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INFOKITFORASPIRINGENTREPRENEURSDOINGBUSINESSINCHINAACEBEIJINGCHAPTERRESEARCHCOMMITTEE
BySingaporeans,ForSingaporeans
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1
Foreword
China isanever-changingmarket, despitebeing thesecond
largesteconomyin theworld,its constantgrowthandrapid
expansionstill continue tobe closelywatched.Being touted
asthebusinesshubofAsia,theimpactandinfluenceChinabrings to theworldwill remaina force that will stay in the
nearfuture.
With that inmind, ACE officially launched its first overseas
chapterinBeijinginJune2012.ItsaimistohelpSingaporean
startups access overseas markets for the first time, by
connectingthemto avibrant networkof entrepreneursand
other partners in these markets. The Chapter will alsofacilitateanumberofnetworkingactivitiestobuildthelocal
communityandtolinkingtheconnectiontoACEinSingapore,
formulatingaplatformbySingaporeans,forSingaporeans.
ACE Beijing Research Committee will produce a live report
everysixmonths,whichaimstohelpthecommitteeserveits
purpose of helping Singaporean startups venture into the
Chinesemarket.The"InfoKitforAspiringEntrepreneurs"thatyouwillread,is a compilation and summary ofresearchon
information which are essential to setting upa business in
China.
Suggestions and comments are most welcome! Enjoy the
report, and here's wishing you all the best in your startup
journey!
ACEBeijingChapter
ResearchCommittee
31thDecember2012
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2
Contents
Contents........................................................2Introduction................................................3
OverviewofChina................................................3PoliticalLandscape..............................................6
TradeRelations.....................................................8
SociologicalLandscape......................................9
DoingBusinessinChina.......................1012thFive-YearPlan............................................10
PracticalGuidanceIssue.................................15
LegalStructuresandProcedures................18
TaxRegime...........................................................21
AuditandAccountancy....................................25InvoiceManagement........................................28
StorageofInvoice..............................................29
HumanResources/StaffRecruitment.......30
IntellectualPropertyRights(IPR)..............36
ConcludingNotes....................................37Appendix1................................................38
ListofUsefulWebsites.....................................38
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3
Introduction
Chinahasoneofthebiggestmarketsintheworld,withgreat
potentialinthenearfutureandishenceahotspotformany
entrepreneurs.BeijingbeingthecapitalofChinaisatthecore
oftheboomingentrepreneurialsceneinChina.
This report aims to provide aspiring entrepreneurs of
Singaporeafirst-stopguidetowardssettingupabusinessin
China,providingbasicessentialinformationforstartingupin
China. This publication is meant to be used as an
informational tool only; please approach the appropriate
channelsforspecificanddetailedadvice.
OverviewofChina
EconomicLandscape
Asof2012,Chinahastheworld'ssecond-largesteconomyin
termsofnominal GrossDomestic Product (GDP). According
to the World Bank1, in 2011, Chinas GDP was US
$7.298trillionwhileSingaporesGDPtotalsUS$239.7billion.
According2totheWorldBank
3,China'sannualaverageGDP
growthbetween2001and2010was10.5%,andtheChinese
economyisprojectedtogrowatanaverageannualrateofat
Takeaglimpse!
ChinasannualaverageGDPgrowth(2001-2010):10.5%;growthrateofatleast8%for2011-2013
Worlds2ndlargesttradingpowerbehindUSTotalinternationaltradevalueofUS$3.64trillion
(2011)
ChinaattractedUS$116.011billionFDIin2011(9.72%
increase)
Chinastotaloutwarddirectinvestmentflow(2010):US$68billion
Figure1-NominalGDPofMajorEconomies,2011(US$billion)2
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least8%between2011and20134.Between2007and2011,
China'seconomicgrowthratewasequivalenttoalloftheG7
countries'growthcombined.ChinaisamemberoftheWorld
TradeOrganisation (WTO)and is theworld's second-largest
tradingpowerbehindtheUS,withatotalinternationaltrade
value of US$3.64trillion in 20115.Its foreign exchange
reserves reached US$2.85trillion6 by the end of 2010, an
increaseof18.7%overthepreviousyear,makingitsreserves
by far the world's largest.China owns an estimated
US$1.6trillion ofUSTreasury bonds and is thus the largest
foreignholderofUSpublicdebt7.Chinaistheworld'sthird-
largest recipient of inward foreign direct investment (FDI),
attracting US$116.011 billion in 2011, marking a 9.72%
increase over 20108. China also increasingly invests abroad,
with a total outward direct investment of US$68billion in2010 and is ranked 5
th amongst othermajor economies as
seeninthefigure9below:
EconomicModel
ModernChinaiscurrentlyunderasocialistmarketeconomy,
consisting of a mixture of state-owned enterpriseswith an
open-marketeconomy.In1978,ChinaunderDengXiaopeng
embarked upon economic reform and opening up, moving
towards a more market-oriented mixed economy while
keepingaone-partyrule.
Withinthismodel,privatelyownedenterpriseshavebecome
a major component of the economic system alongside the
central state-owned enterprises and collective or township
village enterprises. A wide variety of small-scale private
enterpriseswere encouragedwhile thegovernment relaxed
price controls and promoted foreign investment. Foreign
tradewasfocuseduponasamajorvehicleofgrowth,leading
to the creation of Special Economic Zones (SEZs), first in
Shenzhen andthen inotherChinesecities. Inefficient state-
owned enterprises (SOEs) were restructured by introducing
western-stylemanagement systems, with unprofitable ones
beingclosedoutright, resultinginmassive joblosses.Bythe
laterpartof2010,Chinawasreversingsomeofitseconomic
liberalizationinitiatives,with state-owned companies buying
up independent businesses in steel, auto and energyindustries.
China'ssuccesshasbeenprimarilyduetomanufacturingasa
low-costproducer.Thishadbeenattributedtoacombination
of cheap labour, good infrastructure, relatively high
Figure2-Top10EconomiesofOutwardFDIflowsin2010(US$billion)
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productivity, favourable government policy and monetary
policy.Thestatestilldominatesinstrategic"pillar"industries
(such as energy and heavy industries), but allowed private
enterprises (composed of around 30million private
businesses) to expand enormously in others; in 2005, it
accounted for anywhere between 33% to 70% of national
GDP,whiletheOrganisation forEconomicCo-operationand
Development(OECD)estimateforthatyearwasover50%of
China'snationaloutput,upfrom1%in1978.
PoliticalLandscape
CommunismandtheCCP
The People's Republic of China, along with Vietnam, North
Korea, Laos, and Cuba, is one of the five remainingofficial
Communist states in the world. The entire system of state
power is controlledby theChinese CommunistParty (CCP).
Thehighest authority restswith theStanding Committeeof
thePolitburo ofthe CCP.TheincomingPresident, XiJinping
and the incoming Premier, Li Keqiang, togetherwith the 5
othermembersare ineffectChinas cabinet.Beneaththem
are another 25 members followed by the 210-member
CentralCommittee,madeupofyoungerpartymembersand
provincial party leaders. At the grassroots level the partyforms a parallel system to theadministrations in thearmy,
universities, government and industries. Real authority is
exercisedbythepartyrepresentativesateachlevelinthese
organisations. They are in turn, responsible to the party
officials in the hierarchy above them, thus ensuring strict
centralcontrol.
Day-to-day runningof thecountry lies in theState Council,which is directly under the control of the CCP. The State
Council isheadedby thePremier,and beneaththe Premier
are4Vice-Premiers,10StateCouncillors,aSecretary-General,
45 Ministers and with various other agencies. The State
Council implements the decisions made by the Politburo.
ApprovingthedecisionsoftheCCPleadershipistheNational
Takeaglimpse!
Chinahassucceededonmanufacturingasalow-costproducerduetothecheaplabour,goodinfrastructure,
relativelyhighproductivity,favorablegovernmentpolicy
andmonetarypolicy
Strategicindustries:Energy&heavyindustries
Privateenterprises(around30millionprivatebusinesses)In2005:33-70%ofnationalGDP;over50%ofChinas
nationaloutput
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Peoples Congress (NPC), theprincipal legislaturebody that
convenesintheGreatHallofthePeople.Itcompriseselected
delegates who may or may not be party members, and
includesintellectuals,techniciansandindustrialmanagers.
The key in the political system is the armed forces, the
PeoplesLiberationArmy(PLA),embers.Comprisingland,seaandair forceswith a total of2.3millionmother1.1million
serve in the Peoples ArmedPolice.China is divided into 7
militaryregions,eachwithitsownmilitaryleadershipandin
some cases, strong regional affiliations. Xi Jinping, is the
chairman of theCentralMilitary Commissionand therefore
headsthePLA.AlongwithhisstatusastheGeneralSecretary
oftheCCP,Xiholdsthe3mostpowerfulpositionsinChina.
Takeaglimpse!
