2011

ISSUES RELATED TO DOING BUSINESS IN CHINA

Submitted By: Tarun KSG (10DM-162) Vishal Agrawal (10DM-176) Saurabh Thadani (10FN-102) Srikanth Konduri (10FN-109) Tushar Gupta (10FN-115) Nikhil Gupta (10FN-121)

Submitted To: Prof. Debabrata Datta 3/15/2011

ISSUES RELATED TO DOING BUSINESS IN CHINA March 15, 2011

Table of Contents
Table of Figures ............................................................................................................................................ 3 A Stagnant China .......................................................................................................................................... 4 Doing Business in China ............................................................................................................................... 6 Market Indicators ...................................................................................................................................... 6 The Challenges for Business ..................................................................................................................... 7 Business Opportunities ............................................................................................................................. 7 Market entry Strategies ............................................................................................................................. 8 Legal Issues related to doing business .......................................................................................................... 8 Right to Private Ownership and Establishment ........................................................................................ 9 Protection of Property Rights.................................................................................................................... 9 Transparency of Regulatory System ......................................................................................................... 9 Dispute Settlement .................................................................................................................................... 9 SOCIO-ECONOMIC FACTORS ............................................................................................................... 10 Efficient Capital Markets and Portfolio Investment ............................................................................... 10 Competition from State Owned Enterprises (SOEs)............................................................................... 10 Corporate Social Responsibility ............................................................................................................. 11 Labor ....................................................................................................................................................... 11 Corruption ............................................................................................................................................... 11 Investment Climate In China ...................................................................................................................... 12 Openness to Foreign Investment ............................................................................................................. 12 Problems with Chinas Foreign Investment approval regime ................................................................. 13 Foreign Trade zones/Free ports .............................................................................................................. 13 Foreign Direct Investment Statistics ....................................................................................................... 14 Recent Reforms driving business in China ................................................................................................. 15 Dealing With construction Permits: ................................................................................................ 15 Getting Credit: ................................................................................................................................ 15 Closing a Business: ......................................................................................................................... 15 Paying Taxes: .................................................................................................................................. 15 Enforcing Contracts: ....................................................................................................................... 15 Trading Across Borders: ................................................................................................................. 15 2 International Business Project

ISSUES RELATED TO DOING BUSINESS IN CHINA March 15, 2011

Leading Sectors........................................................................................................................................... 16 Agriculture: ..................................................................................................................................... 16 Industrial Sector: ............................................................................................................................. 16 Services: .......................................................................................................................................... 16

Cultural aspects of doing business in china ................................................................................................ 16 1) Take all the time in the world ............................................................................................................. 16 2) Separate fact from fiction ................................................................................................................... 16 3)Build relationships ............................................................................................................................... 16 4) Cultivate guanxi.................................................................................................................................. 16 5) Mobilise local assets ........................................................................................................................... 17 6) Respect face ........................................................................................................................................ 17 7) Chinese negotiators............................................................................................................................. 17 8) Meetings and Negotiations ................................................................................................................. 18 Five Business Tips for Doing Business in China in 2011 ........................................................................... 18 Web References: ......................................................................................................................................... 18

Table of Figures
Figure 1: Comparative Overall Rankings ..................................................................................................... 4 Figure 2: BRIC nation rankings in other indices .......................................................................................... 5 Figure 3: India-China bilateral trade ............................................................................................................. 8 Figure 4: Few other indices......................................................................................................................... 13 Figure 5: FDI inflow country-wise ............................................................................................................. 14 Figure 6: FDI Outflow country-wise .......................................................................................................... 14

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ISSUES RELATED TO DOING BUSINESS IN CHINA March 15, 2011

Issues related to doing Business in China

A Stagnant China
In its latest issue of Doing Business Report for 2011 published by World Bank in December 2010, the annual ranking of Ease of Doing Business in China now stands at 79th, down a place from previous year in spite of a major reform in the form of corporate income tax law (it was earlier announced in 2008 and came into effect now only), which has led to unifying the tax regime for domestic and foreign enterprises, making the system more standardized. Though enforcing contracts (15th rank) and registering property (38th rank) are comparatively easy, starting up a business (151st rank), paying taxes (114th rank) and dealing with construction permits (181st rank) are still a nightmare for entrepreneurs.

