the license transfer had been answered and the sale was complete. The price probably covered my express mailing costs and bought me a couple of dinners. But I was out from under what had become an enormous, very time consuming headache.

As Barru so accurately observes, forming and running and even closing a business in China is going to require you to get up close and personal with your local bureaucrats:

The fact is, when you are doing business in China, the local government where you operate is your de facto partner. Chinese bureaucrats were involved in every aspect of my business over the years, sometimes in reasonable ways but on occasion as meddlesome pests sticking their noses into strictly business decisions. Even the end of my days as a WFOE owner involved getting government officials to, in effect, give me permission to let my business go.

The same holds true today, though just recently there have been some efforts in China to make WFOE formation easier, but so far we have yet to see it.

China veteran Andrew Hupert (of ChinaSolved) recently did a post listing his daily China reads for business. Andrew puts the following sites on his reader (I too use Feedly) and he says he spends 15-30 minutes a day skimming these sites for China business information.

Though I have no beef with any of the sites on Andrew’s list, I think it is too long by about half. I would therefore suggest that if you are looking for a list of China business sources that you start with the below, but either right away or over time, tailor the list to your particular China business needs.

Here’s Andrew’s list:

China Business Intelligence Sources Basic (news, finance & business)

China Legal

China Technology
China Quality Control and Production
China Culture

What would you eliminate from this list? What would you add to it?  The comment lines (as always) are open.

A reader just referred me to a new (relatively) blog called China Stocks Watch and I sort of love it.

The blog is about China’s top twenty stocks and about China business in general and its posts literally alternate between those two.  It describes itself as follows:

China Stocks Watch is a China business blog run by Mike Cormack, who has written for media from Business Tianjin to China Daily, and was most recently managing editor of Agenda magazine. China Stocks Watch provides a running commentary on the twenty biggest stocks in the Chinese business world, alongside relevant China business news of the day.

It even lists out on the side of its home page the twenty stocks it follows:

  1. Sinpopec
  2. PetroChina
  3. ICBC
  4. China Construction Bank
  5. Agricultural Bank of China
  6. Bank of China
  7. China Mobile
  8. Noble Group
  9. China State Construction Engineering
  10. CNOOC
  11. China Railway Construction
  12. China Railway Group
  13. SAIC Motor
  14. China Life Insurance
  15. Dongfeng Motor Group
  16. China Shenhua Energy
  17. Ping An Insurance
  18. China Telecom
  19. China Communications Construction
  20. Bank of Communications

Cormack knows his stuff and the blog proves that.  If you are interested in China’s stock market (or at least in its twenty largest stocks), these blog is a must read.  If you are interested in China’s business and/or economic climate, you should absolutely be reading this blog on the days it does its “China Business Briefs.”

By I qualify my “love” for this blog with “sort of” only because if you are not interested in China’s stock market or a no nonsense deep/technical dive into China’s business world/economy, this blog is not for you as it truly is pure business.

But if it you are seeking a pure stock market/economics/business blog, I highly recommend China Stocks Watch to you.

And we couldn’t be more pleased.

The ABA Journal is the magazine of the American Bar Association.  The American Bar Association is by far the leading/most prestigious bar association in North America.

And yet, there we are, just named to the ABA Journal’s Blawg Hall of Fame, and in there with a star-studded roster of 20 other legal blogs that have been and still are at the top of the blogging game. And thanks to our blog title starting with a “C” for China, rather than a “Z” for Zimbabwe, we are at number two on the list.

In all seriousness, this is quite an honor and one we do not take lightly.

We started this blog nearly eight years ago, on January 5, 2006, with an introductory post explaining what we would be seeking to achieve.  We were young(er) then and a helluva (sorry for that word) more idealistic then:

Why are we doing this?

What exactly will we be doing?

There are more than 4 million blogs. Many of these are about China, including some very good ones. Some of our favorites include Talk Talk China and Simon World for general China information, The China Stock Blog for Chinese stock market information, China Tech Stories for information regarding China’s technology sector, and Journey Around China for travel information.  [3-6-2012 Update: None of these blogs still exist so we removed the links]

There is even a superb Chinese law blog, The Chinese Law Prof Blog, but it has a distinctly academic bent and we will not.