StatePower:UndertheChineseCommunistParty(CCP) HighestAuthority:StandingCommitteeofthePolitburo
[Chinascabinet:7membersincludingincoming
PresidentXiJinpingandincomingPremierLiKeqiang]
StateCouncil:HeadedbythePremier,4Vice-Premiers,10StateCouncilors,SecretaryGeneral,45Ministersand
withvariousotheragencies
DecisionsmadebyPolitburoandapprovedbyNPCwhichconsistsofelecteddelegates,intellectuals,technicians
andindustrialmanagers
Keyinpoliticalsystemisarmedforces,thePLA(land,sea,air)with2.3millionmembers,PeoplesArmedPolicewith1.1millionmembers
Chinadividedinto7militaryregions President-ElectXiholdsthe3mostpowerfulpositions
includingChairmanoftheCentralMilitaryCommission
andthereforeheadsthePLA,GeneralSecretaryofCCP
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TradeRelations
In recent decades, China has played an increasing role in
calling for free trade areas and security pacts amongst its
Asia-Pacificneighbours.ChinabecameamemberoftheWTO
in200110and in2004,China proposed anentirely newEast
AsiaSummit(EAS)frameworkasaforumforregionalsecurityissues,pointedlyexcludingtheUnitedStates.TheEAS,which
includesASEANPlusThree,India,AustraliaandNewZealand,
held its inaugural summit in 2005. China is also a founding
member of the Shanghai Cooperation Organisation (SCO),
alongwithRussiaandtheCentralAsianrepublics.
In 2000, the U.S. Congress approved "Permanent Normal
TradeRelations"(PNTR)withChina,allowingChineseexports
inatthesamelowtariffsasgoodsfrommostothercountries.
ChinahasasignificanttradesurpluswiththeUnitedStates,its
most important export market. U.S.-China official trade
relationshasseenvariousdisputesincludingthatonChinas
currencyvaluationandtradecomplaintsonspecificindustriessuchasChinasrareearthexports.
Takeaglimpse!
Chinahasstrongtraderelations MemberoftheWTO FoundingmemberoftheSCO USallowedChinasexportsatthesamelow
tariffsasgoodsfromothercountries
Significanttradesurplus USisChinasmostimportantexportmarket
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SociologicalLandscape
DemographicsToday, the People's Republic of China has more than 150
citieswithapopulationofmorethanonemillionresidents(in
theurban area), including the threemajor citiesof Beijing,
HongKong,andShanghai.11
Figure3-DemographicsofChina
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DoingBusinessinChina
12thFive-YearPlan
Overview12
Chinas12thFive-YearPlanmapskeydevelopmentalgoalsand
policydirections foryear 2011 to2015,covering economic,
social and cultural aspects. This plan is the Chinesegovernmentsdevelopmentaloutline to guidepolicymaking
and set targets for central and local governments and
ministries, state-owned enterprises (SOEs) and private
sectors.Theplanskeythemesarerebalancingtheeconomy
(higher quality growth), ameliorating social inequality
(inclusive growth) and protecting the environment. The
Chinese government has also set to reduce annual GDP
growthto7percentoverthenextfiveyears.
ImportantGoalsinthePlan13
The12thFiveYearPlanhasthefollowinggoals:
DevelopandurbanizeChinaswesternregions; Improvethesocialwelfareandlivelihoodofitscitizens; Increasedomesticconsumption; Developkeyemergingstrategicsectors;and Protecttheenvironmentandimproveenergyefficiency.
Toachievethesegoals,keytargetshavebeendrafted.Some
mainkeytargetscanbeclassifiedaskeyeconomicandnon-
economic targets (Figure6), with stronger emphasis on the
sevenSEIsidentifiedtoachievethesegoalsasshowninFigure
5below14:
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Figure4-DetailsofSevenEmergingIndustriesunder
Chinas12thFiveYearPlan
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12
AnnualGDPgrowth
7%
UrbanisaJon
47%to51.5%
SpendingonR&D
2.2%ofGDP
InflaJon(CPI)
atorbelow4%peryear
Percapitarealdisposableincome
excessof7%(urban&rural
areas)
PatentedinvenJons
1.7to3.3per10,000
populaJon
increase
ServicesectorcontribuJonto
GDP
43%to47%
EnergyuseperunitofGDP
Reduceby16%
CO2emissionsperunitofGDP
Reduceby17%
Forestcoverage
Increaseby21.66%
Urbanwelcare
housing
36Munits
Non-fossilfueluse
Increaseto
11.4%
Figure5-KeyEconomicandNon-EconomicTargetsofthe12thFiveYearPlan
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StrategicEmergingIndustries15
The 12th FiveYear Plan will not only provide financial
supportfortheseindustriesbutalsosupportintheformof
government industrial policyincentives.Thesecould include
investments in large demonstration projects to justify
feasibility, preferred access to credit and capital and even
direct government investment via investment arms of the
government responsible for allocating capital from the
banking,financialandretirementsystems.
NewEnergy,EnergyConversationandEnvironmental
ProtectionandNewEnergyVehicles16
Renewable energy sources such as nuclear, hydropower,
solar,wind,biofuel, andgeothermal, aswell as natural gas
will be encouraged throughout the plan. As Chinas energy
use continues to climb, so will its need to acquire foreign
energyresourcesandtodeveloprenewableenergybases,
includingwindpowerbasesandgreentowns.Inaddition,the
Chinesegovernmenthasannouncedthatitwillstructurenew
energypoliciesaroundhydroandnuclearpower.
Presently, Chinas 14nuclearpower reactors contribute less
than2%ofthetotalenergy17used,withatotalof9.1millionKW produced.
18By 2015 it is targeted to double, with 25
nuclearpowerplantsinoperation.Hydropowerscapacitywill
increase by 50 percent by 2015. Wind power and coal
industries consolidation remains imminent. Intellectual
property patent protection andResearch andDevelopment
(R&D)aretobefundedheavily,especiallyforelectricvehicle-
relatedtechnology.
Chinas huge dependence on itsmanufacturing and export
industriesforeconomicgrowthandcoal asthemainenergy
source has caused much pollution and environmental
destruction.Hence,thegeneralguidelinewouldbetoreduceunsustainable practices and replace them with sustainable
onesviachangestoitsenergyresourcesandenergyusage.In
fact, oil and coal consumption is still expected to be the
dominantsourceofenergyandexpectedtodeveloprapidly,
thoughthegovernmentwillheavilyfundalternativeenergies.
Thegovernmentwillsupportefficientprovidersandpressure
inefficient ones to shut down operations. The government
plans to continue with the consolidation of coal mining
companies:about11,000coalenterpriseswillbereducedto4,000,with8to10coalcompaniesexpectedtoaccountfor
nearlytwo-thirdsofallcoalproductionby2015.Inaddition,
the government has said that China's investment in the
environmentalprotectionindustryduringthe12thFiveYear
Planperiodwillexceed3 trillion RMB (US$470 billion),with
theindustrygrowingby15-20%annually,itisahugepotential
for international cooperation. Arnold and Porter Consulting
Group(APCO)Worldwidealsoreportsthatimprovingenergy
efficiency and decreasing CO2 emissions are backed by
preferential policies, focusing on waste recycling and clean
coaltechnologies.
During the 11th FiveYear Plan, China designated clean
energytechnology(solar,wind,bio,and nuclear energy) for
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government support, spendingapproximately2 trillionRMB
(US$309 billion) on energy efficiency and environmental
protection measures. Currently, Chinese companies have
emerged as global leaders in wind and solar power. More
specifically, Chinese solar manufacturing companies have
become the worlds largest producer of photovoltaic solar
cellsandmodulesandcontrolapproximately17percentof
theglobalmarketfortheproductionofsilicon.The12thFive-Year Plan steps up these developments to support more
resource usage technologies such as the smart grid. The
Chinesegovernmentseemsdeterminedtotakemeasuresto
bolsterdemandforitsSEIproducts.Overthenextfiveyears,
theChinese central and local governments are expected to
devote significant resources to all seven SEIs, creating both
potentialopportunitiesandchallengesforforeignfirms.
HealthcareandBiotechnology
Biotechnologyis oneofChinaskeySEIs.Ithasthepotential
for large productivity gains and at the same time, solves
healthproblemsassociatedwithChinasrapidlyagingsociety.
Through the fastest growing biotech industry in theworld,
China is increasing its crop and animal husbandry yields,
improving medicines, developing newmedical systems and
increasing alternative energy production, among otherapplications. The 12
th Five-Year Plan will support the
development of innovative biotech products, high-end
medicaldevicesandpatentedmedicines.Thegovernmentwill
reportedly put forth a spending package of more than 12
billionRMB(US$1.8billion)forR&Dofnewdrugsfrom2011-
2015.
Technology
Akeypriorityofthe12thFive-YearPlanisforChinatoadvance
from Made in China to Designed in China. The
government will increase funding for R&D and industrial
upgrading aswell as improve intellectual property rights to
promoteindigenousinnovationdrive.
Next-generation IThasbeenselectedasoneof ChinasSEIs.
China will accelerate the creation of next-generation
information networks, mobile communication and the
Internet, which is crucial for the development of Chinas
logisticsindustry.Inaddition,thegovernmentplanstoinvestinR&Dofthe"Internetofthings"andcloudcomputing,and
develop digital and virtual technologies. China will invest
heavily in smart grid solutions in order to modernize and
ensureefficiency incurrent utilitycompanies. Infact,smart
grid technologyhashuge growth potential,with worldwide
utilitiesfirmsexpectedtoinvestUS$375billionby203019.