Figure 1: Comparative Overall Rankings

The poor performance on certain areas can be attributed to its Big Brother style of regulatory environment. However, compared with BRIC nations (Brazil 127th; Russia 123rd; India 134th) 1, China is still far ahead. In order to maintain its high economic growth, China will be heavily reliant on the further development of the private sector, which has to fall in terms with making life easier for entrepreneurs. There are already rumors of business tax and VAT reforms in the coming months. Apart from the previously mentioned rankings, the five other often observed indices, about other factors related to doing business in an economy. A short note on all of them is mentioned in next page: 4 International Business Project

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Global Competitiveness Index from the World Economic Forum: The most comprehensive of our indices and includes hard data as well as business opinions on a range of issues including institutions, labor, infrastructure and health. It does not have a specific business focus, but rather it assesses the ability of countries to provide high levels of prosperity to their citizens. Ease of Doing Business Index from the Doing Business project at the World Bank Group: Measures the quality of regulations and efficiency of business-government transactions for domestically owned small and medium-size enterprises (SMEs). It does not measure macroeconomic conditions, corruption, cost of labor and capital, or other factors which affect the likely profitability of new business ventures. Index of Economic Freedom from the Heritage Foundation: Covers ten areas including trade freedom, business freedom, investment freedom, and property rights. It relies on secondary sources of information rather than business interviews. Business Environment Rankings of the Economist Intelligence Unit: Examine ten separate criteria covering the political environment, macroeconomic environment, market opportunities, policy towards free enterprise and competition, and others. FDI Confidence Index from A.T. Kearney: Based on a survey of top executives who are asked about the future prospects for foreign direct investment (FDI) in each of the measured countries. World Competitiveness Yearbook by IMD: Looks at five main areas of economic performance, government efficiency, business efficiency and infrastructure. The rankings for BRIC nations were as follows:

Figure 2: BRIC nation rankings in other indices

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While the FDI Confidence index shows that theres no better place in this world than China, it ranks pathetic in terms of Economic Freedom and somewhere in the middle in terms of Business Environment. So, the differences in rankings show that these are only indicative signs of an economy and each one is doing well in its own way. While few of them are specifically focusing on foreign investment, others are focusing on quality of business conditions for all enterprises2.

Doing Business in China

Market Indicators
As a result of its quick measures (fiscal, monetary and bank-lending) against global economic recession in 2008, China is able to record a GDP growth of 9.2% in 2009 and a very impressive 10.3% in 2010, while the GDP projections for 2011 indicate a slowdown between 9% - 9.5% Accompanying the rise in Chinas GDP, Indias exports to China up by 28.7% in first half of 2011 to Rs25613 crore, remains 3rd largest exporting destination of India after UAE & US in the current fiscal. According to FIEO3, The changes in China's social security norms have made the Chinese product costlier and less competitive in the domestic market, as the company has to bear the social cost of each labourer. Earlier, the labourers social cost was borne by the government. FIEO Director General & CEO Ajay Sahai says4: China's one-child policy has lessened the workforce. Also, existing labourers are shifting to white collar jobs from labour intensive areas. As a result China has become an emerging market for India. From almost 0% inflation in 2009, consumer price index rose 3.3% in 2010. It reached 5.1% in December 2010, cautioning the concerned authorities to exercise a greater control over real-estate, food prices and liquidity driven by bank-lending. Inbound FDI rebounded after a dip in 2009, rising 17.4 percent in 2010 to almost $106 billion. China is the worlds second largest recipient of FDI after the United States. China stands as the worlds third largest market for luxury goods behind Japan and the United States, and some studies estimate that there are now more than 200 million Chinese citizens with a per capita income over $8,000. Over the next several years, most economists predict a surge in the number of people achieving true middle class status. Despite these remarkable changes, China is still a developing country with significant economic divisions between urban and rural areas, albeit one with vast potential. The numbers of migrant workers continues to remain high, with the number of laborers employed outside their hometowns at approximately 150 million in 2009. By 2010, the per-capita disposable income of urban residents was RMB 19,109 yuan ($2,895), and per-capita disposable income of rural residents was RMB 5,919 ($897).

