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International businesses need to understand cultural as well as business expectations when establishing a foreign office in China for global trade

Global Trade: How to Open a Foreign Office in ChinaARTICLE

By Debra Donston-Miller

For U.S. companies looking to expand international trade, China is neither the easiest nor most predictable target. However, the challenges related to setting up a business presence in China may be outweighed by the global trade benefits.

China is the United States’ third-largest and fastest-growing export market, as well as its No. 1 import partner. The U.S. shipped $115.8 billion in goods to China in 2016, down 0.3 percent from 2015, according to the Office of the U.S. Trade Representative.1 Despite the slight decline, the U.S. Department of Commerce expects China to offer market growth potential for companies specializing in energy efficiency, clean technology, healthcare and e-commerce.2 Top categories for export to China in 2016 included grains, seeds, fruits (soybeans), aircraft, electrical machinery, machinery and vehicles.

Size and growth are two of China’s biggest appeals as an addressable market. The country has a population of 1.38 billion3 and GDP of $11 trillion in 2015,4 accounting for 17.3 percent of the world’s GDP.5 The growth rate of China’s economy hit 6.9 percent in the first half of 2017, higher than most forecasters originally expected – and rising at a faster rate than most other markets.6 In addition to serving the domestic market, many U.S. companies have set up global sourcing offices in China. For example, one major American retailer has 900 associates identifying and facilitating the export of Chinese-made goods to markets worldwide.7

Looking ahead, China’s newly approved 13th Five Year Plan (2016-2020) calls for policy reform to stimulate growth and sets the goal of doubling 2010 GDP and per capita incomes by 2020.8 To enhance international trade, the country has also focused on improving its infrastructure by expanding its railroad network, adding multiple seaports and building a comprehensive highway system across the country.9

With that said, international trade with China can be a complex challenge due to its size, market diversity, political system, trade conditions and currency fluctuations. China also has a more limiting foreign investment climate than its major trading partners, including the United States.10

Pathway to International Trade in China

For example, China continues to rely on an investment catalog to encourage international trade and foreign investment in some sectors of the economy while discouraging others.11 “For the developed regions of China, the goal of the catalogue is to steer foreign investment towards: 1) investment in high-value-added, non-labor-intensive businesses, 2) investment in technically advanced manufacturing, and 3) investment in low pollution and energy saving technologies,” according to the PwC professional services firm. The Chinese government particularly favors foreign investment that supports its manufacturing sector by providing access to advanced technology, PwC said.12

Once a company has determined that it makes good business sense to grow its international trade by expanding into China, there are several ways it can proceed, including setting up a wholly owned enterprise, a foreign invested commercial enterprise, a joint venture, or a representative office.13

Wholly Foreign-Owned Enterprise

Although they can be time-consuming and complex to set up, wholly foreign-owned enterprises (WFOEs) can make sense for businesses with an established product or service that can be easily imported and sold in China. A WFOE gives investors 100 percent equity and control, and WFOEs have complete jurisdiction over their internal decisions, operations, human resources and corporate culture.14

WFOEs can conduct sales, issue invoices and receive revenues. They can also convert renminbi into non-Chinese currencies, to remit money to parent companies outside of China, upon fulfilling certain documentation and procedure requirements.15

Foreign-Invested Commercial Enterprise

A foreign-invested commercial enterprise (FICE) is a variant on the WFOE. A China FICE can distribute imported or locally manufactured products throughout their wholesale, retail and franchise systems. They can also provide related services, such as storage, training and inventory management. Offices can be opened and operated anywhere in the country, but they cannot change the nature of the product they’ve purchased for sale.16

Joint Venture

There are two forms of joint ventures open to international traders in China: equity joint ventures and cooperative joint ventures.17

In an equity joint venture, which typically takes about six to 12 months to negotiate, the profits, risks and losses are shared in proportion to each partner’s equity stakes. Ownership is determined by capital contributions, but foreign investors must invest at least 25 percent into the venture for it to be treated as a foreign-invested enterprise. A cooperative joint venture has more flexibility – for example, with regard to profit sharing. However, under Chinese regulations, any joint venture partner has the right to sell its ownership interest to a third party, without the partner’s consent. The only recourse is to then purchase that ownership interest.18

Representative Office

The easiest and least expensive way to establish business presence in China is to register as a representative office, or RO. However, this process is subject to tight restrictions for international traders.

An RO can engage in indirect business activities, such as the promotion of its parent company and foreign headquarters, as well as coordinate activities and strategies in China. An RO is not recognized as a separate legal entity from its foreign parent company (which must have been established a minimum of two years) under Chinese law; legal liability remains with the parent company.19

With that said, there are many benefits for international traders to establish an RO in China, including minimal overhead investment and relatively simple foreign invested enterprise (FIE) approval procedures. ROs also provide companies considering further investment in China an opportunity to conduct first-hand market research and develop business contacts, and are therefore considered a good first step into the Chinese market.20

One of the biggest limitations of ROs is that they cannot engage in profit-making activities, accept payment for services or issue receipts. In addition, ROs cannot directly hire local employees, but must instead work through an official Chinese employment agency, and they cannot restructure into a more comprehensive form of FIE.21

ROs must declare and pay enterprise income tax on income attributed to them, as well as business tax and value-added tax on taxable revenue.22

Registration certificates are issued for ROs for a one-year term, subject to annual renewal.23

How to Establish a Representative Office

To establish an RO, companies must apply for a business license by submitting an application with the local Administration for Industry and Commerce (AIC). This process typically takes three to four months. They must then register with any other relevant authorities. Approval from specific industry sectors is required before submitting the AIC application.24