OpportunitiesforForeignBusiness20
IndustrialUpgradingOpportunitiesandChallenges
Thegovernments plan toincreaseSEIsshare ofGDPyields
opportunities for foreign companies as incentives will be
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created for private investment. In fact, the government
reportedlyexpectsmorethan14trillionRMB(US$2.2trillion)
in funds, fromboth governmentand private sectors, tobe
investedintheseindustries.TheaimisforSEIscontribution
toincreasefromtodaysapproximately5%ofGDP to8%by
2015and15%by2020.
However, according to APCO Worldwide, given Chinas
currentdrivetodevelopitsindigenousinnovationcapabilities,
these preferential policies may be biased toward domestic
firms,especiallysincethegovernmenthaspreviouslygivenits
pledge to develop a national procurement list that favours
domestic firms.Foreign business shouldmonitorChinas SEI
policyclosely andlookfor opportunities toparticipate inits
development. Foreign firms can also consider partnerships
withlocalcompaniestobetteraccessthesignificantfundingopportunitiesavailable.
SeekingViewsfromForeignBusinesses
Innovationanddevelopmentof these industrieswill require
advice,trainingandcooperationfromforeigncompanies.This
assistance could vary from informal consultations to more
formal programs under the rubric of corporate social
responsibility,improvingunderstandingandinstitutionalizing
governmentrelationships.
PracticalGuidanceIssue
BusinessCultureinChina21
Chinas distinctive business culture and etiquette makes it
standoutfrom theothermarkets in theworld. Hence, it is
imperative tohave basic knowledge of these to dowell in
China.
Culture
ConfucianismstillshapestodaysChinesesociety.Hencethe
concept of relationships, elements of responsibility and
obligationareemphasised, to achieve surface harmonyand
collectivegood.
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Guanxi
MostofusalreadyknowoneofthekeyconceptsinChinese
business culture is guanxi(), whichmeans connections.
Guanxi is a network of relationships that involve trust and
support. Money does not necessarily build guanxi. In fact,
guanxi can be established by showing and proving you are
trustworthy, reliable and dependable. It is important to
maintaincontact andemotional bondswithChineseas they
oftenfeelobligedtodobusinesswiththeirfriends.
Mianzi
Anotherimportantissue inChina ismianzi()which is a
symbol of one's pride. It revolves around an individual's
reputationandsocialstatusandcanbegiven,gained,savedorlost.Causingonetolosemianzithroughpublichumiliation
or inappropriate level of respect can ruin business
negotiations.Forexample,Chinese businessman donotlike
tosay "no" outright asit would causethe rejectedparty to
lose mianzi. Although the concept is hard for most to
understand, itisessentialasit isstill verymuchapparentin
manyaspectsofChina.
Keqi
Keqi()referstotheideaofbeinghumbleandmodest.It
is important to demonstrate humility and modesty all the
time as exaggerated behaviours can be deemed to be
arrogantand rudewhicharemuchdisliked accordingto the
Chineseculture.
Etiquette
BelowisalistofthecodeofbehaviourthattheChinesehave
accordingtotheirconventionalnorms:
StatusandHierarchyinChina
The hierarchical structures of the Chinese society and
business organisations are strictly based onpositions in the
organisation. Entrances into meeting rooms are based on
their ranks, as status is very important in China.Greet and
introduce yourself to themost seniormember. In addition,
addressyourChinesecounterpartswitha titleandtheirlast
name. If the person does not have a title, use Mr or
Madam. Senior members tend to lead negotiations and
directdiscussions.
WorkingRelationshipsinChina
Prior to closing business deals, the Chinese build strong
relations with the other party. Even if the other party is
friendly and hospitable, it does not guarantee a positiveoutcome.Inasituationwherebothpartiescanbenefitfrom
eachother,itisimperativetohavetrust.Thecollectivistway
of thinking still plays a strong role and influences Chinese
businesstoday.
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DininginChina22
Followtheseatingprotocol,basedonhierarchy,duringmeals
andwaittobeseated.Mealsareusuallyusedtobuildindirect
business relationship and not used for direct business
negotiations. One should not leave a dish empty as it is
perceivedasnotbeinggivenenoughfood,whichisaninsult
totheChinese.Conversely,leavingfooduntouchedmayalsoappearoffensive.
Toastsaremadefrequentlyduringthedinner.Thefirsttoast
usuallyoccursduringorafterthefirstcourseandnotbefore.
Itisrudetodrinkalonewithouttoastingothers.Simplyraise
yourglassandmakeeyecontact.Ifyouaretoasted,sipyour
drinkinreply.
Gifts
Be prepared toexchange amodest gift with your business
colleaguesatthefirstmeetingsoasnottosetyourbusiness
onawrongfoot.
Preparea groupgift from your company tobe given to the
leaderofthehostcompany.Agiftshouldbepresentedtoall
presentornoneatall.Presentagiftwithbothhands.Uponreceiving,thereareusuallynotopened.
TheChineseoftenrefuseagiftwhenfirstoffered.Youshould
offerasecondtime.
DueDiligence
When conducting business in China, no one should
underestimatethevalueandneedofthoroughduediligence.
By doing so, one can fully equip himself of all the key
informationnecessarytohisoperations.
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LegalStructuresandProcedures
Overview
Foreign investors may choose amongvarious Business Vehicles (BV) according
to the operations and needs of their
businesses. The business structures are
mainlyWholly Foreign-owned Enterprise
(WFOE),JointVentures(JV)andRepresentative
Office(RO).Theroutemapbrieflydescribesanoverview
ofthecoursetoundertakeandthelegal
structurefortheestablishmentofforeign
enterprises.
Investors should always approach lawyers and consult the
relevant governmental departments for a better
understandingofthelegalproceduresinvolved.(E.g.thePRCembassies or consultants stationed in their respective
countriesorregionsorthelocalgovernmentsDepartmentof
PromotionofInternationalTrade-thedepartmentincharge
ofthepromotionofforeigntradeandforeigninvestment).
Figure6-RouteMaptoRegulationsandProcedures
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DeterminationofLegalStructureor
BusinessVehicle
The application and approval procedure for all foreign
enterprisesarelargelysimilarbutmayvarydependingonthe
specific type of business vehicle chosen. Different business
vehiclesmaycatertodifferentinvestorswithvaryingneeds.
Assuch,it isimperative that a foreigninvestorunderstands
thecharacteristicsofthevariousbusinessvehiclesinorderto
catertotheneedsofhisbusiness.
TheapprovedBusinessVehiclesare:
1. WhollyForeign-OwnedEnterprise(WFOE)WFOEis alimited liabilitycompanywhollyownedby the
foreign investor(s) and is increasingly being used for
service providers such as a variety of consulting and
managementservices,softwaredevelopmentandtrading.
2. ointVentures(V)A JV is a business arrangement where the participants
create a new business entity or official contractual
relationshiptoshareinvestmentandoperationexpenses,
management responsibilities and profits and losses.Sometimes,JVsaretheonlywaytoregisterinChinaifa
certain business activity is still controlled by the
government. (E.g. Restaurants, Bars, Building and
Construction,CarProductionandCosmeticsetc.)
Thereare2typesofjointventures,namely EquityV,the
second most common manner after WFOE, in which
foreign companies enter the Chinese market and the
preferred mode of cooperation where the Chinese
government and Chinese businesses are concerned; and
CooperativeVenture(alsoknownasContractualJV),the
partiesinvolvedmayoperateasseparatelegalentitiesand
bearliabilitiesindependentlyratherthanasasingleentity.
3. RepresentativeOffice(RO)ROisestablishedbyforeignparentcompanies
23toengage
in business liaisons, quality control, product promotion,
market research, exchange of technology and other
permitted activities in China. About 20% of foreign
investorschooseROastheirChinabusinessentitybecause
itiscostefficientandrequiresnocapitalinvestment.
TheROisanon-legalentityoperatingandrepresentingits
parent company overseas. As such, it is not allowed to
engagedirectlyinbusinessandoperationalactivities,issue
official invoices, remit outward, sign sales or purchase
contracts, or receive income from services performed.
Howeveritmayactasaliaisonandpromotionofficeforits
parentcompany.
4. HongKongCompany
AHongKongCompanyisoftenusedasaSpecialPurpose
Vehicle(SPV)toinvestinChina.HongKongisoneofthe
quickest locations to incorporate a business in China.
Although a HK company is not a legal entity in China24,
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20
many foreign investors, especially investors from Europe
andNorthAmericachoosetoformaHongKongcompany
asaSPVtoinvestinChina.
5. PartnershipEnterpriseThis is a new type of business presence in China (since
March 1, 2010) and it may take some time for local
authorities todeterminehowthesestructures fitinwithothertypesofbusinessentities.Itrefersto:
TwoormoreForeignenterprisesorindividualsestablishaPartnershipEnterprise(PE)inChina;and
Foreign enterprise(s) or individual(s) with ChineseindividualorcompanyestablishaPartnershipEnterprise
(PE)inChina.