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The Challenges for Business

China often lacks predictability in its business environment. Chinas current legal and regulatory system can be opaque, inconsistent, and often arbitrary. Implementation of the law is inconsistent. Lack of effective Chinese government protection of intellectual property rights is a particularly damaging issue for many American companies. Both those that operate in China and those that do not have had their product IP stolen by Chinese companies. China has a government that, in some sectors of the economy, could be called mercantilistic. China has made significant progress toward a market-oriented economy, but parts of its bureaucracy still seek to protect local firms, especially state-owned firms, from imports, while encouraging exports. China retains much of the apparatus of a planned economy. A five-year program sets economic goals, strategies, and targets. The State and the Communist Party directly manage the only legal labor union. The understanding of free enterprise and competition is incomplete in some sectors and political connections or goals at times trump commercially-based decisions. Certain industrial sectors in China are prone to over-investment, leading to over-capacity, overproduction, and declining prices in affected industries. Continued economic reform is essential for China to achieve high levels of economic growth. Chinas own leaders recognize a more balanced economy relying more on domestic demand and development of the service sector are essential for China to become a mature economic power. However, companies must deal with the current environment in a realistic manner. Risk must be clearly evaluated. If a company determines that the risk is too great, it should seek other markets.

Business Opportunities
Bilateral trade between India and China has grown significantly since 2005. After the economic downturn, in 2009 Chinese imports of Indian goods fell by 26.6% more than Indian imports of Chinese goods. In many ways, China seems to be benefitted by the trade. The Indian trade deficit reached close to $20 billion in 2010. China typically exports medium sized finished products, while it imports raw materials from India. In 1962, the two nations fought a war over disputed border territories and to this day, Arunachal Pradesh and a section of Kashmir remain in dispute, though many international organizations including Asian Development Bank support Indias claim of sovereignty. Political tensions frequently affect economic trade. India has successfully appealed to WTO on several occasions to block the export of Chinese products. While it seems that for the time being trade will continue to increase, a major dispute could severely disrupt their economic relationship. Chinas Top exports to India include Aluminum, Electric machinery, Fertilizers, Plastic, Silk, fabrics and Vehicles while Imports include Copper, Artificial Flowers, Precious Stones & Metals, Ores;slag;ash, Tanning, dye, paint & putty5.

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Figure 3: India-China bilateral trade

Market entry Strategies

Chinese companies respect face-to-face meetings. Prospective exporters should note that China has many different regions and that each province has unique economic and social characteristics. Continued long-term relationships are key to finding a good partner in China. To maximize their contacts, companies should aim at forming a network of relationships with people at various levels across a broad range of organizations. In China, Foreign Invested Commercial Enterprises (FICEs) are independent legal entities. They permit the import & export of goods, and can remit profits back overseas. China is a challenging market and requires a strong understanding of a firms capabilities and indepth knowledge of the market. Before making a decision to enter the China market, potential exporters should consider their own resources, their past exporting experience, and their willingness to commit a significant amount of time to exploring opportunities for their products and services in China.

Legal Issues related to doing business

China's economic growth and reform since 1978 have dramatically improved the lives of hundreds of millions of Chinese, increased social mobility, and expanded the scope of personal freedom. This has meant substantially greater freedom of travel, employment opportunities, educational and cultural pursuits, job and housing choices, and access to information6. In recent years, China has also passed new criminal and civil laws that provide additional safeguards to citizens. In April 2009 the government unveiled its first National Human Rights Action Plan. The document outlined human rights goals to be achieved over the next 2 years and addressed issues such as prisoners' rights and the role of religion in society. However, the plan has not yet been implemented.

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ISSUES RELATED TO DOING BUSINESS IN CHINA March 15, 2011

Right to Private Ownership and Establishment

In China, all commercial enterprises require a license from the government. There is no broad right to establish a business. Disposition of an enterprise is also tightly regulated. The Administrative Permissions Law requires reviews of proposed investments for conformity with Chinese laws and regulations and is the legal basis for China's complex approval system for foreign investment.

Protection of Property Rights

The Chinese legal system mediates acquisition and disposition of property. Chinese courts have an inconsistent record in protecting the legal rights of foreigners. Tangible Property Rights All land in China is owned by the state. Individuals and firms, including foreigners, can own and transfer long-term leases for land, structures, and personal property, subject to many restrictions. China's Property Law stipulates that residential property rights will be automatically renewed while commercial and industrial grants shall be renewed in absence of a conflicting public interest. Intellectual Property Rights China acceded to the World Intellectual Property Organization (WIPO) Copyright Treaty and the WIPO Performances and Phonograms Treaty in 2007. China has updated many of its laws and regulations to comply with the Agreement on Trade-Related Aspects of Intellectual Property (TRIPS). However, in 2009 a WTO dispute settlement panel found that some aspects of Chinas IPR regime are inconsistent with its obligations under TRIPS. Industry associations representing software, entertainment, and consumer goods continue to report high levels of piracy in China. Trademark and copyright violations are widespread. Lack of coordination among various government agencies also continues to hamper many enforcement efforts.

