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China’s Slowdown And Your Business
In 2012, I wrote an article for the Wall Street Journal, entitled, China’s Slowdown and American Business. There was a slowdown happening in China at that time and the China lawyers at my law firm were seeing it/feeling it from the phone calls and the emails we were getting. This article was intended to address the issues we were seeing then. We are seeing many of those same issues again as China’s economy is undeniably going through an economic slowdown that could last for years.
China’s Economy is Slumping
The Wall Street Journal editors chose the following subheading for my article two years ago: “Hardly a week goes by without complaints about payment problems or bankrupt debtors.” If I were to choose a new subheading for today, it would be “Hardly a day goes by without complaints about missing or bad product and hardly a week goes by without someone asking about what will be required for them to shut down their China WFOE.”
The following are the key points from my Wall Street Journal that apply with similar or greater force today:
Regulation. The best assumption to make is that the Chinese government will respond to the slowdown by attempting to minimize citizen discontent so as to keep its hold on power.
Sourcing Problems. The slowdown is changing Chinese company interactions with foreign companies. Chinese exporters, particularly those that compete with companies from lower-wage countries like Vietnam and Bangladesh, are suffering—in particular in very low-tech, very low-wage industries such as textiles, clothing, shoes and low-end electronics and toys. Foreign companies that do business with Chinese companies in these industries must be on their guard. Hardly a week [right now its almost daily] goes by without one of the China lawyers at my firm getting a call from a Western company experiencing problems. Sometimes the Western company has paid for a product and the company it paid no longer exists. Sometimes the company still exists but it needs ‘more money’ from the Western company to buy raw materials for the product it already promised to produce.
Foreign managers need to understand what is happening in their own industries within China. This might mean visiting your Chinese co-party’s factory, warehouse or office to look for warning signs of a company in distress. Or it might mean taking out insurance to cover your China business or transaction. A number of Chinese manufacturers are owned by Taiwanese, Singaporean or Hong Kong companies, and sometimes it is possible to secure guarantees from the foreign parent.
The key is to be proactive: If you find yourself in a bad situation with a Chinese company going under, there usually is no remedy after the fact. Bankruptcy in China more often than not consists of a company shutting down in the middle of the night and its owner fleeing to another town.
The key to weathering China’s slowdown will be for foreign companies to go back to basics …. focus on scrupulous regulatory compliance; and renew focus on due diligence at a company-to-company level. Above all, no Western company doing business in China should blithely assume that a slowdown won’t affect it.
Updating the article just a bit, I would note that China is going after companies that are paying individuals in China without paying the required employer and employee taxes. If you are doing that, I would urge you to read Hiring A Chinese Employee Without A Chinese Entity. Good Luck With That. Like today. If you are sourcing product or services from China or doing any other sort of business where the financial health of a Chinese company is important to your company, I suggest you read China Business Due Diligence. Lastly, if you are looking to close down your China operations, consider the long term repurcussions if you do not do so correctly and for that I suggest you read Shutting Down A China WFOE. The Potential Repercussions.
On the positive side, many companies are finding lower prices than even six months ago.
What are you seeing out there?
The post China’s Slowdown And Your Business appeared first on China Law Blog.
We will be discussing the practical aspects of Chinese law and how it impacts business there. We will be telling you what works and what does not and what you as a businessperson can do to use the law to your advantage. Our aim is to assist businesses already in China or planning to go into China, not to break new ground in legal theory or policy.
Source: http://www.chinalawblog.com/2015/05/chinas-slowdown-and-your-business.html
