According to McKinsey, China added, “the equivalent of the entire Australian economy to its GDP” in 2019 alone.
In light of this, it is no surprise that China is now the No. one world destination for foreign direct investment, according to recent UN figures.
And within China itself, GDP growth is set to surge relative to other world locations (see figure 1 below).
But foreign businesses need to do their research before spending money — or signing the lease on office space. Starting a business in China is different than it is in, say, the United States. You’ll find that the government has more involvement in the business world, and there may be a little more paperwork.
Even though you may have to jump through a few more hoops, you’ll find that China is one of the most fast-paced and rewarding business environments in the world.
Read on to discover the 9 steps to start a business in China as a foreigner, from picking a location, to hiring your first employees.
Source: World Economic Outlook by IMF, October 2020
Background – Foreign Investment in China
Foreign investment in the country has been under the regulation of the Catalogue of Industries for Guiding Foreign Investment (Catalogue) since 1995. This is updated every three years in accordance with China’s prevailing political and economic goals.
To comply with the provisions of the Catalogue is crucial.
Under the Catalogue, foreign investments are classified into four, as follows:
- Encouraged – includes 348 industries, eg production of food and vegetable drink, software products development and manufacture, and manufacture of agricultural machinery.
- Restricted – this means that industries under this category are subject to certain limitations. It currently includes 35 industries, eg exploration and exploitation of graphite, airport and power grid construction and operation, general aviation companies, railway passenger transportation, banks, securities, and insurance companies.
- Prohibited – At least 28 industries are not open to foreign investors in China, eg social survey, Manufacturing of weapons and ammunition, and wholesale and retail of cigarettes and any other tobacco products.
- Permitted – industries not included in the first three categories are normally permitted in China.
A complete list of all the industries that fall under each category can be found in the latest version of the Catalogue.
Starting 3 October 2016, some of these industries have been included under the Negative List.
To be allowed to do business in industries under the negative list, the investor must first acquire the approval of the Ministry of Commerce.
Step 1: Pick a Business Location
Before starting a business in China, you’ll have to decide where you want your business to be located. China is a large, growing country, and new business hubs are still emerging. However, you may want to focus on cities that are already bustling business centers, like Shanghai, Beijing and Guangzhou (formerly Canton).
Shanghai is a popular choice because of its special perks. The government actually encourages foreign business and innovation. For example, Shanghai’s 120 square kilometer Free Trade Zone (FTZ) allows many foreign businesses to operate without paying as many taxes as usual. Fewer industries are restricted from foreign investment. The government relaxes some administrative controls that are present in other cities. Office rental is easier and is of higher quality than it might be in less established cities.
While Shanghai might be a good location for most foreign enterprises, your ultimate decision depends on your specific business needs. Before making your final decision, consider key factors like:
- Talent pools
- Proximity to business partners
- Logistical needs (ports, etc.)
- Local government regulations
Don’t discount local culture, either. When you’re starting a business in China, a welcoming environment, like that in Shanghai, can mean the difference between a successful venture and a flop.
China Free Trade Zones
Step 2: Consider a Global Expansion Partner
Before choosing a legal structure for your new business in China, it is worth considering alternatives, even temporary ones. Because of strict Chinese government policies, starting a business in China as a foreigner can consume a lot of time and money. If you choose to incorporate your business with an official legal structure, the process could take months.
If you choose to start your business in China with help from a local Professional Employment Organization (PEO)/Employer of Record (EOR), you can start operating in days.
A China PEO or China Employer of Record (these terms are generally equivalent) is a global expansion partner which helps foreign companies without local entities or interests directly hire local Chinese talent. They act as the local employees’ ‘Employer of Record’, distributing payroll, benefits, and making the necessary arrangements for tax withholding.
The China PEO becomes responsible for all employee tax obligations and possible penalties in China.
Step 3: Use a Recruitment Agency to Hire Chinese Staff
When starting a business in China, it’s generally recommended to hire Chinese staff instead of foreign staff. Chinese employees will know the local market better. They may even be able to provide insights that improve your products or services. Chinese staff are absolutely critical for navigating the cultural differences that you might not expect.
