The Chinese Government Is Getting Real on Requirements

It is not uncommon for foreign companies doing business in China to brag about how they have not been forced to comply with a particular Chinese law. Much of the time when our China lawyers hear this sort of thing, our response is that there are many laws in China that are not vigorously enforced until they are. And oftentimes they get enforced at the worst possible moment, like when the foreign company seeks to engage in a new and different transaction or get money out of China, or pay taxes.

I was reminded of this the other day when a friend of mine wrote me the following email, regarding the same sort of thing happening regarding newly enacted requirements for factories in China to export their products:

Are you aware that China Customs has issued a new edict requiring all 加工贸易 companies to provide a renewed 商务証 and that in order to get this they (or some other agency) has specified that we must have current land title, workplace safety certificate, environmental certificate and fire safety certificate? If not, you will be hearing more soon. Most of the factories in China cannot come up with all of these because they are illegal. The s**t has really hit the fan here in ________ over this and the edict is said to apply to the whole of China. It was announced in the last week of August and came into force on 1 September and nobody can open a new customs book 手册 until they can come up with the documents.

I have been in my current factory, which is in an industrial park and owned by the local government (镇), for _______ years and just discovered that although my land title is okay, they actually built ___% of the park over farmland. One consequence of this is that they have never been able to issue a proper fire safety certificate, which actually I never knew I needed because they do regular inspections and sign off on something or other. But the fire hydrants in the factory have never been connected and I never understood the reason until now. They were unwilling to explain the real reason and have just fudged all these years saying that it was going to happen soon. Now the chickens have come home to roost. One of the problems is that, as well as being illegal, the underground reticulation system that feeds into the factory fire fighting systems was substandard because the officials seem to have pocketed much of the budget that was set aside for it, probably in the form of kickbacks from the contractor. So all have dirt on their hands and want to keep this quiet. At this stage it seems they have come up with a fudge-around solution in cooperation with the next level up (区) and so I can probably get the docs I need. I hope so. Anyway typical s**t that we have to deal with here, although this one is a magnitude more serious because without the right to import we are out of business.

The problem in China is that you never know what it is that you do not know until it is too late. The say here that the “water is deep” and that is certainly the case when it comes to the doings of the local authorities.

One of the China stories I love telling is of an American company that retained my law firm many years ago to form a WFOE in a fairly remote part of China. This American company had a Chinese General Manager based in that remote city on whom it relied for pretty much everything. Early on in the WFOE formation process, it became clear that there was a lot of tension between how our China lawyers wanted to form the China WFOE (completely by the book) and how the Chinese General Manager wanted to form the China WFOE (really quickly and without dealing with most of the formalities). So at some point we put it to the American company: either give us full control over how this WFOE formation is going to be done or just fire us. Because having us involved and paying lawyer fees to do this “the Chinese way” (the General Manager’s term, not mine) makes no sense at all. The American company agreed with our assessment and told us that it had to go with its General Manager because without that person it would have no Chinese company. We parted on very amiable terms.

So amiable in fact, that about two years later the owner of the American company wrote me to say that though it had managed to get the WFOE formed really easily and really quickly, Beijing had come in and audited the local government and shut down a bunch of improperly formed WFOEs, including theirs.

Bottom Line: You can fool some of the people some of the time, but eventually, if you are not operating legally in China, there will come a time when you will pay the price for that. The Chinese government has stepped up its law and order efforts and that has meant that time is coming more often these days for foreign companies doing business in China.

We will be discussing the practical aspects of Chinese law and how it impacts business there. We will be telling you what works and what does not and what you as a businessperson can do to use the law to your advantage. Our aim is to assist businesses already in China or planning to go into China, not to break new ground in legal theory or policy.