With almost 1.4 billion people, China is the world’s largest consumer market. The Asian giant has the largest economy globally by Purchasing Power Parity (PPP) and the second-largest economy by nominal GDP. Chinese consumer expenditure is expected to triple to over $6 trillion a year by 2022. So, what should international companies know before exporting to China?
China is transitioning from an investment-heavy to a consumer-dominated market. Currently, it is a rather peculiar moment in the economic history of China, where various sectors are booming. For example, elderly care has seen significant growth as there will be an expected 350 million citizens over 65 by 2022. Also, with 700 million people online, e-commerce is an area that is expected to grow significantly in the coming years.
After a 13.2% increase in September 2020, China’s imports increased by 4.7% compared to last year, to 178.7 billion in October 2020. For two consecutive months, China has seen a surge in inbound shipments as the local demand continues to recover from the Covid-19 shocks.
So, tapping into that vast market can present challenges for international businesses; doing extensive research, knowing Chinese regulations, laws, standards, and the unique business culture is necessary before taking any steps forward.
What You Need to Know:
Import regulations
As with most countries, regulations governing the import of goods and their subsequent sale on China’s domestic market are involved. In China’s case, they are also rapidly changing. China ensures national security and protects public health, personal property, and the environment through those laws and regulations. Therefore, it is always beneficial to consult with an expert before taking any action.
Any company looking to export products into China’s mainland should comply with several standards issued by The Standardization Administration of China (SAC). China falls into at least one of five broad categories: national standards, industry standards, local or regional standards, enterprise standards for individual companies, and association standards.
- National standards
- Regional standards
- Industry standards
- Enterprise standards for individual organizations
- Association standards
Company Registration and Documentation
Without proper registration and documentation under Chinese regulatory institutions, it is nearly impossible for a company to operate legal and commercial activities in China. Any company seeking to create legitimate business opportunities in China must abide by these constraints and receive the Chinese government’s necessary company registration approval.
Some of the must-have documents are Commercial invoice, Insurance Policy, AES Filing, Packing List, Bill of Landing, Sales Contract, Proforma Invoice, etc. The documentation will vary depending on the products you want to export.
If you wish to just test the market and want to avoid big expenditures of company registration, you can simply hire a local agency that will be responsible for the process. However, please ensure that the agency you choose has the relevant import certificate and that it is indeed valid. These agencies can charge anywhere from 1% to 10%, depending on the import volume and complexity of the process.
Restrictions and Laws
Foreign companies also need to comply with local laws during the business process. Deciphering the complex Chinese laws and regulations can be incredibly difficult and cause an exporter to terminate the export to China.
Any company interested in exporting food to China should know that it will face a multi-layered food regulatory system that ensures quality and safety. China has strict food restrictions. Any company planning to export food to China should review the National Health and Family Planning Commission (NHFPC). Any food products deemed harmful to public health are instantly banned from exporting to China.
Chinese regulation also restricts certain hazardous electronic products from being exported to China until the manufacturing company complies with the standards of The China Restriction of Hazardous Substances (China RoHS 2).
Cultural and Language Barrier
When you consider marketing to Beijing, Shanghai, or Hong Kong, the language might not be a barrier as they are global cities. You can easily use English with the international traders in those globalized cities. However, the situation is very different in other parts of China.
In Southern China, companies and entrepreneurs are still very localized. Most people will use Mandarin or Cantonese as the official language. When beginning the process of exporting to China, you should consider hiring a consulting company that speaks and writes in the Chinese language.
Export to China: Solutions and Methods
Any company that plans to export to China should do extensive research on China’s trade policy, laws, regulations, cultural barriers, and the market itself.
Because of their comprehensive knowledge and years of experience doing business in China, consulting companies with local agents is the best place to start your export business. Those companies have ample experience complying with Chinese laws and can help you create a personalized plan for China’s market entry.
International companies have various employment solution options, and they also help to establish a Chinese market presence. WFOE, Representative Offices, and Joint Ventures are the most used ones. Each of them has its advantages and disadvantages.
