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How to Avoid Uncertainties and Risks When Building a Business in China

How to Avoid Uncertainties and Risks When Building a Business in China

China is an uncertain and risky market to foreign investors, so it is critical to understand these risks before making an investment.

However, China is also full of opportunities for companies willing to invest time in learning how the country works and how Chinese consumers think when they buy.

This article discusses the risks that Chinese companies face, as well as the precautions that must be taken to mitigate these risks so that business success is not jeopardized. It also demonstrates a method for avoiding uncertainties and risks when establishing a business in China.

China remains a hot market

According to recent data, foreign direct investment into China increased by 22.3 percent year on year to $113.7 billion from January to August 2021.

In particular, the service industry grew by 25.8 percent, with foreign investment in the high-tech services sector increasing by 35.2 percent.

FDI in China is just one example of why the country remains appealing to foreign firms. However, other factors play a role in this as well:

  • A growing consumer class – China’s population of young people are growing. They begin to spend more of their income, and their purchasing power is expected to more than double in the next ten years.
  • Political and economic stability – Political and economic stability are important drivers of growth. China has always ensured a stable government with opportunities for further evolution and development.
  • Regulatory environment – the Chinese government encourages commercial and entrepreneurial activity by offering attractive financial incentives in the form of tax breaks, grants, and low-cost government loans.

Risks when building a business in China

China remains an appealing market, but with more uncertainties and risks. COVID caused many problems last year, and it is still a problem if we consider the recent increase in Delta cases.

However, it was the risk of importing cases from abroad that caused the country to close. If you want to visit China right now, there are strict quarantine policies in place, and it is difficult to obtain a working visa, business visa, or tourist visa.

Because of the pandemic in 2020, China’s GDP shrank for the first time in decades.

In addition to the challenges and risks of doing business in China, companies must consider the following factors:

  • Market accessibility

Local distribution networks, consumer purchasing habits, and regulatory requirements can make China a difficult market to enter.

  • High competition

The competition in Chinese markets is massive. More companies are entering China to expand globally, and local businesses are thriving in tandem.

  • 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, social benefits, and tax requirements have always been major challenges for many foreign businesses in China.

How can a PEO/EOR assist your company in avoiding uncertainties and risks in China?

The traditional way to enter China is through a company. When it comes to China, the first thought that most businesses and individuals have is to establish a company.

Initially, many of our clients had this thought as well. They desired to establish a Representative Office or a WFOE in China and begin operations.

The issue with that is the cost and time required for this process.

For example, starting a WFOE 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).

After that, you must consider taxes, hiring employees, and paying the employment costs, and you are directly responsible for everything that occurs if things do not go as planned.

A representative office is not a good option either because it actually allows you to conduct only non-profit-making activities or it requires the same time to open. Besides this, you also have to consider risks to handle if something doesn’t go as planned or if you have to close it.

A PEO/EOR solution is the new way to start a business in China.

A Professional Employer Organization (PEO) is an employment solution for companies that hire staff in China. 

The PEO/EOR becomes the legal employer of your workforce, 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 establishing a local company, which can significantly reduce many of the risks metioned above.

Simply put, a PEO/EOR solution legally employs your staff in China on your behalf while you do not have a legal entity established in China and then returns them to you under a service agreement.

With this arrangement, the PEO/EOR service provider becomes the employer of record in China, 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 manages all aspects of human resources. A PEO can ensure that foreign companies operating in the country are in compliance with the law governing labor contracts and all employment aspects because of their expertise in local laws and regulations.
  • Benefits Administration – Mandatory benefits are an important component of employee compensation, but administering them is a difficult task. In China, for example, social security is divided into two parts: social insurance (which includes five types of insurance) and the housing fund. A PEO handles this aspect, as well as the administration of allowances, vacation pay, sick leave, and other client-provided benefits.
  • Sign Employment Contract – Following the client company’s draft of the employee’s labor conditions (salary, bonus, benefits, leaves, etc.), the HR service provider prepares a bilingual employment contract in accordance with local labor laws. Following that, the HR provider signs a labor contract with the Chinese staff.
  • Benefits Administration – Mandatory benefits are an important component of employee compensation, but administering them is a difficult task. In China, for example, social security is divided into two parts: social insurance (which includes five types of insurance) and the housing fund. A PEO handles this aspect, as well as the administration of allowances, vacation pay, sick leave, and other client-provided benefits.
  • Visa Processing – A professional employer organization (PEO) can assist with the immigration process required by Chinese authorities. All foreign employees must have valid work permits in addition to a residence permit. The work permit application process is complicated, with three steps and corresponding requirements. A 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 have a presence in the country.

This is due to the fact that a PEO can help to reduce the HR and administrative risks and costs that come with doing business in China.

In particular, there are four situations in which a PEO is the best solution:

  • Sell products in China – This is primarily for B2B companies who do not need to invoice in RMB in China. You can invoice in your home country and hire staff to manage your sales and marketing activities in order to promote your products or services. This is a cost-effective solution because you don’t have to go through the entire process of forming a company, but you can efficiently find local employees and the only cost to sustain is labor.
  • Sourcing from China – This is another situation where a PEO can be useful. Instead of establishing a WFOE to manage all operations, you can hire employees through the PEO to manage all relationships with local providers. You can, for example, hire quality control employees to inspect products before sourcing them or managers to negotiate prices with factories.
  • Testing the local market – In this case, it is beneficial to use 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. It is a highly adaptable option that is especially useful in the short term.
  • Employ locals – Companies may need to hire locals to handle ground operations or hire contractors in China. Traditionally, the only way to accomplish this would be to establish a company to hire and pay employees. However, doing so through a PEO, particularly for contractors and short-term roles, saves time and money while effectively reducing business risk.

Procedure of how 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.

For the reasons explained in the article, entering the Chinese market has become difficult. However, the country quickly recovered after the first wave of COVID-19, reaching a high level of growth. Foreign companies can still take advantage of numerous investment opportunities.
We can assist your company in entering the Chinese market in a low-risk manner as a registered PEO in China. You will have our support in recruiting talent in China, running compliant payroll, and outsourcing HR processes.
Contact us if you need more information or a free quote!

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