We will be discussing the practical aspects of Chinese law and how it impacts business there. We will be telling you about what works and what does not and what you as a businessperson can do to use the law to your advantage. Our aim is to assist businesses already in China or planning to go into China, not to break new ground in legal theory or policy. We want to start a conversation with, for and about the person who wants to know “what is what” in China and the practical aspects of starting and growing a business in or involved with China.

We are not writing for those who want to know more about Section (A)viii of a particular piece of Chinese legislation or the history of that act or the policy reasons behind it. Our site is not focused on the legal scholar.

We want to initiate a discussion regarding the changing laws in China. We will constantly be challenging the various misconceptions the West has about law in China, including that the law in China does not really matter or that guanxi can supplant it.

We will provide information to those who conduct business with or in China as to how they can use the law as both a shield and as a sword. We will give you our insights to achieve practical solutions, while doing our best to entertain.

We know lawyers are not popular, and though we are ourselves really quite likable, we recognize the need to avoid those things that incite lawyer hatred. In other words, we will strive to avoid legal jargon and namby-pamby language that attempts to camouflage our views or to avoid controversy.

We want this blog to be a place for conversation and even controversy. We expect many of you will disagree with us much of the time and we do not care. We will always strive to avoid boring you or being unwilling to take a stand. We are not going to be afraid of being wrong — in fact, we want you to tell us when and how we are wrong. If you want “lawyer language” or long strings of caveats, you are going to have to pay exorbitant legal fees to get that elsewhere.

Though our focus will be on the interaction of law and business in China, we most certainly will be personalizing this page with our own experiences. We will tell you more than just that the law is this and this is what needs to be done to comply. We will discuss how the laws as written may say one thing, but our experience dictates something else. We will tell you when you need to do more than just follow the law to succeed and we will set out exactly what that something else is. We will estimate the chances for success if one does one thing as opposed to another. You will hear what we have done to succeed for ourselves and for our clients in China and you will hear about where we failed. We will regale you with stories about the Chinese lawyers with whom we work, the foreign and Chinese businesspeople with whom we deal, and even the places we go. There will be times where our lawyer ethical rules will make us unable to name names, but we will always work to tell the full story.

In addition to our discussions regarding what we are seeing on the ground in China, we will post articles and postings from elsewhere, to which we will, when appropriate, add our own comments. We will also post events, like seminars, conferences and trade shows, that we believe will advance our readers’ grasp of China law and business.

It has become a blog cliché to implore readers for their input, but it is so important we must join the crowd on this. We do not purport to know everything about Chinese law. That is impossible.  China is anything but monolithic and the differences in the legal situations between the various regions are no less pronounced than the cultural differences.

Our strengths are in forming companies in China, in drafting international contracts with Chinese companies (in English and in Chinese), in intellectual property protection, and in litigation. We welcome your comments, suggestions, and ideas on any area of law relating to conducting business in China.

In plain language, we ask that you write us early and often. We will review your comments before we post them, but that does NOT mean you should not criticize us or disagree with us. Our review will be to filter out “comment spam” and comments that are without substance and/or are personally abusive. We want to encourage a high level of discussion but we will not ban or delete your comments just because you come after us — at least not the first few times.

So why are we doing this? The short answer to this initial question is that we are doing this to — in our own small way — advance the dialogue regarding Chinese law and business.

Since that time, our goals have, if anything, become more circumspect and more pedestrian.  At this point, we merely seek to be interesting and to — still in our small way — help Western companies doing business in China.

According to Blog Rank, we have the best overall statistics (mostly a combination of various readership and citing criteria) of any law blog and according to Avvo, we are the fourth (really the third though since the allegedly most read one is Avvo itself, not just its blog) most read law blog.In the 2881 days since our inception, we have written 3,199 posts (counting this one), which is a hair over one a day.  We have received 26,599 comments, which equals approximately 8.5 comments per post.

