Turkey Sino Business Opportunities And Legal Environment

An exciting year started between the Chinese and Turkish governments by committing to and celebrating, a new form of friendship--a friendship of promising collaboration. 2012 kicked off by naming "The Year of Chinese Culture in Turkey 2012." This will be followed by "The year of Turkish Culture in China 2013." These cultural ventures are motivated by the reestablishing of the Legendary Silk Road between Turkey and China. The two countries have committed to building prosperous diplomatic relations, economic collaboration and cultural exchanges. The recent bilateral Agreement entitled "Framework Agreement on Further Expanding and Deepening Bilateral Trade and Economic Cooperation between the Government of the Republic of Turkey and the Government of The People's Republic of China," (2010, ratified on 12th January 2012, but not yet promulgated in the Official Gazette) between Turkey and China can be considered highly inclusive. It contains past agreements dating back to the 1970s, thereby demonstrating our expectations of witnessing a tremendous growth of business relations in the history of Turkey and China, together with prosperous diplomatic relations.

On July 17, 2012, the Turkey (Istanbul) China (Guangzhou) Business Forum was held in Istanbul. Both countries showed great deference to the Forum by having high level officials participate in the opening ceremony. Apart from the diplomatic highlights, the Forum attracted businessmen from both countries, and provided a platform for networking, creating a brainchild of business opportunities.

The Forum aimed to establish China (Guangzhou) Turkey (Istanbul) trade partnership by naming Istanbul and Guangzhou as Sister Cities¹. Besides, the forum named this date as Istanbul-Guangzhou Economic & Business Day which will be followed up by the next business day estimably on October, 2013 in Guangzhou. Most importantly, the Forum introduced Turkish investment and trade policies and promotion of business opportunities. The Forum was very successful in that it resulted in signed agreements between private companies, Chinese organizations and the Turkish Traders' Association; namely, between the Guangzhou General Chamber of Commerce and TUSCAID, Guangzhou Private Enterprise's Association and the Turkish Apparel Exporters' Council. It is fair to conclude that such a large scale collaboration will result in a huge demand in the legal market.

On an academic level, the recent successful legal dialogue between the Turkish and Chinese Legal scholars entitled the "Reopening the Silk Road in Legal Dialogue between China and Turkey," confirmed our expectations of a long-term prosperous relationship between the two countries on every level.

In order to strengthen economic and business relations between the two countries, high quality private sector collaborations gave rise to the foundation of the Turkish Chinese Business council that was established in 1992 under the DEIK² (Foreign Economic Relations Board), working with its counter-partner institution, the China Council for the Promotion of International Trade (CCPIT). According to the Council, it welcomed many business delegations from China, formed a platform to bring them together with Turkish companies, conducted trade inquiries, underlined problems at official levels, and regularly circulated information on business opportunities to its members. At first blush, the past economic relations between Turkey and China disprove the existence of promising bilateral trade and economic collaboration. However, DEIK further empathized that the present outlook of the bilateral economic relations does not reflect the real potential between the two countries. The balance of bilateral trade is against Turkey to a significant degree: Potential in construction, energy, food, leather and building materials industries exists.³

Background of Bilateral Treaties between China and Turkey

Bilateral agreements between Turkey and China may be concluded following: the Trade Agreement (1974); the Economic, Industry and Technical Cooperation Agreement (1981); the Investment Promotion and Protection Agreement (1990); the Double Taxation Prevention Agreement (1995); the MOU for Establishing Trade Consultation Mechanism Between MOFTEC and UFT (1999); the Framework Agreement on Further Expanding and Deepening Bilateral Trade and Economic Cooperation Between the Turkey and China (2010, ratified on 12th January 2012, but not yet promulgated in the Official Gazette); the Memorandum of Understanding on Initiating a Joint Study for Medium and Long-Term Development Plans on Bilateral Trade and Economic Cooperation between Turkey and China (2010); the Memorandum of Understanding on Enhancing Cooperation in Infrastructure Construction and Technical Consulting Services in Third Countries Between Turkey and China (2010); the Memorandum of Understanding on the Composition of the Joint Working Group on the New Silk Road Connection Between the Ministry of Commerce of the People's Republic of China and the Undersecretariat of the Prime Ministry for Foreign Trade of the Republic of Turkey. ⁴

Within the bilateral agreement between Turkey and China, the Memorandum of Understanding on Cooperation in the Energy Sector which was signed between Republic of Turkey, Ministry of Energy and the National Energy Administration of the People's Republic of China is primarily a cooperation memorandum, the memorandum was highly praised by both Turkey and China and seen as a new era has been started between Turkey - China relationship.

Investment status between Turkey and China

Corporation possibilities between China and Turkey

To understand the China's importance for Turkey, it should be stated that China is the biggest trade partner of Turkey in the Far East and China is the 3rd country within the Turkey's import ranking.

