The U.S.-China relationship has consumed global attention—particularly from a business perspective. Despite trade tensions and slowing economic activity, China boasts one of the fastest growing economies in the world.
“China represents a huge market for businesses, whether you’re a startup or you’re an existing middle-market company trying to grow your market share,” said Tom Chang, senior vice president and head of cross border banking at East West Bank.
However, there are some key guidelines that you must be aware of to enter into a successful joint venture. In this article, we’ll touch on regulatory concerns and how to put together a joint venture team.
Study the Chinese regulatory environment
China’s economy is highly regulated, so you need to understand the government’s policies surrounding your industry before you pursue a partnership. “The Chinese government specifically promotes the growth of certain industries and places tighter controls on non-encouraged industries in order to shape the country’s economic development,” Chang said.
As a capital-controlled environment, China places rules on inflows and outflows of currencies, which means businesses can’t simply wire funds in and freely convert them between USD and RMB, according to Chang. Instead, you must work with banks to provide specific supporting documents to comply with regulatory standards.
Given this complex regulatory environment, commercial banking for wholly foreign-owned enterprises (WFOEs) in China is a highly customized service with a strong advisory component. It’s important to have the right professional team in place, including accountants, lawyers and bankers who will keep you aware of the latest regulatory requirements.
Put together your joint venture team
Assembling the right team to manage your China investment is essential to your success, as well as to stay in compliance with domestic and international laws.
“It’s important for CFOs and business owners to understand that there are a lot of opportunities in China, but at the same time, you need to make sure you fully understand all of the necessary requirements and what are the pitfalls to be aware of,” Chang said.
Among the most important appointments you’ll make is your business manager in China, so be discerning when choosing this person. The same standards apply here as selecting your foreign bank partner: transparency, communication and service. The business manager must keenly understand the company’s interests and obligations, and be meticulous about maintaining all required records.
You’ll need to select a commercial bank advisor, as well. Chang said that while the bank can’t advise the company on tax matters, it can provide banking regulatory guidance, which is critical to understanding capital controls.
“The bank is the ultimate gatekeeper to review those documentations, so why not talk to the bank directly and find out what are the documents required before you go down that path?” Chang said. This is a particular concern with regard to profit repatriation. The most common method businesses choose is to distribute profits out of China through dividends, but there are documentation protocols and rules (such as producing and verifying audited statements) that must be followed in order for those to be lawful.
Unsurprisingly, you also need a good tax advisor, according to Chang. In addition to the corporate income tax, businesses that operate in China must also pay a value-added tax (VAT). Chang noted that if you’re not in compliance with Chinese tax law, your operations there could be shut down, so it’s critical that you understand your obligations. It’s imperative that you have an advisor who is versed in the legalities of transferring money into the Chinese subsidiary, as well.
You also need to assemble legal counsel that represents the right type of expertise. “Hiring someone locally who understands the international component, as well as local authorities, is very important,” Chang said.
Don’t default to hiring an attorney because they’re based in one of the big Chinese cities. “He or she may not necessarily be fully familiar with where your factory is located, [and] he or she will still have to deal with local labor and tax laws,” Chang said. Seek out a reputable international attorney, but make sure someone on your team can attend to local regulatory practices, as well.
Finally, connect with your peers in the WFOE space. You can learn a great deal from their challenges and experiences, and Chang recommended inviting them to be part of your advisory team, where they can serve as go-to resources as you establish the venture.