For years, China’s huge financial markets have been largely closed to foreign financial institutions (FIs), but this trend sets to change with evolving global relationships and the demands of a growing middle class that strengthens its globalization agenda. The recent updates of financial regulations have made easier for foreign financial companies to start a business in China.
As authorities have made genuine moves to open the country’s financial sector to both attract foreign capital and broaden the financial system, foreign companies should move fast, but strategically, if they are to seize opportunities to participate in the Chinese market.
In September 30th 2019, the State Council announced a series of regulation updates, including Regulation of the People’s Republic of China on the Administration of Foreign-Funded Insurance Companies and Regulation of the People’s Republic of China on the Administration of Foreign-Funded Banks.
Below are the main changes regarding these regulations.
Regulation of the People’s Republic of China on the Administration of Foreign-Funded Insurance Companies
The latest update of the Regulation of the People’s Republic of China on the Administration of Foreign-funded Insurance Companies has removed the restrictions on Article 8 (1) and (2), which are:
- A foreign insurance company has engaged in the insurance business for 30 years or more;
- A foreign insurance company has maintained a representative office within the territory of China for not less than 2 years.
And furthermore, it added two clauses regarding the Chinese entity set up, which are:
- Article 40 – A foreign insurance group company may form a foreign-funded insurance company within China, and the specific administrative measures shall be developed by the insurance regulatory authority of the State Council according to the principles of this Regulation;
- Article 41– An overseas financial institution may acquire shares of a foreign-funded insurance company, and the specific administrative measures shall be developed by the insurance regulatory authority of the State Council.
Regulation of the People’s Republic of China on the Administration of Foreign-Funded Banks
For the Regulation of the People’s Republic of China on the Administration of Foreign-Funded Banks, there are obviously more modifications. Among the thirteen changes about the regulations, we can see that the trends are:
- Broaden the restrictions about foreign investors for setting up foreign invested bank and foreign banks for setting up foreign bank branches;
- Broaden the restrictions about foreign banks setting up a branch and an independent entity at the same time;
- Further expand the business scope for foreign invested banks and broaden the restrictions for foreign invested banks’ business operation, including allowing foreign invested banks to run new businesses which are “Issuing and redeeming as an agent and underwriting government bonds” and “Bill payment agency”;
- Adjusting the restrictions on the operation fund for foreign bank branches.
Almost at the same time, the State Administration of Foreign Exchange also announced to remove the investment amount restrictions for QFII (Qualified Foreign Institutional Investor) and RQFII (RMB Qualified Foreign Institutional Investors).
On these regulation and policy updates, we can see that in the state regulations’ level, China is in fact releasing the old restrictions for foreign investors entering into finance industry.
Perhaps the strongest indication of China’s genuine willingness to change is the recent unification of its banking and insurance regulators to form the China Banking and Insurance Regulatory Commission (CBIRC) in 2018. This establishment simplifies regulatory structures, creates transparency and efficiencies, and allows for more robust coordination with China’s central bank.
Since then, the CBIRC and the China Securities Regulatory Commission (CSRC) have implemented significant reforms to standardize market entry rules and remove ambiguity around foreign FIs’ entry policies. These include:
- Lifting foreign ownership limits which enable foreign FIs to strategically raise ownership and influence key decisions in domestic subsidiaries;
- Removing the minimum total asset to establish a Chinese entity which means asset size will no longer be a hurdle for smaller, nimble inbounds seeking new prospects domestically;
- Allowing foreign banks to immediately apply for RMB business licenses, instead of waiting a year under previous rules;
- Modifying existing rules to allow flexibility to exit business lines.
China’s new policies and reforms are attracting foreign companies to take advantage of its financial liberalization to enter its financial services market and scale up.
What are the obstacles of doing business in China?
When doing business in China, you will have to overcome different obstacles, like:
- Policy complexity;
- Special license required (even if the finance industry is opened to foreign investors, there are still special licenses required for doing business in China based on the different business scope);
- Communication and cultural difference (especially language problem);
- Complex administration work involved in corporate formation, tax accounting, human resources, etc.