However, talented Chinese employees are always in demand, especially in the current job market. It can be hard to secure the best talent since they’re constantly approached by businesses with enticing job offers.
For foreigners starting a business in China, it often makes more sense to use a recruitment agency in China to identify and secure top local talent. A local staffing team can:
- Create search strategies and job descriptions
- Find the best local professionals
- Interview candidates for a short-list
- Recommend hiring decisions
- Handle all administrative and legal duties that come with the hiring process
- Provide employee retention consulting
- Manage employee payroll and other benefits
Having local staff from the start can be a game-changer for your brand—and using a local staffing agency is the best way to secure a top-notch Chinese staff for your business quickly.
Step 4: Choose a Legal Structure
If you decide to forgo operating with a PEO alone, and decide to incorporate your business, choosing a legal structure is the next step. There are a lot of different business structures to choose from when you’re starting a business in China, and we consider the most popular varieties below. Once you’ve decided on a legal structure, you’ll face a few more considerations, like deciding on minimum registered capital.
Wholly Foreign-Owned Enterprises
A Wholly Foreign-Owned Enterprise (WFOE) is a business established by foreign parties without direct involvement from a Chinese investor: It is the most common type of ‘Foreign Invested Enterprise‘ (‘FIE’) in China.
A company is considered an FIE if 25% to 100% of it is controlled by foreign investors. As the name suggests, WFOEs are 100% foreign-owned. WFOEs come in different types, the most popular of which are Limited Liability Companies (LLCs).
The attractiveness of forming a WFOE in China lies in the different rights that come with it.
Fundamentally, foreigners who own WFOEs in the country share nearly identical rights as any Chinese business owner.
Moreover, with an LLC, owners are not held personally liable and partners are just responsible for their own investment. WFOEs may also operate as a retail store or a trading company by virtue of China’s membership with the World Trade Organization (WTO).
However, just as there are advantages, there are also disadvantages to WFOEs that any entrepreneur should reflect on.
Firstly, the process involved in the filing, registration and eventual approval of WFOEs is complex and necessitates collaboration with the following Chinese governmental bodies:
- Various local authorities;
- State Administration for Industry and Commerce (SAIC);
- National Development and Reform Commission (NDRC); and,
- Ministry of Commerce (MOC).
The process and procedures for registration and approval could take a couple of months to complete.
Moreover, there will be a required minimum capital but only for companies operating in regulated sectors. Otherwise, there is no registered capital maximum limit on WFOEs.
Finally, WFOEs are required to submit to an annual reporting of their financial books to concerned government agencies. The previous practice was a yearly inspection of government agencies of the financial books of companies. With the revision of the PRC Company Law in 2014, the reporting system superseded the inspection system.
WFOEs can engage in profit-making activities across China, and hire both local and foreign employees. Because of these flexible capabilities that limit the need for third-party operators (distributors, importers, factories, etc.). Depending on the circumstances of a company’s expansion, other legal forms that may be appropriate include:
- Sales Office through Staffing / PEO Solutions;
- Joint Venture (JV);
- Representative Office.
We consider these options in greater detail below.
Related: Company Registration in China
Joint Venture (JV)
The second most popular business entity used by foreign investors in China is the joint venture.
Given that foreigners have Chinese partners in JVs, the there are fewer restrictions, and certain industries which are not open to foreigners may become a viable option. Moreover, given that a local partner also owns the business, they can serve as a huge help in forming and running the business. They will know the best approach to challenges and serve as a medium for such issues as language barriers.
However, just as there are benefits, the risks involved in JVs need to be considered carefully.
With a Chinese partner who also has control in the business, there is also the possibility of differences that could adversely affect the business or the partner pushing the foreign investor out.
While there are intellectual property (IP) laws in the country, there is still the risk of loss of the brand, or exposure or copying of trade secrets by the Chinese counterpart.
Experiences of successful JVs in China show that success can be attributed to the constant monitoring of what happens in the JV. Relying on the Chinese partner to run the company alone simply will not work.
A Representative Office (RO), also called a Liaison Office, serves as a separate legal entity which represents an existing foreign company in China, referred to as Hongda.
