Doing Business in China

MSA’s Complete Guide to Doing Business in China gives you a comprehensive understanding of all the administrative aspects of business in China. Our experts have carefully put together a guide that answers any questions you may have on the topics of accounting, tax, HR, and more!

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Overview of China Business Expansion

Growing your business presence in China in 2024 presents a special opportunity. China’s commitment to continued economic growth means significant opportunities for businesses ready to adapt to the local business environment. Corporate reorganizations, particularly for Sino-foreign joint ventures, are under the spotlight as firms navigate the requirements of China’s 2020 Foreign Investment Law before the looming December 31, 2024 deadline.

Adaptation and innovation remain key as businesses strive to align with China’s push for technological advancement and sustainable practices. Lessons from China’s progression towards circular business models are particularly relevant for developing countries looking to participate in the expanding Chinese market. Additionally, integrating digital marketing strategies has become increasingly significant, with gamification being explored as a novel approach to engagement across various business domains.

Entering or expanding within the Chinese market requires a strategic balance between global best practices and adapting to the unique local cultural and economic conditions. Companies must assess the landscape with an understanding that the Chinese marketplace is evolving rapidly, emphasizing innovation, digitalization, and sustainability.

Market Entry

China’s Business Climate

Those entering China’s business environment in 2024 need a comprehensive understanding of the economic landscape, regulatory framework, and the geopolitical and market risks foreign investors may face. Solid information is essential for stakeholders looking to engage with the Chinese market amid dynamic changes.

1. Economic Overview

The Chinese economy continues to occupy a central role in the global manufacturing sector, though its transition towards a consumer-driven economy has gained momentum. According to a 2025 economic forecast, the country’s growth patterns are adjusting to the new norms. Foreign direct investment (FDI) is critical in China’s financial strategies, influencing various policy decisions to foster a more attractive investment climate.

2. Regulatory Framework

China has been implementing various reforms to streamline business operations and encourage inbound investment. Understanding these reforms and the general regulatory environment is non-negotiable for businesses aiming to thrive. A study on China’s business environment policy changes offers valuable insights into the evolution of the country’s economic policies, reinforcing China’s commitment to creating a more open market environment for international entities.

Strategies for Market Entry and Growth

Entering the Chinese market in 2024 requires a tactical approach, considering carefully the potential investment pay-offs, optimizing supply chains, and analyzing consumer markets. Here I look at some of the strategic considerations companies must weigh to navigate market entry and growth successfully.

1. Investment Opportunities

Investors seeking to enter the Chinese market must consider sectors primed for growth and diversification. Policy reforms to improve business ease have created the potential for strategic investment across various industries. Companies should evaluate possibilities for joint ventures, mergers, or limited partnerships, which can offer a more rapid entry into the market and access to local expertise.

2. Supply Chain Considerations

Stable supply chains are crucial for companies operating in China. With its vast manufacturing capabilities, the nation offers immense opportunities for streamlining production and distribution. However, firms must assess the inter-regional dynamics and the impact of organizational environments on supply chain efficiency. Bayesian logistic regression can provide insights into optimal market entry and supply chain practices within different Chinese regions.

3. Consumer Market Analysis

Understanding the Chinese consumer market is essential for long-term growth. Companies must conduct in-depth analysis to tailor their marketing strategies to local preferences and purchasing behaviors. Moreover, it’s crucial to be aware of the competitive environment, as operating in highly competitive regions may necessitate a more aggressive approach to market penetration. Insight into creative assets and how they affect market entry modes can guide the development of effective marketing strategies and product positioning.

Operational Essentials

In 2024, businesses engaging with the Chinese market must consider the implications of rigorous compliance, strategic human resource management, and the steadfast protection of intellectual property.

1. Compliance and Audit Requirements

Businesses operating in China must ensure compliance with an array of regulatory measures. Foreign companies should engage with business advisory services to understand their industry’s compliance landscape and audit processes. An essential part of this is a financial review and audit that satisfies local and international standards. For instance, mandatory annual audits and other financial disclosures are necessary to maintain corporate status within China.

2. Human Resources and Employment Law

Human Resources (HR) management in China requires adherence to employment law, including contracts, labor disputes, and payroll management. Foreign companies must grasp employment regulations to navigate the complexities of hiring, managing, and dismissing employees.

  • Employment Contracts: Must be comprehensive and compliant with Chinese employment laws.
  • Payroll Management: Ensure compliance with tax obligations and benefits entitlement.

3. Intellectual Property Protection

Intellectual Property (IP) protection is a pillar of operational essentials in China, where IP infringement risks are significant. Data and cybersecurity compliance requirements have become as crucial as traditional IP safeguards. Foreign companies should secure their trademarks, patents, and copyrights while upholding cybersecurity and data protection practices.

  • IP Registration: Vital for legal protection in case of infringement.
  • Data Protection: Compliance with the Personal Information Protection Law (PIPL) and cybersecurity laws.

