Top Three Legal Risks for Business Owners in 2023


Written on: January 13, 2023

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China Legal Risks

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There are several legal risks for doing business in China, but what matters to your business the most in 2023? In this article, our platform’s China legal experts have identified the top three legal risks for doing business in China in 2023. We wanted to share this insight with our audience as the new year begins.

Business partner insolvency

The Chinese economy has been facing several challenges in recent months, including the ongoing pandemic, economic downturn, lower global demand due to high inflation, and disruptions caused by various government policies. These factors and high household and business debt levels have led to a slowdown in the Chinese economy. As a result, more businesspeople may become insolvent as they struggle to stay afloat in these challenging conditions. It is important for international businesses doing business in China to be aware of these risks and to take steps to mitigate them, such as by diversifying their customer base and adapting to changing market conditions.

When businesses have a higher level of solvency risk, conducting regular due diligence on business partners is especially important. This involves carefully researching and evaluating potential partners to ensure they are financially stable and able to meet their financial obligations. This is especially crucial in the current Chinese economic climate. By conducting due diligence on business partners, companies can protect themselves from financial losses and ensure that their own financial stability is not compromised. This can be achieved through a variety of methods, including conducting regular background checks on the business partners and their controlling shareholders, checking the so-called “untrustworthy” or “non-trustworthy” people list, and seeking the advice of legal and financial professionals.

More IP infringement

Intellectual property theft is a major risk when doing business with China, and it is not news that businesses find their products or ideas are copied or stolen by Chinese companies, leading to lost profits and damage to their reputation.

As the U.S. continues to implement more restrictions on tech exports to China, it is possible that new forms of IP theft may emerge. More covert or sophisticated means may be adopted to obtain intellectual property, such as cyber espionage or by recruiting employees from other companies to steal trade secrets, or through joint ventures with foreign companies. This could make it more difficult for companies to protect their intellectual property, as the risk of IP theft may become more widespread and harder to detect. It is important for companies to be aware of these potential risks and to take steps to protect their intellectual property, such as by implementing strong security measures, carefully vetting potential business partners, entering so-called NNN agreements (non-disclosure, non-use and non-circumvention) with Chinese OEMs and distributors, and including IP protection clauses in the employment contracts with local employees.

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More contract defaults

The ongoing COVID-19 pandemic has caused widespread disruption to production in China, and as a result, contract defaults in relation to imports from China are likely to rise in 2023.

One of the main challenges would be the return of migrant workers to their hometowns, which would cause disruption to the workforce in production centres. Many of these workers have been employed in manufacturing and other industries in the big cities, and their absence will lead to a shortage of labour and increased pressure on the remaining workers. This will, in turn, cause logistics and late delivery issues, as companies struggle to keep up with demand.

Many companies have already been struggling to meet their contractual obligations due to the challenges posed by the pandemic, such as delays in the transportation of goods and difficulty sourcing raw materials.

Businesses will need to carefully negotiate the terms of their contracts and consider working with a local lawyer or advisor who can help protect their rights. It is also important for businesses to have a plan in place for resolving disputes if a contract is breached.

Companies should also be prepared to adapt to changing market conditions and be flexible in meeting their contractual obligations. This may involve diversifying the sources of raw materials and goods, building relationships with multiple suppliers to reduce reliance on any single supplier, and adjusting delivery schedules to account for delays.

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