Author: Michael Pronk

Partner, BD Director Europe

Social Insurance for Foreigners in Shanghai: Current Practice Continued?

Lately the talk of town has been that foreigners in Shanghai will need to start contributing to the Chinese social security system. While there are developments, in practice nothing has changed yet regarding social insurance for foreigners in Shanghai.

 

Regulations

In 2009, Shanghai issued a now famous policy notice (Circular No. 38) stating that foreigners working in Shanghai “may” contribute to the social security scheme in China. This is the first time that foreigners could start contributing, but it was not mandated. Then in 2011, a national law was passed stating that all employers and employees – including foreigners – must contribute to the social security scheme in China (contributions to the housing fund remain voluntary for foreign nationals). But while national law trumps local policies and the rest of China made contributions mandatory for foreigners, Shanghai decided not to enforce this: the Shanghai authorities continued to regard contributions by foreigners as voluntarily based on the Circular No. 38. This notice was extended in 2016, but finally Circular No. 38 was left to expire on 15 August 2021.

 

What does this mean?

Unfortunately, there are still a lot of unknowns, but some facts are clear:

  • Strictly legally speaking, since 2011 contributions should have been made for all employees in China, which includes foreigners in Shanghai;
  • Shanghai chose to not implement this, and has until now followed the guidelines of the 2009 policy notice, stating that foreigners may contribute on a voluntary basis;
  • The notice has expired, but no new announcements or statements have been made on the position of the Shanghai authorities.

Until now, the social security bureau has not taken any initiative to look into contributions to social insurance for foreigners in Shanghai unless a specific complaint was made to the bureau. Historically, complaints mostly occurred when foreign employees wished to contribute but the employer refused. The social security bureau generally would side with the employee and contributions would have to be made from the starting date of the employment contract.

In verbal discussions with a number of social security officers, however, we have been confirmed that they have received no new instructions to actively look into foreigners’ contributions in Shanghai, and unless such instructions later are given, they will continue to follow the above practice.

Therefore, where Shanghai employers and their foreign employees have agreed not to make contributions, there is basis to decide to continue following current practice, i.e., to not make any contributions. On the other hand, it is important to note there is no guarantee that the social security bureau in Shanghai will not change its position at some point in time; and if so, there is a risk that contributions may have to be made from 15 August 2021 or even from the start of the employment contract (though this seems impractical and therefore may be less likely).

For companies that want to operate conservatively and so decide to start making contributions for their foreign staff, we have outlined the financial impact:

 

Influence on employee’s net pay

A part of the contributions shall be borne by the employee, though withheld and paid by the company (as with individual income tax, IIT). This means that this personal contribution will decrease the net amount that a foreign employee receives.

The personal contribution is set as a percentage of the monthly gross salary:

Social Security for Foreigners in ShanghaiPersonal contribution social insurance for foreigners in Shanghai

Note that the personal contribution is not subject to IIT. Moreover, foreigners that leave China can have the majority part of the contributions that they have made paid out in a lump-sum. So, this part is not “lost”.

When making the decision on whether or not to contribute to the housing fund scheme, one consideration could be that this amount is not subject to IIT, and that every quarter an amount of up to CNY 7,500 (current amount valid for foreigners in Shanghai) can be withdrawn and used to pay rent and rent-related expenses.

 

Influence on employers

The employer part is calculated as a percentage of the monthly gross salary, and paid on top of that salary. The part contributed by the employer is paid into the social insurance system and is therefore a sunk cost. So this contribution will increase the company’s cost of the employment, without any direct benefit to either the employer or the employee.

In Shanghai, it is currently optional for employers to contribute the maternity and workplace parts of the social security insurances for their foreign employees. Whether this practice continues remains to be seen.Social Security for Foreigners in ShanghaiCompany contribution social insurance for foreigners in Shanghai

Exemptions

China so far has signed bilateral agreements with the below 11 countries, which allow for exemptions for certain contributions if relevant conditions are met. The principle is that a national of one of these countries should not have to make contributions to similar schemes in both China and at home. And so, if they continue to make relevant social insurance contributions in their home country, then they (and their employers) can be exempt from doing so in China.