China holds second-place ranking in the world for creating funds and development projects. It is vital information for Turkish companies to be fully aware of the fact that the Chinese government has placed priority on these efforts.

In order to promote trade volume between the Turkey and China, the Turkish Chinese Business council is working on an Asia-Pacific project. Within the project, there is a sub-category that focuses on Chinese market research. The project is also focused on construction, chemistry, automobiles, textile, and textile machinery. These sectors are very important for Turkish export business in China. ⁵

Foreign companies continued to have mixed experiences in the Chinese business Market; many have been extremely profitable, while others have suffered major financial loss.

According to the DEIK'S report, it is difficult for Turkish investors to enter into the Chinese market -- the main reason being is lack of knowledge as to the Chinese market. Obviously, there is huge difference in the income and consumption cultures between Turkey and China. Therefore, small and medium sized enterprises (SMEs) that aim to launch their business in the Chinese market should have knowledge of restrictions, regional differences, legislation, distributions channels, and business culture regarding the Chinese business market.

Entering the Chinese Business Market -- challenges and knowledge for investors

Breaking into the Chinese market successfully is not an easy task for foreign companies with limited or no experience of doing business there. With respect to the Chinese market, investors should be aware of the regional characteristics. China is not a singular and homogenous market. Although China is unified in the geo-political sense, socially and economically, the picture is much more disparate and fragmented.⁶ It is fair to say that China is a market with combinations of many.

The nature and make-up of markets in different parts of China also vary considerably, which means that foreign companies should consider carefully which geographical location offers the best vantage point to target the broader Chinese market.⁷ Some regions are prone to foreign investment with a progressive approach. The recent Forum clearly indicated that the Turkish businessmen are mainly targeting Guangzhou for their entrance into the Chinese business market, which is a city is in China's Tier 1 group of cities with mature business markets. It would be suitable for the Turkish investors to make their entrance into the Chinese business market in Tier 1 cities, as compared to other European countries, the Turkish entrepreneur in the Chinese market is still considered to be a newborn child with limited experience in the fast-growing Chinese market. Many Turkish foreign investors have preferred Guangzhou among the Tier 1 cities. Although the city has much to offer in terms of mature consumer behavior, the cost of entrance is much higher than growing economic Tier 2 cities with potential future. Some of the Turkish investors have stepped up their move towards taking advantage of lower set-up and operating costs in the T2 cities, and have successfully launched their businesses. For instance, Shenyang Star Mall Plaza, which was collaboratively invested and established by the famous enterprise, the FIBA Group, and the Turkish Real Estate Development Company, the Turk Mall was established in Shengyang 2007, with the special focus of operating in the commercial real estate development sector in China.

Policy and Regulations

It has been indicated that the experience of foreign firms in one city differs from the other. One should take into account the municipal legal environment prior to doing business in China. Although it was reported that after acceding to the World Trade Organization, many reforms have been made by China, but yet there remain quite a few areas that do not comply with international standards. One of the major pitfalls is that the Chinese economy is far from being transparent, and many industries remain heavily regulated, and subject to limitations.

Lack of government transparency and inadequate disclosure of information lead to corruption, and distortion of free competition and work to the detriment of public interests. One vital question that should be asked is to what extent does China show deference to the WTO obligation?

After acceding to the WTO, the WTO put forward the general principles of an open and transparent government information disclosure system, but China has not enacted the special laws on information. The public has no access to information that it requires except, for some, through "unusual means." On the other hand, officials who are in control or possession of information resources often regard this as a "right" that is often abused for selfish ends.⁸

At the end of 2011, the central government, again, introduced new foreign investment category guidelines: The Foreign Investment Industrial Guidance Catalogue (2011 Revision) (the "2011 Catalogue") issued by the Chinese National Development and Reform Commission (the "NDRC") and the Ministry of Commerce (the "MOFCOM") went into effect in China on January 30, 2012. It is a central policy of the Chinese government that foreign investment must be made in a manner that is consistent with Chinese policy.⁹ The central government believes that in a way, this will promote China's development.

The guidance has divided its industrial projects for investment into four categories, classified as encouraged, permitted, restricted and prohibited. These are set forth in the Industry Category Guide for Foreign Investors. Secondly, the scale of an investment amount is also worth noting. For large investment projects of USD 30 million or more, the approval authority rests on the central government (the State Council Ministries); for projects under USD 30 million, in the unrestricted category, or quota free, or license free, the approval authority goes to the local government departments.¹⁰ Again, it would be crucial for investors to conduct thorough research with each local government's policy before entering into the Chinese market.