Financial Considerations

In considering entering the Chinese market in 2024, businesses must consider the local tax environment, risk management strategies, and the protocols for repatriating profits. These areas are critical to maintaining financial health and regulatory compliance.

1. Taxation Framework

China’s tax system provides a structured approach to taxation for businesses and requires strict adherence to compliance measures. Essential taxes include corporate income tax, value-added tax (VAT), and business tax, among others. Foreign investors typically engage in tax advisory services to ensure they are meeting tax data compliance. Moreover, due diligence in accounting practices is paramount to establishing confidence in financial reporting.

Major Taxes for Businesses in China include:

Tax TypeRate
Corporate Income Tax (CIT)25%
Value-Added Tax (VAT)Ranges from 6% to 13%
Business TaxApplicable for certain service-oriented enterprises
Consumption TaxVaries depending on the product category

Recent Tax Changes: Observations indicate a trend towards digital reporting and real-time tax data compliance.

2. Managing Financial Risks

To manage financial risks, businesses must develop robust strategies that account for market volatility, regulatory changes, and geopolitical shifts. Effective risk management is crucial to building and sustaining investor confidence. Strategic financial planning and regular due diligence are essential for risk mitigation. Strategies May Include:

  • Diversification of investment
  • Hedging against foreign exchange risk
  • Regulatory analysis

Necessary: A stringent internal compliance system reinforces stability and risk management.

3. Repatriation of Profits

Understanding the protocols for repatriating earnings is imperative for foreign investors to protect their interests and ensure the continued viability of their investments in China. Repatriation involves several steps and ensures funds are transferred legally and efficiently back to the investor’s home country. Key considerations for profit repatriation include:

  • Adherence to foreign exchange controls
  • Fulfillment of tax obligations
  • Compliance with statutory audit requirements

Profit repatriation, while streamlined, must still follow stringent regulatory protocols.

Can Foreigners Do Business in China?

Yes, foreigners can participate in the market and do business in China through the following entities: Wholly Foreign-Owned Enterprise (WFOE), Limited Partnership, Joint Venture, or Representative Office.

1. Wholly Foreign-owned Enterprise (WFOE)

  • The WFOE in China is a Limited Liability Company through which a foreign investor’s capital is used to establish the business in the country.
  • The most significant advantage of these setups is that foreign investors maintain complete business ownership. Investors do not have to partner with local entities; they can hire foreign and local employees.

For more information on a China WFOE, visit our resource page and request a FREE copy of the white paper.

2. Joint venture (JV)

  • This type of Limited Liability Company in China is formed through a partnership between a Chinese company or individual and a foreign investor.
  • A JV is the most commonly used business structure for foreign investors who wish to access restricted industries in China.

Learn more about a JV and how it works through our FREE Joint Venture white paper.

3. Representative Office

  • Registering a Representative Office (RO) is the easiest way for foreign investors to test the Chinese market for their business.
  • A Representative Office grants foreign businesses a presence in the local market but not as a legal entity established in the country.
  • Businesses registered under an RO cannot issue invoices, directly partake in profit-generating activities, or hire local Chinese employees.

Challenges of Doing Business in China

While China has relaxed its policies when it comes to foreign and local investments, there are still several challenges that investors can anticipate and prepare for if they decide to participate in the Chinese market:

1. Bureaucracy

Government officials play an active role in managing the national and local economies. This was illustrated during the COVID-19 lockdowns when strict measures were imposed on businesses and local governments to restrict the virus from spreading.

Domestic businesses may also enjoy more privileges and protection than international firms. However, market access is also limited, especially for imported goods and service providers.

2. HR Challenges

Regulations for hiring in China can be restrictive for foreign business owners. Also, obtaining references from previous employers for background checks can be challenging since it is not a common practice.

Foreign representative offices cannot also directly hire local employees. They must go through special HR management agencies to comply with local hiring requirements. This process can create a disconnect between what the company needs and what the agency looks for in a candidate.

3. Intellectual Property Protection (Lack of Protection)

IP infringements have been a major concern for foreign businesses doing business in China. This has often been seen with counterfeited products like handbags, shirts, shoes, and other goods such as auto parts, pharmaceuticals, and high-tech equipment.

Foreign firms have often faced barriers, such as judicial protectionism, challenges in obtaining evidence, and a perceived bias, making them hesitant to participate in the market.

4. Increasing Labor Costs and Standard of Living

The cost of living in major cities in China has drastically increased in the past few years, along with the demand for a qualified and skilled workforce. This means that the cost of hiring skilled talent has also increased, forcing companies to raise the salaries of their valued employees.

5. Market Competition

Market competition in China is very tight, and whether the market is highly fragmented or only has a few players, it is often hard to enter and gain momentum. Many foreign businesses with a robust overseas presence have entered and found the marketplace challenging. Some notable examples of this can be seen with companies such as Walmart and Amazon, who, despite having succeeded in their home markets, were unable to be successful in the world’s largest consumer market.