Transparency of Regulatory System

Foreign investors rank inconsistent and arbitrary regulatory enforcement and lack of transparency among the major problems they face in China's market. The State Council's Legislative Affairs Office (SCLAO) posts proposed regulations and many draft rules on its website for public comment, though usually for less than 30 days. Thus the comment periods are extremely brief and the impact of public comments on final regulations is not clear. Also, many foreign investors report that Chinese regulators at times rely on unpublished internal guidelines that affect their businesses.

Dispute Settlement
Chinese officials typically urge firms to resolve disputes through informal conciliation. If formal mediation is necessary, Chinese parties and the authorities typically promote arbitration over litigation. Many contracts prescribe arbitration by the China International Economic and Trade Arbitration Commission (CIETAC). 9 International Business Project

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Formal commercial disputes between investors are heard in economic courts. China's court system is not independent of the government, and the government often intervenes in disputes. Corruption may also influence local court decisions and local officials may disregard the judgments of domestic courts. China's legal system rarely enforces foreign court judgments.

SOCIO-ECONOMIC FACTORS
Next we look at the various economic and social factors that affect the international business environment in china.

Efficient Capital Markets and Portfolio Investment

Bank loans continue to provide the vast majority of credit in China, although other sources of capital, such as corporate bonds, equity financing and private equity financing are expanding their scope, reach and sophistication. The People's Bank of China (PBOC), China's central bank, maintains a floor on lending rates that is 2-3 percentage points above the ceiling on deposit rates, thereby preserving a healthy profit margin on bank loans. The ceiling on deposit interest rates has consistently been below the rate of inflation in recent years, making real interest rates negative. The result is a net flow of capital from depositors to banks. Favored borrowers, particularly SOEs, benefit from what is effectively subsidized capital. Small- and medium-sized firms, by contrast, experience the most difficulty in obtaining bank financing, so instead they finance investments through retained earnings or informal channels. Non-bank financing has expanded over the last few years, with increasing numbers of Chinese firms opting to seek capitalization by publicly listing their stock, either inside or outside of China. Most foreign portfolio investment in Chinese companies occurs on foreign exchanges, primarily in New York and Hong Kong. In addition, China permits limited access to Renminbi-denominated markets for portfolio investment by certain foreign institutional investors. Direct portfolio investment by private equity and venture capital firms is also rising rapidly, although from a small base.

Competition from State Owned Enterprises (SOEs)

China's leading SOEs benefit from preferential government policies and practices aimed at developing bigger and stronger national champions. SOEs enjoy administrative monopolies over the most essential economic inputs (hydrocarbons, finance, telecoms, electricity) and considerable power in the markets for others (steel, minerals). SOEs have long enjoyed preferential access to credit. Provincial governments have reportedly used their power to deny operating licenses to persuade reluctant owners to sell out to bigger state-owned suitors.

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ISSUES RELATED TO DOING BUSINESS IN CHINA March 15, 2011

Corporate Social Responsibility

Corporate social responsibility (CSR) is a new and still relatively unknown concept for most Chinese, though CSR awareness appears to be rising among younger and more affluent consumers. The 2008 Sichuan earthquake led many Chinese to recognize the contributions of enterprises to earthquake relief efforts, and an increasing number of press reports highlight the importance of enterprises' labor and environmental CSR commitments. Large Chinese SOEs and large foreign-invested enterprises now tend to follow generally accepted CSR principles.

Labor
Human resource issues remain a major concern for foreign companies operating in China. Difficulties in hiring appropriately skilled labor, navigating new and comprehensive labor and social safety net laws, the restriction on the mobility of workers, and the lack of independent trade unions combine to create a challenging environment for foreign-invested enterprises. Skilled workers remain in short supply. Independent trade unions are illegal in China. Officially sanctioned trade unions must affiliate with the All-China Federation of Trade Unions (ACFTU), which is an arm of the Communist Party. It is illegal for employers to oppose efforts to establish ACFTU unions. While worker protests and work stoppages occur regularly, the right to strike is not protected in law. Also, enforcement of existing labor regulations is poor.

