Most easily overlooked risks when exporting to China (part 2)
This article is part two of a series. If you missed our last blog, click here to read part one of this series. It contains the first two risks.
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.
If you missed our last blog, click here to read part one of this series. It contains the first two risks.
Risk #3. The potential importer lacks the required license for engaging in a particular business, and/or the legal qualifications to import certain products.
China is the top export destination of over 100 countries, including the European Union, the U.S., and Japan. It is also the world’s fastest-growing consumer market. However, while planning to export your products to China, you should be aware of its import regulatory environment.
Not every Chinese company has the qualifications to import from abroad. A Chinese company you deal with may have such rights included in its registered business scope. However, certain products may very well be out of the permissible extent of their lawful importation rights. For example, certain industrial chemicals and specialized machinery and equipment are subject to import restrictions in China. For this reason, they require a special license. Such information about import qualifications should be expressly confirmed with your counter-party. Ideally, have it checked by a legal professional.
Risk #4. The business partner is legitimate and solvent when you sign the deal, but its situation later changes.
As in most global markets, a Chinese company’s credit risk is not a static thing. Rather, it fluctuates from time to time. Nevertheless, there is an overall foreseeable trend you can monitor.
For example, as S&P Global Market Intelligence points out, “From early 2021 to May 2021, the risk trends of all sectors [in China] showed an initial upward movement followed by a downward movement, in line with the volatile fluctuation of stock markets around the Chinese New Year.” The same article also notes that risk in all sectors then eased in the following month, though certain sub-industries fared better than others.
In addition to following trends, you can also verify some things about your specific trading partner. You should regularly check their situation in order to make sure your long-term business transaction stays on the right track. For example, before you sign a contract or ship products, you may want to check whether your partner is on the list of “debtors lacking credibility” in China’s court system.
In our next blog, we will discuss how a controlling shareholder’s downfall may affect subsidiary companies, and what trademark actions you should take before entering the Chinese market.