Wholly Foreign-Owned Enterprise
One of the easiest and commonly used options for international companies trying to establish in China is WFOE. They are typically limited liability enterprises (like with EJVs).
Accordingly, the WFOE obeys all Chinese laws. It allows people to sign contracts with legal authorities to acquire rights to use the land, rent offices, and receive various services.
There are three different types of WFOEs: Trading WFOE, which permits exports/imports to China, a Consulting WFOE (a more straightforward process), and a manufacturing WFOE that enables shareholders to enact full manufacturing operations within China.
So, the WFOE in China enables foreign companies to:
- Employ local staff directly and ensure their contributions to the Social Insurance and Housing Fund.
- Independently decide and oversee your group strategy for China without a Chinese partner.
- Issue invoices with VAT available for deduction and receive payments in RMB/foreign currency.
- Legally cover your China office premises, activities, and operations with the Business License required by China’s authorities.
- Access local grants and funds from government authorities and loans or financing in RMB from Chinese and overseas banks.
Representative Office
A representative office is the local representative of your business in China. It enables international companies to establish a physical presence in mainland China. A representative office also allows foreign entities to send their company representative for business activities in China and hire the local staff, if necessary. It is one of the simplest and most common ways for foreign entities to enter the Chinese market.
A representative office in China is a place where local Chinese clients and partners can meet. It gives you control over your brand marketing and supply chains in China. However, A representative office is not qualified as an independent legal person. Its business operations have various regulations that restrict companies from trading, profit from day-to-day operations, and directly hiring local staff.
Joint Venture
A Joint Venture (JV) serves as another type of company formation in China. It is a mutual agreement between a foreign and a Chinese partner. A local partner establishes a new business or official relationship with a foreign company and then shares administrative and operative responsibilities, investment costs, and financial results.
Equity Joint Venture (EJV) and Cooperative Joint Venture (CJV) are the most common types of JVs typically established for foreign entities.
However, a foreign company entirely relies on a local entity for its existence in the Chinese market. In most cases, international companies are initially not familiar with the complicated Chinese laws, regulations, business culture, and consumer habits. They also have to rely on their local partner to execute the financial operations, make important decisions, manage the employees, etc.
Operating Under a Local Third-Party
The problem with most solutions aforementioned is that they require a substantial investment or understanding of the local market. A foreign company hiring local employees is complicated and risky. For instance, any minor dispute with an employee might affect the company’s business in the long run.
Some of our SME clients have realized it is much safer and easier to maintain small-scale operations under our supervision, including hiring local experts and sales representatives, handling shipping, logistics, and regulations. For Xinergy, as a local Chinese company, there are many advantages compared to a foreign one.
It maintains the quality of the work and avoids the risks and hassle caused by direct employment and payroll expenses. In most cases, clients decide to a certain amount of hours rather than paying for a full-time employee, which can save a substantial amount of money in the long run.
The Influence of Covid-19
During Covid-19, Chinese customs increased the import requirements for foreign goods in order to prevent additional eruptions of the pandemic in China. The huge demand to export and the lack of sufficient containers made sea shipping costs rise by over 400%. Thus, in some cases, air shipping may be more cost-effective.
Conclusion
In conclusion, a lot has changed in the Chinese export market. Once known as the world’s manufacturer, China has grown into one of the world’s largest consumer markets. International companies that look forward to expanding should carefully examine the market shift of China.
China’s 1.4 billion population represents numerous opportunities for small, medium, and large businesses. However, you must adjust your business to China’s local demands to use that opportunity. Even choosing the right brand name can be game-changing. Do not rush and think that the size of the market means you can sell anything; the growing Chinese consumer market is competitive and requires adjustments and compliance with local standards.
In sum, you should first conduct research on consumer behavior and the market in general. Secondly, develop a smart marketing and communication strategy if you want to understand the market’s pitfalls. 50% of brands fail because they do not adjust their business to Chinese locals. It is highly recommended to work with specialists to establish a presence in China’s complex but opportunity market. Xinergy Global is here to help build a long-term strategy for your company’s exportation needs. For more information, please contact Xinergy Global today.
