Entering the Market

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The Market

China is the world’s second strongest economy, with the world’s largest population of one-and-a-half billion occupying the planet’s fourth largest country in area. The figures are huge and so is the potential. Establishing a presence in China also opens the route further into the Far East and Pacific Rim. Unlocking this potential, however, comes with challenges for foreign companies which underline why Bradford Jacobs’ global expansion is essential. Plus, in addition to the state laws, compliance with employment, payroll and tax laws vary between provinces and autonomous regions. There are speedier and more cost-effective alternatives to launching a subsidiary, with Bradford Jacobs opening the door to a hassle-free route into China.

Work alongside our Professional Employer Organization (PEO) recruitment specialists, then utilize our Employer of Record (EOR) in-country experts to handle every challenge that comes with entering the China economy. Employers can depend on our in-depth knowledge of China and how to navigate the smoothest passage to success. Here we have set out some basic summaries of what you need to make the transition into the Chinese market, whichever sector you operate in.

Starting a Business in China

China expects a nominal Gross Domestic Product (not adjusted for inflation) of 15.6 trillion US dollars for 2021 compared with US$20.5 for the United States of America, but the World Bank predicts a faster growth rate for China over the US. China’s exports reached a record high in 2021, driving a US$535 billion surplus and building on US$2.5 trillion of exports in 2020, which made it the world’s largest exporting nation outside the European Union bloc. Raw minerals processing including metals, fuel, coal, and fertilizers are at the heart of China’s industrial base along with manufacturing machinery, textiles, and armaments. Innovative entrepreneurs have seen many Chinese companies become global leaders, such as Alibaba and Tencent.

The World Bank’s ‘Ease of Doing Business’ report ranked China 27th out of 190 nations in 2020 (up from 31st), and fifth for enforcing contracts. China is comfortably in the top 50 for dealing with construction permits, obtaining electricity and registering property. Ease of paying taxes is the only category where China slips out of the top 100.

Companies must stick to strict procedure when starting a business. These include:

  • Verify and prepare to register the unique name of the company
  • Obtain a registration certificate for a new company from the State Administration for Industry and Commerce (AIC)
  • Provide details of the owners, location of the parent company and the planned activities of the subsidiary, with feasibility report
  • Appoint management board, which can comprise foreigners or Chinese nationals
  • Open business bank account and deposit minimum share capital, if applicable, and which will depend on local regulations or decisions from the State Council (not required in free trade zones)
  • Apply for a business license at the State Administration for Market Regulation (AMR), usually through a local office, which is a legal requirement for all Chinese companies
  • Provide and register Articles of Association with the AMR
  • Certain foreign investor information may need to be registered with the Ministry of Commerce (MOFCOM)
  • Register with the State Tax Administration to run payroll, income tax, VAT, and business taxes

Beyond registering the company, employers must also deal with employment terms, payroll, establishing tax schedules and ensure employees’ contracts include guaranteed benefits and allowances for such as sick leave, maternity allowances and termination and severance agreements.

Expanding Business into China

Foreign companies planning expansion into the Chinese economy will quickly realize they need to embark on extensive research before drawing up a business plan for the new territory. A detailed blueprint will have to answer many critical questions. Will staff be migrated across the world or recruited in-country? Who will handle payroll? How will your company deal with issues surrounding tax law, social security contributions, termination and severance, entitlements, and benefits? In China, these questions are complicated by having to deal with state authorities and those at provincial and territorial level who can make their own rules and regulations. Partnering with Bradford Jacobs, from the consultation stage onwards, will access our know-how on the Chinese economy and how it works; its manufacturers, distributors, where to find business support, production facilities and offices and where to locate the best qualified staff for your sector. We will also know who your competitors are. This is the simple alternative. By partnering a Professional Employer Organization (PEO) and Employer of Record (EOR) such as Bradford Jacobs, companies can plot a time-efficient and cost-effective path to locating and employing staff in China.

