For foreign investors, China is an uncertain and risky market, so it is critical to understand these risks before making an investment.
China, on the other hand, is brimming with opportunities for companies willing to invest time in learning how the country operates and how Chinese consumers think when they buy.
This article discusses the risks that Chinese businesses face, as well as the precautions that must be taken to mitigate these risks and ensure business success. It also shows how to avoid uncertainties and risks when starting a business in China.
According to recent data, foreign direct investment into China increased by 22.3 percent year on year from January to August 2021, totaling $113.7 billion.
The service industry, in particular, expanded by 25.8 percent, with foreign investment in the high-tech services sector increasing by 35.2 percent.
Foreign direct investment (FDI) in China is just one example of why the country continues to be appealing to foreign firms. Other factors, however, play a role in this as well:
A growing consumer class: China’s young population.
People are maturing. They begin to spend a greater proportion of their income, and their purchasing power is expected to more than double over the next ten years.
Political and economic stability: Political and economic stability are critical growth drivers. China has always maintained a stable government with room for further evolution and development.
Regulatory environment
The Chinese government encourages commercial and entrepreneurial activity by providing attractive financial incentives such as tax breaks, grants, and low-interest government loans.Risks when building a business in China
China remains a desirable market, but with increased uncertainties and risks. COVID caused numerous problems last year, and it continues to be a problem in light of the recent increase in Delta cases.
However, it was the risk of importing cases from other countries that prompted the country’s closure. If you want to visit China right now, there are strict quarantine policies in place, and obtaining a working visa, business visa, or tourist visa is difficult.
China’s GDP shrank for the first time in decades as a result of the pandemic in 2020.
Companies must consider the following factors in addition to the challenges and risks of doing business in China:
• Market accessibility
China can be a difficult market to enter due to local distribution networks, consumer purchasing habits, and regulatory requirements.
• Statutes and regulations
Chinese laws and regulations are complicated. For example, entering the market and establishing a local entity can be time-consuming and costly.
• Overseeing sales and distribution
With 1.4 billion people, China has a market for any product in the world. The challenge is identifying and managing the appropriate distribution channels to reach them.
• Government concerns
Many businesses that have expanded into China have encountered problems with government procedures.
• Human resources and payroll
Hiring the right employees, managing human resources, providing social benefits, and meeting tax obligations have always been major challenges for many foreign businesses in China. The graph below, from the European Center for Small and Medium Businesses, explains the challenges that Chinese firms face in greater detail. As we can see, the most serious issues are HR issues, the economic situation, financial risks, and administrative hurdles.
China, on the other hand, remains a treasure trove of opportunities and one of the world’s largest markets. Consumer spending power is growing, and consumers are becoming more accepting of foreign products.
How can a payroll service assist your company in avoiding uncertainties and risks in China?
There is one method for reducing the uncertainties and risks.
The traditional route into China is via a company. When it comes to China, most businesses and individuals’ first thought is to establish a company.
Initially, many of our clients felt the same way. They wished to establish a Representative Office, also known as a WFOE, in China and begin operations there.
The problem is that this process is expensive and time-consuming.
Starting a WFOE, for example, requires a significant investment and can take 3-4 months to register (assuming there are no issues with the registration process or with the government).
Following that, you must consider taxes, hiring employees, and paying employment costs, and you are personally liable for everything that occurs if things do not go as planned.
A representative office is not a good option either because it allows you to conduct only non-profit activities or because it takes the same amount of time to open. Aside from that, you must consider risks to deal with if something does not go as planned or if you must close it.
One solution is the new way to start a business in China.
Before I get into the specifics, I’d like to distinguish between a PEO (Professional Employer Organization) and an EOR (External Resource Organization) (Employer of Record). In fact, the jargon is very similar. In the United States and other European countries, there is a distinction between PEO and EOR; in China, there is none.
A Professional Employer Organization (PEO) is a staffing solution for companies hiring in China.
The PEO/EOR becomes your legal employer, handling compliance, taxation, and payroll.
One of the primary advantages of using this type of solution is that it allows you to start a business in China without the need for a local company, which can significantly reduce many of the risks I mentioned earlier.
