After last year’s leadership transition, many U.S. firms doing business in China hoped to see an expansion of trade and an easing of regulations in 2013. The sudden openness of the Chinese media and Xi Jinping’s apparent crackdown on corruption has fueled this speculation. Unfortunately, this year is shaping up to be nearly as vexing for foreign companies as last year.
In 2012, the Chinese Communist Party (CCP) underwent its first leadership transition since 2002. Similar to 2002, during this current transition foreign businesses have been burdened by new restrictions on visa applications, work permits, building permits and new product introductions, as well as stricter customs clearance standards.
Looking back, 2003 marked a turning point for foreign firms doing business in and with Chinese companies. In fact, from 2003 through 2007, both Chinese imports and inbound foreign direct investment increased more than 300 percent. Most of this growth was attributed to favorable trade policies and regulations enacted after Hu Jintao and Wen Jiabao took power. Many China observers see similar potential over the next five years. In reality, however, this new Chinese administration faces a different set of priorities, obstacles and choices.
A decade ago the incoming leadership needed to overcome stagnating state-owned enterprises, banking reforms and unemployment. Now, China’s economic concerns include enormous income inequality, environmental and food safety problems, inflation, and international monetary issues.
Additionally, China no longer needs the huge inflows of foreign capital, technology and expertise it once did to grow its economy. With today’s pressures facing the CCP, it is understandable that foreign firms will face greater scrutiny. This is common in many nations coping with tough economic times or large-scale societal changes.
Since the start of 2013, many non-Chinese firms say the government is making it more difficult to operate there. In fact, the following examples clearly indicate that China is embarking on a path of less openness toward foreigners and foreign firms:
- Effective July 1, 2013, new work visa and permit regulations may exclude many foreigners seeking to work in China,
- Effective January 2013, higher Chinese duty and tariff rates likely will affect limit the importation of hundreds of products, and
- The singling out of American-owned Yum Brands, a purchaser of meat products from Chinese suppliers, is suspected of illegal steroid levels in its products. No other companies that purchased from this supplier or similar suppliers have been openly investigated.
On a more positive note, Chinese reforms over the last three years have streamlined interactions with various levels of the Chinese government. For example, while there are still some communication issues with customs officials, the process of clearing goods is more efficient than in previous years. And customs officials now are better trained, more competent and, for the most part, very approachable and professional when dealing with importers. China-based companies also have a growing number of options allowing expedited and paperless customs clearance. As a result, it is easier today to clear customs than it was in 2010.
Other improvements at both the federal and local levels also are evident. For example the permitting and approval process for many types of products has been streamlined and improved. This has led to a significant increase in the importation of many foreign food products since 2010.
In addition, many larger municipalities now have dedicated staffs that expedite applications and cooperate with foreign firms seeking clarification of rules and regulations. With the exception of foreign representative offices, this has effectively shortened the timeline previously required to establish a basic non-manufacturing company in China by nearly half.
And Xi Jinping’s apparent willingness to tackle corruption cannot be overlooked. Corruption has been cited by many non-Chinese firms as one of the biggest obstacles to doing business there. Any improvements in this area can be exceptionally beneficial to foreign companies operating in China.
If the new leadership is serious about this change and not simply “xin guan shang ren san ba huo”—translated as “new officials light three fires,” but best understood as “new officials light a fire to create the appearance of change”—then moving forward, foreign firms can anticipate improved and streamlined interactions with China. In China, foreign companies currently are under a microscope. In our experience, U.S. and other non-Chinese companies that follow the letter of the law are less likely to encounter major issues. The current obstacles facing foreign firms in China are considerable. Nevertheless, they have not yet reached a level to cause genuine alarm.
How does doing business in China currently compare to doing business in other countries? In my opinion, it is still easier to do business in China than in India, Russia or Brazil. And although China is in the midst of making monumental changes necessary to achieve the next stage its economic and social development, this will require patience on the part of foreigners doing business there.Originally Posted on the Manzella Report by Shawn Mahoney