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China’s Market: Opportunity or Threat

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In the search for new opportunities for growth, the first impulse of many companies is to widen the scope of their operations. For some, this means looking beyond their borders and into foreign markets, where they’ll have the opportunity to expand their product offerings and reach new customers.

As the world’s second-largest economy, China is an attractive destination for companies looking to expand their footprint and seize new opportunities. With a population of more than 1.4 billion people, a growing middle class, and a rapidly developing technology sector, China can be a lucrative market for small and large businesses alike. Today, several hundred U.S. companies maintain offices in China, including heavy hitters like Google, Microsoft, Boeing, and General Electric.

Broadly speaking, there are three key factors underpinning China’s position as a premier global destination for business expansion.

1. A Dynamic Economy

Since the global financial crisis, the Chinese economy has sustained a remarkable rate of growth, providing companies with ample capital availability, a large and increasingly skilled labor force, and a growing consumer class. To further stimulate commercial activity and combat pandemic-induced lethargy, the Chinese government has introduced a raft of measures to boost the economy, including reducing corporate tax rates, lowering bank reserve requirements, and simplifying bank lending regulations. The result has been a veritable flood of capital into the country, which has been used to fund an investment boom in big commercial projects, such as retail developments, airports, and public use infrastructure.

2. Trade Opportunity

International trade is an integral component of business activity. It enables companies to increase their market reach, tap into cross-border revenue streams, and mitigate supply chain risks. By opening a branch in China, companies are better positioned to capitalize on the country’s gateway position in the thriving Indo-Pacific trade sector.

China’s long-term commitment to regional and international trade is underscored by projects like the Belt and Road Initiative (BRI), a mammoth program of infrastructure development and trade promotion spanning Asia, Africa, Europe, and beyond. The primary goal of the BRI is to strengthen trade connectivity between China and other countries, but it’s also creating opportunities for business expansion and investment within China. The extension of the China-Pakistan economic corridor, for example, will increase the amount of cargo that travels through Pakistan to China, improving supply chain efficiencies and potentially opening new revenue channels for China-based branches to penetrate adjacent markets.

3. Business Climate

Frequently maligned for its regulatory restrictions and difficult operating environment, China has made significant progress in becoming a more business-friendly jurisdiction. In the finance and auto sectors, China has lifted restrictions on joint ventures and proprietary technology transfers, making it easier for foreign companies to maintain branch offices.

Keep in mind that in order to begin working with local contractors, foreign companies will need to enter the Chinese market as an Employer of Record (EOR) or registered entity. The five entity structures that can be established in China are a Representative Office, an Equity Joint Venture, a Foreign Investment Partnership Enterprise, a Contractual or Cooperative Joint Venture, and a Wholly Owned Foreign Enterprise.

Unfortunately, setting up a registered entity continues to be a slow, expensive, and bureaucracy-heavy process. To maintain compliance with local labor laws and minimize the costs of hiring without an entity in China, most small to mid-size companies opt to cut through the red tape by contracting an EOR.

Risks and Downsides

Despite the potential for growth, a branch expansion in China comes with its own set of challenges and risks. For businesses that are new to the market or unfamiliar with the nuances of operating in China, the decision to enter the Chinese market may seem like an easy one. However, the complexities of operating in China, from managing compliance issues to understanding the complex regulatory environment, can turn what appears to be an opportunity into a costly headache.

Another concern is the threat of recession due to structural risks within the Chinese economy. In addition to a protracted downturn in the Chinese stock market and capital flight from the bond market, Chinese regulators are still dealing with the fallout of the ongoing collapse of real estate development companies like Evergrande. With 14 major developers facing bankruptcy, the property crisis has already wiped out more than $90 billion of developer market value. With mortgage defaults on the rise, there is widespread concern that the real estate slump could spread to the broader economy.

The Bottom Line

There are risks involved with every commercial venture, a cliché that’s especially true for a business expansion in a foreign jurisdiction. Ultimately, expanding in China requires a deep understanding of the local regulatory regime, cultural norms, and hiring practices. While the current instability within the property market is concerning, the long-term outlook for the Chinese economy remains bright.

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