Business strategy in China

The recent changes in China following the abandonment of its zero-Covid policy have had significant impacts on businesses. Brian Blömer explains how to reassess your business strategy in China.

The global economic outlook continues to be challenging, with energy supply uncertainty in Europe along with rising inflation and the lack of forecasted growth. However, with the Covid-19 restrictions China upheld throughout 2022, the property market crisis and other issues arising, there are additional headwinds to be faced by businesses operating in China. In this article, we will examine four strategic moves to optimise your business performance in China when considering current market conditions.

The current market environment

While the fallout from the pandemic includes slowing down economic growth worldwide, in China the zero-Covid policy had presented a challenge that obstructed recovery. This has also had a knock-on effect on importers and exporters, supply chains, foreign direct investment and businesses operating locally.

Businesses are now facing a myriad of challenges, including currency volatility, supply chain disruptions, higher freight costs and port constraints. Supply chain disruptions and restricted port access means longer time lags to land products, making the import process more costly and requiring that importers ensure adequate working capital for longer periods. Higher freight costs exacerbate the financial risks for any business.

As one of China’s key business sectors historically, the decline of the Chinese property market and the current crisis it now faces has kept investors wary of aggressively investing in the Chinese market. Since 2020, the downturn of the real estate market has had a severe impact on operators in the region and caused a rapid slowdown in investment. Furthermore, a lack of willingness for potential homebuyers to purchase and tighter restrictions on mortgage lending has led to a knock-on effect impacting stakeholders in China and beyond.

Challenges that arise can negatively impact businesses but can also give way to opportunities for organisations to reassess business strategies and possibly to readjust, streamline and consolidate for better results. While some businesses may experience hardships, others may strive. Here are four different approaches your business can take during this period.

1.Restructuring your entity

Successful businesses are built on a strong foundational strategy and clear business objectives, so changes to strategy and objectives may be required for businesses to adapt successfully. Amidst the outbreak of the Covid pandemic and with multiple geopolitical issues arising, many businesses have placed emphasis on being agile.

For businesses in China, this can include a restructuring or downsizing of the business during tough or unpredictable times. As such, businesses should refocus their core competencies and reign back on expansion and further investment to ensure that clients have specialist skills to rely on.

Altering the company structure or details of the company’s registration can help in staying agile. Whether your company is looking to decrease the registered capital, increase it (if you see an opportunity), change shareholders or alter the business scope, this can all be done easily according to due process.

Following the correct procedure

Importantly, any change in company structure will need to be amended and relevant details will be required to be approved and recognised by administrative processes in China. In particular, this includes: the scope of the business; the registered personnel within the business; and any change of the registered address of the business. Any revisions to registered capital and total investment also need to be detailed.

Some of the procedures for a change in the company structure generally include:

● preparation of relevant documents:

● Administration for Market Regulation (AMR) application form(s), amendment of the Articles of Association and board/ shareholder decisions;

● certain changes require the shareholder to prepare and obtain legalised company documents from the headquarters abroad;

● update the company’s record with the local AMR;

● update the company’s records with the Tax Authority;

● update the company’s record with its bank(s); and

● update company records at the Customer Authority (if applicable).

These will be subject to approval by Chinese authorities.

2.Liquidation: winding up competently

There are number of reasons for businesses to consider liquidation. It may be as simple as not gaining traction in the local market, a change in the market environment or a division of a business may become obsolete. While businesses may want to stop operations, they are in fact required to follow the correct liquidation process.

Compliance is key

Once the company has decided to cease operations in China, it is imperative that appropriate administrative processes are followed. Non-compliance can cause negative legal implications resulting in monetary fines and penalties, blacklisting for personnel and irreparable reputational damage, along with the probability of not being able to operate in the country either for a number of years or for the foreseeable future.

In order to obtain approval to deregister the Chinese entity, these are some of the key points that need to be considered and managed carefully prior to any liquidation procedures:

● Termination of labour contracts: Each employee will need to reach a settlement with the company in line with Chinese law.

● Ongoing legal disputes: All ongoing legal conflicts and cases need to be resolved satisfactorily. Proof is required prior to any liquidation procedures commencing.

● Annual Statutory Requirements: This audit is one of three statutory requirements that must be carried out each year by all foreign-owned entities in China. Subsequently, general inspection with regards to tax filings and audit reporting will be performed by tax authorities during liquidation.

● Registered address: A company is required to have an accurate registered address in China until the license is retracted during the liquidation process.

You can see a complete overview of the liquidation process in China in our Company Liquidation White Paper at bit.ly/3HfDttL

Expert help will be required to ensure that the process is managed efficiently. It is also important to have an established partner locally who understands the regulations and processes, as it may take up to 12 months or longer.

3.Applying for dormancy

Some businesses may not want to exit the market, but rather just suspend their activities in the Chinese market for the short term. If a company decides not to liquidate, they will still be required to fulfil their ongoing compliance requirements.

Therefore, in order to reduce any unnecessary costs and keep the functioning costs as low as possible, a business can apply to become a dormant company.

Ensuring official dormancy

Before 1 March 2022, companies were not able to switch their status to dormant. However, after a successful trial run, companies are now able to apply for dormant status, which is available to six different categories of businesses (see bit.ly/40boREn).

4.An opportunity for growth

The EU Chamber in China position paper indicated that European businesses are not leaving China, but instead are diverting some investments to other markets to mitigate risks. The diversion of investment can primarily be attributed to policy shifts and reduced confidence in the market; however, this does not apply to all businesses. Even though many organisations have had setbacks due to supply chain disruption, Covid-19 and travel policies, some businesses have had more opportunities presented to them while others have taken this as an opening to secure strong and profitable partnerships.

It is worth noting that companies with scale and diversification prospects tend to be more resilient during challenging times. With economic recovery set to be an extended process, it may be an opportunity for established businesses to gain market share and consolidate their presence in China. It can also be an opportunity for smaller players to take place of the gap in the market which has been left by outgoing or downscaling enterprises.

Planning forGrowth

With growth and upscaling comes fiscal responsibilities. It is crucial that foreigninvested enterprises in China ensure that their financial compliance in accounting and annual audits are in line with Chinese requirements to remain operational.

Furthermore, all companies are required to meet their tax obligations and complete monthly/quarterly tax filings as set out in Chinese tax legislation. While upscaling activities is familiar to many businesses, the administrative side may often not be and remains a complex landscape to navigate, which is why many successful businesses have a partner in China to assist with this. ●

At Moore – MS Advisory, we have a keen interest in helping navigate businesses through the financial and administrative system. We aim to make sound recommendations to help your business grow and succeed in China. Find out more in our ‘Complete guide to doing business in China’ at bit.ly/3jfTVlK