All applications from international traders must be submitted in Chinese, but can in addition be written in a foreign language. Documents that should be included with the AIC application are: certificate of incorporation for the parent company (notarized and legalized); lease or purchase contract for office space in China; application letter to establish the RO; appointment letters for the chief representative and all overseas representatives (including copies of identification documents and resumes); and capital credit certification for the parent company (notarized and legalized). It’s important to note that the AIC may request additional documentation at its discretion.25

After the AIC provides the RO registration certificate, international trading companies must complete certain procedures within a set timeframe. The timeframe will vary depending on geographic location and industry. Companies must create a record of establishment and have the official seals engraved with the Division of Entry and Exit Administration of the local Public Security Bureau; obtain the organization’s code number from the Technical Supervision Bureau; register with and obtain certificates from the state and local tax authorities and the Bureau of Statistics; register with the Administration of Foreign Exchange to create a foreign currency account; open a local bank account; register with the Customs House to create a customs record; apply for work and resident permits for foreign representatives; and apply to hire local employees through a government-authorized employment agency.26

To ensure compliance with these requirements, the agencies that supervise ROs – the AIC and the Public Security Bureau – conduct onsite investigations of ROs, typically within the first three months after registration.27

Cultural Awareness and International Trade

One of the challenges of establishing a business presence in China involves the considerable differences between U.S. and Chinese culture, etiquette, language (written and spoken) and traditions. Following are some general guidelines that international traders can apply, but it will be important for companies looking to do business in China to consult with people who are experts in the specific area of China they intend to do business in and/or colleagues who have demonstrated business success in the nation.

China has opened up in the past decade, and Chinese managers have adopted some of the traits of their Western counterparts, but one of the main differences between Chinese and U.S. business culture is regard for the group versus regard for the individual. In the U.S., employees are more likely to be held responsible for individual tasks to which they have been assigned. In China, individuals are given less responsibility and are judged more as part of a team or group.28

U.S. businesspeople working in China may find the pace of negotiations slower than they are used to. One of the reasons is the value that the Chinese place on building relationships before doing business. In addition, the Chinese tend to focus on long-term commitments and long-term rewards.29

The Chinese value punctuality. Indeed, being late is considered a sign of disrespect.30 Seniority is also highly valued in China, and it is customary to address colleagues by their titles. During occasions when you don’t know all of the people in a room, such as meetings or dinners, it’s important to find out who the most senior person is so that you can address that person first.31

When the Chinese introduce themselves to others, they refer first to their company, then their title and then their name. Foreign businesspeople should include the same information when introducing themselves to their Chinese colleagues.32

It is customary to shake hands in China, and the exchange of business cards is common. Cards should include a Chinese translation of your personal and company information. The Chinese use both hands when giving or receiving anything with perceived value, including business cards. Be sure to acknowledge receipt of a card given to you, and take a moment to show that you are reading the information on the card.33

The Takeaway

U.S. companies have a great deal to gain from expanding global trade into China. Understanding and meeting expectations on all business and cultural fronts can help to ensure a profitable and positive relationship for both U.S. international traders and their Chinese colleagues.

The Author

Debra Donston-Miller

Debra Donston-Miller is a veteran journalist, specializing in IT, business, career and education content. Formerly editor of eWEEK magazine and content director of eWEEK Labs, Donston-Miller currently develops content and content strategy for multiple organizations.

Sources

1. “The Peoples Republic of China,” Office of the United States Trade Representative; https://ustr.gov/countries-regions/china-mongolia-taiwan/peoples-republic-china
2. “China - Market Overview,” U.S. Department of Commerce; https://www.export.gov/article?series=a0pt0000000PAtVAAW&type=Country_Commercial__kav
3. “China,” United Nations Statistics Division; http://data.un.org/CountryProfile.aspx?crName=China
4. “GDP (current US$),” World Bank; http://data.worldbank.org/indicator/NY.GDP.MKTP.CD?locations=CN
5. “China’s Growth Masks Unresolved Debt and Real-Estate Problems,” The Wall Street Journal; https://www.wsj.com/articles/the-problem-with-chinas-economic-growth-1500303789
6. “GDP Growth,” World Bank; http://data.worldbank.org/indicator/NY.GDP.MKTP.KD.ZG?page=
7. “China,” Walmart; https://cdn.corporate.walmart.com/0c/29/72eab9984267992a4499bae6ba40/china-market-fact-sheet-october-2016.pdf
8. “China - Market Overview,” U.S. Department of Commerce; https://www.export.gov/article?series=a0pt0000000PAtVAAW&type=Country_Commercial__kav
9. “The world's economy without Chinese growth,” World Economic Forum; https://www.weforum.org/agenda/2016/10/the-worlds-economy-without-chinese-growth
10. “Bureau of Economic and Business Affairs: Investment Climate Statements for 2017,” U.S. Department of State, https://www.state.gov/e/eb/rls/othr/ics/investmentclimatestatements/index.htm#wrapper
11. Ibid
12. “Doing Business and Investing in China,” PwC; http://www.pwccn.com/en/migration/pdf/iic-full.pdf
13. Ibid
14. Ibid
15. Ibid
16. Ibid
17. Ibid
18. Ibid
19. “Establishing a Representative Office,” The Canadian Trade Commissioner Service; http://tradecommissioner.gc.ca/world-monde/132225.aspx?lang=eng
20. Ibid
21. Ibid
22. Ibid
23. Ibid
24. Ibid
25. Ibid
26. Ibid
27. Ibid
28. “3 Main Differences in Management Culture between the US and China,” Expertise in Labour Mobility; http://www.labourmobility.com/three-differences-in-management-culture-between-the-us-and-china/
29. Ibid
30. Ibid
31. “Business Etiquette in China,” The Canadian Trade Commissioner Service; http://tradecommissioner.gc.ca/world-monde/107932.aspx?lang=eng
32. Ibid
33. Ibid

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