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1. The Opportunity
China is already the world’s largest economy on a purchasing power basis. The UK is the second largest European investor into China and Chinese investment into the UK has increased dramatically in recent years to establish the UK as the most popular major destination in Europe. For information on exporting to China, please see the exporting to China guide on the Department for International Trade’s website.
The Chinese government is now seeking to rebalance the economy away from investment-led growth and towards consumption. The emerging focus on innovation, higher-end consumer goods and services represents a significant opportunity for UK companies.
However, doing business in China can be challenging. The 2017 World Bank’s Doing Business report ranks China 78th in the world for overall “ease of doing business” and according to the World Economic Forum China ranks 28th on the Global Competitiveness Index. While China has started to open up its economy in some areas, there are restrictions on the extent to which foreign companies can operate in large areas of the economy. Personal relationship networks can exercise significant influence. There is a widely held perception that local companies may also enjoy greater political protection, including from local courts.
The team at DIT China and the China Britain Business Council are on hand to support and advise UK businesses who are considering entering the Chinese market.
2. Latest Regulatory Updates
2.1 Foreign NGO Management Law
China’s Foreign NGO Management Law came into effect on 1 January 2017. The law applies to all non-profit, non-government organisations legally established overseas (including Hong Kong, Macao, Taiwan) that wish to register offices or conduct activities in mainland China. Organisations that do not register or report activities under the law will not be able to legally operate in mainland China or transfer funds to locally-established NGOs.
The Communist Party of China (CPC) is the founding and ruling political party of the People’s Republic of China. Within the CPC, the Central Politburo Standing Committee (PBSC) is China’s highest and most powerful decision-making body. Current members, formally appointed at the China’s 19th Party Congress in October 2017 and whose roles became clear during the 13th National People’s Congress in March 2018, are (listed in order of seniority):
- XI Jinping, President of the People’s Republic of China
- LI Keqiang, Premier of the State Council of the People’s Republic of China
- LI Zhanshu, Chairman of the Standing Committee of the National People’s Congress
- WANG Yang, Chairman of the National Committee of the Chinese People’s Political Consultative Conference
- WANG Huning, First Secretary of the Central Secretariat of the Communist Party of China
- ZHAO Leji, Secretary of the Central Commission for Discipline Inspection
- HAN Zheng, First Vice Premier of the State Council of the People’s Republic of China
3.2 China’s Reform Strategy
In November 2013, the Third Plenary Session of the 18th Communist Party of China Central Committee (the ‘Third Plenum’) outlined the new leadership’s strategic direction. Key themes were financial reform, including greater RMB exchange rate flexibility; social policy such as reforms of the ‘hukou’ household registration system; and political and administrative reform, including steps to improve judicial process.
Political and administrative reform took centre stage at the ‘Fourth Plenum’ in 2014. The Plenum’s central theme was ‘Rule by Law’. While the Plenum ‘Decision’ set out plans to increase judicial independence, improve governance and transparency and instil greater accountability for Party and government officials, it was clear that the Party remains above the law.
In March 2016, China ratified its new 5-year plan (2016-2020) which forms the blueprint for China’s national social and economic development. The Plan focuses on ensuring higher-quality growth and jobs and improving people’s livelihoods, in order to reach China’s goal of becoming a moderately prosperous society by 2020.
In October 2016, the 6th Plenum launched new regulations on improving discipline within the Party and strengthening the anti-corruption campaign, President Xi was crowned ‘the core’ of the CPC, elevating his authority in advance of the 19th Party Congress.
3.3 Anti-corruption Campaign
Since 2013 the government has led a sustained anti-corruption campaign, seeking to root out vested interests and strengthen the Chinese authorities’ power, paving the way for further future reforms. A number of high-level officials have been charged with corruption and expelled from the Party, including former security chief, Zhou Yongkang.
Since the economic reforms and ‘opening up’ policy of the late 1970s, China has experienced a period of rapid economic growth, averaging almost 10% per annum for the three decades up to 2010. Over this period China’s economy effectively doubled in size every eight years.
Despite this, China is yet to become a high income country. Income per capita remains behind the advanced economies and it is ranked 90th in the world in the UN’s Human Development Index in 2015.
5. Commercial/ Legal Disputes and Travel Bans
As the number of foreign enterprises investing in China and doing business with Chinese partners has increased so has the number of commercial disputes.
There are various options available to settle a commercial dispute, principally litigation, arbitration and mediation. The most appropriate option will always depend on the circumstances of the case, and companies should seek the advice of a lawyer who specialises in the laws of the People’s Republic of China.
Before entering into a contract in China, companies should take appropriate legal advice, both in the United Kingdom and in China on including dispute resolution clauses and governing law clauses in the contract to plan how, where and under what law, any disputes will be resolved. Chinese law restricts both the choice of law and the types of resolution mechanisms that can be used in China-related commercial contracts, so the contract needs to be drafted carefully. Contracts entered into in the United Kingdom are not generally enforceable by Chinese courts.