LawsandRegulationsforForeignInvestmentsinChina
GeneralLawsandRegulations
Generallawsandregulationsregulateallforeigninvestment
enterprisesanddomestic companies.They includeCompany
Law, Contract Law, Insurance Law, Arbitration Law, Labour
Law, Intellectual Property Law (including Trademark and
Copyright Law),The ProvisionalRegulationsonValue-Added
Tax, The Provisional Regulations on Consumption Tax, The
Provisional Regulations on Business Tax, and, other related
lawsandregulations.Assuch,itisalwaysrecommendedthat
a certifiedlawyer ispresentto adviseonvarious regulatory
issues.
MainForeignInvestmentLawsandRegulations
Other than the general laws and regulations, foreign
investments are also subject to a series of laws and
regulationsspecifictoforeigninvestments.Afewmainlaws
include:
Law of Chinese-Foreign Equity Joint Ventures and itsimplementationregulations
Law of Chinese-ForeignContractual Joint Ventures anditsimplementationregulations Law of Wholly-Owned Foreign Enterprise and its
implementationregulations
LawofForeign-investedenterprises,theincometaxanditsimplementationregulations
Law on the Protection of Taiwan CompatriotsInvestment
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InternationalTreaties
Foreign investments are subject to some international
treaties, such as the Bilateral Investment Treaties and
BilateralAgreementontheAvoidanceofDoubleTaxation.
ExaminationandApprovalProcedure
Foreign investors are also required to produce certain
documents for the approval process. Such documentations
may vary depending in the form of business entity i.e.
whethertheyareJointVentures(JVs),WhollyForeignOwned
EnterprisesorRepresentativeOffices.
TaxRegime
TaxisthemostimportantsourceoffiscalrevenueofChina.
Tax policies are also used to create certain economic and
socialdevelopmentimpact.Thegovernmentagencyincharge
oftaxpolicyistheMinistryofFinance;fortaxcollection,the
StateAdministrationofTaxation.
Tax rates in China, more often than not, are subject to
frequent changes and many tax rules and regulations are
subjecttolocalinterpretation.Alwayscheckforthelatest
informationbycontactinglocaltaxingjurisdictionsoroneof
theaccountingorganizations in the location where youare
operatingorgoingtooperate.Takenotetoseekadviceonly
fromreputablefirms,internationalorlocal.
Under the current taxation system in China, there are 19
typesoftaxes,namelythevalueaddedtax,consumptiontax,
business tax, enterprise income tax, individual income tax,
resource tax, urban and township land use tax, house
property tax, citymaintenance andconstruction tax, taxon
theuseofarableland,landappreciationtax,vehiclepurchase
tax,vehicleandvesseltax,stamptax,deedtax,tobaccoleaf
tax,customsduty,tonnagedues,andfixedassetsinvestmentorientationregulatorytax.
Astaxpayersonlyneedtopaytherelevanttaxesaccordingto
theactivitiestheyareengagedin,mostenterprisesonlyneed
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topayfrom6-8categories.Thenumberofpayabletaxesmay
reachupto10categoriesforlargerenterprises.
CapitalGains
An individuals capital gains are taxable in China at 20%.
Capital gains tax for a Chinese company is added to the
regular tax.A 10%deductionat sourceismadefromcapital
gainsfromaforeigncompanyinChina.
Thetablebelowservesasareferenceandshowstheincome
tax rates in China for an individual in 2012. Income for
business is taxable at 5-35% and passive income such as
interestandroyaltiesistaxableatastandardrateof20%.
MonthlyTaxable
Income(RMB)
Tax
Percentage(%)
QuickDeduction
(RMB)
11,500 3 0
1,5014,500 10 105
4,5019,000 20 555
9,00135,000 25 1,005
35,00155,000 30 2,755
55,00180,000 35 5,505
80,001andabove 45 13,505
Table1-IndividualIncomeTaxRatesinChinaforYear2012
ReportingDatesandPayment
ThetaxyearinChinaendsonDecember31.Itiscompulsory
to file a report and pay advances monthly or quarterly
(monthly for individuals). Submitting an annual report and
arrangingpaymentsshouldbedonebeforeMay31.Thereare
finesonarrears.ForeigncompaniesinChinaareobligatedto
submit an interim report every three months (advancepayments should be paidwithin15 days of the end of the
quarter).
Inmostcaseswhen theannual incomeis less than 120,000
RMB, an individualwhose entire income inChina is from a
salaryorwhoseincomeis subjectedtoa deductionoftaxat
sourcewillbeexemptedfromsubmittinganannualreport.An
employer is obligated to submit a monthly report on his
employees'wagesandtopaythetaxdeductedwithin7days
oftheendofthepreviousmonth.
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DeductionofTaxatSource
Anemployerisobligatedtodeducttaxatsourceonamonthly
basis from a salaried employee and to make additional
contributions to social security. Social security in China
consists of 3 parts: basic pension, personal accounts and
additional payment. The rates for social security vary in
differentcities.Ratesinthemajorcitiesarearound30% foremployers,and11%foremployees.
Thefollowingtableshowsa detailed summary of taxesand
mandatorycontributionsthatamediumsizedcompanymust
pay or withhold in a given year, as well as measures of
administrativeburdenin payingtaxes.In 2012,a numberof
major cities and provinces (including Shanghai, Beijing and
GuangdongProvince)haverolledoutapilotVAT(Pilot)Tax
schemeforbusinessesintransportationandmodernserviceindustries
.25262728
The following data was collected by the
WorldBankaspartofthereport,DoingBusinessin2012.
Taxormandatorycontribution Payments
(number)
Noteson
payments
Time
(h)
Statutorytax
rate
Taxbase Totaltax
rate(%
profit)
Employerpaid-socialsecurity/housing
fundcontributions
1 Onlinefiling 192 44.0% Grosssalaries 49.6%
Corporateincometax 1 Onlinefiling 74 20.0% Taxableprofits 5.4
Urbanmaintenancetax - Paidjointly 7.0% VAT 3.5
Educationsurcharge Paidjointly 3.0% VAT 1.5
Stampduty 1 Onlinefiling 0.03% Transactions 1
Realestatetax 1 1.2% 80%buildingvalue 1
Leviesforconstructionand
maintenanceofriverprojects
0 Paidjointly 1.0% VATandbusiness
tax
0.5
Businesstax 1 5.0% Capitalgain 0.5
Landusetax 1 Onlinefiling CNY6per
squaremeter
Landarea 0.4
ValueAddedTax(VAT) 1 Onlinefiling 132 17.0% Valueadded Notincluded
Totals 7 398 63.5
Table3-SummaryofTaxes&MandatoryContributionsofaMediumSizedCompany(StatisticsfromCalendarYear2010)
Di id d Withh ldi T
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Takeaglimpse!
TaxisthemostimportantsourceoffiscalrevenueofChina
UnderthepurviewoftheMinistryofFinance;taxcollectionisundertheStateAdministrationof
Taxation
25typesoftaxesin8categories:Turnover,Income,Resource,Taxesforspecialpurposes,Propertytaxes,
Agriculturaltaxes,Customstaxes
TaxyearinChinaends31December Submissionofannualreportandarrangingpayments
mustbedoneby31May
Companiestosubmitinterimreportsevery3months(advancepaymenttobemadewithin15daysofendofquarter)
Annualwagereportexemptionincasesofemployeeswithannualincomeoflessthan120,000RMB
Employerstosubmitmonthlyreportsonemployeeswagesandtopaytaxdeductedwithin7daysofend
ofpreviousmonth
AdditionalcontributionstoSocialsecurity:BasicPension,PersonalAccountsandAdditionalPayment
Ratesinmajorcities:30%foremployersand11%foremployees
DividendWithholdingTax
ProfitscanbetakenoutofChinaintheformofdividends,but
anydeclareddividendsforforeignenterprisesaresubjected
to10%withholding tax. Therefore,most of thetimeprofits
arebetterspentreinvestingintheenterprise,whichisexactly
whatthegovernmenthopestoachieve.
Fees are an important aspect to account for in starting a
businessregardlessoftheindustry.Feesandlicenseswould
havetobeincurredforproceduressuchaspowerhook-ups,
installations, fire safety permits. Fees and regulations may
change, thus it is useful to understand the updated local
practices.
Benchmarkingcansometimesprovidebetterinsighttowhat
feesmaybeimposedandhowbigtheymaybe.Ifstartingupafactoryforexample,contacta fewfirmswhohavejust set
upshopintheareaforanideaofwhattobetaxed.
3 C h fl t t t
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AuditandAccountancy
Audit and accountancy can vary across different types of
companies. Companies can be registered and categorized
variously such as private companies, representative office,
Hong Kong registered office and listed companies in which
accountingregulationswoulddiffer.
