Table of Contents
This guide provides insight to foreign companies on how to export to China. The article covers:
- Export Environment in China
- Pre-market entry considerations (standards, certificates, restrictions)
- China market entry vehicles
1- The export environment in China
China’s economy is currently the largest economy in the world by purchasing power parity and the second largest economy by nominal GDP, representing a large number of business opportunities for foreign companies exporting to Mainland China.
China’s exports have been gradually increasing since 2000 and China became the world’s largest exporter in 2010 and the largest global trader in 2013. From 2013 to 2017, China’s economy experienced rapid growth and now plays a leading role in international trading.
Several factors may explain this significant growth, including China joining the WTO in 2001 and an increasing global demand for cheap labor and electronic goods.
The Chinese government has continued to make strides to open its markets and attract international enterprises and the first China International Import Expo (CIIE) has emerged as a product of this national effort.
a) U.S.-China Trade War
The CIIE happens to coincide with the current ongoing U.S.-China Trade War which has greatly escalated trade tensions between the two countries. However, the CIIE is designed to promote bilateral trade relations between China and the world and further secure China’s prominence within the global market.
2- Export to China: Pre-market entry considerations
a) Import standards in China
Foreign companies looking to enter this growing Chinese market and promote their products need to first consider the local laws in China and determine the most suitable type of company formation for their business.
China regularly enforces its import standards through laws and regulations to ensure national security and protect public health, personal property, and the environment.
The Standardization Administration of China (SAC) is the central body in China in charge of developing all national standards. Chinese product standards fall into at least one of four categories:
- National standards
- Industry standards
- Local standards
- Enterprise standards for individual organizations.
Foreign companies must use and adopt these numerous levels of standards to successfully participate in the Chinese market.
b) What certificates are needed?
The China National Certification and Accreditation Administration (CNCA) is responsible for China’s conformity assessment policies and organizes compulsory certification and testing of products, including the China Compulsory Certification (CCC) mark.
The CCC mark is China’s national safety and quality check and is necessary for 23 categories of products. If individual products coming into China are on the list, they cannot pass the border until the CCC marks have been obtained.
Around 20% of China’s imports from the U.S. need to obtain CCC marks. Any products not in accordance with these requirements will be held at the Chinese border by customs and the exporter will be subject to numerous penalties.
c) What are the restrictions?
Various printed materials, media, photographs, materials for warfare, such as guns, poison, and explosives, counterfeit, and other items deemed detrimental to the cultural, political, economic, and moral interests of China are barred from entering China.
d) Are there any industry restrictions?
Food products deemed harmful to public health by the National Health and Family Planning Commission (NHFPC) are restricted from entry. Food imported to China face a multi-layered food regulatory system that seeks to ensure the quality and safety of the products.
Foreign food manufacturers and exporters must register with the State Certification and Accreditation Administration (CAA) if their products are on the regulation list, especially certain items such as meat that must meet additional health requirements.
The China Restriction of Hazardous Substances (China RoHS 2) also prevents hazardous electrical and electronic products from crossing the Chinese border and requires manufacturers to comply with Chinese standards.
3- Market entry methods
Companies must fully examine China’s trade policies and their own resources, business experience abroad, and both short and long-term plans before entering the Chinese market.
Chinese agents or partners are recommended for foreign firms entering China because of their extensive knowledge of the area and expertise in complying with local laws.
Foreign companies have a wide range of options for employment solutions and establishing a presence in the Chinese market, including Wholly Foreign Owned Enterprises, Representative Offices, Joint Ventures, and other methods of company formation. Each has its benefits as well as its risks.
A Representative Office (Rep Office) is among the simplest, cheapest, and quickest options for foreign companies to establish a presence in China.
The three basic requirements are that a foreign company or corporation (or similar foreign entity) that has existed for two years must control the Representative Office, a Chief Representative must manage it, and the Representative Office must have an approved working area for a year after the acceptance of the Representative Office by government officials.
The setup time usually takes only about 2-3 months to establish. A Representative Office is not qualified as an independent legal person and its business operations face numerous limitations.
These restrictions prohibit companies from trading, deriving profits from daily operations, directly hiring local staff, and only allow companies to engage in certain activities (such as market research, promotion, and personal premises).
Representative Offices are also subject to taxation of a minimum of 10% on their gross expenses.
Rep Offices can manage the payroll of foreign employees and issue permits to up 4 foreign workers (including the legal representative) but a Chinese agency is necessary for employment and payroll operations of local employees.
A Wholly Foreign-Owned Enterprise (WFOE / WOFE) is the most common business structure among foreign companies in China.
While establishing a WFOE is a significantly longer, more complicated, and more costly process than other methods of company formation, WFOEs do not require a Chinese partner and so provide the most freedom to companies by increasing autonomy and efficiency.
Additionally, a WFOE allows a company to trade, manufacture or provide services, legally make a profit, directly hire local staff, and repatriate funds overseas.
WFOEs are also full legal entities under Chinese Company Law and it is legally necessary to have a WFOE (or another form of a legal entity) in China if a company wishes to hire Chinese employees and/or if payments are made in RMB.
A Joint Venture (JV) serves as another type of company formation in China and is an arrangement between a foreign and a Chinese partner who creates a new business or official relationship and then shares administration responsibilities, operation and investment costs, and financial losses and gains.
Equity Joint Venture (EJV) and Contractual Joint Venture (CJV) are the most common types of JVs normally established for foreign entities.
Employment solutions or Employer of Record Solutions allow foreign companies to hire local and foreign employees without a legal entity in China and can aid in matters concerning company payroll, income tax compliance, mandatory contributions, medical insurance, and visas.
Companies frequently contract foreign staff members abroad to aid in business activities and employment solutions cover all necessary logistics for legally hiring staff and allow foreign companies to focus on their primary business matters.
Foreign companies seeking to establish business operations in the Chinese market can begin by creating a sales network with distributors in the area of interest. These distributors can then assist in monitoring and adapting to changes in both local and national regulations and policies while also gathering market data.
The growing Chinese market provides a series of opportunities for foreign companies wishing to further develop and expand their operations. Planning well in advance before entering is essential for business success in China and FDI China is prepared to provide the necessary solutions.