Therefore, it is critical to spend time researching and understanding the regulatory environment prior to making any decisions to enter the market. Having entered the market, it is equally important to constantly monitor for any changes to legislation or regulations, and how these could affect your business. Chinese regulatory bodies often operate in a fairly opaque manner, making it difficult to anticipate regulatory changes before they happen. ¹¹ It is also vital to observe the Chinese market, to see the potential business affiliates, and to verify the credibility of the business affiliate.

Choosing the right vehicle for entry into the Chinese business market is one of the most crucial decisions a business can make when entering China for the first time. It would be wise to consult with market research specialists and legal consultants prior to investing in business in China.

Factors that should be taken into account regarding the Chinese market

Chinese Business Culture

Prior to conducting business in China, it would be wise to obtain knowledge of the Chinese style of doing business that would require one to have a minimum knowledge of the Chinese culture. The Chinese culture is based on what is considered to be a genuine relationship, or "Guan Xi." The word "GUANXI"comes from the word "relationship," as the Chinese prefer to conduct business with someone whom they trust. The Chinese place much effort in socializing and building up relationships with others as they believe that "Guanxi" is the foundation of a successful business. In a way, a level of trust has to be established before a successful business partnership. Sometimes, without knowledge of the Chinese culture, the Chinese way of long-term relationship building might exhaust others, or sometimes it can be misread as though they are avoiding reaching a mutual agreement. In a dialogue between an official of a Chinese company at the "Istanbul Guangzhou Forum," she advised me, in confidence, that "Guanxi is good with the Turkish partner -- everything will work out through good communications and negotiations."

Protecting Intellectual Property Rights in China

The issue of protecting intellectual property rights (IPR) is the single biggest hurdle for most companies to overcome when considering entering the Chinese market. Since joining the World Trade Organization (WTO), China has strengthened its legal framework and amended its IPR and related laws and regulations to comply with the WTO Agreement on Traded-Related Aspect of Intellectual Property Rights (TRIPs). Despite stronger statutory protection, China continues to be a haven for counterfeiters and pirates.¹²

Introducing foreign products into the Chinese market at lower prices is common practice in China. The Chinese government has taken legislative measures regarding the situation to prevent these activities, but this negative situation continues in varying fashions. In addition, it has been suggested that some Chinese entrepreneurs register world-known brands that are not yet registered in China, thus taking advantage of the name. we also advice Turkish Businessman to register their brand together with the translation, it has been indicated in the past that there was abuse of translating brand names into Chinese and take advantage of the brand name.

In an effort to combat counterfeit foreign brands in the country, a coalition of international businesses founded "The Quality Brands Protection Committee (the "QBPC")," supported by the former Ministry of Foreign Trade and Economic Cooperation, was formed in March, 2000, and registered under the Chinese Association of Enterprises with Foreign Investments (CAEF). Until now, with over 200 multinational member companies, the Committee has not only lobbied for laws and regulations for intellectual protection, it also aims to work cooperatively with the Chinese Central and local governments, local industry, and organizations to make positive contributions to intellectual property protection in the People's Republic of China. Among the member list of the QBPC, there is no Turkish company listed.

The Fabak firm started business more than 20 years ago dating back to 1993. With its silk and cashgmier brand, Fabak's business is originated in the region of Inner Mongolia. The firm exports to the US and EU. They have 27 outlets worldwide, and yet fail to recognize the importance of protecting brand quality.

Visa process and requirement

One the major difficulty arises between China and Turkey, since 15th of June 2008, obtaining a Chinese visa for Turkish nationals has become very difficult. It was expected that after the Chinese Olympics less restrictions would be imposed, but yet the same problem continues. This problem also encompasses work permits for Turkish businessmen. Facilitating visas and work permits for Turkish citizens who predominantly live in Guangzhou China was one of the dialogues at the Guanzhou Istanbul Forum. This regard is highlighted between the lines of trade and investment. Turkish side emphasized that further development of transport and travel facilities is one of the most important aspects of trade and economic relations improvement.

Commercial Transactions in the Chinese Banking System

In China, the majority of foreign trade and finance connection is regulated by the Bank of China. Recently, the banks such as Construction of China, Industrial and Commercial Bank of China, Agricultural Bank of China, and CITIC Industrial Bank issue letters of credit increasingly. Foreign banks registered in china are also allowed to issue letters of credit. However, with respect to confirmed letters of credit, there is debate yet to be held over this matter.

In the past, Chinese Bank have not issued confirmed letters of credit; however, a very significant change is that some major banks, such as the Bank of China will, when issuing L/Cs, now be prepared to ask another bank to add its confirmation. This was almost unheard of until recently; however some of the smaller, local Chinese banks will adhere to the old perception that it is not honorable to ask another bank to add its name to an L/C. In these cases, silent confirmations and commitments to negotiate remain relevant.¹³

However, according to the Bank of China, the qualification for a confirmed letter of credit has to be met under the condition that the issuing bank is a financial institution granted with credit, and having a good credit standing.