GeneralAccountingPrinciplesand
Regulation
A few sets of general accountingprinciples and regulations
applytoallregisteredcompaniesinMainlandChinaandHong
Kong. Thegeneral accountingprinciples and regulations for
publiclylistedcompaniesaremuchmoreextensive,andthese
companiestendtohaveinternationalauditingfirmsmanaging
theiraccountsinChina.Allcompanieshavetosubmitannual
financialstatementstotheStateAdministrationforIndustry
andCommerce(SAIC)forinspection.Thesereportsalsohave
tobeauditedbyChineseaccountantswhoareregisteredwith
theChineseInstituteofPublicCertifiedAccountants (CICPA)
in accordance to Companies Law. In February 2006, the
Ministry Of Finance (MOF) announced the newest 38
accounting standards, which were enforced from 1 January2007. In general, the financial accounting statements
required,notincludingtaxstatementsrequired,are:
1. Balancesheet2. Incomestatement
3. Cashflowstatement4. Statementofprofitappropriation5. Notestothefinancialstatements6. Supplementarystatements7. Management's commentary on the entity's financial
performance
PrivateCompanies
Private companies can preparetheir financial statements in
accordancetotheAccountingSystemforBusinessEnterprises
or Accounting Standards for Business Enterprises. There is
alsoanAccountingSystemforSmall-sizedBusinessEnterprise
which is for small companies that have no publicly traded
sharesandfulfilthebelowstatedrestrictions.
Industry No.Of
Staff
Sales
(RMB,
million)
Assets
(RMB,
million)
Construction
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RepresentativeOffice
ForcompaniesthatareregisteringtheirbusinessinChinaasa
representativeofficeof their foreign office, thecompany is
not allowed to engage in any revenue-generating business.
Hence,thefinancialstatementsareto bepreparedon atax
basis andaudited for taxpurposes. Theaccounting records
aremuch simpler, containing cash andbankbooks, expenseandassetaccounts.30
HongKongRegisteredCompanies
Since 1st January 2005, Hong Kong has adapted a Financial
ReportingStandards(FRS)frameworkthathasbeenmodelled
on InternationalFinancial Reporting Standards (IFRS), issued
by theInternational AccountingStandardsBoard(IASB). For
companiesregisteredinHongKongandhavetheirbusinesseslegally registered under a Chinese agency, these are the
following documents needed for accounting back in Hong
Kong31:
1. Thebooksofaccountsrecordingreceiptsandpayments,orincomeandexpenditure
2. The underlying documentation necessary to verify theentriesinthebooksof account;suchas vouchers,bankstatements,invoices,receiptsandotherrelevantpapers
3. Arecordoftheassetsandliabilitiesofthebusiness
4. Adailyrecordofallmoneyreceivedandexpendedbythebusinesstogetherwithsupportingdetailsofthereceipts
orpayments
AprivatelimitedcompanyincorporatedinHongKongunder
theCompaniesOrdinanceisrequiredtofileanAnnualReturn
signed by a director, company secretary, manager or
authorized representative with the Companies Registry. An
AnnualReturncontains theparticularsof thecompanysuch
as the address of the registered office, shareholders,
directors, secretary, etc. The Annual Return must be filed
once every calendar year (except in the year of its
incorporation) within 42 days of the anniversary of the
companys incorporation date. Even if the information
containedinthelastreturnhasnotchangedsince,anannual
returnstillneedstobefiled,certifyingthattherehasbeennochangesincethedateofthelastreturn.
Late filing will result in a higher registration fee and the
companyanditsofficersareliabletoprosecutionandfines.
Unlike companies registered inMainland China, there is no
restriction on the accounting software used by Hong Kong
companies.
ListedCompanies
There area great variety of accounting companies offering
complete accountingservices forlistedcompanies inChina.
Generally foreign listed companies need to prepare 3 sets of another date as its balance day This is subject to the approval
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Generally,foreignlistedcompaniesneedtoprepare3setsof
accounts, one in accordance to the China Accounting
Standards (CAS), one for the International Accounting
Standardsandoneforthestandardsinthehomecountry.
Inaddition tosubmitting theannual financialstatements to
theSAIC,companieslistedinChinamustalsosubmitthemto
the China Securities Regulatory Commission (CSRC). The
AccountingStandardsforBusinessEnterpriseswasissuedon
15th February 2006 by Chinas MOF. This is the accounting
standardrequiredforlistedcompanies.
In2006,thechangestotheCAShadresultedinanestimated
90-95% convergence to the IFDS, reducing translation costs
greatly. For example, in the Accounting Standards for
Business Enterprises mentioned above that is required oflisted companies, thedifference lies in that IFRS allows the
reversal of impairment loss of long-term assets such as
equipmentplants,intangibleassetsandinvestments.TheCAS
forBusinessEnterprisesdoesnot.32
AdditionalNotes
AccountingPeriod
The accounting period in China is from 1 January to 31
December.However,ifaChinesecompanyisasubsidiaryofa
foreigngroupofcompanieswhosebalancedaydoesnotfall
on 31December, theChinese subsidiary can choose to use
anotherdateasitsbalanceday.Thisissubjecttotheapproval
oftherelevantregulatoryauthorities.
AccountingBooksandRecords
Under the Enterprise Income Tax Law for Mainland China,
foreign companies are required to keep accounting records
for at least 15 years. For Hong Kong, all records must beretainedfor7yearsfromthetransactiondate.
CurrencyRequirements
Enterprisesarerequiredtomaintaintheiraccountingrecords
inRMB. If a companyuses foreigncurrencies foroperating
incomeandexpenses,oneofthesecurrenciescanbeusedas
the bookkeeping base currency. However, the financial
statementsmustbeconvertedtoRMB.
Language
AccountingrecordshavetobemaintainedinChinese.Foreign
companiesmayuseChineseonlyoracombinationofChinese
andaforeignlanguage.
I i M t An invoice collection book specifying the type and quantity of
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InvoiceManagement
DefinitionofInvoice
An invoice is the proof of payment for the sale of goods,
provision of labourservice,or otherbusiness activities. Itis
alsoaproofthatapaymentandreceipthavetakenplace,anofficial document for financialmanagement andaccounting
andanimportanttoolinauditingfortaxationpurpose.
Invoices are generally in triplicate copies, namely the stub,
invoice copy and accounts copy. Value-added tax (VAT)
invoiceshaveanadditionalcopy,whichisthedeductioncopy.
PurchaseandCollectionofInvoice
A tax registration certificatewill be issued to individualsor
enterprises that have completed tax registration, which is
compulsorybylaw.Topurchaseinvoices,thefollowinghave
to be submitted to the competent tax office for invoice
purchase:
1. Identificationdocumentoftheapplicant;2. Taxregistrationcertificateorotherproof;and3. Officialsealorspecialsealforinvoices.
Aninvoicecollectionbookspecifyingthetypeandquantityof
invoicestobepurchasedaswellasthemethodofpurchase
willbeissuedaftergainingapprovalfromthetaxoffice.The
applicantcanthenpurchasetheinvoicesfromthecompetent
taxoffice.
IssuanceofInvoice
Thefollowingaresomeguidelinesontheissuanceofinvoices
bybusinesses:33
1. Anindividualorenterprisethatreceivespaymentfromthesale of goods, provision of service or other business
activitiesshouldissueinvoicestothepayer.Underspecial
circumstances,thepayerwillissueinvoicestothepayee.
2. When enterprises and individuals engaged in production
or other business operations purchase a good, receivea
serviceorconductabusinessactivity,theyshouldaskthe
payeeforaninvoiceandmustnotchangethedescription
oramountshownontheinvoice.
3. Invoicesshouldbeissuedinserialorderwithinaspecifiedperiodoftime.Invoicesinmultiplecopiesshouldbeissued
at one time to accurately record the details of a
transaction andstampedwith theissuer'sofficial seal or
specialinvoiceseal.
4. No individual or enterprise should borrow, transfer or Storage of Invoice
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4. No individual or enterprise should borrow, transfer orissueinvoicesonothers'behalf.Unlessapprovalisgranted
by the tax authority, the invoice books should not be
detached for use. The scope of use for special invoices
shouldnotbeextendedcasually.
5. Invoices that fail to meet the relevant requirementscannot be used as financial proof. Enterprises andindividualsmayrefusetoacceptsuchinvoices.
6. Since1July2003,taxpayersinBeijing,Tianjin,Shanxi,Jilin,Heilongjiang, Jiangsu, Ningbo, Anhui, Fujian, Xiamen,
Qingdao, Henan, Hubei, Hunan, Guangdong, Shenzhen,
Guangxi,Hainan,Sichuan,Chongqing,Yunnan,Gansuand
NingxiaarerequiredtoissueVATinvoicesbyanti-forgery
VATinvoicesystem.HandwrittenVATinvoiceshavebeen
disallowed for input VAT claimpurpose (except theVAT
invoicesissuedbytaxauthoritiesonbehalfofsmallscale
VATpayers).
7. Inaddition,since1August2003,handwrittenVATinvoiceshave been disallowed for input VAT claim purpose in
Hebei,InnerMongolia,Shanghai,Guizhou,Shanxi,Qinghai
and Xizang (except the VAT invoices issued by tax
authorities on behalf of small scale VAT payers). AnyhandwrittenVATinvoicesissuedonorafter1August2003
cannot be used as input VAT claim evidence across the
whole country (except the VAT invoices issued by tax
authoritiesonbehalfofsmallscaleVATpayers).
