China ranks as one of the more complex jurisdictions for business incorporation and operation. In fact, TMF Group's Global Business Complexity Index (GBCI) 2022 ranks China as the 14th most complex jurisdiction in which to do business.
In the context of economic globalisation, more and more enterprises are seeking overseas expansion and China is often one of the key markets targeted, given the attractiveness of its investment opportunities.
However, with China being such a popular location to incorporate and run a business, it's important to be aware of the potential challenges that could hold companies back. Here, we take a closer look at what we consider to be three of the biggest challenges when doing business in China.
One particular aspect that creates greater complexity for foreign businesses is that legislation and compliance requirements differ between provinces, municipalities and cities. This means that up-to-date local knowledge is a must. Furthermore, the use of Chinese as the principal language of commerce in the jurisdiction can add to complexity, not only adding to the administrative burden for multinationals, but also meaning that navigating certain documents is made all the more challenging.
Mainland China has 31 provincial-level administrative regions and more than 600 cities, large and small. Although the same legal system applies throughout the country, there are still great regional differences in practice. In such a huge market, professional managers and key stakeholders in companies tend to find it a significant challenge to ensure that all their legal entities and branches are operating legally and compliantly in different cities.
In contrast to differing laws between regions, China's Personal Information Protection Law (PIPL) entered into forced as of 1 Nov 2021 and is the first national-level law comprehensively regulating issues in relation to personal information protection. The PIPL applies to organisations or individuals that independently determine the purpose and means for processing of personal information. The PIPL defines "personal information" as various types of electronic or otherwise recorded information relating to an identified or identifiable natural person. Information processing is defined as the collection, storage, use, refining, transmission, provision, public disclosure or deletion of personal information.
This law has data transfer and technology implications for foreign organisations setting up in China, as any company who has cross-border personal data transfer activities is required to pass data assessment organised by the Cybersecurity and Information Department. These Security Assessment Measures will go into effect from 1 September 2022, and existing data export activities must be remediated by 1 March 2023.
When multinational corporations and foreign investors set up subsidiaries or branches in different cities across China to carry out business activities, there is often a need to rely on suitable local service providers to deal with compliance matters. And as mentioned earlier, Chinese is the principal language of commerce, which can prove problematic for organisations with no in-house capabilities.
In first and second-tier cities, this might not be an apparent challenge as there is a reasonably good ecosystem of professional service providers with international management and standards to choose from. However, when the business expands into third and fourth-tier cities, most companies will find it difficult to find a qualified service provider to assist in completing the necessary filing procedures with government authorities.
In most situations, such service providers (mainly locally owned firms) might not have strong teams that can correspond well in English, and there is no guarantee on service quality. For multinationals, such local vendors might not even pass muster and qualify as an approved service provider according to internal controls or procurement guidelines. Moreover, most companies find difficulty in managing these local service providers when the volume of entities or branches reaches a certain level, and they are dealing with multiple service providers (some foreign owned, some locally owned) in different locations.
If not properly managed, these circumstances can potentially expose companies to risk.
Another area that impacts business complexity in China are changes to regulation. The government frequently amends and updates regulation. For example, the Chinese government reversed a decision to end certain tax-exemption policies for ex-pats living in the jurisdiction, at the end of 2021. This was a U-turn policy change, driving complexity as human resources departments had already started putting systems in place to meet the requirements of new legislation.
That being said, while keeping up to speed with a changing environment poses a challenge for businesses, many regulatory changes brought about by Chinese authorities are done so with a view to encouraging foreign direct investment, often by simplifying processes. For example, there have been changes to move towards a more digitalised and transparent way of operating. Regulators have been working systematically to open up and simplify industries that can yield the greatest positive impact on the Chinese economy, such as financial services.
How TMF Group can help
Many international organisations and multinationals turn to firms such as TMF Group, where a multi-location, multi-entity scenario needs a greater level of care and project management expertise.
Understanding the local rules and compliance obligations is critical. At TMF China, our experienced entity management teams sit across all our offices in China and are well versed in managing these complex scenarios where senior stakeholders and professional managers would prefer to rely on a one-stop, multi-location solution for their operations in China.
TMF China has six offices located in the key cities of Shanghai, Beijing, Tianjin, Guangzhou, Shenzhen and Chengdu, with nearly 500 professionals. Since 2006, we have seen tremendous growth and development in this market, and many of our international clients have leveraged the experience of our teams in delivering services for their entities spread across more than 130 major cities in China.
Find out more about our local service offering here.
Talk to us
At TMF Group, we make a complex world simple: our approach is one of always wanting to help our clients better manage their entities in cross-border and cross-cultural situations.
If you are a senior stakeholder responsible for legal administration and entity compliance, and are currently struggling with the management of different local vendors for your China-based entities, or are worrying about finding a reliable service provider in an unfamiliar city, reach out to us to discuss how we can offer a tailor-made solution to meet your compliance requirements.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.