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Most easily overlooked risks when exporting to China (part 1)

Tags: Company Verification, Doing Business in China, Due Diligence, SMBs and SMEs

       
overlooked business risks in China

This article is part one of a series for doing business in China. We will go through eight typical risks that are easily overlooked for small and medium-sized businesses over four blogs, which will help your company’s success in doing business with China.

When exporting your services or selling products to a foreign market with which you are not as familiar as your home market, you are more careful. You spend weeks, even months, negotiating essential terms, such as price and payment, with potential importers, distributors, agents, or licensees. However, people often overlook some basic but crucial details. The devil is in the details! Overlooked items often result in bad surprises, messy situations, or even substantial losses. We want to share some common risks when an international business exports either products or technology solutions to the Chinese market. You might easily overlook these risks, but they are avoidable.

Risk #1. The company with whom you negotiate business is not the same entity in the contract to be signed.

It is understandable to assume that the counterparty in your contract is the same as the one you’ve been communicating with.  Unfortunately, although this sounds like a straightforward thing to check, many experienced Western businesspeople often take it for granted until they run into trouble in China.

Many Chinese companies have similar names. This is especially true of companies within the same group or controlled by the same investor. They may have one company sitting across the negotiation table with you on purpose or by accident, but put another’s name in the sales contract. So keep in mind that a company’s English name in China is only for reference purposes; the official legal name is different. The legal name is the company’s full Chinese name printed in their most updated Business License and Articles of Association.

Make sure that the party’s name in your contract is identical to the company you want to sign the deal with.

Risk #2. The person you communicated with does not have the authority to bind the company

This seems to be another seemingly impossible mistake to make. Unfortunately, however, it happens more often than it should. Sometimes the person negotiating on behalf of a Chinese company speaks fluent English and communicates in the way international companies understand. Still, their words do not have legally binding authority over the company.

In China, there is a concept of the “Legal Representative“. It refers to the individual who has the authority, legally, to sign on behalf of the company. This person is usually the CEO, the Chair of the Board, or the General Manager. Only this person, or someone legally authorized by this person, has the authority to sign on behalf of the company. Therefore, you need to make sure the person giving the promises has the authority to do so. Otherwise, promises and sometimes even contract terms you’ve negotiated do not mean anything.

In addition, many Chinese companies’ bylaws require that a contract only becomes legally binding when signed by the legal representative and stamped with the company’s official chop. Please refer to our article on “China company seals – what are they and how it works” for details.

There is nothing wrong with dealing with a young or new partnership. The risk is in possibly being unaware of the actual situation of the counterparty. Under Chinese law, shareholders do not need to inject any capital into a company when formed. Sometimes the shareholders may promise to contribute millions of dollars to a company. The company records these promises in its publicly-filed document. However, if you look more closely, you will notice the shareholders may not need to pay a dime for years to come. You may believe you are negotiating with a potential business partner with strong financial capabilities. However, it may be a complete sham. Or the company might be just a shell company, acting as a middle man or planning from the beginning to sub-contract out your deal.

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