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Economic Overview

Discuss about the Legal and Regulatory Issues for GDP Growth.

With the global slowdown and decreased pace of growth of developed nations, emerging economies are now being considered as the popular destinations for setting up and expanding business to earn sustainable profits. As a result, China is looked upon as the economic powerhouse by global firm for investment purposes. Even the expected GDP growth rate of 6.7% projects a promising future thereby luring companies looking to expand at international level.[1] However, with such promising growth prospects, the country is also known for the notoriously stringent legal and regulatory laws and issues that pose many challenges for foreign companies’ conducting business in China. It is for this reason that World Bank’s 2015 “Doing Business Report” placed China at 90th position in world for ease of doing business.[2]

The following report highlights the important issues that contribute to the challenges of doing business in China for foreign companies. These issues relate to legal and regulatory requirements that need to be followed by the foreign companies while doing business in China.

China is the fastest growing economies of the world with the GDP growth rate of 6.9%. The strength and financial robustness of the economy was evident from its economic activities and rate of growth during the times when the major developed economies were gripped by recession of 2008. As per Price Waterhouse Cooper’s estimate, China will surpass USA to become the largest economy in world by 2025. Moreover, China was ranked as one of the top three global investment destinations by 77% of the respondents while 80% respondents agreed to have increased their investment, in a survey conducted by the American Chamber of Commerce in China.[3]  Along with this, major structure reforms and fiscal and monetary stimulus have been applied and proposed to increase the financial conditions of the country.[4] These factors make China a favourable and prized destination for investment.

The following are the major challenges that affect the entry of the business in China.[5]

Legality of business is at first hand, without legal orders a company cannot start its business operations in any country. The legislative environment of China is unpredictable. To enter into the Chinese market, business needs to complete the legal formalities. Without legal procedure business cannot start their operation in China.

Before entering into Chinese market, organizations need to complete the form filling of representation for business which includes information about the type of business that will be started in China, the cost and profit criteria and the liabilities of business to perform regarding China. If any business fails to fill up the registration form, company cannot hire people and start the promotional strategies on country.[6]

Challenges of Doing Business in China

Registration of business in China is an essential part for starting the operation in the market. As per the Food Safety Law in China, products that may be harmful for the society need to be certified before manufacturing. If any product is found out fake, government body can take action and control it. After getting the license, businesses need to report the tax certificate within 30 days.[7] At the same time business need to present the foreign trade registration to operate its business in China. The ISO certificate should also be verified by the Chinese supplier.

Intellectual property right is a big challenge for the companies which are thinking to enter into the Chinese market. Intellectual property of an organization is the real value of business that is considered in non-monetary terms and intangible assets of the company. Intellectual property includes patent, trademark and copyrights that are achieved by the company. Protection of intellectual property is needed for goodwill of the company in Chinese market. These properties help the business expansion in other country, so it should be secured as per the regulation of Chinese government. Both English and Chinese trademarks and copyrights should be registered with the legal authority of China. IP identify and determine the existence of business for long period of time. Intellectual property audit is used to assess the performance of the company and get these rights. Intellectual property right system helps the countries for its economic developments and potential catalyst and social and cultural benefits.[8] After cooperating with WTO, China stabilized its legal framework of law and regulation of intellectual property. With this, Chinese government took actions towards controlling the piracy of these rights.[9] Chinese government enacted many regulations that cover the protection and safety of company’s business in country. Distributors who are seeking to sell their products in China need to register their logos with the trademark office. Copyright law was also enacted to protect this right but it is not required to register, it is voluntarily. Furthermore, Chinese government established a state IP office that issues patent, copyrights and trademarks and it also resolves the issues concerning about these. It also examines the foreign and domestic patents and enforcement of these rights.[10]

Chinese government has different structure of local tax and import duty so it is a challenge for newly entered organization. Business need to pay local tax as per the regulation of authorities. It can affect the financial index of business. Organization need to pay import duty and value added tax on each imported goods. It is necessary for the new enterprises to take care about local tax and import duties before entering into Chinese market.

Legal Issues

China enacted a labor law in 2008 that protect the interest of labor. This law is applicable for domestic and foreign employees both. Labor law needs that employee signed with the employer as a contractual term for fixed or open ended termination date. China government has fixed the wages and salary for workers, according to the rules new business need to pay wages to the employees. This law is equally applies on enterprises individual-owned business. Organization need to provide all facilities as mentioned in labor law. According to the law economic developments and skill enhancement opportunities also provided.

State capitalism is a political system under which the trade and industries of the country is controlled and rules regulations are enforced on the business. State capitalism of China can highly affect the foreign companies. Better capitalism system can provide the stability as well as growth to newly entered business. On the other hand, an unsupported system can negatively affect the business.  Polity of each and every state can support the business in its operation. Capitalist enterprises generate major business in states. It depends on interference of state in private enterprises. Any law passed by states regarding the enterprises can usually impact the efficient running of the business. China’s private sector is very large that contain the high growth potential with supportive state capitalism.