Many foreign companies seek to resolve disputes by arbitration rather than litigation. Although it is possible for parties to reach agreement on arbitration after a dispute arises, in most cases an arbitration clause is better included from the outset. Joint ventures operating within China are considered to be domestic Chinese entities and disputes involving joint ventures will mostly be considered to be domestic disputes to be arbitrated in China. We have published advice on how we can help British nationals with commercial disputes here.
5.1 The Chop System
Under Chinese law, any entity legally registered in China must have an official company chop and a financial chop. Chops are red stamps which act as an official seal. There are several other chops with specific functions. They are used as a form of signature that is accepted as legally binding. Chops have to be made by a specialist company and registered with the local Public Security Bureau.
The holder of an official chop can bind a company in important transactions even where they have not been authorised by the legal representative or shareholders. If chops or other corporate documents such as business licences are lost or stolen a company may be unable to sign contracts, pay wages or withdraw funds.
5.11 Lost or Stolen Chops
If a chop is lost or stolen an announcement must be published in an official journal recognised by the local authorities. This makes it possible to request the cancellation of the lost or stolen chop, to have it remade and to register the new chop with the Public Security Bureau. A company must present its original business licence in order to register a new chop. If the licence has also been lost or stolen companies must request a replacement.
It is possible to file a complaint with the police with evidence a theft has occurred. However, the police are rarely willing to intervene in what they regard as commercial disputes and filing a complaint generally requires the company chop.
The most common risk is that someone will use the chops and/or official documents to take control of a company without the knowledge of its owner or a joint venture partner. Owners based outside China are at a particular risk if no regular checks are carried out on the company. If the perpetrator is the company’s legal representative or CEO/General Manager it can be very difficult for shareholders to remove them and declare their removal to the authorities without access to chops and corporate documents.
5.13 Preventative Measures
The consequences of the loss or theft of chops can be extremely damaging and hard to correct. It is therefore essential to put in place preventative measures and effective internal controls. This should ensuring chops can only be accessed by trusted individuals who need them as part of their job, that no one individual (other than the company owner) holds or has access to them all, that they are kept under lock and key and that documents that bear the company chop are checked and recorded.
5.2 Legal Liability
Directors and senior managers may face civil, administrative or criminal liability if they act in breach of Chinese law, administrative regulations or a company’s Articles of Association and cause losses to the company.
A stricter liability applies to the company’s Legal Representative (法定代表人fading daibiaoren) - an individual with broad powers and potentially unlimited liability. An individual appointed as a Legal Representative may be held personally liable in Chinese law for a company’s debts. The legal representatives of some foreign companies in China are individuals who have never set foot in China.
5.3 Intimidation and threatening behaviour
There have been incidents of foreign nationals being subject to threats and intimidation as part of a business dispute with a Chinese partner. In some cases facilities have been surrounded by employees or casually-hired support who have refused to allow the foreign partner to leave until a payment is made. Threats of violence are common although actual violence is rare. Stand-offs can last hours or days. The police may be reluctant to intervene and generally will not do so unless a situation does turn violent. If you or your family are threatened in the course of a commercial dispute, you should report it to the local police and obtain a police report.
5.4 Travel bans
The Chinese government may prohibit a foreign national involved in any kind of business or legal dispute from leaving China until the matter is resolved which in some cases can take years. This is known as a travel ban and can last for an indefinite period. Individuals might not be aware they are subject to a travel ban prior to trying to leave the country when they may be stopped; interviewed and refused boarding. If you are the subject of a travel ban, you should immediately inform the British Embassy or local Consulate-General and seek legal advice.
6. Business and Human Rights
In September 2013 the UK launched its action plan on business and human rights, becoming the first country to set out guidance to companies on integrating the UN Guidelines on Business and Human Rights into their operations. China is currently listed as a country of concern in the FCO’s annual Human Rights and Democracy Report.
6.1 Child labour
China is a member of the International Labour Organisation (ILO) and has ratified the two core conventions on child labour. The Chinese government condemns child labour. China’s Labour Law prohibits the employment of minors under 16. But reports suggest child labour remains a problem, particularly in the manufacturing and service industries. Education law supports work-study programmes where this does not interfere with normal study, but some internship programmes appear to violate Chinese and ILO standards.
6.2 Ethnic minorities
The Chinese government officially recognises 55 ethnic minority groups in China, in addition to the majority Han Chinese ethnic group. Despite anti-discrimination provisions in Chinese employment law, discriminatory employment practices reportedly persist including against ethnic Uyghur’s and ethnic Tibetans.
