China

Country starter pack
Business practicalities in China
87
Against a general trend towards liberalisation, the
revised Investment Catalogue imposes new and
tighter restrictions on investment in regards to vehicle
manufacturing and education. Accordingly, in a JV
that produces vehicles, the local partner must retain a
controlling stake. Further, such enterprises will only be
allowed to make up to two of any passenger vehicles:
commercial vehicles (such as trucks or those used in
construction) or motorcycles. Similarly, higher education
and day care operations will face the same ownership
constraints, having been added to the ‘restricted’
category, meaning foreign investors can only play a role
through a JV that is majority-owned by a local Chinese
company. High school investment remains restricted,
while foreign investment in compulsory education (for
example, primary schools) is prohibited.
It is important to note that regulations can also differ
depending on whether a business is operating in the
Shanghai FTZ or inside any of the other special economic
zones or free trade zones. The implementation of
ChAFTA could also influence investment rules applying
to foreign-backed operations. It is therefore strongly
recommended that prospective investors consult
professional advice tailored to their situation when
considering investing in China.
Land and property rights
The scale and lack of familiarity with the Chinese real
estate market combined with the need to negotiate a
myriad of new legal and financial rules, as well as cultural
and language difficulties, make finding, buying or leasing
premises one of the key challenges in establishing a
business beachhead in China. While ownership of land for
Chinese nationals is currently under review, no foreigner
can currently own land in China. Generally, Australian
businesses can get land use rights through a WFOE or a
JV.
Land and buildings are designated industrial, residential or
commercial in China. Requirements for leasing property
will depend on the business structure of the venture
being set up. For example, WFOEs must have their
planned place of business leased prior to submitting an
application to establish a business. These regulations are
becoming increasingly strict. Few jurisdictions or types
of entities allow for the use of ‘virtual offices’ (effectively,
letter boxes), so the investor may be required to rent
in the district in which they are registered. It is vital to
review all of the regulations prior to signing leases as
these can be very difficult to break and authorities can
be inflexible. Real estate agents can be very helpful not
only in finding, leasing or buying commercial or residential
premises, but also in undertaking registration, sourcing
furniture and fittings, and completing installation. There
are many international and local Chinese agencies from
which to choose, but investors should always check that
the agency they are considering engaging has a licence.
Furthermore, they should seek to make direct contact
with the agency rather than using third parties that
will charge a commission. Law firms can also help with
translating lease documents. Such translations may not
be enforceable in a court, but it is critical for prospective
foreign investors to ensure they understand what they are
signing.
The use of serviced offices in China is an option for
people starting up a business, especially for those who
have a limited budget. These established offices are often
accompanied by bilingual secretarial support that takes
care of routine needs such as communications, mail
and courier services, freeing up executives to focus on
establishing their business.
To lease premises (which is a requirement for WFOEs
and representative offices), it is necessary first to ensure
that the nominated office or building is allowed to be used
in this way. Most cities only allow representative offices in
top-quality buildings. Investors should also make sure that
the location is in an area approved for carrying out the
type of business proposed. It is recommend that before
entering into any negotiations that businesses research
all aspects including market rental trends (particularly in
the chosen areas), best locations and projected property
developments. Note that leases generally run for two or
three years.
Intellectual property (IP)
China is well known for a business environment that
carries significant risks of counterfeiting and infringement
of intellectual property (IP) rights. For this reason, the
US has put China on its Priority Watch List of countries
having "serious intellectual property rights deficiencies."
Nevertheless, the Chinese Government is concentrating
on improving IP law and its enforcement, including
the introduction of legal and regulatory incentives
for Chinese companies to file patent applications.
Improvements include aligning the relevant legislation to
the minimum WTO requirements of the Trade-Related
Aspects of Intellectual Property (TRIPs) protocol, which
outlines general standards for the enforcement of IP
rights. Overall, China’s legal framework for IP protection
meets international standards, though implementation
and enforcement are areas of concern.
Australian businesses need to have in place formal legal
protection of IP rights well before entering the Chinese
market, including a well-researched and executed strategy
to protect their IP. Be aware that the process of registering
IP rights in China is more expensive and far slower than in
Australia. For example, trademarks take 18 months to be
granted, design patents six to eight months and copyright
recordal procedures three months. Another critical
difference is that China has a first-to-file system requiring
no evidence of prior use or ownership, leaving registration
of popular foreign marks open to third parties, who register
famous marks ahead of the legitimate owner. There have
been cases of well-known Australian companies whose