Compared to WFOEs and JVs, ROs are easier to open and less costly. However, given the operational limitations imposed on ROs, this may not be a viable option depending on the purpose of the business entity.
ROs are prohibited from performing such operations as:
- Import and export;
- Accepting payments;
- Issuing Fapiao (legal receipt or official invoice in China that serves as proof of purchase for goods and services);
- Executing contracts;
- Doing business or trading with other companies;
- Manufacturing of products.
Figure 2 summarizes the pros and cons of ROs.
The Pros and Cons of a Representative Office in China
ROs are only allowed to conduct research and marketing activities, thus they are commonly not recommended.
The following are the activities ROs can do, which are beneficial to the foreign counterpart:
- Research and study the market;
- Promote the foreign company;
- Engage in such activities which will not generate profit;
- Serve as the foreign company’s marketing arm in China;
- Serve as customer support;
- Develop advertisements;
- Gather information useful to the company;
- Rent residential and commercial properties; and,
- Create a network of contacts.
Despite its inability to generate profit or collect payments, ROs could be subjected to taxation depending on certain factors, eg location, business plan, etc. Moreover, it has a short lifespan given its limited range of operation, normally about two years. Note also, a rented office space must be established prior to starting the RO.
Since one of the advantages of creating an RO is China is to study the market, however, a disadvantage will arise when it comes time to change the RO into a WFOE. To be able to turn the entity into one that can operate more extensive business, the RO must first be shut down. Only then will the foreign company be able to start the entire process of registering the WFOE.
The entire process can be completed between 6 to 18 months.
Sales Office or Labor Dispatch
The formation of a sales office (SO) through labor dispatch in China is the easiest and less costly means of doing business in the country, particularly if there is a lack of a legal business entity.
Through Order No. 22 of the Ministry of Human Resources and Social Security (MOHRSS) of China, which was enforced 1 March 2014, the use of dispatch labor became easier and more achievable.
The SO via dispatch labor business model involves the outsourcing of the administrative and legal management of the representative office of the foreign company to a PEO located in China.
As discussed above, a Professional Employment Organization (PEO) can be likened to a ready-made HR department that a foreign company effectively rents or hires to allow for the swift expansion of business in an overseas country, in this case, China.
PEOs are fully licensed entities and are certified in China to perform various legal, HR, administrative, and fiscal requirements which includes, among others, the following:
- Employee benefits services
- Worker’s compensation administration
- Tax compliance
- Payroll outsourcing & processing solutions
- Visa facilitation
- Expense management
- Health insurance administration
A PEO offers any foreign company with intentions to expand globally with the convenience of turning into its subsidiary in China, instead of having to go through the rigorous process and legal challenges of forming a legal entity in China.
It negates the delays, costs, and intricacies involved in forming a business structure, eg WFOE, RO or JV.
The foreign company may simply concentrate on how to market and strategize the business, with the administration portion left to the PEO. No direct relationship between the main company and the employees at the PEO exists. Therefore distractions and issues on the approval to operate are likewise negated.
There is a saying that “locals know best.” This can very well apply to the use of PEOs in China. The process will be greatly eased by the hiring of a PEO that will serve as the foreign company’s local counterpart. It can even help in the immigration process required, as may be needed by the foreign company.
The PEO will be in charge of hiring the foreign company’s employees in China. It, therefore, becomes the “employer of record” for tax issues, mandatory benefits, and insurance. This type of service is referred to as co-employment or joint employment.
PEOs will not just make the launch of the business easier but more importantly, it minimizes the legal risks and delays that come with hiring employees. This is because the foreign enterprise need not have a direct employment relationship with the local employees but instead contracts the PEO.
The latter, in turn, deals directly with the employees and makes use of the management fees paid to them by the client foreign company to pay the salaries of the employees. The employees will do the work required by the foreign company in China.
While there are several benefits as to the use of SOs through labor dispatch in China, there are also disadvantages.
Firstly, SOs come with limitations. Moreover, payment processes and Fapiao issuances are to be conducted by local payment/invoicing partners.
Finally, the funds of the company which is in China will be administered by the administrative partner of the dispatched employee. This means that all benefits and funds will be sent directly to China.
