Current business situation
China is a complex and ever-changing market. Austrade has identified a selection of useful reference materials to help you learn more about key areas affecting China’s changing business environment. Resources will be added on a regular basis.
The China Australia Free Trade Agreement
On 17 November 2014 Trade and Investment Minister Andrew Robb and China’s Commerce Minister Gao Hucheng signed a Declaration of Intent regarding the landmark Australia China Free Trade Agreement (ChAFTA) in the presence of Australia Prime Minister Tony Abbott and Chinese President Xi Jinping at Parliament House in Canberra. Both countries are now in the process of conducting legal reviews of the concluded text and they will prepare Chinese and English language versions to be signed in 2015.
ChAFTA will unlock substantial new benefits for Australian businesses in the years ahead. The agreement gives Australian businesses unprecedented access to the world’s second largest economy and greatly enhances our competitive position in key areas such as agriculture, manufacturing exports, services, investment, resources and energy. Along with the trade deals the Government has already concluded with Korea and Japan, ChAFTA forms part of a powerful trifecta of agreements with Australia’s major trading partners in North Asia. ChAFTA greatly improves Australia’s position relative to major competitor economies such as New Zealand Chile and ASEAN, whom have already concluded FTAs with China.
ChAFTA is a game changer for Australian companies and institutions involved with China. An understanding of the agreement is important to any Australian company planning a China strategy. For more information, visit Department of Foreign Affairs and Trade.
Third Plenum and China’s Economic Reforms
Each time China experiences a change in leadership, the Third Plenum serves as an indication of how the country will be led for the next decade. The Third Plenum in 2013 unveiled a comprehensive reform plan by the new leadership under President Xi Jinping and Premier Li Keqiang, setting an ambitious agenda for addressing China’s governance challenges and influencing economic reform. The much anticipated communiqué of the Third Plenum of the 18th Central Committee of the Communist Party on 12 November 2013 outlined a framework for reform addressing:
Chinese Governance: incentivising government agencies to withdraw from market intervention and to re-focus on: macroeconomic management, market regulation, public service delivery, “social management” and environmental protection. Along with this has been a clear and purposeful anti-corruption drive which has seen a significant shift in the willingness and capacity of government officials to travel for work, dine lavishly, exchange gifts or receive other ‘benefits’.
‘Anti-market’ Practices: effectively limiting or influencing the ability of government at all levels to manipulate prices or the allocation of key resources through mechanisms such as:
- subsidised capital
- access to energy or land for favoured enterprises
- complicated administrative licensing
- private investment restrictions in various sectors
- protectionist barriers that impede the movement of goods.
Competition: equalising policies and treatment of foreign and local enterprises underpins a major component of the new leadership’s reform agenda. Improvements have been made in the competitive environment for private enterprises through eliminating regulatory and local protectionist barriers to investment and increasing access to capital, land and energy. This should assist in driving marginal State Owned Enterprises (SOEs) to boost their efficiency.
China (Shanghai) Pilot Free Trade Zone
Officially launched on the 29th September 2013, the China (Shanghai) Pilot Free Trade Zone (SHFTZ) is a 29 square kilometre zone on the outskirts of Shanghai which is considered by many to be a major plank of the new leadership’s reform platform. It is a mechanism that encourages administrative innovation, as well as stimulating trade and investment. The strategies trialled in the SHFTZ are intended to influence deeper financial and economic reform across China and it has already encouraged other key cities to plan for future FTZ’s.
Measures being trialled within the SHFTZ have the potential to significantly open up the services sector to foreign investors. Measures include:
- simplified business registration processes with minimal registered capital
- greater administrative transparency
- fewer regulations around the importing and exporting of goods
- taxation benefits
- RMB capital account convertibility and cross-border use
- interest rate liberalisation.
Progress has been widely criticised as being too slow, but a significant number of local and foreign enterprises have been established in the SHFTZ in the anticipation of more favourable policies in the future. Many observers are still optimistic about the benefits to be gained as policies are refined.
The China Australia Free Trade Agreement refers to the SHFTZ as a key area for innovative and liberalised Australia-China cooperation, particularly in the services sectors.
Setting up in China
Do your research
- Firstly, consider what your company’s objectives are and carefully research the target market before developing a formal business plan. Discuss the strategy with a local representative who understands the market and economic conditions.
- Is the product or service suitable for the market in China. If yes, ensure competitiveness and more importantly, resources and stamina to handle the demands of communications, frequent travel, product delivery and after-sales service.
- All foreign investments need to be registered with the appropriate local and state authorities, which can be slow and bureaucratic. Exporters will also need to deal with Chinese tax, accountancy, employment law, transport infrastructure and commercial legal system.
- Understand the basic Chinese regulations which govern the industry or investment. Companies are often constrained in flexibility due to the regulatory environment. Familiarise yourself with the relevant provisions of ChAFTA.
- It is recommended that to have a website including product description, indicative Free on Board (FOB) price and unique selling points.