Corruption
In China, the Supreme People's Procurator and the Ministry of Public Security investigate criminal violations of laws related to anti-corruption, while the Ministry of Supervision and the Communist Party Discipline Inspection Committee enforce ethics guidelines and party discipline. Corruption remains endemic in China. Sectors requiring extensive government approval are most affected, including banking, finance and construction. The lack of an independent press as well as the fact that all bodies responsible for conducting corruption investigations are controlled by the Communist Party hamper anti-corruption efforts. It is important for foreign companies, irrespective of their size, to assess the business climate in the relevant market in which they will be operating or investing, and to have an effective compliance program or measures to prevent and detect corruption, including foreign bribery. They should take the time to become familiar with the relevant anticorruption laws of the foreign country and in order to properly comply with them, and where appropriate, they should seek the advice of legal counsel.

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ISSUES RELATED TO DOING BUSINESS IN CHINA March 15, 2011

Investment Climate In China

Openness to Foreign Investment
China attracted almost USD 106 billion in foreign direct investment (FDI) in 2010, second only to the United States. China's sustained high economic growth rate and the expansion of its domestic market help explain its attractiveness as an FDI destination. However, foreign investors often temper their optimism of potential investment returns with uncertainty about China's willingness to offer a level playing field to foreign investors in the long term. In addition, foreign investors face a range of difficulties related to China's current investment climate. These include: a lack of transparency weak intellectual property rights (IPR) protection corruption industrial policies that protect and promote local firms an unreliable legal system.

China has a legal and regulatory framework granting it the authority to promote investment in specific regions or industries it wishes to develop and to restrict foreign investment deemed not to be in its national interest or that might compete with state-condoned monopolies. Many regulations contain undefined key terms and standards and are applied in an inconsistent manner. Potential investment restrictions are much broader than those of many developed countries, including the United States. A major goal of China's investment policies is to encourage the domestic development of technological innovation and know-how. Investment projects that involve the transfer of technology or the potential for "indigenous innovation" tend to be favourably received by China's investment authorities. Foreign investors have said they must often weigh China's market potential and its interest in attracting technology against China's inability or unwillingness to protect investors' intellectual property. China has indicated that it will consider restricting foreign investment in resource-intensive and highly-polluting industries, citing basic manufacturing as an example. In addition, China appears to discourage foreign investments in sectors: 1) where China seeks to develop domestic firms into globally competitive multinational corporations; 2) that have benefited historically from state-authorized monopolies or from a legacy of state investment; 3) deemed key to social stability.

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Problems with Chinas Foreign Investment approval regime

All proposed foreign investments in China are evaluated on a case-by-case basis, allowing significant discretion on the part of Chinese regulators to impose unexplained restrictions on new investment projects and to take into account the interests of domestic competitors. This ad hoc system diminishes the transparency of China's investment regulations and adds to investor uncertainty.

Rankings The following table lists China's most recent rankings by organizations that monitor economies' economic freedom, business regulations, and perceived level of corruption.
The following table lists China's most recent rankings by organizations that monitor economies' economic freedom, business regulations, and perceived level of corruption. Indicator Transparency International Corruption Perceptions Index Heritage Foundation and Wall Street Journal Index of Economic Freedom World Bank Ease of Doing Business Index Millennium Challenge Corporation (MCC) Government Effectiveness Indicator MCC Rule of Law Indicator MCC Control of Corruption Indicator MCC Fiscal Policy Indicator MCC Trade Policy Indicator MCC Regulatory Quality MCC Business Start-Up Indicator MCC Land Rights and Access Indicator MCC Natural Resource Management

Year

Score

Rank*

2010 2010 2011 2011 2011 2011 2011 2011 2011 2011 2011 2011
Figure 4: Few other indices

3.5/10 51/100 N/A 0.48 -0.01 -0.14 -0.8 71.6 0.21 0.970 0.765 81.52

78/178 140/179 79/183 84% 48% 45% 67% 37% 65% 55% 76% 44%

Foreign Trade zones/Free ports

China's principal free trade zones include Dalian, Guangzhou, Hainan, Shanghai, and Tianjin. Besides these official duty-free zones, numerous economic development zones and open cities offer similar privileges and benefits to foreign investors.