StorageofInvoice
Thefollowingaresomeadviceonthestorageofinvoice:
1. For regular users of these invoices, an invoice registershouldbesetuptorecordtheusagesandforreporting
tothecompetenttaxoffice.
2. Changes or cancellation of invoices and invoice booksshould be done concurrently with changes and
cancellationoftaxregistration.
Invoicestubsandinvoiceregistersshouldbewelltakencare
ofandretainedforfiveyearsafterwhichtimetheyshouldbe
destroyeduponcheckingbythetaxoffice.
FilingofAnnualTaxReturnwith
InlandRevenueDepartment(IRD)
With respect to Hong Kong registered companies, it is
requiredasperHongKongcompanylaw,thateverycompany
formedinHongKong,mustfilea TaxReturn(alsoknownas
Profits Tax Return) along with its audited accounts on an
annual basis with the IRD of Hong Kong. The following
companiesarenotrequiredtosubmitauditedaccountsalong
withtheirreturns:
Small corporations: Defined as those corporations whose The prescribed Supplementary Form which contains most
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Smallcorporations:Definedas thosecorporationswhosetotalgrossincomedoesnotexceedHKD500,000forthe
basisperiod
Dormant companies: Defined as having no relevantaccountingtransactionsduringafinancialyear
Companies incorporated in a jurisdiction whose laws donotrequireaccountstobeaudited
HongKongbranchofaforeigncompany,subjecttocertainconditions
IRDissuesTaxReturnfilingnotificationstocompaniesonthe
1stofAprileveryyear.Forthenewlyincorporatedcompanies,
the notification isgenerallysent onthe 18thmonth ofthe
incorporation date. Companies must file their Tax Return
withinonemonth from thedate ofnotification.Companies
can request for an extension, if needed. You may incur a
paymentofpenaltyorevenprosecutionifyoufailtosubmit
yourtaxreturnbytheduedate.
When filing the Tax Return, the following supporting
documentsmustalsobeattached34:
Acertifiedcopyofthecompanysbalancesheet,auditorsreport and Profit & Loss Account relating to the basis
period;
A tax computation indicating how the amount ofassessableofprofits(oradjustedlosses)hasbeenarrived
at;and
TheprescribedSupplementaryFormwhichcontainsmostparticularssuchastaxdataandfinancialdataetc.
HumanResources/Staff
RecruitmentContractsandUnions
LegalEnvironment
TheMinistryofLabourandSocialSecurityisthegovernment
bodyresponsiblefortheadministrationofemploymentlawin
China. The Ministry is responsible for formulating national
labour and social security policies. The labour and socialsecurity bureaus, which are under the Ministry, are
responsible for administering the national and local
regulations.Labourpracticesvarybetweenregionsgiventhe
fairlywidediscretioninhandlinglocallabourmatters .
Effective from 1 January 2008, a new Labour Contract Law
wasenforcedinChina.ThisLabourContractLawisformulated
with the purpose of governing the establishment ofemploymentrelationships,andtheconclusion,performance,
amendmentandterminationoflabourcontractsbetweenthe
employerandtheemployee.ThisLawencouragesemployers
to enter into long term or non-fixed term employment
contractswithemployees,andsetsmorestrictregulationsfor
the termination of employment, stipulating conditions of choose whom they employ, and what criteria to apply
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p y p g
termination and increasing any relevant costs. It also
increases thepenalties for violation of the Labour Contract
Lawandotherrelatedregulations.
Additional labour-related lawsand regulations accompanied
theLaw,includingtheSalaryRegulation,theLabourDispute
Arbitration Law, the Social Security Law, etc. The
implementation of such rules for the Labour Contract Law
affects the way inwhich foreign companies do business in
China,andwill have far-reaching implications.The new rule
brings a further tightening of labour regulations and in
general,ismorelabour-friendly.Afterfullimplementationof
the new Contract Law, the general impacts on foreign
companies include, increased labour costs due to stricter
compensation requirements when firing employees andincreased risks relatedto employment. Employee rightswill
also be better protected, andas a result, companiesmight
find it more difficult to prevail in labour disputes. It also
means that employerswill have to bemore cautiouswhen
recruiting new employees because ofnewrequirements on
severanceandprobation.
Recruitment
MethodsdifferforForeignInvestmentEnterprises(FIEs)and
RepresentativeOffices (ROs)of foreigncompanies inChina.
FIEs, for instance, Joint Ventures (JVs) andWholly Foreign-
Owned Enterprises (WFOEs), are afforded autonomy with
regardtotheiremploymentdecisions.Forexample,theymay
y p y pp y
throughout the recruitment process. Nevertheless, such
companies must file their recruitment plans to their local
Labour andSocialSecurity Department, who in turn ensure
that within all labour contracts, the legitimate rights and
interestsoftheworkersarewellprotected.
AnexampleofautonomyinrecruitmentforJVsandWFOEsis
thattheseenterprisesmayrecruitChineseemployeesdirectly
orthroughlocalemploymentservicecentres.JVsnormallydo
so through recommendationsfrom their Chinesepartner or
thelocalauthorities.TheJVwilloftenemploystafffromthe
originalmanufacturingplantof theChinese partner.WFOEs
normallyhaveafreehandinrecruitingstafflocally.However,
duetoalackoflocalnetworks,theywilloftenneedtorelyon
professional firms,massmedia,or othermethodsto recruitstaffsinthemanageriallevel.
RecruitinglocalstaffisdifferentforROs,whicharerequired
tohirestaffthroughanauthorisedlabouragency.Thereare
severalavailableauthorisedlabouragenciesinChina,suchas
the Foreign Enterprise Service Corporation, China
InternationalIntellectCorporation(CIIC),forexample.Today
there are over 70 authorized Foreign Service Corporations
who provide local staff to ROs in 25 provinces and
municipalities.
The labour agency is the legal employer of the staff and
seconds them to the RO to provide agreed services. In
practice,ROsneedtoestablishacontractualrelationshipwith TerminationofEmployment
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Takeaglimpse!
FIEsgivenfreedomforemploymentdecisionsjustneedtofiletothelocalLabourandSocialSecurityDepartment
ROsmusthirethroughanauthorisedlabouragency;theemployermusthavearegistrationcertificatetohirelocals
whichrequirescompletionofcertainformalities
the labour agencyandpaythe required service fee. As the
staffworkingforROsaretheemployeesoftheagency,many
ROsinChinachoosetoenterintoaseparateagreementwith
the staff stipulating the terms and conditions of the
engagement.
TherearenospecificstipulationsinChineseLawregardingthelanguage of the contract, but it is advisable to create a
bilingual document - one of the languages being Chinese;
particularly as all contracts must be verified by the labour
authorityandrequiresthecontracttobeinChinese.
InordertoemployChinesenationalsinaForeignROinChina,
theemployermustobtaina registration certificate.Inorder
tobegrantedthiscertificate,anumberofformalitiesmustbecompleted such as opening a bank account for foreign
exchange, applying for direct telecommunication lines and
securingamultipleentryvisaforlocals.
Unlike practices in many other countries, employment at
will is not permitted in China. Employment termination is
complicatedinChinaandemployersshouldexercisecaution
in this regard. Employershave to followcertain procedures
andconditions toterminatetheemploymentwiththe staff,
e.g. upon contract expiration, or where the employee is
provedto beunqualified,violatesthe enterprises rules and
regulations, discloses criminal convictions. In addition, staff
maybemaderedundantasaresultofproductionortechnical
changes.
However,anemployerisnotpermittedtodismissstaffswho
undergostipulatedmedicaltreatment,wholosetheirability
to work due to an occupational disease or a work-related
injury,andwhoareonpregnancyormaternityleaveorinthe
midstofalactationperiod.
To terminate an employment relationship with staff,
enterprisesmayneedtogiveastatutoryterminationnotice.
Employersmaydismissemployeeswithoutnoticeonlywhen
the employee is dismissed during the statutory probation
period; has seriously violated workplace rules; cause great
losses to the employer due to serious dereliction of duty,embezzlement or another criminal offence; or is being
investigated for a criminal offence. Conditions permitting
employeedismissalwithprior30daysnoticeincludeinability
of an employee to take up his original or new work upon
returningfromnon-workrelatedmedicaltreatmentforillness
or injury, is unqualified forhis joband remains unqualifiedEmployer-Employee Relations
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Takeaglimpse!
Dismissalofstaffduetomedicalissuesisnotpermitted
Astatutoryterminationperiodneedstobegivenbeforeterminationunlessstatutoryprobation
periodappliesorunderseriouscircumstances
Severancepaymentfollowingterminationbasedonactualserviceyearandsalarylevelofstaff
ROsgothroughagenciessubjectedtotheiragreedconditionsbetweenbothparties
Takeaglimpse!
Companiesneedtoprovidefundsequivalentto2%oftotalsalarycostsfortradeunionactivities
Labourdisputesshouldgothroughnegotiations,compulsoryarbitration,beforeinitiatinglegal
proceedings
even after receiving training or an adjustment to another
workpost.
