China remains a growth economy and many U.S. businesses continue to do well in the country despite the geopolitical uncertainty and ongoing trade war. But while many U.S. companies wish to venture into the Chinese market, most are not sure how to take the first steps.
Despite the current geopolitical tension between the U.S. and China, U.S. businesses continue to do well in China and this is encouraging more to venture into the Chinese market.
U.S. companies invested US$14bn in China in 2017, an increase of about US$200,000 from 2016, bringing cumulative investment in the country to US$256bn, according to one of two studies by the National Committee on U.S.-China Relations and Rhodium Group.
At the same time, a report by AmCham on 2018 China Business surveyed 434 American companies between April and May 2018, and found that the majority of U.S. businesses in China are operating profitably.
While the statistics may be optimistic, many U.S. companies are still finding it difficult to set up a business in China due to the complex regulatory environment and contrasting business culture to the U.S. market.
Trading disputes between the two countries are further complicating the situation. Here are some insights we believe can be helpful for any U.S. company planning to set up a business in China.
Prepare for tension between Trump and China
Tension between the U.S. and China continues, as President Donald Trump is expected to impose another US$200bn in tariffs on Chinese imports while China has replied with tariffs on U.S. fruit, wine, steel pipes and pork among other goods.
This growing trade war puts many U.S. companies in an agonizing position, as China may further implement additional barriers to trade as it runs out of goods on which it can apply tariffs, making things difficult for the American companies to operate in the country.
U.S. tariffs on China could also do some damage to American companies. CBS News reported: "Tariffs on Chinese imports would increase the cost of raw materials for U.S. businesses, forcing them to pay more to make the same goods, whether cars, appliances or electronics. China's reciprocal tariffs make U.S. goods more expensive for Chinese consumers, hurting the many businesses trying their luck in the world's largest market."
U.S. companies should be prepared for the possibility of the Chinese government imposing regulations to make it harder or stricter for the former to do business in their country.
Compliance regulatory environment in China
China has been adopting global reporting standards and requirements, such as disclosure of the Ultimate Beneficial Owner/s (UBO), the Common Reporting Standard (CRS) and the Foreign Account Tax Compliance Act (FATCA).
As a result, China is one of the most complex countries globally in terms of corporate compliance, according to TMF Group's Compliance Complexity Index 2018.
U.S. companies must clearly identify the rules and requirements applicable when they set up a business in China and always be well-informed of any changes as the government is undertaking efforts to update its regulations, especially in the foreign direct investment segment.
For instance, the Chinese government announced several reform initiatives in April 2018 to further open up its insurance and banking sectors to foreign players. Foreign banks and insurance firms can now set up a branch in the country under loosened requirements.
U.S. companies seeking to set up a new business in China must know the basic requirements, such as the company's name must be written in Simplified Chinese and the company's address must be physical and not just virtual.
Hiring and managing talent in China
China is undertaking several revisions of its Labour Law and this affects companies' human resource functions, including recruitment and payroll.
The official version of the labour contract must be written in Chinese. Only two fixed-term contracts are allowed before an employee is considered permanent.
Foreign companies in China will probably need to hire expats and it's not an easy task to comply with the complex procedures and requirements to obtain a foreign worker permit in the country.
Foreign companies are required to go through the following stages to obtain a work permit for their expats:
- Obtain an Employment License and invitation letter for the prospective employee
- employee applies for Z Visa abroad (Chief Representatives and Legal Representatives may apply in China)
- employee must pass a Health Examination Check once in China
- employer obtains a work permit for the employee (valid for 1-2 years)
- employer obtains a Residence Permit for the employee (valid for 1-2 years, multiple entry).
China's financial and tax environment
There are plenty of financial requirements for foreign corporations operating in China, such as the statutory reporting requirements, which are non-negotiable. For example, if your company's financial year is different to China's fixed January-to-December year, the company will have to perform year-end closing twice.
China also has strict and restrictive Foreign Exchange controls, which are governed by the State Administration of Foreign Exchange (SAFE). All cross-border transactions are regulated and monitored by the People's Bank of China and are executed by local commercial banks.
Whether it is statutory reporting requirements, cross-border transactions or managing local tax compliances activities, U.S. companies should be mindful of the complicated procedures and strict requirements to ensure their smooth expansion into the country.
Although China has one of the most complex financial environments in the world, as evidenced in our Financial Complexity Index 2018, the government has been undertaking efforts to bring down barriers, making the jurisdiction a more attractive destination for foreign investment.
Talk to us
The aforementioned circumstances can make things difficult for U.S. companies setting up a business in China.
This is why working with a partner that has local knowledge and experience is important for U.S. companies. Our team of experts can help you with cost-efficiency, operational simplification and regulatory compliance, to support your daily business and ensure that you have full focus on your core business.
TMF China offers services in bookkeeping and reporting, corporate secretarial and HR and payroll.
Want to know more about our services? Contact us.
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.