We have categorized our posts as follows:

  • China Business   1381
  • Legal News 1,133
  • Recommended Reading 608
  • Events 183
  • China Travel 93
  • Basics of China Business Law   90
  • Good People 80
  • China Film Industry 39
1,243 of our posts have ended by asking “what do you think?”  Our first post to ask that was in May, 2006.  257 of our posts ended by asking “what are you seeing out there?”

The following are our top five posts in terms of readers comments

Though our readership has increased every single year since our inception, the number of comments we receive has, unfortunately, declined.  We attribute this mostly to the greatly increased use of RSS readers.

But our numbers really tell only a small fraction of the story.  We (and by we here, I am talking about myself, Dan Harris, and my co-blogger Steve Dickinson) remain in awe at the friends and business relations our doing this blog has brought us.  And we are sincerely and eternally grateful for that.

But if I had to mention the one thing that saddens me most, it would be the number of great China blogs (many written by my friends) that are no longer extant.  I would be lying if I were to claim that our own blogging has not suffered from their absence.

So where do we go from here?  Where should we go from here?  Honestly, at this point, our plan is simply to keep doing what we have always done as it seems to still be working.  Just as we promised in our very first post, we will keep seeking to “give you our insights to achieve practical solutions, while doing our best to entertain.”

What do you think?  What are you seeing out there?

We still really really want to know.

Was cc’ed on an email between one of our China lawyers and a client that sets out what our client can do to help ensure that the company chop on its China contract corresponds with the actual company chop held by the Chinese company with whom our client is conducting its China business.

Thinking the email might be helpful to our readers, I reproduce a sanitized version of it below.

The only way to be virtually certain about a Chinese company chop is to do a great deal of in-person due diligence. For example, you could visit the factory in person, inspect the company chop there and then compare it to review previous contracts executed by the company and provided to you. Or, better yet, you send a Chinese attorney to confirm with the government that the company chop that will be used on your contract is actually the company’s real company chop.  But since the dollar value of this particular transaction probably does not warrant your doing either of these things, we suggest you ask the Chinese party to provide you with the following:

  1. _________’s [the signatory] title, in Chinese and English;
  2. _________ name in Chinese characters;
  3. a scanned copy of __________ business card, in Chinese and English [unless you already have a copy];
  4. a copy of the company’s business license, and;
  5. an explanation as to why the “seal” or company chop on this document appears nonstandard (i.e., oval instead of circular) and does not have the company’s registration number.

Got that?

We recently did a set of tooling agreements for a client doing business in China and as a part of that, one of our China lawyers sent the client the following instructions on making sure those agreements were properly signed:

As noted above, you must ensure that the tooling agreements are properly executed by the Chinese companies that will control the tooling. This means that you need to make sure that each of these agreements is signed by a duly formed Chinese company and by the legal representative of these Chinese companies, and that the names and addresses of the Chinese companies are in accord with the information registered for those companies and that the formal company chops are used to seal the agreements. […]

In terms of verification of the Chinese company information, at minimum you need to do the following: 1) personally visit each factory; 2) obtain the business card of each person who will sign on behalf of each Chinese company and have that person give you a specimen of their company’s chop; 3) obtain a copy of a previously executed company document to verify the authenticity of the chop; 4) obtain a copy of the business license which will provide the registered address and the name of the legal representative. If ANYTHING about the tooling agreement is inconsistent with the information you receive, DO NOT EXECUTE it and do not do business with the manufacturer. Even a simple mistake in the address can lead to invalidity of the contract

A few months later, another of our China lawyers did some China NNN Agreements (a/k/a NDAs or Non Disclosure Agreements) for the same client.  NNN Agreements are not long or complicated agreements and they are typically discussed and even entered before the parties have a much of a business relationship. Our client asked our (and its) lawyer whether it would need to go through the same long and somewhat difficult process for the signing of each NNN Agreement, just as it had done for its tooling agreements.

