Last updated: 28 Mar 2013
Current business situation
China is a complex and ever-changing market, below is a selection of analyst information to help you understand key reforms and driver’s. This will be updated on an regular basis.
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 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 plank of the new leadership’s reform drive. Improving the competitive environment for private enterprises by eliminating regulatory and local protectionist barriers to investment and increasing access to capital, land and energy will drive marginal State Owned Enterprises (SOEs) to improve their efficiency.
China (Shanghai) Pilot Free Trade Zone
Officially launched on 29 September 2013, the China (Shanghai) Pilot Free Trade Zone (SHFTZ) is a 29 square kilometre zone on the outskirts of Shanghai. Considered by many as a major plank of the new leadership’s reform drive; a mechanism through which to explore administrative innovation to stimulate trade and investment. The strategies trialled in the SHFTZ are intended, over-time, to influence deeper financial and economic reform across China.
Measures being trialled within the SHFTZ have the potential to significantly open up the services sector to foreign investors. Measures include:
- simplified business registration process with minimal registered capital
- greater administrative transparency
- fewer regulations around import and export of goods
- taxation benefits
- RMB capital account convertibility
- interest rate liberalisation
- cross-border use of RMB
Progress has been widely criticised as too slow, but a significant number of local and foreign enterprises have been established in the SHFTZ in anticipation of more favourable policies or changes to the Negative List. Many observers are still optimistic about the benefits to be gained as policies are refined.
The Australian Government in partnership with peak industry bodies – including AustCham Greater China, the Australia China Business Council, the Law Council of Australia and the Business Council of Australia - is taking steps to minimise the severity and frequency of Australia-China commercial disputes.
The majority of Australian companies doing business in China do so without significant problems. However – like all cross border commercial activities – the benefits of doing business in China are coupled with considerable risks.
Increased Australian business activity in China has resulted in higher numbers of commercial disputes in recent years. These disputes cause significant difficulties for Australian companies and individuals. The Government is often called upon to assist Australian companies involved in commercial disputes in China. Very often there is little that it can do. The ‘Doing Business in China’ commercial disputes initiative seeks to inform Australian companies about the risks of doing business in China, and provide them with information and advice that helps them to manage these risks.
Find out more about the ‘Doing Business in China’ commercial disputes initiative or read the discussion paper.
Setting up in China
Do your research
- Firstly, consider what your company’s objectives are in China and carefully research your target market before developing a formal business plan. Discuss your strategy with a local representative who understands the market and economic conditions.
- Consider the unique selling points of your product or service and whether there is actually a market for that product or service in China. If there is, you need to ensure you can be competitive in China and, more importantly, whether you have the time, 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 time-consuming and bureaucratic. Exporters will also need to deal with Chinese tax, accountancy and employment law, and China’s transport infrastructure and commercial legal system.
- Understand the basic Chinese regulations which govern your industry or investment in China. Companies are often constrained in how flexible they can be due to the regulatory environment.
- It is recommended that you have a website including product description, indicative FOB price, and unique selling points for your product or service.
- It may be helpful to talk to other Australians with business experience in China, for example, 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.
- The Internet can be an invaluable tool when it comes to researching country and market information before you even begin to formulate your strategy.
Develop a market entry strategy
- When determining your market entry strategy, consider recent market trends and keep in mind your long-term and short-term requirements for infrastructure, labour and your customer base. Remember China is changing at a rapid pace and it is essential your research and market information is up-to-date.
- Don’t automatically assume Beijing or Shanghai should be your target markets. Many other regions of China are substantial markets in themselves and competition can be less intense. It is therefore advisable to treat China as a global region in its own right and focus your initial market entry approach on a particular region or city.
- 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 and time taken to enter the market. As well as having someone on the ground to look after your interests, you will have access to good local knowledge and contacts.
- It may be highly beneficial to have your own 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 your company. If you are setting up in China, it is important 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 further down the road.
- If you are concerned that your product is in danger of being copied, seek legal advice on how best to protect your intellectual property (IP).
- Halve your expectations, and double your time and budget. Chinese business people prefer to establish a strong relationship before closing a deal.
- Be prepared for tough negotiations and to deal with grey issues. Be firm, polite, and creative, but be prepared 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.
- 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 of seniority.
- A handshake is the standard way to greet men and women, whatever their age or seniority. Note that the Chinese respect their elders, so an extra show of courtesy in the presence of an older person will reflect well on you.
- Business cards (ming pian) are essential in China, and it is a good idea to have your card translated into Chinese on the reverse side. Present your 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 that surnames are placed first, eg. Mr Yao Ming should therefore be addressed as ‘Mr Yao’.
- A great deal of business in China is conducted over dinner, where very senior people may attend who were not at previous negotiations, but are key to the approval of a business deal. However, business dinners or lunches can also indicate a general warming of a relationship, and in this case, their role should not be over-stated.
- Never begin eating or drinking until you host does. It is polite to try all dishes that are offered to you, but you can discreetly leave anything you don’t like at the edge of your plate.
- Dinner speeches and frequent toasts are standard, with locally produced wines or ‘bai jiu’ spirit the usual drinks for toasts. It is customary for toasts to be made by both sides during the meal.
- The Chinese generally like to give small and inexpensive gifts. It is a good idea to bring small gifts with an Australian theme for your hosts and wrap them in colours such as red, yellow or gold, which are regarded as lucky in China. It is not customary for your hosts to open the gifts in front of you, unless you encourage them to do so.
- Chinese negotiators are shrewd and know that foreigners will be reluctant to travel home from China empty-handed. They are willing to stretch out discussions, which can wear their foreign counterparts down. Be sure that your interpretations of any business deal are consistent with theirs and that everyone understands their duties and obligations.
- Expect to encounter delays or frustration during your business dealings in China, 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 you are beckoning to someone, motion towards you using your hand and palm pointed downwards – never palm up. Furthermore, don’t use your index finger or point when speaking.
- Try to speak with your counterparts in short, simple, and jargon-free sentences.
Be aware that business in China slows down during the Chinese New Year – usually from late January to early February, and for periods such as National Day (1 October) and May Day (1 May). 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
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