Making the Choice
It is important for foreign businesses in deciding the legal structure for their China expansion to carefully consider the pros and cons of each structure.
What should be considered first and foremost are the needs and objectives of the company. Those that prefer to penetrate the Chinese market in a quick and cost-effective means may greatly benefit from a Sales Office via labor dispatch.
A PEO in China can provide insurmountable advantages.
Figure 3 could help in deciding by providing the distinctions between a SO and WFOE/JV/RO.
Summary of Distinctions between SO and WFOE/JV/RO
PEO’s allow for a flexible and less costly means of doing business in China.
One good thing about it is that they now proliferate and are readily available. However, evaluating PEO’s remotely can prove difficult since they are not created equal.
As such, finding a trustworthy and capable partner PEO is critical.
Minimum Registered Capital
Once you choose a legal structure, you’ll need to determine the minimum registered capital. The registered capital is the total amount of capital contributions that must be paid by shareholders to a foreign-invested enterprise registered with the Chinese government. Technically, the Chinese government has eliminated this requirement for most WFOEs, which was always the only legal structure required to pay the minimum registered capital amount. This means that now the only required upfront costs are those for the actual registration. However, it may still make sense to declare capital anyway.
Declaring a capital amount of at least 1,000,000 RMB can:
- Help streamline the business registration process
- Open up governmental benefits, like temporary residence sponsorships and increased foreign employee allotments
- Cover initial operating costs, like salaries, rental fees, resource purchases, etc.
- Assist with the solidification of your legal structure
Declaring this amount does not mean that you have to pay it into the company all at once. Rather, this is a statement of the amount of funds that is planned to be generated by the WFOE within a fixed period of 29 years. That capital will then be used to pay for expenses like office rental, salaries, and equipment costs, for example.
Before starting a business in China with official incorporation, you’ll want to review all of the available legal structures with a lawyer to determine which best fits your needs. It is also a good idea to hire an accounting agency with China-specific expertise. Financial compliance during the company incorporation process is critical, and an accountant can help you each step of the way. Throughout the process of choosing your legal structure, it may also make sense to partner with a consultant to see whether you should register minimum capital—and how much to register.
Step 5: Create Your Business Plan
In most countries, it is useful to create a detailed business plan. When you’re starting a business in China, a thorough business plan is critical. Besides a description of your industry and product or services, your business plan should include:
- Business location
- Projected revenue
- Expected number of employees
- Budget requirements
This is a good time to plan your employment process and operational workflow, too. Review employment regulations with your Chinese lawyer and your consulting partner.
Once completed, your business plan will be approved by the government. You’ll have to stick to the guidelines you’ve written down—or risk fines or other punishments by the Chinese government.
Considering this restriction, you’ll want to create a business plan that is not so broad that it will be denied. However, your plan should not be so specific that it will tie up your business if you want to expand later.
As part of the business plan, an international enterprise will often need a robust marketing strategy to guid the expansion. Some guiding principles that have helped many foreign businesses succeed in the Chinese market include:
- Market to the Chinese buyer – Western businesses must learn new strategies to appeal to local customers and cannot rely exclusively on what has been successful in other markets. Experts may be able to conduct market research on your behalf to help you determine effective marketing strategies.
- Make long-term partnerships – Focus on strategic and effective long-term partnerships. This will help you dispel hesitance against you as an outsider and show your commitment to the Chinese economy. Your choice of partner could also have an impact on your social credit score.
- Form good relationships with government agencies – Getting on the wrong side of the government can cause your business to be banned and erode your relationship. A local expansion partner with solid relationships with local agencies can help you remain compliant at all times.
- Have a local expert on your team – Engage a local partner like who can guide you through the logistical and cultural challenges ahead.
Step 6: Open a Bank Account
Opening a bank account is a necessity, especially if your business is registered as a WFOE. If your business isn’t incorporated, you can open a few different kinds of non-resident accounts like a bank account for foreigners.