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ISSUES RELATED TO DOING BUSINESS IN CHINA March 15, 2011

Foreign Direct Investment Statistics

FDI as a Percentage of Gross Domestic Product According to the United Nations Conference on Trade and Development, China's FDI stock equaled 10 percent of its gross domestic product (GDP) in 2009; China's FDI inflows equaled 2 percent of GDP. Foreign Direct Investment Flows for 2009 (Top 10 Sources of Origin) Country/Economy of Origin Hong Kong British Virgin Islands Japan Singapore South Korea Cayman Islands United States Samoa Taiwan Germany
Figure 5: FDI inflow country-wise

Millions of U.S. Dollars 46,075 11,299 4,105 3,605 2,700 2,582 2,555 2,020 1,881 1,217

Flow of Outbound Direct Investment for 2009 (Top 10 Destinations) Destination Hong Kong Cayman Islands Australia Luxembourg British Virgin Islands Singapore United States Canada Macau Russia
Figure 6: FDI Outflow country-wise

Millions of U.S. Dollars 35,600 5,366 2,436 2,270 1,612 1,414 908 613 456 348

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ISSUES RELATED TO DOING BUSINESS IN CHINA March 15, 2011

Recent Reforms driving business in China

Dealing With construction Permits: Beijing and Shanghai now process applications for
construction permits electronically and allow construction companies to apply for safety certificates online, reducing delays by 2 weeks.

Getting Credit: A new bankruptcy law gives secured creditors priority in receiving proceeds
from their collateral if the borrower becomes insolvent. The bankruptcy law also allows bankruptcy administrators to operate the insolvent company in place of the original management. And a new property law expands the range of assets that can be used as collateral to include inventory and accounts receivable. Before the reform, Chinese businesses held more than $2 trillion in "dead capital" - assets that could not be used as collateral because of restrictions in laws. With the new property law, some of these assets can be used for loans to expand businesses. Getting credit was made easier by expanding the range of assets that can be used as collateral through a new property law in October 2007. Accounts receivable and a combination of assets can now be used to secure a loan.

Closing a Business: The first law regulating the bankruptcy of private enterprises since 1949
came into effect. Secured creditors with claims created after the law was passed now rank first in payment priority, even over tax and new wage claims. A reorganization procedure for restructuring insolvent companies was also introduced. Finally, the law introduced provisions for bankruptcy administrators, creditors' committees.

Paying Taxes: The tax burden was reduced on businesses by reducing the corporate
income tax rate from 33.3 percent to 25 percent and unifying the criteria and accounting methods for tax deductions. Chinas new corporate income tax law unified the tax regimes for domestic and foreign enterprises and clarified the calculation of taxable income for corporate income tax purposes.

Enforcing Contracts: The rules on enforcement of judgments were tightened, making it

harder for debtors to prevent enforcement.

Trading Across Borders: Trade credit restrictions were relaxed in response to the economic
and financial crisis. Foreign exchange authorization is no longer required.

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ISSUES RELATED TO DOING BUSINESS IN CHINA March 15, 2011

Leading Sectors

Agriculture: China replaced the original commune system in its agricultural sector with a
household responsibility system, which links remuneration to output. Under the new system, agricultural output has more than doubled.

Industrial Sector: China is now the worlds manufacturing base. In order to move up the
value chain, China encourages the development of new and advanced technologies, including high-value manufacturing, information technology, microelectronics and biotechnology.

Services: Coinciding with the increases in per capita income and living standards, the
services sector is becoming increasingly important to the economy, particularly in large cities. Since China has become a member of the World Trade Organization (WTO), the country has gradually opened up more service industries to foreign investment, including the banking, insurance, trade and retail industries. With a population of more than 1.3 billion people, China provides a vast market for consumer goods and services. The services sector accounted for an estimated 40.7% of Chinas GDP in 2004.

Cultural aspects of doing business in china

1) Take all the time in the world
Western business visitors are often deadline-driven and unwilling to slow down to the Chinese pace when discussing business7But in China the pace can be fast and slow simultaneously. Those involved in negotiations know how long they can drag on when the Chinese side is consulting internally or has other reasons for delay. But Chinese negotiators can move with lightning speed on other occasions.

2) Separate fact from fiction

Virtually everything you hear about China is true, and so is the opposite. Western thought is dominated by linear logic whereas Chinese thinking is influenced by early philosophers, Where Westerners tend to look for clear alternatives (option A instead of option B), Easterners may examine ways to combine both option A and option B.