Exemptions based on bilateral trade agreements

Our professional payroll team is happy to provide further advice on whether your company should contribute social insurance for Foreigners in Shanghai and how to implement the bilateral agreements.

Acclime is a corporate service firm, which provides a full range of services including custodian of stamps and licenses, treasury, payroll, and accounting + tax filing assistance. We focus on compliance and advice when dealing with irregularities, and representing clients in discussions and negotiations with the authorities. For more information, please contact us, email Ms. Ann Sophie de Meester, or connect with your usual contact at Acclime. 

Environmental protection in China: Opportunities in a green economy

In recent years, environmental pollution has caused widespread concern and adverse health effects. The Chinese government has since started addressing climate and environmental issues, particularly related to air and water quality. At the national Conference on Ecology and Environmental Protection, President Xi Jinping indicated that China would battle against pollution and develop an ecological civilization[1]. With the stated goal of controlling pollution and reversing environmental problems, there are now commercial opportunities to join in the efforts to protect the environment.

 

Environmental challenges: Water & Air

By 2019, 53.4% of all cities still failed to meet the national air quality standards. The standards set by the national-level government are meant to ensure the health and safety of citizens. Chronic exposure to major pollutants like particles including PM2.5, O3 (surface ozone a pollutant, not to be confused with “ozone hole” in Antarctica), and NOx in cities can cause a variety of health concerns, detrimental to the ecosystems such as acid rain and reduce yield in crops. Small particles like PM2.5 can bypass natural defences of the respiratory system and penetrate deep into the lungs where they cause serious damages. When O3 is breathed in, it irritates lung and throat, and tighten up airways causing difficulty in breathing and respiratory distress. Control and prevention of ozone pollution are much-complicated processes as it is not directly emitted and is instead formed from other pollutants. In short, reducing volatile organic compounds (VOCs) emission is the key to control ozone pollution in cities.

China has 20% of the world’s population, but it only has 7% of global water resources. Constant floods, drought, contamination, and uneven distribution resulted in water scarcity and poor water quality in many regions. Poor water quality poses a great health risk and reduces the already limited freshwater resource. The wastewater reuse rate is currently only 15.98%. In terms of water quality, chemical oxygen demand (COD) and total phosphorus (TP) are key indicators. COD can effectively determine pollutants level in water, and TP used as an indicator to prevent eutrophication (algal boom) in freshwater. Eutrophication rapidly deprives oxygen in water and therefore kills many aquatic animals.  Preventing eutrophication and meeting the demand of urbanization, the wastewater treatment industry has boomed. Hence, this article will introduce detailed VOCs and wastewater treatment developments in China.

 

Environmental protection and regulation in China

The Ministry of Ecology and Environment (MEE), an integral department of the State Council, is the regulatory body that oversees ecological and environmental protection. Since 2012, China has invested RMB 3.7 trillion into battling pollution. The central government has demonstrated efforts in environmental welfare through their legislative changes. The new Environmental protection law effective from 2015 has expanded from 47 to 70 articles, which prioritized environmental protection over development and granted public access to information in environmental protection. Illicit activities, under the new law, will face fines with no maximum amount. Besides Environmental protection law, Water Pollution Prevention & Control Law regulates urban, as well as Agriculture and Rural areas water treatment and release. Moreover, in 2015, the state department released Action Plan for Prevention & Control Water Pollution aiming to improve water quality in the major river basin and urban area. The plan has ensured wide coverage of sewage network across countries and a minimum 95% and 85% treatment rate in urban and countries, respectively. The action plan is also seeking to upgrade facilities, recycle, regenerate industrial water, halt heavy industrial contamination, and prevent livestock farming pollution. In June 2018, MEE issued Action Plan on Winning the battle for the blue sky set goals of joint control of Greenhouse Gas (GHG) emissions while promoting air pollution control. A year later, the Comprehensive Control Plan for Volatile Organic Compounds (VOCs) in Key Industries issued by the MEE brought attention to VOC emission issues. China is now a huge market for industrial solutions to limit VOC emission from its diverse sources.