Our lawyer responded as follows:

The short answer is that the same standard of enforceability applies to all China business contracts.
I understand your concern that the legal representative of the Chinese party may not always be willing to sign your agreement. It is always preferable (and safer) to have the legal representative sign, but if the agreement is sealed with the company chop then it should still be enforceable even if it is signed by some other company representative.
With regard to the verification steps listed, none of them are, strictly speaking, mandatory. That is, they do not themselves make a contract any more enforceable. But they are all highly advisable. The more steps you take, the more confident you can be that the contract has been properly executed by the proper company. Of these steps, securing the business license of the Chinese company is probably the most important, for two reasons: (1) it provides an easy method of verifying the name and registered address of the company and the identity of the legal representative, and (2) it is extremely easy for the Chinese party to provide, and if they can’t do so it is usually a warning sign.
It is that “easy.”

Every few days I make a point to go to the China section of AllTop News.  Not sure how to describe AllTop so I will simply crib its description straight from its site:

The purpose of Alltop is to help you answer the question, “What’s happening?” in “all the topics” that interest you. You may wonder how Alltop is different from a search engine. A search engine is good to answer a question like, “How many people live in China?” However, it has a much harder time answering the question, “What’s happening in China?” That’s the kind of question that we answer.

We do this by collecting the headlines of the latest stories from the best sites and blogs that cover a topic. We group these collections — “aggregations” — into individual web pages. Then we display the five most recent headlines of the information sources as well as their first paragraph. Our topics run from  adoption to zoology with photographyfoodsciencereligioncelebritiesfashion,
gamingsportspoliticsautomobilesMacintosh, and hundreds of other subjects along the way.

You can think of Alltop as the “online magazine rack” of the web. We’ve subscribed to thousands of sources to provide “aggregation without aggravation.” To be clear, Alltop pages are starting points—they are not destinations per se. Ultimately, our goal is to enhance your online reading by displaying stories from sources that you’re already visiting plus helping you discover sources that you didn’t know existed.

Bottom line: It’s a great place to keep up on the zeitgeist of China and a great way to learn of any new and interesting China blogs.

Lo and behold I came across two today, both interesting, but neither exactly new: Engaging China Blog by Geoff Nairn and the China Economics Blog by Robert Elliott.

Engaging China Blog actually started the same year we did — way back in 2006 and we even did a blogpost announcing its addition to our blogroll:

Just added Engaging China Blog to our blogroll and we recommend our readers check it out.  Engaging China describes itself as follows:

EngagingChina aims to keep you informed about the new strategic opportunities in China’s  fast-growing economy — and warn of potential pitfalls.

There are plenty of other sites that write about China.  But in their enthusiasm to describe this fascinating country, readers risk not seeing the wood for the trees.

Our focus at EngagingChina is strategy, pure and simple.

And unlike other sites, we look across the range of fast-growth industries, rather than concentrating on just one.  That’s because the lessons to be learned from doing business in China are rarely sector-specific.To be sure, the challenges facing electronics companies are different from those facing investment banks or wind farms.  But there are also plenty of parallels. We want to encourage this cross-fertilization by drawing readers from different industries and backgrounds.

Geoff Nairn, the founder and managing editor of Engaging China, is a veteran business journalist and long-term contributor to the Financial Times.

I agree with Mr. Nairn’s views of China, but I disagree with his perceptions on the Chinese blogosphere.  All Roads Lead to ChinaChina Business ServicesChina Economic Review Blog, and Diligence China [now China Solved] all “look across the range of fast-growth industries, rather than concentrating on just one” and they do an excellent job of it.  ImageThief and Danwei, though to a large extent focused on media, are great blogs that also often look across the range of fast-growth industries.

Having said this, however, China being as vast as it is, and as quickly changing as it is, there is definitely room for another stellar China business blog, and Engaging China definitely fits that bill.

In e-mail correspondence with Mr. Nairn, I learned he is “a Brit” currently living in Spain.  He has been a journalist in various European countries for nearly 20 years.  For the past decade, he has been a regular contributor to the Financial Times (FT), “writing mostly on IT and telecoms, but also areas like  renewable energy, medical innovation and financial technology.”

Mr. Nairn first became interested in what he calls the “China story,” while writing a magazine article on Cable & Wireless back in 1987.  According to Mr. Nairn, C&W wanted to use Hong Kong as a springboard to the mainland and it had built a fibre optic network in the Shenzhen SEZ. “The idea that China would one day be a huge and attractive market for western tech companies then seemed far-fetched.  A decade on, I was writing about the  internet boom.  A  clutch of  China dotcoms listed on Nasdaq and the western world woke up to the advances that had been made in China’s economy.”

