With the highest GDP growth rate in the world, the Chinese economy is a quickly expanding powerhouse that’s on the rise.
According to the IMF, China has an average GDP growth rate of 9.5% per year.
Like many other business owners, you might be considering opening your own business in China, or expanding your business to include the Chinese market.
With an economy as large and growing as rapidly as China’s, there are huge revenue opportunities waiting across the pacific.
But how exactly should you go about this venture? What are the risks involved?
We’ll go over the process with a three-step guide that will help you get your foot in the door of the Chinese market.
Assessing your Resources
Before you do any planning, start this process by taking inventory of your resources.
Most importantly, how are you going to fund this venture?
Are you going to need investors?
On top of the expenses associated with starting a business, the legal process of starting a business in China can be a costly one.
The Chinese government is far more involved in business than the American government.
The business regulations in China are more strict and numerous than those in the United States, so there will be more hoops to jump through in order to get started.
What you need to do before getting started is making sure you have the resources necessary to get through the red tape.
Here’s a brief list of factors to consider when assessing your resources:
- Funds: Do you have the money required to start your business venture? Will you need the assistance of an investor to get started?
- Legal: Do you have lawyers ready to help you become legally established? Are you familiar with the laws that you will need to adhere to?
- Logistics: Will you be able to facilitate your business in an efficient manner in China?
- Business Plan: Do you have a business plan in place?
Once you’ve taken stock of your assets and deem yourself ready to continue, it’s time to start making concrete plans.
Choosing a Location
The first step is to decide where you want to start your business. Location is extremely important for starting any business, but this factor is especially important in China where economic development varies widely between cities.
There are a total of 18 free trade zones in China as well. Each free trade zone has its advantages and disadvantages.
More established free trade zones such as Shanghai are very popular due to how low the local taxes are, however they’re much more competitive.
Since some zones are very popular, companies will fight tooth and nail to keep their spot in the zone.
Since it’s so competitive, it will be much more difficult to find the talent you need, as well as quality office space for a reasonable price.
On the other hand, less developed and newer free trade zones have a different set of advantages.
These zones may have higher taxes, however, the regulations in these areas may be more relaxed, or there may be more high-quality office spaces for rent, and for better prices.
The location that’s best for your business depends on the type of business you run, and the specific needs of your business.
For every business, however, there are a few key factors to consider when looking for the right location to set up shop.
If you're planning to run a service-based business, operating outside a free trade zone is fine too, as you'll likely not be held accountable to any regulated commodities or assets.
Here’s a step-by-step guide for choosing the right location.
First, look into the local regulations of the area.
Would they be too stringent for your business? Are the taxes too high?
Get very familiar with the regulations of the area.
For some regions, the amount of paperwork required and the legal counsel needed will cost too much time and money.
Next, consider the potential talent pools of the area.
Some areas have a talent pool advantage over others.
For example, zones that have nearby colleges will produce a class of bright individuals ready for work every four years.
On the other hand, also consider the competition you may face when recruiting talent.
On the topic of competition, consider how heavy the competition will be in the zone you choose.
For example, if you’re a tech company, it may be more difficult to attract business, recruit talent, and find suitable office space.
Lastly, consider your proximity to your logistical needs. If you’re shipping inventory and need to be close to a port in order to function, prioritize zones that are near water.
You can also consider Free Trade Zones in China where certain products and industries can benefit from government-approved free trade agreements.
Becoming a legally licensed foreign company operating in China can be a difficult, time consuming, and costly process.
On top of the legal hoops you need to jump through, there is a lot of liability involved in starting a business in China.
Here are the four basic steps for getting your business legally established in China:
Tip: Some businesses prefer to open their company registry in Hong Kong first before moving into China because it's typically cheap and fast to get a presence in China in this fashion.
1. Employ a PEO or EOR
To keep things simple and efficient, you should hire a Professional Employment Organization (PEO) or Employer of Record (EOR).
These organizations help foreign companies become legal in China in a much simpler manner.
PEOs/EORs will help your company recruit local Chinese talent that meets the needs of your business.
Additionally, they will take care of all employee-related liability.
Through the help of a PEO/EOR, you can significantly expedite the process of getting your business running in China.
But what else do you need to do beyond employee and payroll management?
2. Choose your Legal Structure
Next, you need to choose a legal structure. Like the United States, there are a few different business types you can choose from, each with different legal and tax advantages and disadvantages.
The best option you can choose is a Wholly Foreign-Owned Enterprise, or WFOE.
This is a fully foreign business established without the involvement of a Chinese investment. WFOEs are the most popular type of legal structure for foreign businesses in China.
This is because WFOEs are flexible in their capabilities, as they can conduct business and hire foreign and local employees across the country.
3. Settle Your MRC
Next, consider your Minimum Registered Capital (MRC).
This is the minimum amount of capital that shareholders must pay to a foreign-invested company that answers to the Chinese government.
Essentially, this is the cost of registering your business in China.
4. Open a Bank Account
Lastly, you need to open a business bank account.
Depending on whether your business is a corporation, LLC, or sole proprietorship, you have some options for what kind of bank account you open.
Again, the specific requirements for opening a bank account differs depending on the economic zone you choose to do business in.
While a bank account does offer certain benefits in China, businesses live and breathe off making payments in as smart a manner as possible.
Open a business account with Statrys today, and get access to 11 currencies including the RMB, and trade with your China suppliers with their preferred currency.