 

Perspective based on China’s Five-Year Plans

Since the 12th Five-year plan (FYP), the Chinese government emphasized the importance of the development of the wastewater treatment industry. The new 14th FYP was released in 2021 and continued to focus on developing this industry. Besides the well-known goal of becoming carbon-neutral, environmental quality control remains a top priority in environmental governance. Like the 12th and 13th FYP, sewage treatment, emission reduction, and energy transition remain in the central framework. Noticeably, 14th FYP has included ozone pollution. The new PM2.5 and O3 coordinated control plan aimed to achieve a 10% reduction in PM2.5 in the urban area and a 10% reduction in ozone precursor gases (NOx and VOCs). Since the 13th FYP accomplished most of the goals related to transitioning the energy sector, the new plan will cover more sectors.  Even though VOCs are not as infamous as PM2.5, they have the most business potential due to worsening ozone pollution in China and high demand from various industries.

Figure 1 from 2019 Report on the State of the Ecology and Environment in China. Inferior to Grade V has no useful function except adjusting of the local climate.

Concerning water pollution control, although the previous 13th FYP set a goal for all water to meet the Grade V standard of agriculture and landscape irrigation, 3.4% of total surface water was still below this grade in 2019. Intending to improve water quality, the 14th FYP hopes to eliminate all these inferior bodies of water and set a new goal of an 8% reduction in Chemical Oxygen Demand (COD), ammonia, and nitrogen emission. To meet these goals, it all comes down to water treatment.

 

Wastewater treatment

There are three stages in wastewater treatment: primary, secondary, and advanced treatments. In the primary stage, physical methods like sedimentation are used to remove any large objects and suspended particles. The secondary treatment takes much longer to remove biochemical oxygen demand (similar to COD) and suspended particles. Common practices include activated sludge (most commonly applied and effective), trickling filters (applied in smaller operations), or oxidation ponds (cheaper and easy to maintain). The advanced treatment is complex and targets a variety of substances. After this stage of treatment, the water can be reused for industrial or household water consumption. Treatment methods are roughly divided into physical, chemical, and biochemical methods.

The water treatment industry roughly includes three components: equipment manufacturers, engineering constructors, and service facility operators. Although most cities have already established wastewater treatment facilities, many cities seek to upgrade their existing centres to improve quality and efficiency for urban sewage. Furthermore, smart technologies also entered the industry and created many new opportunities.

 

Figure 2 an overview of the general wastewater treatment process

Regulation in Wastewater Treatment

In China, water treatment is not a part of water resource management and is therefore not regulated by the Ministry of Water Resources. The Chinese Ministry of Housing and Urban-Rural Development is the government body in charge of wastewater treatment. This puts the local government as the main investor in treatment centres. Law of Prevention and Control of Water pollution and Environmental Protection Law required sewage prevention and treatment. The government also established sewage discharge standards and a discharge-permitting system. New technologies and innovations have great potential in China’s water market. If water treatment is related to the marine environment, the State Ocean Administration is in charge of regulation and approval. As water treatment requires government participation, the following models can be applied:

Operation models in China

  • PPP Public-Private partnership
    • BOT(Build-Operate-Transfer) [Popular]
    • DBO (Design-Build-Operate)
    • TOT (Transfer-operate-transfer)
    • ROT(Retrofit-Operate-Transfer)
    • BT (Build-transfer)
  • EP (Engineering, Procurement)
  • EPC (Engineering, Procurement, Construction)

 

Ambient Air Pollution- VOCs Treatment

Volatile organic compounds (VOCs) reduction is a critical group of pollutant and precursor gas of ozone and aerosols. Despite the effort to “beat air pollution”, ozone pollution in cities has increased by 8.4% in 2019 compared to the previous year. These challenges led to current issues. Based on MEE released VOCs treatment plan, China has only used 20% of low VOCs industrial paint compared to 40-60% in the US and EU. Many existing treatments are inefficient such as photocatalysis, photo-oxidation, and others account for more than 80%. For the detection, the LDAR (Leak Detection and Repair) procedures are not followed thoroughly. VOCs monitoring remains in the early development stage.