Obviously, foreign banks in China with good reputations may be categorized as having good standing. Until now, only Is Bank and Garanti Bank have opened their branches in China. This is helpful in order for Turkish banks to be known in China. In that respect, it would only make sense to advise the Turkish Businessmen to issue their letters of credit through these two banks.

In this instance, an issuing bank in China requests the confirming bank in Turkey for the beneficiary's credit confirmation; then, the Turkish bank provides the gaunrantee. However, what will happen if the Turkish bank nominates a Chinese Bank as the confirming bank?

Garanti Bank

Garanti Bank established a branch in Shanghai in May, 2009; however, it is not yet providing banking services. Currently, Garanti Bank is mainly focusing on monitoring recent developments in the banking system in China in an attempt to be more proactive in the development of relations between China and Turkey in the banking sector, in general. In addition, Garanti Bank aims to learn the legal structures regarding finance, project, economy, commerce and banking in order to develop relations with the Chinese banks.

Iş Bank

Iş Bank Shanghai Agency was established on the 25th of April, 2006. In comparison with Garanti Bank, it has a long-standing tradition in China. The main activity of the agency is to promote Iş Bank to the Chinese institution firms, and to establish relations between local and foreign firms that are involved in commercial activities in China. By promoting Iş Bank Agency, it aims to get larger shares of foreign transactions in China. It has been providing consultancy services to Turkish firms that are interested in the Chinese business market.

Legislation and Bureaucracy

One of the biggest challenges is that the legislation and common practice can be very different. Due to the lack of transparency, foreign firms are disadvantaged at receiving information about the modifications of the laws, and foreign joint ventures may have slightly better access to this information having a Chinese partner who is familiar with the local laws and the ways in which new laws are introduced. In this respect, the joint venture (JV) business model is recommended and still brings with it many advantages. and can often be seen as a lower-risk strategy than the wholly foreign owned enterprise (WFOE). However, one should give credit to a growing number of foreign companies that are 'going it alone' in China with successful businesses being established in all parts of the country.

It should be noted that there is a difference in the application of law between the central authority and the local authority. This situation results in non-transparency in law, but sometimes ends up providing a favor regarding the foreign investment wherein in order to attract foreign investors, the local government introduces advantageous offers. However, on a further note, the current legislation or practice in China still favors local investment as a part of the Bureaucracy. Again, we are still positive in our thinking that China will fulfill its obligations and commitment as a new member of the WTO, as we believe China will make its best effort to improve its legal environment for investments.

Footnotes

^{1 Having already established a country representative in the Turkish Chinese Business Council under the DEIK, does this mean that there will be Guangzhou Istanbul Business Council with the main targets of these two sister cities?}

^{2 DEİK was formed in 1988 and gained its legal mandate as a private sector institution due to the enactment of the new regulation based on Law No. 5174 / Clause 58. According to the new regulation that came into force on June 23, 2008, DEİK was reorganized by the prominent private sector institutions of Turkey such as unions, foundations and associations. The foremost purpose of the Foreign Economic Relations Board of Turkey (DEİK) is to pave the way for the development of Turkey's economic, commercial, industrial and financial relations with foreign countries, as well as international business communities. DEİK believes that increasing industrial cooperation, widening the foreign trade network, and opening up the Turkish service sector to the global economy are essential in achieving this target.}

^{3 According to the DEIK, http://www.turkey-now.org/Default.aspx?mID=131&mSID=135&pgID=1228&langid=1}

^{4 The Bilateral Agreements provided above does not reflect the volume of current agreements. The author selectively chooses few among the agreements signed between China and Turkey.}

^{5 DEIK's Report on China.}

^{6 Mark Hedley, White Paper on Entering Chinese Business to Business Markets: The Challenges and Opportunities.}

^{7 Supra Note 7.}

^{8 Wang Feng, Legal Environment of Foreign Capital Investment in the Current Chinese Situation, Problems and Suggestions}

^{9 Steve Dickinson, China's New Foreign Investment Catalog. The Scope of FDI. http://www.chinalawblog.com/2012/01/chinas_new_foreign_investment_catalog_the_scope_of_fdi.html}

^{10 China Overview, Investment Guidelines in China. http://www.china-investment.org/china-overview/guidelines.htm .}

^{11 Supra note 7.}

^{12 Protecting Your Intellectual Property Rights, A Practical Guide for US Companies. 13 Mark Hayward, Trading with China by Letter of Credit, http://understandinglettersofcredit.blogspot.com/2011/08/trading-with-china-by-letter-of-credit.html .}

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.