Foreign investors have to compete with local businesses more favored by the government regarding resource access.

The supply of skilled employees in China remains a significant hurdle for investors to establish a foothold. The demand for workers outnumbers the supply, making the talent market highly competitive.

6. Attracting Foreign Talent

Foreign talent and personnel remain a priority for foreign businesses with operations in China. Even though there is a large workforce based in China, the demand for expertise and cultural understanding of a particular company or brand remains strong.

With experience working in a culturally familiar setting, there is an increased sense of understanding of a brand or company, which is why top foreign talents were frequently transferred to China over the past two decades. However, convincing employees to transfer to China has been difficult over the past few years, primarily due to the travel restrictions and city-wide lockdowns.

Despite the maintained COVID measures undeniably keeping international workers from staying in China, there are notable efforts to enhance the country’s appeal to global talent, including more efficient visa systems and working permits.

8. Transparency in Regulations

Unfavorable regulations and a lack of transparency make compliance difficult for many foreign businesses. This deters foreign investors from establishing a business or, in some cases, decoupling their Chinese entity from their foreign entity due to the inconvenience and difficulty of complying with regulations. A prominent example is China’s implementation of the Data Privacy Law, which has led to some firms decoupling from their foreign entity.

9. Corporate Culture

Chinese business culture is different from that of its Western counterparts (read more about business culture in China). For example, corporate culture in China gives higher hierarchy importance than Western firms.

Chinese managers expect obedience from subordinates, meaning asking questions or raising disapproval during meetings is treated differently than in a Western environment.

10. Systemic Control on Foreign Exchange

Strict compliance with a ‘closed’ capital account policy means that companies face barriers in moving money freely into or out of control. While progressive changes are being made to create a more liberal foreign exchange market, companies still deal with regulatory challenges regarding the administration of foreign exchange policies.

What are the Emerging Opportunities for Doing Business in China?

Despite the challenges above, the Chinese government is continually attempting to make the market more accessible and enticing to foreign entities and more competitive for local businesses.

Some of the opportunities that encourage investors to take part in the Chinese market are:

1. Free trade zones (FTZ)

The government introduced FTZs or special economic zones (SEZs) to encourage foreign direct investment in several industries available in certain regions.

The first one opened in Shanghai in 2013, followed by Guangdong in 2015.

The other FTZs in China are located in Anhui, Beijing, Chongqing, Fujian, Guangxi, Hainan, Hebei, Heilongjiang, Henan, Hubei, Hunan, Jiangsu, Liaoning, Shaanxi, Shandong, Sichuan, Tianjin, Yunnan, and Zhejiang.

Companies doing business in FTZs enjoy:

  • Lower corporate taxes
  • Faster VAT refund
  • Fast customs clearance
  • Import tax exemption within the designated zone
  • Easy access to logistic service providers

FTZs allow businesses to receive, handle, manufacture, reconfigure, or re-export goods without the intervention of local authorities.

However, customs duties and other regulations will apply when the goods are moved to consumers within the province of the FTZ.

2. Revised Negative List

The Negative List consists of industries prohibited or restricted to private companies in China. Foreign investors planning to do business in any sector on the Negative List must undergo a complex process to get additional administrative approvals. Industries not on the list are presumed to be open to investment.

In March 2022, the National Development and Reform Commission and the Ministry of Commerce released a revised version of the Negative List. The government trimmed the list from 123 industries to 117 to attract more investors to the Chinese market.

Some of the biggest industries foreign investors can have a majority stake are automotive and television manufacturing. Investors can now also fully own enterprises in vehicle manufacturing, specifically special purpose, new energy, commercial, and passenger vehicles.

3. Market size and growth potential

While China’s economic growth has slowed, it still outpaces other countries and remains one of the most viable countries to invest.

Plus, the sheer market size of one of the world’s largest economies — with a population of 1.4 billion — is enough to surpass the GDP of the entire 27-country European Union.

According to the British Consultancy Centre for Economics and Business Research (CEBR), China is projected to grow between 4 and 6% annually until 2030. China will have surpassed the USA as the world’s largest economy by then.

4. Labor pool

China is known for its vast and affordable labor pool. However, labor costs are rising due to increasing worker productivity, an experienced and more educated workforce, and better infrastructure and working environments.

The breadth of China’s labor pool presents highly adaptable workers who can work in various fields. Aside from cost efficiency, foreigners can tap into the Chinese worker pool, which is composed of highly educated talents.

The Chinese market remains one of the most attractive places for foreign investors and businessmen. However, registering a legal entity in the country can be challenging due to the complex processes enforced by the local and national governments.

How MSA can help you navigate the Chinese market

If you are considering expanding your enterprise to China, we can help you enter the market. MSA has supported a diverse range of clients with navigating the Chinese regulatory environment and effectively setting up their businesses in China. We specialize in accounting, financial advisory, and corporate services and can help your business succeed in the Chinese market. Contact us right away to find out more about how we can help!