Last week's webinar China’s Great Wall: Overcoming Expansion Challenges encouraged a lot of discussion. There were several interesting questions from attendees for HSP's China experts; here are some of the highlights, and answers:
What is involved in an annual inspection in China?
An annual inspection requires a company to complete a standard inspection report, and also provide supporting documents (ex. business license). It is overseen by the Ministry of Commerce and State Administration for Industry and Commerce (SAIC). Other governmental agencies involved include Ministry of Finance, State Administration of Taxation (SAT), State Administration of Foreign Exchange (SAFE) and the National Bureau of Statistics.
Inspections are usually conducted between March and June. Companies that are noncompliant will be subject to penalties. Things causing noncompliance include: failure to follow annual inspection process, false declaration, operating outside approved business scope or not complying with regulations.
What are typical accounts receivable/accounts payable one can expect?
If using direct billing, you can expect regular accounts receivable. Otherwise, for cost-plus entities, generally no accounts receivable other than perhaps “due from inter-company”, as it relates to inter-company transactions.
Accounts payable generally comprise regular payables to suppliers, vendors and/or service providers locally.
If a company already has employees in China, would you recommend going through an existing U.S. banking relationship to set up accounts or let the local employee deal directly with a local bank?
Both of these approaches are used frequently, so make sure you first determine what fits your company’s plans for financial management of the Chinese entity. If you want to drive account set up from the U.S., have a high degree of direct oversight and get access to more materials in English, you should consult with your existing U.S. bank to determine their direct capabilities in China and/or any indirect account opening and product offerings they may have through a correspondent bank. Several U.S. banks have relationships in China that can help make the account opening process much smoother, alleviate need for U.S.-based directors/signors to travel to China, and provide direct assistance when problems arise. If you have employees in-country who you will entrust to manage financial relationships, report back to the U.S. and operate through changes, you should have more success vetting and selecting an appropriate local bank.
We are a small medical device company nearing commercialization of our device in EU and are contemplating a launch in China. Is a U.S.-based manufacturer required to sell product out of an EU subsidiary to China? Or, could we sell to China direct?
It is very likely that products should be sold out of the EU sub to China, if the products are CE marked. Note that you would need to obtain product registration certificate in China regardless.
Are entities specific to the city in which they are opened? So if expanding into another city, would another entity be required?
You need to maintain office in the city where the entity was registered. However, you can expand into another city. If operations in the other city becomes significant (number of employees, revenue etc.), then you may need to set up a branch. The branch may then be a dependent branch (of the WFOE, for example) or an independent branch.
How do I know whether buying CNH is a good strategy for my company? What are the risks?
As with any strategy, you need to first identify the goal you’re working towards, as there are costs and risks to managing foreign exchange. Using CNH can sometimes provide a currency hedge. For example, when establishing a WFOE, one way to preserve the value of to-be-invested capital for the four to six month setup period is to buy and hold CNH in a direct deposit account or to buy a CNH future or option contract. Others purchase CNH to directly transact and pay some of the qualified onshore Chinese companies for products/services.
There is risk, though, and at times CNH doesn’t track as closely to CNY as hoped, so while CNH is usually a good marker for where onshore RMB will be, sometimes the offshore can be more expensive. In general, you’ll want to work with your in-house global treasury team or bank to understand all of the options, and how government regulations (which can change often in China) will impact the market.
Where can I access a list of restricted company types or activities when determining if I need to setup a WFOE vs. a Variable Interest Entity? What are some examples?
The catalog is published by China’s National Development and Reform Commission. It is a 29 page document, written in Chinese. The catalog lists three main categories: encouraged, restricted and prohibited. Some common examples would be e-commerce, catalog commerce and internet and mass media business. Also, certain medical and manufacturing industries are restricted.