The perils of being a nonentity

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The rapid growth in China’s economy and its propensity to trade in the 21st century has brought teething problems along with opportunities. Not least among the issues has been the navigation of a legal framework geared up for regulation, not commercial activity. China’s commercial law and indeed its legal system as a whole have traditionally been viewed as part of the apparatus of government.

While China’s lawmakers have shown signs of flexibility by adopting certain Western practices and concepts, non-compliant companies have faced severe sanctions. And those who’ve chosen to set up shop in China without even securing their status as legal entities can hardly complain when their hosts throw the book at them.

Better by far to get the right advice and play by the rules from day one. What are the options for overseas companies seeking to establish a legally recognised presence in this lucrative market?

A representative office offers a minimal legal presence, an intermediary equipped and entitled to assess market opportunities. Representative offices are low-cost and low-maintenance, but as a rule they won’t be allowed to engage in sales activity, sign binding contracts or issue invoices.

A joint venture between a foreign operation and a Chinese company offers a presence and a degree of local knowledge and credibility, but entering into this type of agreement inevitably means relinquishing a level of control, and differences in working practices can sour a partnership very quickly.

A wholly foreign owned enterprise (WFOE) offers 100 percent ownership to foreign shareholders, allowing them to conduct business in China, enter into contracts, recruit local staff, engage in research, development and marketing, and to issue invoices and accept payment in Chinese currency. A WFOE must be clear about its scope and aims, and will usually be expected to stay within the boundaries set for it.  

Whichever option companies choose, accurate advice is of paramount importance. Not only in matters of law but in matters of language. Some have tried to cut corners by using bilingual lawyers to translate important contracts, and lived to regret it. Whatever their professional strengths, a bilingual lawyer is not a qualified translator any more than a person who owns a microwave oven is a qualified chef. The mistranslation of legal terminology in the courtrooms of Beijing and Shanghai has been a decisive factor in many cases. If you’re taking the trouble to establish yourself as a legal entity in this closely scrutinised market, why risk undoing your good work and good intentions by taking the cheap option?

Taking the decision to set up shop in China, the powerhouse economy of the 21st century, is far sighted and bold. To capitalise on this boldness and fulfil the long term vision, you need specialist help. That means listening to the most suitable legal advice, as well as putting your trust in the most suitable translation service.

 

David Jones

 

 

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