However, no matter the country, finance industry entities still have other restrictions comparing with a simple consulting company.
First of all, what we have here is merely the state level’s regulation, it always takes time for the local registration authorities to capture and operate these new policies, as these are also new policies for the local authorities.
Second, although the updated policies have broadened a series of restrictions, still, it takes the highest level of approval to run such business. The state’s level of finance industry administration, which are the Ministry of Commerce, the China Banking and Insurance Regulatory Commission, the China Securities Regulatory Commission and the People’s Bank of China are still responsible for the approval for any request for entering into the core finance industry.
The application process could be very time consuming, and these authorities will process the application very carefully and strictly to evaluate if the applicant has fulfilled every law restrictions and the regulation set.
Third, the laws and regulations in China set a very detailed rule regarding every step for the company to operates. The steps involve acquiring the business license, acquiring the approval from the finance industry administration authority, acquiring the bank account, completing the tax registration process, acquiring an actual qualified working address, acquiring the social insurance and housing fund account for the employee and so on. Not to mention the strict foreign currency policy and the employee-favored employment laws and regulations.
Without the assistance of a consulting company specialized with foreign investors, every step of the process could further prolong the whole process duration.
Last but not the least, so far the policy only sets a general trend, how the policy will operate is still not clear enough. The Detailed Rules for the Implementation of Regulation of the People’s Republic of China on the Administration of Foreign-Funded Banks and The Detailed Rules for the Implementation of Regulation of the People’s Republic of China on the Administration of Foreign-Funded Insurance Companies have been separately published at the end of 2019.
In the foreseeable future, unless the investor has a strong background or strong connection with the local government, it is still not that easy to complete the process under the standard procedure.
Stages for foreign financial companies to start a business in China
Starting a business in China with all the complex policies and changing reforms can be a very tedious and a challenging task for any foreign company who is not familiar with the local laws and is unknow to all the rules governing the foreign direct investment. An in-depth knowledge of the law is required to successfully complete a company setup in China.
Foreign financial companies that start a business in China can have different problems related to aspects like:
- Which kind of legal entity create in China;
- How to hire foreigners or locals;
- Tax and accounting;
- Payroll and tax;
- Office rental.
The company has to go through three stages to start operating in China.
Stage 1 is about the employment solutions and invoicing solutions. The company has not an entity already established in China and needs to start hire staff to develop its operations, network and main business assets. The solutions that the company needs are:
- Labor contract signature
- Visa processing
- Allowances & Bonus
- Personnel tax compliance
- Statutory benefits compliance
- Expense claim
- Payment reception
- Fapiao issuance to Chinese clients
Stage 2 is about company formation (WFOE) and the office space. In this stage, the company needs to set up the legal entity and in the meantime, the staff needs to remain employed to guarantee the business activity during the formation process. To create the WFOE, the company needs some documents like:
- Business license
- Special certificates (if required)
- Company name
- Company chops
- Chinese bank account
- Social insurance and housing fund accounts
- Tax registration and organization code
- Other relevant permits
Stage 3 is about the payroll, tax, accounting, and bookkeeping. In this stage, the company is established and there is the need to transfer all the employment relationships to the new entity. In addition, the business needs support with administrative and compliance operations. In particular:
- Monthly payroll
- Individual Income Tax (IIT) compliance
- Statutory benefits administration
- Expense claim
- Tax and regulatory compliance
- PRC financial statement
- Annual audit and inspection
- Monthly and yearly bookkeeping
How can FDI China help you?
As we have seen, starting a business in China can be a very challenging task for finance companies, especially given the number of regulations and procedures that must be followed, losing valuable time and resources in the process.
FDI China can help to set up your company in China and with all the services related to employment, tax, payroll, accounting, office rental.
Contact us to know more and start your business in China!