Q&A: Starting a Business in China

Who should I contact to set up a WFOE in China?

Incorporating in China is a complex process that involves contact with several government agencies.  It is important to have legal counsel and consulting services when going through this process.  TriVista’s China Greenfield and Brownfield operations and start-up team is experienced in guiding businesses through the process of creating a China WFOE or other incorporation structure in China.

What does an Investment Promotion Agency do?

An Investment Promotion Agency is a special bureau, usually sponsored by the Chinese Government, that works to attract investment by providing information and other services to foreign enterprises. Contacting an area’s Investment Promotion Agency is the best way to get detailed information on investment environment, preferential policies, and local infrastructure.

What is MOFCOM?

MOFCOM, short for the Ministry of Commerce of the People’s Republic of China, is a department of the Chinese Central Government that deals with all things related to business, foreign investment, and business law. Contacting MOFCOM directly is often difficult since it is such a high-ranking governmental department, but its website (english.mofcom.gov.cn) offers resources for foreign investors and contact information for various local authorities and Investment Promotion Agencies.

How do I protect Intellectual Property in China?

Intellectual Property is one of the main dangers of doing business in China.  In order to avoid such a loss, we recommend that companies apply for trademark registration and patents, execute patent documents in a detailed Chinese transcription, and obtaining legal counsel from a firm that specializes or has great experience dealing with IPR in China. If intellectual property is an issue for your business, we recommend incorporating under the WFOE or Representative Office structures in China.  They offer greater protection than Joint-Ventures or Partnership Enterprises, which require an exchange of information by default.

What is FESCO and am I required to use them for human resources in China?

FESCO stands for Foreign Enterprise Servicing Company. It is actually a generic title rather than an actual commercial entity. Companies that self-identify as a FESCO offer human resource services and basic financial help such as invoicing and payroll for foreign enterprises. WFOEs, Joint Ventures, and Partnership Enterprises can hire local Chinese Nationals directly, but Representative Offices are required by law to use a local human resources agency such as FESCO.

What makes a Special Economic Zone (SEZ) or Development Area so attractive to foreign businesses?

Special Economic Zones are unique areas sponsored by the Chinese Central Government.  They offer special tax policies and other investment incentives to attract foreign business.  China’s five Special Economic Zones (SEZ), Shenzhen, Shantou, Zhuhai, Hainan Province, and Xiamen, have become important business centers.  In addition to the obvious investment incentives, SEZs usually have excellent infrastructure and logistics capabilities, as well as greater supply chain access due to the large concentration of companies in one area.

What are the benefits of locating in areas already heavily invested in by other foreign enterprises?

Heavily invested areas usually have a well-developed infrastructure, good logistics, and several American and International support companies such as financial services and banks, law firms, and real estate brokerages. The downside to these areas is they tend to have higher external costs and less customized preferential policies than underdeveloped areas. The best location for your business depends both on the scope of business services offered and the specific resources that you require.

What are the average costs of employing unskilled labor in China?

The cost of unskilled labor varies significantly between provinces in China, but base monthly salaries generally falls within the range of RMB 1,200 to RMB 4,000 per month.  For a more detailed explanation of salary and wage costs in Mainland China, please see our average wage summaries for specific areas of China and our China labor costs term glossary.

Is Hong Kong a different country than China?

Hong Kong was a British Crown Colony until July 1, 1997, when sovereignty was transferred to the People’s Republic of China.  Under the provisions of the transfer, Hong Kong reserved the right to a large degree of autonomy for a period of fifty years (until July 1, 2047).  Under the specified terms, Hong Kong has retained a separate currency (the Hong Kong Dollar), legal system, taxation policy, and free-market economy. Although Hong Kong is technically a part of China, it offers entirely different financial incentives and corporate structures to foreign investors. For a more detailed comparison on the benefits of incorporating in Hong Kong, please see our Hong Kong Company incorporation brief.

What are my rights as an American in obtaining Visas to China for both employees and business visitors?

The processes for obtaining entrance visas to China differ in regards to which incorporation type your business follows. Generally, all four types of incorporated businesses are eligible for one-year multi-entrance visas with the exception of Hong Kong Companies, which follow different immigration policies.

How much capital investment do I need to start my business in China?

The amount of capital required to incorporate in China depends both on which incorporation type you are choosing and which business sector you are entering. For quick and inexpensive incorporation, a representative office is an immediate option.  It requires no registered capital contribution, but it’s business capabilities are severely restricted. Other incorporation options require registered capital amounts between RMB 100,000 and RMB 1,000,000 depending on specific circumstances.  It should be noted that in addition to required minimum capital contributions, time limits are also imposed on capital injection. For more detailed information, please see our section comparing the different China business incorporation options.

Will the language barrier be an issue to business in China?

A working knowledge of Mandarin (the main language in China) is essential for incorporating in China. Most business transactions and contracts require processing in Mandarin for approval. A company can invest in learning the language, outsourcing to translation services or hiring bi-lingual staff. It is also important to know, that Hong Kong offers an English-speaking business environment with legal recognition of English contracts and documentation.

Is China open to foreign investment?

China has opened up to the outside world significantly in the past 20 years. It’s policies now not only allow, but encourage foreign investors. The Central Government and various Provincial and City Governments of China now offer tax incentives and other preferential policies to attract foreign investors to their regions.