VOC contains gaseous pollutants with vast properties. Emission sources are not limited to a single industry. The diversity of VOCs complicates the solution for industrial waste gas treatment. An overview of treatment and some specific technologies is shown in the table below. The complexities of the gas pollutants require customized solutions. Compared to the US and EU, China has a much shorter history of environmental protection practices and engineering solutions to air pollution mitigation. Therefore, many devices in both treatment and monitors partially rely on foreign technology. CECO, Dürr, ABB, and Thermo Fisher scientific are leading companies in treatment solutions and gas monitoring.

Recently, local enterprises have made significant progress in overcoming the challenges of dealing with VOCs as well. For instance, Focused Photonic acquired 75% share of Synspec, a Dutch company specialized in monitors and analyzers of VOCs. Meanwhile, Focused Photonic is also developing VOC treatment solutions. Beijing SDL, another monitoring supplier company, acquired KORE technology which focused on real-time or onsite measurement products. SailHero leading the first VOCs treatment PPP project in China offers both monitoring and treatment solutions.

Conclusion

The current environmental challenges and government commitment to pollution prevention have led to rapid developments in both the air and water treatment sectors. Based on our review of current technologies and progress in pollution control, VOCs and wastewater treatment are lucrative candidates for future investment and development.

If you would like to know more about environmental opportunities in China, feel free to contact us. We will be more than happy to assist you in navigating the Chinese market.

 

Digital Marketing in China

According to The 47th China Statistical Report on Internet Development, the total number of Internet users in China reached 989 hundred million by December 2020, which is an increase of 84.50 million compared to March 2020. China’s internet penetration rate exceeded 70% by December 2020.

In addition, China has been the largest online retail market in the world since 2013. In 2020, the revenue of online retail sales reached CNY 11.76 trillion ($1.81 trillion), which was an increase of 10.9 % compared to 2019. The number of online shoppers in China reached 782 hundred million by December 2020, another increase of 72.15 million compared to March 2020.

With an ever-increasing internet penetration rate as well as an ever-growing online market, digital marketing becomes a priority of many businesses operating in China. If companies need to create their digital strategy, they can never ignore the three digital behemoth trio of China: Baidu, Alibaba and Tencent, which are known as BAT for short. Both Alibaba and Tencent have their own ecosystem with their star apps as well as their own payment service which companies need to leverage because Chinese people have gotten so used to the two online electronic payment methods already. Baidu has its own different ecology, and it was the pioneer to apply deep learning of all the BAT giants.

 

Definition of Digital Marketing

Digital marketing refers to a targeted and data-driven marketing approach that uses Internet, interactive digital media, search engines and mobile devices to reach customers and achieve various goals.

 

Strengths of using digital marketing in China

  1. Comprehensive information

The price, specification, technical standard, warranty information, method of application, and common Q&A of a product can be displayed clearly on the Internet. With digital marketing, customers can access all this information more easily than with conventional marketing.

 

  1. Integration and convenient conversions

Digital marketing integrates pre-sales promotion, transaction, and after-sales services into one chain of services, allowing customers to benefit the most from the services provided by the business. In the past, if a person became interested in a product after seeing a TV advertisement or a poster, the fastest way he or she could purchase the product is by calling the company to make a reservation and then pay on delivery. With digital marketing and its well-designed webpage or software, conversions are easier and more convenient. A person can simply click a tab on his or her phone or laptop to make the purchase.