3)Build relationships
Westerners normally build transactions and, if they are successful, a relationship will ensue. However, the Chinese believe that prospective business partners should build a relationship and, if successful, commercial transactions will follow.

4) Cultivate guanxi
The logical development of close relationships is the Chinese concept of guanxi, pronounced gwan shee. the kernel of guanxi is doing business through value-laden relationships. In a highly 16 International Business Project

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centralised, bureaucratic state, the use of personal contacts was the only way to get things done. Guanxi is the counterpart of a commercial legal system. Where the latter is relatively weak, as in China, the need to rely on guanxi will be strong. As long as the relationship is more valuable than the transaction, it is logical to honour it.

5) Mobilise local assets

The challenge of learning to speak Chinese fluently, the complexities of the Chinese way of doing business, and a strong sense of national pride mean that a foreigner will only extremely rarely be accepted by Chinese interlocutors on equal terms. The solution is to find a reliable Chinese ally to work with you.

6) Respect face
Face is an essential component of the Chinese national psyche. Having face means having a high status in the eyes of one's peers, and is a mark of personal dignity. The Chinese are acutely sensitive to gaining and maintaining face in all aspects of social and business life. Face is a prized commodity which can be given, lost, taken away or earned. Causing someone to lose face could ruin business prospects or even invite recrimination. The easiest way to cause someone to lose face is to insult an individual or criticise them in front of others. Westerners can unintentionally offend Chinese by making fun of them in a good-natured way. Giving face earns respect and loyalty, but praise should be used sparingly. Over-use suggests insincerity on the part of the giver.

7) Chinese negotiators are shrewd and use a wide variety of bargaining tactics. The following are
just a few of the more common strategems:

-Controlling the meeting place and schedule

The Chinese know that foreigners who have travelled all the way to China will be reluctant to travel home empty-handed. Putting pressure on foreigners just before their scheduled return can often bring useful benefits to the Chinese side.

-Threatening to do business elsewhere Foreign negotiators may be pressured into making concessions when the Chinese side threatens to approach rival firms if their demands are not met.

-Using friendship to extract concessions

Once both sides have met, the Chinese side may remind the foreigners that true friends would reach an agreement of maximum mutual benefit. Make sure that the benefit is genuinely mutual and not just one-way.

-Showing anger
Despite the Confucian aversion to displays of anger, the Chinese side may put on a display of calculated anger to put pressure on the foreign party, who may be afraid of losing the contract.

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ISSUES RELATED TO DOING BUSINESS IN CHINA March 15, 2011 -Attrition

Chinese negotiators are patient and can stretch out discussions in order to wear their interlocutors down. Excessive hospitality the evening before discussions can be another variation on this theme.

8) Meetings and Negotiations

Meetings must be made in advance. Preferably some literature regarding your company should be forwarded to introduce the company. Punctuality is vital when doing business in China. Ensure you are early as late arrivals are seen as an insult. Meetings should begin with some brief small talk.

Five Business Tips for Doing Business in China in 2011

Keep more cash on hand, credit tightening is likely and you might need it8. Take more notices of applicable financial tools such as double tax treaties to gain tax refunds. China has signed treaties with 95 countries including US and most of the EU members. Foreign investment companies can reduce withholding taxes, taxes due on royalty payments and dividend taxes by upto 50%. Develop an HR employment manual for your workforce. Without it you can be subject to more penalties when faced with HR issues than is necessary. US and EU corporations with subsidiaries in China should look out for FCPA and related bribery regulations applicable to them and develop an internal controls process to mitigate management against prosecution. Use January-May 2010 audit period to conduct quick tire-kicking checks on your China subsidiary, especially if it is Chinese managed.

Web References:
1. 2. 3. 4. 5. 6. 7. 8. http://www.chinalawblog.com/2011/01/doing_business_wwwdoingbusinessorg_is_a.html http://bizshifts.wordpress.com/2011/02/14/china-vs-india-where-is-it-better-for-doing-business/ http://www.fieo.org/view_section.php?lang=0&id=0,34,552 http://www.business-standard.com/india/news/exports-to-china287-in-first-halffy11/126689/on http://www.2point6billion.com http://www.state.gov/r/pa/ei/bgn/18902.htm#political http://www.kwintessential.co.uk/etiquette/doing-business-china.html http://www.china-briefing.com

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