Enterprisesmayneedtoproviderequiredseverancepayment
following termination of an employment relationship. The
severancepaymentiscalculatedbasedontheactualservice
yearandthesalarylevelofthestaff.
InChina,ROsarealsoabletoterminatetheirstaff.Astheydo
nothaveanemploymentrelationshipwiththesecondedstaff,
ROs may terminate the serviceof these staff through their
engagedagency.TheserviceagreementbetweenROsandthe
labouragencyservesastheguidanceofthetermination.
Employer EmployeeRelations
TheChinesegovernment is nowenforcing theTrade Union
Law. According to the Trade Union Law, companies are
required tosupport employees to setup a trade union and
providefundsequivalentto2%ofthecompanystotalsalary
costsfortheactivitiesofthetradeunion.Foractivitiesrelated
toemployees, forexample, re-organisations and layoffs, thecompanyshallnotifythetradeunionandheeditscomments
beforetakingaction.
On labour disputes, Chinas Regulations Concerning the
HandlingofLabourDisputesinEnterprisesandtheProvisional
Regulations onHandlingofPersonnelDisputes establish the
procedures forhandling labour disputes. Under thedispute
regulations,partiesareencouragedtosettlelabourdisputesby negotiation ormediation. If neitherof these works, the
partiesmustresorttocompulsoryarbitrationbeforetheymay
initiatelegalproceedings.
WorkingConditions deducted or delayed without justification. Delayed payroll
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g
WagesandSalaries
In China, enterprises have the right to set their own
remunerationpackage,includingcompensationandbenefits.
Pursuant toChinasLabourContractLaw,thewagesof staff
shall not be lower thantheminimumwage in the locationwhere the company is registered. Minimum wage
requirementsaredeterminedataprovinciallevel.The1993
RegulationsonMinimumWages inEnterprises (amended in
October1994)requireallprovinces,autonomousregions,and
directly administered municipalities to set minimum wage
standardsandreportthemtotheMinistry.Employersthatfail
to meet these standards may be ordered to compensate
employees for the difference, pay other compensation, or
both.
Inadditiontocompensation,enterprisesmayalsoimplement
effective incentive programmes, e.g. sales incentives,
performancebonuses,stockoptions,andthelike,inorderto
attract talent. This is usually of greater importance for
positionsinmanagementandsales.
In termsofpayroll, salary shall bedisbursed to thestaffat
least once a month in local currency. The date of
disbursementcanbedecidedthroughanagreementbetween
the company and staff. The wagepaid tostaff shall not be
disbursementmayleadtoafinancialpenalty.Inaddition,the
companyisresponsibleforwithholdingPRCindividualincome
taxesthatispayablefromstaffgrosscompensation.
FringeBenefits
In China, employers and employees are required toparticipate ina socialbenefits system.As a result, they are
obliged to make contributions to the statutory social
insurance programmes based on the schemes for different
locations.Foramajorityoftheworkforce,whosesalarylevel
fallswithin thelocal socialinsurancecontribution base, the
social insurance contribution could be between 35-40% of
theirsalarycost.
Thesocial insuranceprogrammescover the following social
insurance and funds: pension, medical insurance,
unemployment insurance, work-related injury insurance,
maternity insurance and housing fund. It was recently
announced that foreigners face a compulsory inclusion into
thesocialinsurancesystem.35
To participate in social insurance programmes, enterprises
need to registerwith therelevant labourbureau, set upanaccount with a social insurancemanagement authority and
pay the required insurance premiums on a monthly basis.
Apartfromemployerpremiums,companiesshallwithholdthe
premiumsofemployeesfromtheirmonthlysalaryandmake
thepaymenttotherelevantauthority.ForROs,becausethey
l l i i i h ld b id i h
retainlocaltalent.
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35
are not legal entities, premiums should be paid via the
authorized labour agency. In addition to statutory social
insurance, enterprises in China also provide supplementary
benefitsschemestotheiremployeesasawaytoattractand
WorkingHours
The working hours per week were reduced from 48 to 44
hoursinMarch1994,andfurtherreducedto40hoursinMay1995 by the State Council. In general, overtime is not
encouraged,thoughpermissibleunderspecialcircumstances.
Overtimepay ishigher than that fornormalworking hours,
ranging from150%up to300%ofnormalwages,depending
onwhether the overtime is during weekdays, rest days or
statutoryholidays.
Challenges
CompaniesinChinaneedtobeawareofpotentialchallenges
in industrial and community-relations in doing business in
China following the implementation of the new Labour
ContractLaw.Thisincludesstrongerlabourunionsandmore
litigious employees, who now are less likely to hesitate to
protestincasesofdownsizing.SincecompaniesinChinaare
increasinglyexpectedtodemonstratesocialresponsibilityand
corporate citizenship, it is important to implement changes
wellandpromotegoodcommunicationwithinthecompany.
A good start is to receive expert labour law input when
formingforexampleJVandothercontracts.
Takeaglimpse! EmployersandEmployeesarerequiredto
participateinsocialbenefitssystem,make
contributionstostatutorysocialinsurance
programmes(locationbased)contribution
between35-40%ofsalarycost.
Socialinsuranceprogrammescoverpension,medicalinsurance,unemploymentinsurance,work-relatedinjuryinsurance,maternityinsurance
andhousingfund.
Registerwithrelevantlabourbureau,setupanaccountwithsocialinsurancemanagement
authoritiesandpayrequiredinsurancepremiums
onmonthlybasis.
Employersholdpremiumsofemployeesfrommonthlysalarytomakepaymenttorelevant
authority.
EnterprisesinChinaalsoprovidesupplementarybenefitsschemestoemployees.
Human resource constraints or the difficulty to recruit
lifi d t ff f tl f t th b h ll
TrademarkApplication
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36
qualifiedstafffrequentlyfeatureasthenumberonechallenge
thatcompaniesface.Interestingtrendsandinsightsthatare
surfacingincludetheintensecompetitionforthesametalent.
There is a wide recognition that talent quality coming out
from local universities is better than ever, but competition
from employers is also fierce. Competition to recruit top
talentis comingnot only fromother foreign companiesbutalso from private Chinese companies and state-owned
enterprises.Furthermore,domesticcompaniesarereplicating
some of the western formulas that make an employer
attractive, like moving their offices to prime real estate so
that they make the setting more attractive to top talents.
Observations have been made that there has been an
evolutioninthetypeoftalentthatislacking.Itiscommonly
saidthatin2001therewasalackofprofessionals,in2005a
lackofmanagersand2011alackofexecutives.
IntellectualPropertyRights(IPR)Overview
This section isa summary of the relevant laws that aim to
protect an individuals intellectual property rights, namely,
the registration process for trademarks, patents, aswell as
possiblelegalavenuestoseekredressonIPRdisputes.36
1. The two principal pieces of legislation forming thetrademarksystemaretheTrademarkLaw,andtheUnfair
CompetitionLaw.
2. China employs a "first-to-file" system, meaning that ingeneral,thefirstpartytofileatrademarkapplicationin
China will be deemed the owner of that trademark,
assumingtheapplicationproceedsontoregistration.
3. ForeignpartiesmusttakeupthetrademarkregistrationprocesswithanapprovedChineseagent,whichcantake
about1to3years.
PatentApplication
1. The application for a patent right to any invention orutility model must possess novelty, inventiveness and
practicalapplicability.
IntellectualPropertyRightsDisputes
1. Chinas intellectual property legislation stipulates thatinfringements of IPRs are dealt with by administrative
proceduresandlegalproceedings.
2. China currently adopts a dual-track system for IPRprotectionunderwhichtheinterestedpartiesmayseek
to resolve IPR-related disputes through administrative
procedures or legal proceedings
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37
proceduresorlegalproceedings.
3. WhenanIPRinfringementdisputearises,theinterestedpartiesmay resort to mediation. If mediation is not a
preferredoption,ormediationhasfailed,oroneofthe
interested parties refuses to abide by the outcome of
mediation,legalproceedingsmaybeinstitutedwiththePeoplesCourt.
4. It should be noted that under ChinasPatentLawandTrademarkLaw,foreignenterprisesarerequired
toappoint designatedagentstohandlematters related
to patents and trademarks. This also applies to the
handling of disputes involving infringements, which
means that the designated agent should make the
request for settlement of the dispute onbehalf oftheinterestedparty.
ConcludingNotes
Inthisinfokit,wehopetogiveentrepreneursanoverviewof
thesituation inChina,assist andequip them with essential
information required inenteringtheChinesemarket forthe
first time. Undoubtedly, there is still vast knowledge to be
realisedabouttheChinesemarketthatisincompressibleinto
onekit.
Our future updates of this report aim to continue giving
Singapore entrepreneurs the latest information regarding
startingupinChina.Dostaytunedforournextupdate!