6.3 LGBT persons
Chinese Labour Law specifically protects Chinese workers against discrimination on the basis of ethnicity, gender or religion. There are no applicable provisions against discrimination on the basis of sexuality or gender identity.
China is committed to preventing gender discrimination in the workplace under the International Covenant on Economic, Social and Cultural Rights, and the Convention of the Elimination of Discrimination Against Women. Domestic laws are in place to promote gender equality and prevent gender discrimination and sexual harassment. China’s report to the Convention on the Elimination of All Forms of Discrimination against Women (CEDAW) in January 2014 acknowledged that problems remain in gender-based employment and pay discrimination, and sexual harassment.
6.5 Migrant workers
China has an estimated 280 million migrant workers, who have moved from rural to urban areas for work. Most are ineligible for many urban public services, and are employed in low-skilled, low-paid jobs in the secondary and tertiary sectors. Minimum wage guarantees are undermined by illegal employment practices. Migrant workers may be employed without a contract, or sign unfair contracts that stipulate a very low basic wage with long overtime needed to earn a living wage. Withholding wages is illegal, but reportedly rife and frequently causes labour disputes. Recent reforms to the hukou system of household registration have alleviated but not solved, the problem in some cities.
6.6 Working conditions and occupational safety
The Guidelines for occupational health and safety are laid down in the Safe Production Law, which was revised in 2014 to establish a blacklist for companies with poor safety records, and the Occupational Disease Prevention Law, was revised and strengthened in 2013. In addition, enterprises wishing to set-up production in China must obtain a permit from provincial authorities under the Safety Production Permit Regulations, revised in 2013.
Allegations of unsafe working environments and workplace abuses in a range of industries remain widespread. These include excessive forced overtime; exposure to hazardous materials and inadequate safety management training. Official statistics show the number of industrial accidents is steadily declining, but approximately 180 people are still killed every day in workplace accidents. Despite new regulations for filing workplace injury compensation claims, procedures remain complicated and time-consuming.
6.7 Rights of Association (Trade Unions)
The right to organise, strike and engage in collective bargaining remains strictly limited in both law and practice. Trade union activity in China must be carried out under the auspices of the All-China Federation of Trade Unions (ACFTU), a quasi-governmental body under the direction of the Communist Party. In recent years Chinese workers have become more assertive at the grassroots level about using collective action to secure their rights: illegal protests and strikes are relatively common and increasing in frequency.
A number of labour NGOs operate informally to advise and support workers in labour disputes. In Guangdong Province, where most strikes occur, regulations on collective bargaining have been introduced. They place a greater obligation on (i) employers to honour minimum wage requirements, working hour directives and social security payments and (ii) the unions to play an engaged role in dispute resolution.
7. Intellectual Property
China has increasingly sophisticated IP and legal systems which are used by large numbers of British companies to obtain IP protection and enforcement relief. However, IP problems still cost British business in China hundreds of millions of pounds each year. Damage is not restricted to businesses in the Chinese domestic market - IP infringing Chinese businesses often have global export capacity.
One source of risk is that IP rights are territorial, that is they only give protection in the countries in which they have been granted or registered. If you are thinking about trading internationally, then you should consider registering your IP rights in overseas markets. If you are a UK company selling to China, sourcing from China, or even attending the same trade fairs as Chinese companies, your IP is already exposed to risk of infringement.
Another source of risk is that the Chinese IP system works differently to in the UK. We provide factsheets on the British Embassy Beijing IP webpage to help British companies navigate the Chinese IP system. We distribute a monthly newsletter informing companies of IP regulatory updates in China. The Embassy and the China Britain Business Council (CBBC) support over 250 IP cases per year.
For more information on our IP cooperation with China or to discuss possible Embassy support please contact Tom Duke via email. Legal advice may also be obtained from legal services providers based in both the UK and China.
8. Bribery and Corruption
Bribery is illegal. It is an offence for British nationals or someone who is ordinarily resident in the UK, a body incorporated in the UK or a Scottish partnership, to bribe anywhere in the world.
In addition, a commercial organisation carrying on a business in the UK can be liable for the conduct of a person who is neither a UK national or resident in the UK or a body incorporated or formed in the UK. In this case it does not matter whether the acts or omissions which form part of the offence take place in the UK or elsewhere.
8.1 The UK Bribery Act
The Bribery Act applies to non-UK companies operating in the United Kingdom and to UK companies working overseas. It created four prime offences:
- Two general offences covering the offering, promising or giving of an advantage, and requesting, agreeing to receive or accepting of an advantage;
- An offence of bribing a foreign public official ; and
- A new offence of failure by a commercial organisation to prevent a bribe being paid to obtain or retain business or a business advantage (should an offence be committed, it will be a defence that the organisation has adequate procedures in place to prevent bribery).