Chinese economy is marked by high governmental control over the important share of the economy while the private sector operates in the free-market scenario. As a result, state owned enterprises (SOEs) form a major part of Chinese economy. Moreover, investment in key sectors of economy like energy, infrastructure, banking, etc. are open only to such SOEs while industries like manufacturing of consumer goods, restaurants, accommodations, etc. are open for private businesses. As such, SOEs pose major challenges for doing business in China. New business have to face tough competition from SOE’s that benefit from cheaper finance available from state-owned banks, favouritism from government bodies and enjoy less stringent rules and regulations.[11] Moreover, China’s large SOE sector is protected by the central, state and local government and hence is seen as having a monopoly position in key industrial segments. This position allows such SOEs to exploit its stakeholders in terms of supply of goods, prices, and other aspects. In addition to this, it is claimed that Chinese SOEs often receive financial benefits in terms of non-market based interest rates on loans, bailouts, pricing arrangements, etc.[12] These benefits allow such firms to provide products at highly competitive prices and improve their profitability. This further increases pressure on private firms to reduce their costs. Furthermore, the impending reforms to improve the operational efficiency of SOEs will lead to intense competition to new business.

Representation of Business Forms

Bureaucracy of China affects the newly entered business in country. It has become a challenge for the foreign companies to do business in country. This issue arises on sector basis and new rules and regulations are amended to be followed by organizations. Bureaucrats enact regulations for business at different provincial and municipal areas. Furthermore these are the policy maker for private enterprises in country.

Foreign exchange contains the regulation for moving of financial transaction from one country to another. Foreign transaction takes place at every organization which is operating in other country so business needs to follow the regulation of China at the time of currency exchange. After tightening the foreign transaction policy, China liberalized the currency exchange procedure for easily transaction. In china people’s bank of china set up the new policies and rules for the credit facility for business, its decision can affect the flow of money for import from china to other country. Restrictions for debts and equities are lifted from the capital account so business can convert currency.  

Scope of business may become a challenge for the company when it is not compromising with the Chinese market. Business scope plays a vital role in ensuring the success of the business in a country. Each company has scope of its business in the market. Chinese government allows the foreign investors on sector basis as per the requirements of country. So before entering into the Chinese market the scope of the business must be considered for successful operation of business. It would be an extent opportunity for business.

Any organization is entered in new country, at the time of establishment of business many disputes arises within the organization and outside the organization. The legal system in china’s every state is different so the foreign businesses may not be familiar with the regulation to resolve disputes. To solve the disputes businesses should clearly understand the procedure that van be effectively managed.  [13]     

Conclusion

Even though China is a market prized above all, its dynamic and perplexed business environment poses many challenges for foreign investors planning to start their business there. This dynamism is attributed by policy shifts undertaken by the Chinese government, which further creates uncertainties for operating business in the regulatory and legal landscapes. The fundamental challenges related to state owned enterprises, intellectual property rights, bureaucracy, registrations and administration, tax laws, labour compliance laws etc. make it difficult to conduct business in China. This leaves loops holes and gaps in laws related to business regulations. These ambiguities make the legal environment challenging for doing business in China even if the economic environment is poised for growth and backed by legal framework.

References

[1] Trading Economics, Web site, https://www.tradingeconomics.com/china/gdp-growth-annual/forecast (accessed October 21, 2016).

2 World Bank Group, “Doing Business 2015: Going Beyond Efficiency”, 12th ed., https://www.doingbusiness.org/~/media/GIAWB/Doing%20Business/Documents/Annual-Reports/English/DB15-Chapters/DB15-Report-Overview.pdf (accessed October 21, 2016).

3 PwC, Doing Business in a Changing China: Seeking similarities, respecting differences, https://www.pwc.com/us/en/view/assets/pwc-view-issue13-doing-business-in-a-changing-china.pdf (accessed October 22, 2016).

4 Millay, Todd, “Investing in China: too Big to Ignore,” Forbes, August 25, 2016, https://www.forbes.com/sites/toddmillay/2016/08/25/investing-in-china-too-big-to-ignore/#722dd9ba2f47 (accessed October 22, 2016).

5 Hamilton, Stewart and Zhang, Jinxuan, Doing Business With China: Avoiding Pitfalls, UK: Palgrave Macmillan, 2011. 

6  Husch BlackWell, “Top Eight Legal Issues regarding Entering The China Market”,  

https://www.huschblackwell.com/businessinsights/top-eight-legal-issues-regarding-entering-the-china-market (accessed October 22, 2016). 

7  Husch BlackWell

8 Gov.uk, "Overseas Business Risk- China," Foreign and Commonwealth Office, https://www.gov.uk/government/publications/overseas-business-risk-china/overseas-business-risk-china (accessed: October 22, 2016).

9  Husch BlackWell

10 Intellectual property rights protection in China, Web Site, https://www.chinaipr.gov.cn/list/patents/1/cateinfo.html (accessed October 22, 2016).

11 The Economist, “State-owned enterprises: Fixing China Inc,” August 30, 2014, https://www.economist.com/news/china/21614240-reform-state-companies-back-agenda-fixing-china-inc (accessed October 22, 2016).

[1]2 Chen, Hejing and Whalley, John, “The state-owned enterprises issue in China’s prospective trade negotiations,” Working Paper 48 (Centre for International Governance Innovation, 2014), https://www.files.ethz.ch/isn/185024/no.48.pdf (accessed October 22, 2016).

[1]3  Lieberthal, Kenneth. Managing the China Challenge: How to Achieve Corporate Success in people’s Republic, USA: Brookings Institution Press, 2011.   

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