China Business Facts

  • Capital city – Beijing
  • Population – 1.447 billion
  • Regions – there are 31 provinces, municipalities, and autonomous regions
  • Official languages – main Chinese dialect is Mandarin. Other major dialects include Yue (Cantonese), Min, Gan, Xiang (Hunanese), Kejia and Hakka
  • Economy and world ranking – according to the International Monetary Fund China ranks 2nd in nominal GDP with US$15.6 trillion. For ease of doing business, China ranks 27th in the world.
  • Leading sectors by revenue – construction, real estate, mail-order and online shopping, software development and internet
  • Main exports – largest exporter in the world. Includes: electrical machinery, computers and telephones, household and hi-tech goods, plastics, vehicles, textiles, and clothing
  • Main imports – includes electrical equipment, mineral fuels and oil, computers, optical, medical, and technical apparatus
  • Main trading partners – EU, USA, South Korea, Japan, and Australia
  • Government – republic, socialist and communist, one-party state
  • Currency – Chinese Yuan

Advantages and Challenges of the China Market

Advantages of expanding into the Chinese market include:

  • Economy: China is a rapidly growing economy with GDP averaging annual increases of between 7% and 10%
  • Consumerism: China has the world’s largest population, close to 1.5 billion, with increasing income levels pointing towards a potential ‘middle class of 500 million with spending power by 2022
  • Demographics: The urban middle class is expected to account for 70% of the population by 2030, with the increased demand for luxury goods and enhanced lifestyle drawing the rural population into the cities
  • Global Profile: Innovative entrepreneurs have seen many Chinese companies become global leaders – an encouragement for multinationals to see China opening up as a market for their own expansion

Challenges of expanding into the Chinese market include:

  • Bureaucracy: State and provincial ‘red tape’ make China a potentially troublesome market to enter
  • Culture: Adjusting to a workplace and social environment vastly different to most other countries, especially those of the west. The Chinese language also presents barriers
  • Restrictions: Foreign involvement in the Chinese market is regulated by sectors being categorized as ‘encourage, restricted or prohibited’. Sectors on the prohibited list cannot be accessed by Foreign Direct Investment (FDI) partnerships or takeovers
  • Access: Despite the prospect of growing consumerism people’s buying habits are difficult to predict or assess, particularly where government encourages domestic products and producers
  • Labor: The demand for highly trained, professional staff remains ahead of supply

Limited Company / Subsidiary or Branch in China

International companies targeting China for expansion will generally choose a private limited liability subsidiary, known either as a Wholly Foreign-Owned Subsidiary (WFOE) or a Foreign-Invested Enterprise (FIE). Subsidiaries and branches have differences in how they are registered and operate. Key points are:

Main characteristics and registration procedures of a subsidiary:

  • They have independent legal status from the parent company
  • The parent company is generally free from responsibility for any debts or liabilities of the subsidiary
  • Subsidiaries can have a totally different name from the parent company, pursue independent business activities and form their own contracts
  • Obtain a registration certificate for a new company from the State Administration for Industry and Commerce (AIC)
  • Provide details of the owners, nationality and location of the parent company and the planned activities of the subsidiary, with feasibility report
  • Appoint management board, which can comprise foreigners or Chinese nationals
  • Open business bank account and deposit minimum share capital, if applicable, which will depend on local regulations or decisions from the State Council (not required in free trade zones)
  • Apply for a business license at the State Administration for Market Regulation (AMR), usually through a local office, which is a legal requirement for all Chinese companies
  • Provide and register Articles of Association with the AMR
  • A limited liability company subsidiary can have between one and 50 shareholders

Main characteristics and registration procedures of a branch:

  • Branches are an extension of the parent company and are not a separate legal entity, with the parent company responsible for any debts or liabilities of the branch
  • A branch has the same name as the parent company and follows the same business operations
  • Branches do not need share capital
  • A branch has a representative or agent acting with powers granted by the parent company
  • The parent company submits Articles of Association and full details of the owners
  • Register with the State Tax Administration
  • Apply for mandatory licenses and permits
  • Open a business bank account for local currency transactions
  • Obtain the company seal for the branch

Expert guidance is vital when weighing the options between a subsidiary and branch in China. There is an alternative route – one that is quicker, stress free, cost effective and will have you up-and-running in days rather than weeks or even months. Bradford Jacobs will locate top talent for your company. Once you select your new employee our Employer of Record (EOR) specialists will handle every aspect of employment law, including payroll and tax.