Mr. Nairn sees China as “impossible for western businesses to ignore” and he aims his blog at helping them better understand it.

Mr. Nairn described EngagingChina to me as follows:

It is not an “insider’s view” on  doing business in China — that would be presumptuous, as I don’t live in China. Nor do I set out to exhaustively detail every  Chinese announcement made by Microsoft, each new store opened by Carrefour or every mobile phone model launched in China.   There are other sector-focused China sites that do that, but they are often light on analysis and sometimes one cannot see the wood for the trees.  EngagingChina’s focus is strategy, pure and simple.   To narrow it down, it covers a handful of sectors that are developing rapidly — IT and telecoms, China’s consumer boom, financial services, energy and the environment, and high-tech.

Engaging China has rapidly become one of my daily “must reads.”  It is both thoughtful and original and I urge all readers interested in China business to check it out.

The new EngagingChina looks as though it has not missed a beat as it still consists of short pithy China business update posts.  For example, its five most recent posts consist of the following:

Do check it out.

The China Economics Blog is another recently revived oldie but goodie.  Back in 2010, in a post entitled, China Blogs: That’s The way, Uh-Huh Uh-Huh, We Like It, Uh-Huh, Uh-Huh. Part V, we explained why that blog was on our blogroll:

China Economics Blog. This blog describes itself as a “place to find news, observations, statistics, information on undergraduate (BSc and BA economics) postgraduate (MSc economics) and academic analysis of important issues for China’s economy including economic growth, inequality, stock market, shares, exchange rates, the environment, foreign direct investment, WTO and much more” and that is exactly what it is. I read it for its usually spot on and clearly written China economic analysis.

I have every reason to believe the same will hold true of its latest incarnation.  Its three posts since its return consist of the following:

Do check it out.

And let us know what you think of them both.

I love our China Law Blog Linkedin Group.  Love it.

Most of the time.

It’s a great way for those interested in China law and China business issues to converse with each other and to learn from each other.  We have countless great discussions every week. Commonly, people ask great questions and get great answers.  Legal questions get asked and answered.  Mostly correctly.  I almost never weigh in as I do not see it as my role.

But the other day I couldn’t resist.

Let me explain.

A group member posed the following question:

Any tips on repatriating inter-company loans or profits out of China?

Wondering if anyone can provide insight or point me in a direction for information on how to repatriate money back to the home country. I understand that dividends are an option but are subject to tax from China as well as the home country. How about loaning money back or other inter-company charges or transfers?

I winced.  I winced because I knew what would be coming and I knew I would not like it. I winced because I know that this is an incredibly complicated question and I know that there are all sorts of “home remedies” for this that can be worse than the bite itself.  I winced because the best answer to questions regarding getting money out of China is probably going to be that it cannot be answered at all in a general way and that the only smart way to answer is to tell the questionnaire to consult with a China accountant, a China tax specialist, or a China tax lawyer.  But nobody wants to hear that.  So I said nothing.

But the answers started pouring in and they caused me to wince even more. Especially after the person who posed the question clarified that what he needed help with was figuring out how to repatriate China WFOE profits back to the parent company overseas.  Someone made the following suggestion:

Suppose the parent company provide service to the WOFE….

Then another someone confirmed this as a potentially good way to go:

Royalties or technical service fees charged to the China operating company might be another option.

Then the person who originally posed the question hinted that his company might do as advised above:

Thanks for the suggestions. The service or royalty fees approach is an interesting concept.

I could no longer take it and I just had to chime in, and I did, with the following:

It may be interesting, but it’s also incredibly complicated and could be disastrous. First off, the tax on services and royalties (especially royalties) can be very high. So your doing this could cost you up to 42% of whatever funds leave the country. You also will need to document this entirely correctly or the funds might never leave. See Service Companies In China. How To Get Paid. for more on this. And, even worse, the Chinese tax authorities could argue that your US company, by performing whatever services it performed, has become permanently established in China, and then you will need to deal with that. Honestly, if I were you, I would retain a really good international accountant because if you don’t you could find that your machinations will cost you way more than any amount you are trying to save. This stuff is not for lay-people.

