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China Real Estate Market - Foreign Business Establishment

By Xiannian Ye

This article is from realtor.org. Please contact the author with any questions.

There are several types of investment/business form for foreign investors or operations to conduct business in China including Sino-foreign joint ventures, Sino-foreign cooperative ventures, wholly foreign-owned ventures and cooperative exploitation. Each of them has its unique advantages and disadvantages depending on finance resources, market goals, tax purpose, and other factors.

Based on current laws and regulations, the establishment of foreign invested enterprises will go through the item-by-item examination, approval, and registering system. These procedures are implemented by various government agencies. Basically, there are four steps to establish joint ventures and cooperative enterprises. They are listed below:

1. To submit the project proposal concerning the establishment of the enterprises. Upon the approval by relevant departments (Planning departments or managing departments of technological reform), all the involved parties can start to work on researches of the project feasibility;

2. To submit the research reports on projects feasibility. Upon the approval, all involved parties in the investment can negotiate and work toward signing legal documents, e.g., contracts and regulations of the enterprises;

3. To submit the contracts and regulations of the enterprise to be established. Upon the approval of the departments in the Ministry of Foreign Trade and Economic Cooperation, the examination and approval institutions will issue the approval Certificate for establishing foreign invested enterprises;

4. With the approval certificate, the investors go to the administrative institutions of industry and commerce to complete the procedure of registration for the enterprise.

5. The procedures for establishing foreign invested enterprise are comparatively simple. The application along with the regulations of the enterprises and other relevant documents can be filed after the tentative project application reports are approved in written form by the governmental examination and approval authorities. Upon approval, the foreign enterprises can go through registration procedures with the approval certificate.

The following are major market entry strategies for foreign businesses:

Establishing a Representative Office. Representative offices are probably the easiest type of offices for foreign firms to set up in China. But these offices are limited by Chinese law to performing "liaison" activities, which means they cannot sign sales contracts or directly charge customers or supply parts and after-sales services for a fee. Most representative offices perform these activities in the name of their parent companies. Despite limitations on its scope of business activities, this form of business has proved very successful for many U.S. companies as it allows the business to remain foreign-controlled.

Foreign concerns may also choose to open branch offices under China's Company Law. While representative offices are issued a registration certificate, branch offices obtain an actual operating or business license and can engage in profit-making activities. A representative office gives a company increased control over dedicated sales force and permits greater usage of its specialized technical expertise. The cost of supporting a representative office or branch office varies depending on location, size and how it is staffed. The largest expenses are rent for office space and housing, expatriate salaries and benefits.

Foreign companies that wish to apply for an establishment of representative offices in China should file applications with competent commissions, ministries and administrations of the Government of the People's Republic of China for approval, in accordance with the nature of their business. Generally, the following documents are required when applying for opening an establishment of a representative office in China:

1. A completed and signed application from the president or managing director of the enterprise, including the name of the representative office to be established, information on senior officials, its scope of business, the duration of stay, its address, etc;

2. An official license to do business issued by competent authorities of the foreign country or region where the enterprise is based;

3. Certificates of the credibility rating of the enterprise issued by financial institutions, which have regular business relations with the enterprise;

4. And, letters of authorization for the personnel with the representative office appointed by the enterprise and the resume of the personnel.

Additional documents, such as annual statement of assets and liabilities, the charter of incorporation and a list of the members of the board of directors, may be also required, particularly for banking and insurance concerns that are approved on a selected basis.

Once approved, the concerned firm will need to contact the State Administration for Industry and Commerce of the People's Republic of China to complete the procedures of registration within 30 days starting from the date of approval. A registration fee is required for the assurance of the registration certificate.

Establishing a Chinese Subsidiary. A locally incorporated equity or cooperative joint venture with one or more Chinese partners, or a wholly foreign-owned enterprise, may be another option in developing markets for a company's products or services. Obviously, the role of the local partner in the success or failure of a joint venture is very crucial. A good partner will have the connections to help smooth over red tape and obstructive bureaucrats. A bad partner, on the other hand, may make even the most promising venture fail. The drawback for this business form includes concerns on conflicts of interest (e.g., the partner setting up competing businesses), bureaucracy and violations of confidentiality. Also, joint ventures sometimes consume lots of time and commend costly resources. Foreign companies should pay careful attention to critical areas such finance, personnel and operations to ensure success.

Franchising. China currently has no laws to specifically address franchising, but many foreign businesses are beginning to establish multiple retail outlets under a variety of creative arrangements, including some that for all practical purposes function like franchises. It was reported that nearly all of the foreign companies operating multiple-outlet retail venues in China either manage the retail operations themselves with Chinese partners (typically establishing a different partner in each major region or city) or sell to a master franchisee that then leases out and oversees several franchise territories within the territory. According to the WTO agreement, within three years of its WTO accession, China is required to eliminate restriction on equity share, number of outlets and geographical area.

Direct Selling. Direct selling was widely spread after it was introduced by foreign companies. However, in early 1998, the government started implementing a series of strict controls over this industry and requiring the re-licensing of all direct selling companies to protect consumers' interest due to some irregularities from some foreign and domestic companies. Although a few major direct selling companies were re-issued the business license, restrictions and requirements have resulted in difficult business environment. The foreign direct selling industry is working with various government departments and agencies, as part of an overall effort toward China's WTO accession, to construct a fairer business climate in this industry.

Local agents. In recent years, local sales agents have been growing rapidly. The agents handle internal distribution and marketing. Most of these companies do not have import/export authorization. They are the next layer down the distribution chain, buying imported products from those that do. They may be representative offices of Hong Kong or other foreign trading companies, or domestic Chinese firms with regional or partial national networks. It may make sense to engage several agents to cover different areas, and to be cautious when giving exclusive territories. Usually, there are at least five major regions: the South (Guangzhou), the East (Shanghai), the Central/North (Beijing-Tianjin), West China, and the Northeast.


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