- It may be helpful to talk to other Australians with business experience in China e.g. Australia China Business Council members in Australia; China Australia Chamber of Commerce members in China and Austrade’s network of trade advisers in both Australia and China. Austrade provides market research services across a wide variety of sectors.
Develop a market entry strategy
- Consider recent market trends and keep in mind the long-term and short-term requirements for infrastructure, labour and customer base. China is changing at a rapid pace and it is essential that your research and market information are up-to-date.
- Do not automatically assume Beijing or Shanghai should be your target markets. Many other regions are substantial markets in themselves and competition can be less intense outside the best known markets. It is advisable to treat China as a global region and focus the initial market entry on a particular region or city. Austrade has offices in China’s regions.
- It may be highly beneficial to employ an agent or distributor with marketing skills who has excellent knowledge of local market conditions and preferably speaks English. A good agent can greatly reduce set-up costs, time taken to enter the market, look after interests on the ground and provide access to good local knowledge and contacts.
- It would be useful to have a well briefed interpreter available to assist with discussions, formal presentations and explanation of technical issues.
- Potential Chinese business partners are often more interested in the cost effectiveness of the product rather than the product itself, so it is important to be able to demonstrate how the product can save money.
- Choose the right partners. In-market contacts are often more important than product and price.
Always seek good quality independent legal, tax and professional advice before signing anything that could have implications for the company. It is important when setting-up to get the business and tax structure right from the start.
Use a qualified legal firm with a presence in China to review all contracts. Failure to gain full information about a potential partner’s credit and professional background could lead to serious problems in the future.
If concerned that the product is in danger of being copied, seek legal advice on how best to protect your intellectual property (IP).
Manage expectations and maximise the amount of budget, other resources and management time allocated to the market.
Be prepared for tough negotiations and to deal with grey issues. Be firm, polite and creative, but be ready to say no.
Building up good business relationships and trust is very important in China, so expect to spend a lot of time at meetings and banquets with your potential business partners. Chinese business people prefer to establish a strong relationship before closing a deal.
Business meetings always start promptly, so it is important to arrive early for the standard formal introductions. It is usual to be introduced to the most senior person at the meeting first, followed by the others in descending order.
A handshake is the standard way to greet men and women, whatever their age or seniority. Note that the Chinese respect their elders, an extra show of courtesy in the presence of an older person will reflect well.
Business cards (ming pian) are essential in China and it is a good idea to have your card translated on the reverse side and present the card with both hands with the Chinese side face up. It is a sign of respect to spend a few moments examining the business cards you receive rather than putting them away immediately.
When meeting potential business partners, it is helpful to know some Mandarin. Simple phrases such as Ni hao (hello), Zao shang hao (good morning) and Xia wu hao (good afternoon) can go a long way. Note, surnames are placed first e.g. Mr Yao Ming should be addressed as Mr Yao.
A great deal of business in China is conducted over dinner, in which very senior people may attend who were not at previous negotiations, but who are key to the approval of a business deal. Dinners or lunches can indicate a general warming of a relationship and their role should not be over stated.
Dinner speeches and frequent toasts are standard, with locally produced wines or ‘bai jiu’. Spirits are usually the drinks for toasts and it is customary for toasts to be made by both sides during the meal. Never begin eating or drinking until you host does. It is polite to try all dishes that are offered, but discreetly leave anything you do not like at the edge of the plate.
The Chinese generally like to give small and inexpensive gifts. Bring small gifts with an Australian theme for your hosts, wrapped in colours such as red, yellow or gold, which are regarded as lucky. It is not customary for hosts to open the gifts in front of you, unless encouraged to do so.
Chinese negotiators are shrewd and know that foreigners will be reluctant to travel home empty handed. They are willing to stretch out discussions, which can wear their foreign counterparts down. Be sure that interpretations of any business deal are consistent and everyone understands their duties and obligations. Expect to encounter delays or frustration during your business dealings, but it is important to remain patient and polite. The Chinese don’t like to ‘lose face’ so losing your temper or showing frustration will only set you back.
If beckoning to someone, motion towards you using your hand and palm pointed downwards, never palm up and do not use your index finger or point when speaking. Try to speak with counterparts in short, simple and jargon free sentences.
Be aware that business slows down for almost a month around the Chinese New Year – it is based on the lunar calendar so varies each year from between mid-January to mid-February. Other periods such as National Day (1 October) and May Day (1 May) will often experience slowdowns of a week or more. It is best to avoid arranging meetings during these times.
Links and Resources
18th National Congress of the Communist Part of China
Introduction to China’s Plenary Sessions and the CPC Central Committee
Communiqué of the Third Plenum of the 18th Central Committee of the Communist Party
KPMG – Third Plenum Research Series
Asia Society – China’s Economic Overhaul (PDF, 810KB)
Dezan Shira – Revisiting the Shanghai Free Trade Zone: A Year of Reforms
Deloitte - Shanghai Pilot FTZ Resources
EY China - Insights of the China Pilot Free Trade Zone (PDF, 3.73MB)
PWC China - (Shanghai) Pilot Free Trade Zone Summary (PDF, 1.04MB)