Law Office of Chinese Lawyer Roy Chan

There are three different business incorporation vehicles which can be utilised to do business in China. These are:
1. The utilisation of a representative office
2. Seeking a Chinese joint venture partner
3. Establishing a Wholly Foreign Owned Enterprise (WFOE)

Representative Office (RO)

A representative office is just a subsidiary of a foreign company in China. If your are looking for a company, which needs a local presence to manage services or coordinate outsourcing business activities or research developing Chinese market, then a representative office is useful and inexpensive vehicles for establishing a presence in China. Main purposes of a representative office are conducting market research, monitoring purchasing activities, marketing and sales administration for sales conducted between China and your parent company etc. Representative offices cannot write bill for service or sales to their clients in China. However, you can act like a liaison in matter of ordering, shipping, collecting money and so on.

Joint Venture (JV)

Joint venture is business where a foreign firm goes into businesses with local Chinese partners. Joint venture is usually established to exploit the market knowledge, preferential market treatment, and manufacturing capability of the Chinese side along with the technology, manufacturing know-how and marketing experience of the foreign partner.

Wholly Foreign Owned Enterprise (WFOE)

These are 100% foreign owned companies, originally developed for the specific purpose of encouraging foreign investment in manufacturing for export in Special Economic Zones (SEZs) in China, and they were prohibited from selling to the Chinese domestic market. Since a recent change in regulations, from 1 December 2004, WFOE's can now trade within China, and can sell wholly foreign manufactured goods in China. The capital requirements for such companies have also been dramatically reduced.

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Due to increasing market pressures and other situation-specific factors, employers are often required to terminate employees in China. This article briefly outlines some of the issues that must be addressed by employers before and after employee termination, including matters to consider during the hiring of prospective employees, from the perspective of the employer.

1. Grounds for Termination

a. Immediate Termination

An employer may terminate an employee without requirement for notice in the following situations:

(1) During the probation period, if the employee is determined to be unfit for the position;

(2) The employee materially breaches the rules and regulations provided by the employer;

(3) The employee is in serious dereliction of duty, graft or corruption causing substantial damage to the employer’s interests;

(4) The employee has established an employment relationship with another employer and that relationship affects the completion of his tasks and he refuses to appropriately remedy the situation after notification from the employer;

(5) The employee was fraudulent in concluding the labour contract; or,

(6)The employee is subject to criminal investigation.

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b. Practical Considerations
 

As termination during the probationary period is virtually at the will of the employer (an employee is required to give a minimum of 3 days notice to the employer), a prudent employer will, in the employment agreement, select the longest probationary period under the law (labour contracts of less than 3 months: no probation period; 3 months to 1 year: 1 month; 1 year to 3 years: 2 months; and, 3 years or more or open-ended: 6 months).

Employers should clearly (in writing) define the rules and regulations of the workplace and what, both specifically and generally, constitutes a serious or material breach resulting in employer’s option to terminate (this can be accomplished through the distribution of employment handbooks or other more extensive policy guides); and employers should carefully document any breach of the rules and regulations and serve written notice thereof.

An employer must give 30 days’ prior written notice or payment in lieu thereof, if it terminates the labour contract under the following situations:

(1) The employee is unable to perform his original duties or re-assigned duties, after returning from medical leave or non-work-related injury;

(2) The employee is incompetent and remains incompetent after training or adjustment of position; or,

(3) There has been a major change in ‘objective’ circumstances which were relied upon in the signing of the labour contract, and the employee and employer are unable to agree upon the modified terms of the labour contract.

(4) Document any and all performance, particularly when the employee fails to perform or underperforms; and,

(5) Provide training to employees so as to ensure they are updated with the skills required of their position.

2. Severance Compensation

a. Severance compensation is due in a number of situations

(1) The employer terminates the employee under situations requiring 30 days’ prior written notice (as previously mentioned);

(2) The employee is terminated due to restructuring or difficulties in business operations;

(3) Termination of the labour contract is proposed by employer and there is mutual agreement with regards to the termination thereof;

(4) Expiration of a fixed-term labour contract (except where the employee refuses to renew the contract on terms equal to or better than that previously concluded);

(5) Termination of the labour contract is due to the revocation of the employer’s business license; or, bankruptcy.