How do I ensure quality control in China?

Ensuring quality control in China is subject to the same processes as manufacturing operations as other countries. While outsourcing to China can reduce labor and resource costs, it is often times more challenging to control quality and efficiency when factories are in another country. TriVista specializes in helping American companies incorporate lean six-sigma practices into their Chinese factories to ensure both quality and efficiency.  Our China associates offer factory audits to help optimize the practices of production facilities.

How will the recently announced Chinese Yuan (RMB) currency float affect export prices from China?

For several years now the Chinese Yuan (also referred to as RMB) has been fixed to the value of the US dollar. However, after months of pressure from international governments who believed that the artificially low Chinese Yuan was keeping exports cheap and labor costs low for foreign investors, the Chinese Central Government has chosen to release their currency in June of 2010.  No one is entirely sure how this decision will affect the Chinese economy in the long run, but sudden, drastic changes are highly unlikely.

What are the policies for exit inspection and quarantine of goods?

Most commodities are subject to entrance-exit inspection by Chinese Authorities. Instead of opening shipping containers at the port for customs inspection, Chinese customs declaration laws allow goods to be inspected at the source. This makes the shipping process easier and more efficient. Generally, this special service must be applied for in advance. (See the Logistics section in any region resources that deal exclusively with customs declaration and inspection documentation) For more information about quarantine and inspection, contact the General Administration for Quality Supervision, Inspection, and Quarantine (AQSIQ).

Do I need to hire customs brokers to handle proper documentation when starting an export-oriented business in China?

A Customs Broker is an additional agency that exclusively handles customs forms and documentation for goods exiting a country and entering another. In most cases, customs brokerage services are offered by logistics companies or outsourced through them. Foreign enterprises can reserve the right to hire customs brokers independently if they so choose.

Are local and provincial preferential policies guaranteed?

Preferential policies are not guaranteed. In most cases, the stated preferential policies require an additional approval process with the local authorities to verify that your business satisfies the required criteria. In addition to the declared incentives, many municipalities and provinces offer additional, unstated preferential policies and incentive packages that can be customized to your business.

Note: Take caution when dealing with incentives at the provincial and/or municipal level.  Many incentives must be repaid in the event that your business leaves the region.  National incentives are not usually subject to these restrictions.

What is the best location in China for my business to invest?

Although some parts of China are almost always more conducive to investment than others, the best location for your business to incorporate in China depends on scope of business services and resources you require. Different areas within China have different logistical networks, labor costs, specialty industries, infrastructure capabilities, utility costs, and other factors. While one company may find it best to locate in Shenzhen, another might be better suited for Qingdao.

Will the Chinese legal system protect my business rights as an American?

To a newcomer, China’s legal system can appear quite complex.  While a strong, centralized government holds the ultimate authority to enact legislation for the entire country, small concessions of authority are given to certain regions. Establishing foreign owned companies and enterprises in China requires a lengthy business license approval process that involves working with various government agencies.  China’s legal system for resolving commercial issues has improved greatly for foreigners in the recent years, and the Central Government has recognized the importance of protecting Intellectual Property Rights of foreign firms by making them a top priority.  China now gives foreign companies equivalent protection to that of domestic ones, with protection for Wholly Foreign Owned Enterprises (WFOE’s) being the most comprehensive.   Understand-China recommends that companies obtain legal counsel prior to establishing an entity in the region.

To what extent will the Chinese welfare system affect labor costs?

China has a robust social welfare insurance program that provides medical, unemployment, work-injury, and maternity coverage as well as retirement pension and a housing fund for workers who seek to purchase homes. All of these are state mandated in the form of a social welfare tax that is payed mainly by the employer, but also in part by the employee.  The employer’s total cost for these mandatory benefits is about 50% of the worker’s salary.

Are income and VAT taxes more favorable in China?

Income tax and VAT structures vary depending on the preferential policies of the given location, but are generally set up in tax brackets very similar to those of the United States. For income tax, higher incomes are required to release a greater percentage of their earnings to the Chinese Central Government. VAT taxes are subject to a large number of exemptions and subsidies based on the eligibility of your business.

What are Chinese policies regarding repatriation of profits back to the United States?

Chinese legislation regarding the remittance of profits varies according to the incorporation type of the business. Generally, Wholly Owned Foreign Enterprises (WFOEs) have the most freedom in repatriation of profits, and Representative Offices have the least.

What is a Business Incubator and do I need one?

In addition to the standard incorporation options, China, like many other countries, has a number of formal “business incubation centers” for foreign companies looking to establish operations for the first time.  These incubation centers offer start-ups the ability to operate on a small scale, often sharing buildings and facilities with other, similar companies.  In addition, there are companies that offer “incubation services” to foreign enterprises that are seeking to establish operations in China.  These companies help foreign enterprises ease into the China market by joining into a partnership with them and helping them get started before transitioning day to day management to them over time.  This model is very similar to that of the Shelter Company used by many foreign enterprises in Mexico.  While small-scale, start-up companies might benefit from business incubation services, many companies have successfully entered into the China market without them.

When should I start the incorporation process?

You should not start the incorporation process until you are confident about investing in China. Depending on the incorporation type you choose, the incorporation process can be relatively expedient or complex and detailed.