At which point, Matthew McKee, a tried and true tax lawyer previously based in China added the following great advice:

Kevin, this can be a very complex issue and usually involves an interaction between Chinese tax laws, the tax laws of the company in which the parent is resident (and sometimes the country in which the controlling shareholder(s) of the parent company is resident). I agree with Dan and would recommend that you speak with an accounting firm that can provide advice on Chinese tax law and the tax laws of the country in which the parent company is resident.

The attractiveness of royalties and services fee options ultimately depends upon the location of the parent and the circumstances. Service fees can attract business tax (which has recently been incorporated into the VAT system) which may negate any benefit in avoiding withholding tax on the dividends. This can work out worse as many countries provide a tax offset for foreign income tax paid. This would apply to the withholding tax on dividends but not to business tax.

When looking at tax issues on international transactions it is imperative to look at the outcome from the application of the tax laws of all countries involved and not simply China.


What do you think?

A long time ago, I arrested a Russian ship vessel in Japan’s Hokkaido province on behalf of an American client-creditor.  My client wanted to get that ship to the United States, believing that once there, it could repair and update it and use it.  The arrest was a blast in that we (me, the Japanese Coast Guard and our Tokyo attorney) got to the ship literally as the gangplank was being lifted.

But once we had the ship, we needed to figure out a way to get it to the United States and, more importantly, that meant we needed to secure some sort of short-term visa for its mostly foreign crew.  And of course every day of delay was costing my client a lot of money.  I made the decision to try to short circuit things by going to the US Embassy in Tokyo.  Security was really tight there and a Japanese guard told me that I could not get in without an appointment.  I somehow convinced him that I had a right as an American citizen to visit my embassy at any time (is this correct?) and he made a few phone calls and let me in.

Once inside, a lower level functionary told me to set up an appointment for around two weeks out.  I very politely kept insisting to her that two weeks would be too long and as I was doing so, I started noticing that an important looking person who had been walking by was now listening to our conversation.  Interested, he came over to us and asked me what was going on.  I explained the situation and within about 15 minutes I had about 60 visas for the crew and had left.

The above is one of at least a half dozen stories I could tell of times when a US Embassy or Consulate has gone out of its way to assist either me/my family or one of my clients in a time of need.  I have nothing but the utmost respect, generally, for how the US State Department treats its citizens and aids its citizens overseas.

But there is only so much they can do….

And one of the things they typically cannot do is aid someone involved in a civil dispute overseas.  I would guess that around 100 times over the years I have had someone tell me of some sort of China business dispute (oftentimes involving fraud) and of how they plan to alert the US Embassy regarding it.  I am always hesitant to tell them flat out that the US Embassy doesn’t have the time or the manpower or even the authority to get involved in every little commercial dispute so I usually say something like the following:  “It is my understanding that the US Embassies and Consulates generally do not get involved in civil disputes, but if there is something different about yours that will cause them to take it on, more power to you.”  I used to follow up with these people, but after about ten times where nothing happened, I stopped.

I mention all of this now because of a comment left on our blog the other day by Micah Sitig. The comment was a scan of the latest version of the “Shanghai Consulate News for Americans,” a monthly newsletter sent by the US Consulate in Shanghai to mostly American expats in Shanghai.  The reason Micah left this as a comment was because the lead story was our post from about a month ago, entitled, China Hostage Situations. More Common Than Most Think, But Not Really A Big Issue.  But the reason I am discussing this in this post is the following lead in to my post:

The Consulate is unable to intervene in civil cases and has little influence with the Public Security Bureau.  If you are involved in a civil or business dispute we recommend you contact an attorney immediately.

Good advice, and the advice I am going to use the next time someone tells me they are going to get the consulate or embassy involved.

I would also add that even in criminal cases, the role of the embassy/consulate is usually limited to making sure that the detainee gets access to counsel and decent food while in prison. I think that most companies that have been doing business in China for some time know all of this, but it seems that many new to international business do not

What do you think?