Appendix 1
HongKongTradeDevelopmentCouncil(HKTDC)
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Appendix1
ListofUsefulWebsitesACESingapore
http://www.ace.sg
ACEBeijing
http://www.acebeijing.org/
InternationalEnterpriseSingapore
http://www.iesingapore.gov.sg
SingaporeChamberofCommerceandIndustryinChina
http://www.singcham.com.cn
SingaporeEmbassyinBeijing
http://www.mfa.gov.sg/content/mfa/overseasmission/beijing.html
MarketResearchonChina
APCOWorldwideInc.(ResearchReports)
www.apcoworldwide.com
TheAmericanChamberofCommerceinChina
http://www.amchamchina.org
BeijingConsultingGroup(Newcompanysetup/staffrecruitment/
sourcing)
www.BJConsultingGroup.com
ChinaBriefing
http://www.china-briefing.com/en/
g g p ( )
http://www.hktdc.com/en-buyer/
iResearch(ChinaInternetMarket)
http://www.iresearch.cn
TheJLJGroup(ChinaEntryMarketHandbook)
http://www.jljgroup.com/page/en/21/China-Market-Entry-
%20Handbook.html
NationalBureauofStatisticsofChina
http://www.stats.gov.cn/english/
NielsenResearch(ChinaConsumerResearchReports)
http://cn.en.acnielsen.com/trends/index.shtml
MediainChina
ChinaDaily(widestcirculationofallChineseEnglish-languageprint
newspapers)
http://www.chinadaily.com.cn/index.html
XinhuaNet(Chinasofficialnewsagency)
http://www.xinhuanet.com/english/
LegalMatters
China-Law-Firms
http://www.chinalawfirms.cn/(LegalInformation)
NationalPeoplesCongressLawsandRegulations(InEnglish)
http://www.npc.gov.cn/englishnpc/Law/Integrated_index.html
EconomicMatters
TheWorldBank
http://www.worldbank.org/
WorldTradeOrganisation
http://www.wto.org/ 1714nuclearreactorsareinservice.ChinaDaily,Buildingofnuclearplantstoresume,8th
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39
p // g/ 1TheWorldBank,Data:GDP(currentUS$),
(http://data.worldbank.org/indicator/NY.GDP.MKTP.CD).2Ibid.3Ibid.4InternationalMonetaryFund(IMF),WorldEconomicOutlook:GrowthResuming,Dangers
Remain,Apr2012,(http://www.imf.org/external/pubs/ft/weo/2012/01/pdf/text.pdf).5ResearchInstituteofEconomy,TradeandIndustry,IAA,RidingontheVigorofAnEconomic
Superpower:JapanshouldseekanFTAwithChina,13thMarch2012,
(http://www.rieti.go.jp/en/columns/a01_0340.html);JiangsuGuotaiInternationalGroup,2011
ChinasImportandExportoverUS$3.6trillion,(http://www.gtig.com/en/news-view-
1731.aspx).6BloombergDaily,ChinasForeignExchangeReservesSurge,Exceeding$2Trillion,15
thJuly
2009,(http://www.bloomberg.com/apps/news?pid=newsarchive&sid=alZgI4B1lt3s).7CBSNews,EconWatch,Chinanowowns$1.16trillionofU.S.debt,28
thFebruary2011,
(http://www.cbsnews.com/8301-503983_162-20037535-503983.html).8FDIChina,NewsReleaseofNationalAssimilationofFDIFromJanuarytoDecember2011,19th
January2012,
(http://www.fdi.gov.cn/pub/FDI_EN/Statistics/FDIStatistics/ExpressofForeignInvestment/t20120
119_140569.html).9EconomicandCommercialCounsellorsOfficeoftheEmbassyofthePeoplesRepublicofChina
intheRepublicofZambia,2010StatisticalBulletinofChinasOutwardForeignDirect
Investment,4thNovember2011,
(http://hzs.mofcom.gov.cn/accessory/201109/1316069658609.pdf).10WTO|China,MemberInformation,
(http://www.wto.org/english/thewto_e/countries_e/china_e.html).11WallStreetJournalAsia,ChinaTurnsPredominantlyUrban,18thJanuary2012,
(http://online.wsj.com/article/SB10001424052970203735304577166652002366514.html);
NationalBureauofStatisticsofChina,China'sTotalPopulationandStructuralChangesin2011,
20thJanuary2012,
(http://www.stats.gov.cn/was40/gjtjj_en_detail.jsp?searchword=cities&channelid=9528&record
=79).12NewZealandTrade&Enterprise(NZTE),ReportOnthe12thFive-YearPlan:Anin-depth
overviewandanalysisofChinaspolicyblueprintforyears20112015(Wellington:NewZealandandEnterprise,2011),page4,(http://www.nzte.govt.nz/features-commentary/In-
Brief/Pages/Report-Chinas-Five-Year-Plan.aspx).13Ibid.14KPMGChina,Chinas12thFive-YearPlan:Overview,March2011
(http://www.kpmg.com/CN/en/IssuesAndInsights/ArticlesPublications/Publicationseries/5-
years-plan/Documents/China-12th-Five-Year-Plan-Overview-201104.pdf),page215
APCO,page6-9.16NZTE,page69-70.
March2012,(http://english.peopledaily.com.cn/90778/7751956.html).18Xinhua,ChinatoSafelyandEffectivelyDevelopNuclearPower,5thMarch2012,
(http://english.cri.cn/6909/2012/03/05/1461s684995.html).19Casey,J.&Koleski,K.,Backgrounder:Chinas12thFive-YearPlan.(U.S.-ChinaEconomic&
SecurityReviewCommission)page9.20APCO,page9.21MaryMurrayBosrockandCraigMacIntosh,PutyourBestFootForward(UnitedStatesof
America:InternationalEducationSystems,1997);AlbertaSchoolofBusiness,BusinessEtiquette
inthePeoplesRepublicofChina,May2012,
(http://www.business.ualberta.ca/International/InternationalPrograms/InternationalStudyTour/~/media/business/International/InternationalPrograms/Documents/StudyTour/etiquette2012.p
df)22JefferyHays,EatingandDrinkingCustomsinChina,February2011,
(http://factsanddetails.com/china.php?itemid=112&catid=4&subcatid=19).23TheParentCompanymustbeestablishedformorethan2years.(StateAdministrationof
IndustryandCommerce'sfile:GongShangWaiQi[2010]No.4).24Duetotheonecountry,twosystemspolicy.Formoreinformation,visit
(http://en.wikipedia.org/wiki/One_country,_two_systems).25StateAdministrationofTaxationofThePeoplesRepublicofChina,ThePilotSchemeof
SwitchingfromBusinessTaxtoVATinBeijingCommenced,October2012,
(http://www.chinatax.gov.cn/n6669073/n6669118/12103048.html)26SchemeonSwitchingfromBusinessTaxtoValueAddedTaxandtheRelevantPoliciesand
RegulationsonPilotWorkinShanghai,November2011,
(http://www.csj.sh.gov.cn/pub/ywb/MediaViewpoint/201212/t20121226_401509.html)27GuangdongPublishedtheDetailedRulesfortheSwitchingfromBusinessTaxtoVATtoCarry
ForwardShanghaiModeandAddTwoNewBracketsofLowTaxRate,December2012,
(http://www.szds.gov.cn/portal/site/site/portal/szds/englishcontent.portal?contentId=2602A8E
EA89F9862968E6F0B6EE8EAB0&categoryId=3690)28
BriefAnalysisontheImpactsoftheVATTransitionPilotExpansion,October2012,
(http://www.kingandwood.com/Bulletin/ChinaBulletinContent.aspx?id=0bd7c9e3-fd46-46f0-
81cd-9ab27bdad905)29GrantThornton,DoingBusinessinMainlandChina(Shanghai,China,2011),page15,
(http://www.grantthornton.ie/db/Attachments/Doing-business-in-China-2011.pdf).30Ibid,page10.31Janus,GeneralComplianceandAnnualFilingRequirementsforHongKongCompanies,
(http://www.guidemehongkong.com/incorporation/company/hong-kong-company-annual-
filing-compliance-requirements).32KPMG,LiteratureabouttheDifferenceandConvergenceofCAS,September2011,
(http://www.kpmg.com/CN/en/IssuesAndInsights/ArticlesPublications/Documents/New-PRC-
GAAP-201109.pdf).33ChinaLawFirms,GuidetoDoingBusinessinChina-InvoiceManagement,8thJune2009,
(http://www.chinalawfirms.cn/practice-areas/finance/finance/176-guide-to-doing-business-in-
china-invoice-management-.html).34
TheGovernmentoftheHongKongSpecialAdministrativeRegionofthePeoplesRepublicof
China,InlandRevenueDepartment,ProfitsTaxReturnPersonsOtherThanCorporations;Final
AssessmentandProvisionalPaymentFormSample,
h
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40
(http://www.ird.gov.hk/eng/pdf/ebir52.pdf).35ChinaBriefing,BeijingDetailsForeignersMandatorySocialInsuranceParticipation,11th
January2012,(http://www.china-briefing.com/news/2012/01/11/beijing-details-mandatory-
foreigner-participation-in-social-insurance.html).36TamaraA.Miller,WhyRegisteringTrademarksinChinaisaNo-Brainer,Leydig,Voitand
Mayer,Ltd.,December2007,(http://www.leydig.com/publications/articles_publications-22).
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