The Act recognises that no bribery prevention regime will be capable of preventing bribery at all times. A company will have a full defence if it can show that despite a particular case of bribery it nevertheless had adequate procedures in place to prevent persons associated with it from bribing. Companies must therefore make sure that they have strong, up-to-date and effective anti-bribery policies and systems in place to prevent bribery by persons associated with them.
8.2 Bribery and Corruption in China
Since coming to power in China, President Xi Jinping has launched a wide-ranging anti-corruption drive. While the main focus has been on corruption within the Party and Government it has also targeted foreign and domestic companies in key sectors including energy, pharmaceuticals and transportation. It is likely that the anti-corruption drive will continue and there is therefore an increased risk of more British companies being caught up in bribery cases.
China has enacted extensive anti-bribery legislation. For serious cases this allows for up to life imprisonment for offering bribes, receiving bribes can, in some cases, attract the death penalty. The two key laws are the relevant sections of China’s Criminal Law and the Law of the PRC against Unfair Competition. In recent years the Supreme People’s Court and the Supreme People’s Procuratorate (China’s public prosecution service) have begun to issue detailed “interpretations” on key aspects of China’s legislation. These are designed to help the police and courts in the prosecution of different crimes.
The latest judicial interpretation for the Handling of Criminal Cases of Embezzlement and Bribery was issued on 18 April 2016, specifying detailed thresholds, as well as what it means in practice by “serious circumstance”, “extremely serious circumstances” and “significant loss of national interests” as outlined in the 9th Amendment to the Criminal Law passed in 2015.
Under the 9th Amendment and this new judicial interpretation, companies may be found guilty for providing money or property to former public officials, or close relatives of or any person close to the public officials for former public officials for illegitimate benefits. This act was not previously considered a criminal offence which now highlights the increased scrutiny companies and commercial relationships are now placed under.
While the authorities have taken a number of steps to strengthen the independence of Chinese courts, the judiciary is not independent of the party and the rule of law remains weak. There have been instances of the official use of state media channels to pre-empt the judicial process. The courts can be influenced by ongoing political campaigns.
In view of the continuing anti-corruption drive and the stricter measures imposed by the revised Criminal Law and this new judicial interpretation, companies doing business in China should review their compliance policies and business practices to avoid any potential violation of China’s Criminal Law.
Please follow the link to see where China ranks on Transparency International’s 2015 Corruption Perception Index.
9. Organised Crime
A number of British companies have been attracted by potentially lucrative business offers in China, which have turned out to be scams. We therefore always recommend conducting basic due diligence before making any financial commitments (e.g. checking that your Chinese counterpart is a properly registered and licensed business). More information can be found on the Chinese government State Administration for Industry and Commerce (SAIC) website’s database.
- An offer that is ‘too good to be true’ may be, in fact, just that.
- Any request to pay a fee to have a contract notarised is liable to be a scam.
- Verify the data of your business partner, make due diligence checks.
- Increase your vigilance when making deals via e-commerce.
- When making purchases use secure payment instruments. When selling, secure the payment before delivery of the products.
- Contrary to what a customer says, it is not always necessary to visit China to finalise a contract. Be wary of a customer who insists otherwise.
10. UK Export Finance
The government can provide finance or credit insurance specifically to support UK exports through UK Export Finance – the UK’s export credit agency. For up-to-date country specific information on the support available see UK Export Finance’s country cover policy and indicators.
11. Protecting the Digital Security of your Company
British companies, whatever their size, may be subject to cyber attacks. This can impact on the bottom line thefts of money, customer data or IP - and associated damage to your reputation. As a deterrent we advise companies to get their cyber security right. This is a board-level issue that all businesses need to deal with, and the 10 Steps to Cyber Security guidance provides Government advice on how to protect your business. Smaller firms starting out with implementing cyber security measures may find the related ‘Cyber Security: what small businesses need to know’ guidance more useful, as well as visiting the Government’s advisory website Cyber Streetwise.
Businesses wishing to implement the most important technical controls, and demonstrate that they take cyber security seriously can apply to be assessed under the Cyber Essentials Scheme, leading to the Cyber Essentials or Cyber Essentials PLUS badge. Companies may also wish to consider joining the Cyber Information Sharing Partnership, which shares real-time cyber threat information on cyber threats.
12. Protective Security Advice
Business people should be cautious about what information they bring with them to China, and how they use information whilst they are in China - either using IT or speaking in public places, including hotel rooms and public offices. Further protective security advice can be found on FCO travel advice.
13. Terrorism Threat
There is a general threat from terrorism in China, but the risk of attacks are higher in the Xinjiang Uyghur Autonomous region. Further information on the threat from terrorism can be found in the travel advice for China.
14. Department for International Trade Contact
Contact the UK’s Trade Policy team in China for further information.