Last updated: 28 Mar 2013
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 have undertaken to conduct respective legal reviews of the concluded text and prepare Chinese and English language versions for signature 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 it greatly enhances our competitive position in key areas such as agriculture, resources and energy, manufacturing exports, services and investment. 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 of North Asia. ChAFTA greatly improves Australia’s position relative to major competitor economies such as New Zealand, Chile and ASEAN which have previously concluded FTAs with China.
ChAFTA is a game changer for Australian companies and institutions involved with China. An understanding of the agreement should form an integral part of 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 plank of the new leadership’s reform drive. Improvements in the competitive environment for private enterprises by eliminating regulatory and local protectionist barriers to investment and increasing access to capital, land and energy should drive marginal State Owned Enterprises (SOEs) to boost 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 platform and a mechanism by which the authorities can 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. Other FTZ’s are planned for key cities, but for now they are several steps behind.
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 and cross-border use
- interest rate liberalisation.
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. 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 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 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 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 your industry or investment. Companies are often constrained in how flexible they can be due to the regulatory environment. Familiarise yourself with the relevant provisions of ChAFTA.
- It is recommended that you have a website including product description, indicative Free on Board (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 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.
- The Internet can be an invaluable tool when it comes to researching country and market information before you begin to formulate your strategy.
Develop a market entry strategy
- Consider recent market trends and keep in mind your long-term and short-term requirements for infrastructure, labour and customer base. Remember China is changing at a rapid pace and it is essential your research and market information is up-to-date.
- Do not automatically assume Beijing or Shanghai should be your target markets. Many other regions are substantial markets in themselves; competition can be less intense and your sector may have better complementarity outside the best known markets. 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. The Austrade network includes 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 your interests on the ground and provide access to good local knowledge and contacts.
- It may be highly beneficial 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 your 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 you are concerned that your 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 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, 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, where very senior people may attend who were not at previous negotiations, but are key to the approval of a business deal. Business dinners or lunches can indicate a general warming of a relationship and 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, but can discreetly leave anything you do not like at the edge of your plate.
- 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.
- 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. 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 from China 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 you are 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)