Newsletter November 2015
In late October, Britain gave Chinese leader Xi Jinping a bright red carpet welcome. With a 103 gun salute, carriage ride with the Queen and feasting on its famous fish & chips, it was the British charm he would not forget for some time. Agreements valued at US$60 billion were signed, heralding “a golden era” for the relationship.
The British government has also acknowledged that the general directions and policies of the Chinese government to continue its economic reform and market opening, would be beneficial to the 2 countries and the world.
China presents opportunities and risks… rewards are high but so are the consequences for the uninitiated. Over 10 years of operating in China, we have seen expensive lessons being learnt by corporations dipping into the gold mine.
Nevertheless, companies would need to seize this opportunity to enter the China market, as the Chinese saying:
“If you do not enter the tiger’s cave, you would not get the tiger’s cub”
Harry… on behalf of The Innovare Team
A. Authenticity Issue
In developed countries, we tend to take many things as truth. Company Registration certificates, financial documents are proof of authenticity of a company and their financial standing. Basic references taken are relied upon as there are systems in place for cross verification. However, what we take for granted in say London or Singapore cannot be applied when dealing with an emerging jurisdiction. Proper due diligence is absolutely necessary.
Several years ago, a major London recruitment agency received calls from a China company claiming to need skilled contractors for a start-up telco. The necessary certificates, and local references were provided with a generous margin to sweeten the deal.
Our China office were approached to provide work permits and payroll the contractors. However, as we have not heard of the client, we suggested a due diligence be conducted to ensure authenticity of the information provided. This can be done via visits, verification of documents with proper authority as well as a financial review. This was not done and unfortunately, after three cycles of payrolling the contractors, the agency could not collect any money from the client and eventually could not contact the client representatives. It resulted in a large write-off and China and even Asia aversion for some time, missing out on the real opportunities.
B. Debt Collections
The culture of honouring payments promptly for services rendered improves over time but is still work in progress. This is particularly a problem where the service providers are managing such a relationship from a distance.
Recently, a recruitment agency began supplying contractors to the large China client. All contracts were properly discussed, agreed and signed. The project was proceeding well. However, when the payments became past due, the worried agency gave active chase. The client then began asking for breakdown of costs, margins and wanted to re-negotiate the pricing. The situation was finally diffused after numerous calls, emails, visits and discussions with our local team.
One has to have a buffer and provide for active debt management. Just as important, an on the ground relationship helps to push things along (Guan Xi 关系).
C. Law vs Enforcement
In a society which emphasises much in learning, there are laws that cover most aspects of business. However, the extent which the laws are enforced is different on the ground as well as between provinces.
A case in point would be the issue of social security contributions in China.
China’s social security law was put in place by the central government but its administration and specific details are governed by local authorities. For example, employer and employee contribution rates and caps for each benefit vary according to local provinces and are subject to annual changes and reforms. The contribution to China’s social security system is compulsory for Chinese employees and their employers as well as foreigners employed in China.
However, until 2011, foreigners were not required, in practice to pay social security (in part, as they would not stand to benefit from the social security safety net). This suddenly changed in 2011 since the China’s Ministry of Human Resources and Social Security passed the Interim Measures for the Participation in Social Insurance of Foreigners Employed in China. As a result, companies relying heavily on expatriates could incur up to 37% in additional employer burden although there is a cap on the max amount of contribution. With the exception of Shanghai, almost all cities in China have adopted this social insurance policy for foreigners.
Contracts, therefore have to cater to this flexibility with some cost sharing burden. Again, an on the ground representative with a good measure of Guan Xi to mediate would be necessary.
Nevertheless, many companies have successfully navigated their way into China. Don't be disheartened... with a careful and informed approach, many of these risks can be managed:
"The pestle can be grinded into a needle, as long as you keep working hard." - Chinese proverb.
Innovare operates a dedicated China desk, managed by Mandarin speaking team.
Should you need assistance in China, we would be pleased to hear from you. Please contact:
Tel: +65 6336 7966
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