Simply put, a PEO/EOR solution legally employs your employees in China on your behalf while you lack a legal entity in China, and then returns them to you under a service agreement.
The PEO/EOR service provider becomes the employer of record in China under this arrangement, avoiding the time-consuming process of establishing a legal entity in China and making market entry much easier.
A PEO offers specifically these services:
Human Resource Services – The PEO is in charge of all human resource matters. Because of their expertise in local laws and regulations, a PEO can ensure that foreign companies operating in the country are in compliance with the law governing labor contracts and all employment aspects.
Sign Employment Contract– The HR service provider prepares a bilingual employment contract in accordance with local labor laws based on the client company’s draft of the employee’s labor conditions (salary, bonus, benefits, leaves, etc.). The HR provider then signs a labor contract with the Chinese employees.
Benefits Administration – Mandatory benefits are an important component of employee compensation, but they are difficult to administer. Social security in China, for example, is divided into two parts: social insurance (which includes five types of insurance) and the housing fund. A PEO manages this aspect, as well as allowances, vacation pay, sick leave, and other client-provided benefits.
Payroll Services – The payroll process is how organizations or businesses pay their employees. Payroll in China, for example, entails paying an employee’s salary, administering mandatory benefits (social security), deducting Individual Income Tax, paying an annual bonus, Overtime Payment (if applicable), and so on. A PEO can handle the payroll process and make payments to employees in accordance with local laws.
Visa Processing – A professional employer organization (PEO) can help with the Chinese government’s immigration process. In addition to a valid work permit, all foreign employees must have a valid residence permit. The application process for a work permit is complicated, with three steps and corresponding requirements. A professional employer organization (PEO) can ensure that employee applications are correct and that they are submitted smoothly.
When using a PEO/EOR is the best option
In general, a PEO is a solution that can be used by companies that already have a presence in China as well as those that do not yet.
This is because a PEO can assist in reducing the HR and administrative risks and costs associated with doing business in China.
There are four situations in particular where a PEO is the best solution:
Sell products in China – This is primarily for B2B companies in China that do not need to invoice in RMB. In order to promote your products or services, you can invoice in your home country and hire staff to manage your sales and marketing activities. This is a cost-effective solution because you do not have to go through the entire formation process, but you can efficiently find local employees and the only cost to sustain is labor.
Sourcing from China – This is another instance where a PEO can be beneficial. Rather than creating a WFOE to manage all operations, you can hire employees through the PEO to manage all relationships with local providers. Hire quality control employees to inspect products before sourcing them, or managers to negotiate prices with factories.
Testing the local market – In this case, using a PEO to hire sales, marketing, and business development personnel to conduct market research and better understand whether expanding in China is the right solution for your company is beneficial. It’s a versatile option that’s especially useful in the short term.
Hire locals – Companies may need to hire locals or contractors in China to handle ground operations. Traditionally, the only way to accomplish this would be to form a company and hire and pay employees. However, doing so through a PEO saves time and money while effectively reducing business risk, especially for contractors and short-term roles.
Procedure to use a PEO/EOR solution in China
The PEO takes care of everything related to HR, employment, and payroll for your company in China.
I will briefly outline the procedure for using a PEO in China below:
1. The client identifies the candidate to hire.
2. The PEO verifies the employment eligibility (CV, health check, background check).
3. The employee is hired by the PEO and signs an employment contract.
4. The employee is on boarded by the PEO and the employer.
5. The employee’s daily tasks are managed by the employer.
6. PEO manages human resources and payroll. 7. PEO is in charge of employment-related communication with the government.
8. The PEO is in charge of compliance.
9. Employment issues are handled by the PEO and the employer.
10. In the event of a termination, the employer bears the cost, while the PEO handles the termination process.
Conclusion
Entering the Chinese market has become difficult for the reasons explained in the article. However, following the first wave of COVID-19, the country quickly recovered, reaching a high level of growth. Foreign firms can still take advantage of a plethora of investment opportunities.
As a registered PEO in China, we can assist your company in entering the Chinese market in a low-risk manner. We can help you find talent in China, run compliant payroll, and outsource HR processes.
Please contact us if you require additional information or a free quote!