Setting up a bank account can be difficult. The details you need to provide will differ from city to city, so consider calling ahead before heading in to set up an account. However, some requirements are constant. When going to set up your bank account, you can expect to provide:
- Business registration proof, such as a valid business license, enterprise code certificate, tax registration certificate, or articles of association
- A list of directors’ names
- A company chop (a seal or stamp)
- Valid ID for legal representatives of the company (responsible officers, directors, and principal shareholders)
- Company structure and ownership details
- Recorded state approval for your business venture
Popular bank choices include Hang Seng Bank, ICBC, Bank of China. You can even choose a bank that’s familiar to you. Many foreign banks have a Chinese presence. For example, companies like HSBC, Citibank, Standard Chartered, and Bank of America have a big presence in China and are trusted by foreign and Chinese business people alike. If you already have an account in one of these banks, they may allow you to transfer it to a Chinese branch.
Ultimately, having a local bank account simplifies the process of doing business in China. With a reliable bank account, you’ll have much more transparency into your day-to-day business dealings. (And starting a business in China will be that much easier.)
Step 7: Work with a Market Entry Consulting Agency
The Chinese market is rewarding—but it’s highly complex, especially for a foreigner.
No matter whether you choose to use PEO services to manage your Chinese business or incorporate your company with one of the official legal structures, you’ll want to get help from China market consulting services to help you develop a strategic market entry plan for starting a business in China.
For example, in is essential that enterprises setting up in China understand how the China social credit system can impact on their business. This is something that only a local expansion partner will understand.
A consulting partner already knows about local regulations and industries and can help your business navigate cultural differences, too. A consulting team should be able to help you:
- Assess the current market
- Craft a market-entry strategy
- Create a long-term business plan
- Determine a procurement strategy
- Conduct consumer and customer surveys
A top-tier consulting partner knows everything about starting a business in China and doing business in the local area you choose, like who the local talent is, where to buy a resource for the least inexpensive price, and how to approach a business deal.
Step 8: Protect Your Intellectual Property
First-time foreign investors are particularly wary of intellectual property (IP) theft in China. But as long as you take preventative steps, you can protect your most valuable intellectual assets when starting a business in China. Before completing any other paperwork, be sure to:
Register Your Trademark
China doesn’t recognize trademarks filed in another country. In fact, it’s a first-to-file country, meaning that the first person to file the trademark gets it legally. After ensuring that your trademark is currently available, you’ll need to register trademarks immediately and register any patents in Chinese. If your application is denied, you can still appeal. The government recognizes:
- Logos and symbols that distinguish particular goods or services as belonging to your brand
- Words, designs, letters, numbers, or 3D symbols that are unique and are associated with your business
- Combinations of colors that denote association with your business, good, or service
Watch Chinese Trademark Filings
China’s trademark office regularly publishes trademark applications so that businesses can oppose trademarks that are too similar to their own. Monitor these filings and oppose fraudulent marks before they are approved.
Work with Chinese Customs
If you register your trademarks and design patents with Chinese Customs, they can stop the import and export of counterfeit products. If you already know of any offending manufacturers and their locations, that will help Chinese Customs officials catch the culprits.
Request Takedowns on Chinese Webpages
After registering your IP, you can petition Chinese websites like Alibaba, Taobao, and Baidu to take down infringing products. With the right paperwork, this process takes about a week. As long as you take preventative steps when starting a business in China, you can keep your intellectual property safe.
Step 9: Turn In Any Remaining Paperwork
At this point in the process of starting a business in China, you’ve already chosen your legal structure, written a business plan, hired employees, and filed your trademarks and patents. Now, it’s time to turn in any remaining paperwork.
A consulting team will be particularly useful throughout this final step. They can help you determine:
- Which local applications you might have missed
- What you need for final approval from government officials
- When you can estimate paperwork completion
Turning in your paperwork may come with a few surprises. Depending on where you are, a local authority might want to see a physical example of your product or view your facilities. To prevent delays, allot more time than you think you’ll need during this stage of starting a business in China.
Conclusion: Start a Business In China
Starting a business in China can be a complex process, but with the help of a little research and New Horizons Global Partners, you’ll be able to quickly start enjoying the financial gains of doing business in China.
Interested in starting a business in China as a foreigner? We can help.