Establishing a Business in China 101


Whether you are interested in establishing a business yourself or simply want exposure to Chinese assets, it would be wise to understand (at least broadly speaking) what the framework is with respect to the Chinese business interests of foreign entities. While China has had various initiatives with goals revolving around making it easier for foreigners to do business in this jurisdiction and some of them have proven to be quite successful… let’s just say a lot more progress is necessary.

First and foremost, it’s all a matter of determining what the conditions are for your specific sector. In other words, there is no such thing as a “one size fits” app approach when starting a business in China. While in some sectors, for example those relevant to the poorer regions of China, the authorities want to encourage foreign investment by providing a more attractive legal framework, some sectors tend to be less foreign investor-friendly.

To that effect, an important observation is that the status quo in China used to revolve around maintaining a catalog in which it was stipulated, on a category-by-category basis, which activities are preferred or discouraged when it came to foreign investors, with there being four distinct categories: encouraged, permitted, restricted and prohibited. Nowadays, China has moved to an arguably more lax “negative list” framework, as stipulated in the People Republic of China’s Foreign Investment Law, passed in March of 2019 and which will start producing effects as of January 1, 2020. Theoretically, activities not included on the negative list are permitted but do keep in mind that local administrations have a certain degree of autonomy when interpreting the list, so don’t expect perfect predictability.

To complement the negative list, a list of projects that the authorities encourage is also maintained, colloquially referred to as the “encouraged catalogue” or to use its longer name, the Catalogue of Industries Encouraged for Foreign Investment. Finally, there is also a Catalogue of Priority Industries for Foreign Investment in the Central-Western Region (or the “central-western catalogue” colloquially) which has specific stipulations for this particular region of China due to its less developed status.

Next comes the business licensing dimension, with a business license governed by the National Economic Industry Category Definitions making it possible for you to operate in a well-defined business area. Furthermore, it tends to be difficult to perform activities that have little to do with one another under the same business license, for example let’s say programming and manufacturing.

Again, however, do keep in mind that despite China being considered a highly centralized jurisdiction, foreign entities do, at times, deal with the exact opposite: local particularities they did not plan for. These local particularities can be both positive (for example China’s liberalization experiments with pilot free trade zones) and negative (for example, a local interpretation of the negative list which is not exactly in your favor).

Due to the complex nature of the entire equation, we would highly recommend working with consultants that specialize in the local particularities of the region you are targeting, with being more than happy to assist you throughout the process. But even after the entire bureaucratic process related to establishing your business is behind you, do keep in mind that as mentioned in a previous article, predictability is not exactly a characteristic the Chinese legal system is famous for.

As such, it would be wise to expect the unexpected and understand that to take advantage of the (many) opportunities China has to offer, you need to accept that there will be a “Wild West” element associated with them, unlike what you are accustomed to in the… West, no pun intended. For this reason, as self-serving as it may sound, it would be highly recommended to establish partnerships with companies that have a solid presence in China., with over 17 years of experience in this jurisdiction, most definitely qualifies.