If the employee earns more than 3 times the average monthly wage of the locality, then the compensation will be capped at 3 times the average monthly wage and up to a maximum of 12 months.

China wasn't on business, but as a tourist. I was apprehensive due to the many preconceived notions I carried, fed by media reports of the physical and social conditions there. I half-expected stomach upsets from badly cooked food and guarding against robberies at every turn. Most of my fears were unfounded, and you can find products and services of international standard.

Many buyers are guarded about buying from China – understandably so with recent unfavorable news coverage of the country, its products, and its business practices. However, China is still the third largest exporter in the world – proof that there are plenty of serious and high quality suppliers.

Visiting China is a good starting point for doing business there. If not, there are many online and print sources to help you find quality products and suppliers, which I'll mention within this article.

These risks can be minimized by understanding all the costs involved in your import arrangement. Some may be completely hidden, and others not overtly expressed. Many costs don't come in numbers, but will nonetheless lead to bottom line losses if ignored.

Understanding the market

Before deciding on what to import, look at your local market to make sure that the product is in demand. Then find as much information as possible about the export market for that product in China. Be vigilant and ask every detail you need to know. If you cannot obtain first-hand opinions, sourcing publications are a good place to start.

For industry trends and verified suppliers information, there are free products sourcing e-Magazines that you can refer to. For in-depth studies on specific industries, pricing and trends forecast, you might want to invest in a China Sourcing Report.

Finding a trustworthy supplier

This is perhaps the most important step in your import business. A serious and dependable supplier minimizes any concerns on quality, trust and disputes.

There are a number of sourcing sites where you can find suppliers from massive directories. To find the right one can be a laborious task, but your work can be made easier by going to sites that screen suppliers before they are listed – like Global Sources Online. Under their "verified suppliers" system, suppliers need to have their company information and contact person verified and are visited 3 times in-person before being authenticated as a "verified supplier". This also means if you pick a "verified supplier", you can be sure the contact person is a legitimate representative and the company is registered and export-ready.

A good sourcing portal should allow you to easily contact prospective suppliers. They should display clear contact names, phone numbers and e-mails. The listings on Global Sources Online, for example, let you easily send direct inquiries to suppliers so you can ask further questions on their products such as price and minimum order quantity.

In 1998, China established the State Intellectual Property Office (SIPO), with the vision that it would coordinate China’s IP enforcement efforts by merging the patent, trademark and copyright offices under one authority. However, this has yet to occur. Today, SIPO is responsible for granting patents (national office), registering semiconductor layout designs (national office), and enforcing patents (local SIPO offices), as well as coordinating domestic foreign-related IPR issues involving copyrights, trademarks and patents.

Protection of IP in China follows a two-track system. The first and most prevalent is the administrative track, whereby an IP rights holder files a compliant at the local administrative office. The second is the judicial track, whereby complaints are filed through the court system. (China has established specialized IP panels in its civil court system throughout the country.) Determining which IP agency has jurisdiction over an act of infringement can be confusing. Jurisdiction of IP protection is diffused throughout a number of government agencies and offices, with each typically responsible for the protection afforded by one statute or one specific area of IP-related law. There may be geographical limits or conflicts posed by one administrative agency taking a case, involving piracy or counterfeiting that also occurs in another region. (In recognition of these difficulties, some regional IP officials have discussed plans for creating cross-jurisdictional enforcement procedures.) China’s courts also have rules regarding jurisdiction over infringing or counterfeit activities, and the scope of potential orders.

For administrative enforcement actions, the following is a list of the major players. Again this list is not exhaustive, as other agencies, such as State Drug Administration (for pharmaceutical counterfeits) or the Ministry of Culture (for copyright materials and markets) may also play a role in the enforcement process. In most cases, administrative agencies cannot award compensation to a rights holder. They can, however, fine the infringer, seize goods or equipment used in manufacturing products, and/or obtain information about the source of goods being distributed.