 

  1. Broad geographic reach

With digital marketing, an advertisement is not subject to geographic constraints. Once an advertisement is placed on the Internet or a social media platform, people from all over the country can see the advertisement.

 

  1. Cost efficiency

Firstly, as the effects of an advertisement are not constrained by geographic boundaries, businesses do not need to place so many advertisements as before. Secondly, with digital marketing, businesses can directly sell their products to customers. The payment to local distributors can be saved. Thirdly, people who browse the information of a product on the Internet or social media platforms are usually those who have the tendency to purchase or are at least interested in the product. Thus, this avoids invalid clicks and ineffective advertisements to a certain extent. All these save costs for businesses.

 

  1. Personalization

Many websites and applications can track people’s browsing history. This enables websites and applications to provide people with personalized content. Since more targeted information is delivered to each consumer, a consumer is more likely to find needed products and make a purchase.

 

  1. Quantifiable results

With big data analysis and advanced information technology, businesses are able to track the number of conversions made from implementing a certain digital marketing strategy. This allows businesses to adjust their digital marketing strategy according to the current market trend and people’s feedback on their products. Businesses can also adjust their inventories accordingly.

 

Most commonly used digital marketing strategies in China

  1. Search Engine Optimization (SEO)

Search Engine Optimization (SEO) is often defined as “the art and science of making web pages attractive to search engines”. Businesses apply this strategy to improve the rankings and visibility of their websites on search engines. Search engines rank websites based on factors such as keyword relevance, quality of website’s content, level of user engagement, number and quality of inbound links, and structure of the website. SEO specialists use these factors as key indicators to help businesses improve their websites. Although being a widely used strategy, the effects of SEO can be limited for certain reasons: 1) The algorithms of a search engine change frequently. Businesses need to closely monitor these changes and make adjustments accordingly. 2) If the SEO of a website is made by amateurs or made inappropriately, search engines may punish this website by lowering its rankings or clearing its data on the search engine. In China, SEO is often implemented on search engines such as Baidu, Sogou and 360 Search. As these search engines struggle to read foreign languages, the website must be in simplified Chinese. The loading of pages and accessibility will be improved if the official website is hosted in China. Besides, the content should also comply with the law and respect China’s restriction on the themes of articles and videos.

 

Most commonly used search engine in China:

  • Baidu—Baidu is the most popular engine in China and is the preferred search engine in the country. Baidu has around 70% of the market share in China, so it is crucial to focus on how to be highly ranked on Baidu. When implementing a SEO strategy, it is important to create fresh and new content if a company wants to devote itself for a high ranking on Baidu.
  • Sogou— Sogou was established in 2004, and it is famous for its Sogou Input keyboard for mobile devices as well as tablets. The market share of the Sogou search engine in China is nearly 25%. It is worth noting that in 2013 Tencent acquired the search engine, as a result, Sogou searching engine is built-in on the WeChat platform, which is a unique advantage when compared with other search engines in China.
  • 360 search– 360 search claims to have unique ranking algorithms. Thus, companies need to implement different SEO strategies for it. Besides 360 search, the company also owns several internet properties such as 360 directory and the 360 anti-virus program.
  • Bing— Although often made fun of in the West, in China Bing is gradually and recommended by many Chinese netizens as it has the access to western search results. Bing has two search bars, one is for domestic searching only, and the other one is for international results.

 

  1. Content Marketing

Content marketing is a strategy to attract leads by delivering relevant content to targeted groups without conveying an advertising message directly. According to a survey from Pew Research Center , 81% of consumers’ purchasing decisions are influenced by ‘doing their own research online’, making content marketing important to get in touch with customers. In China, examples of content marketing include advertorial, press release, podcasts, blogs, audio, video, white book and infographics on Weibo, WeChat, search engines, official websites, and client-side applications. As Chinese netizens encounter content in the hundreds of thousands on their social network apps every day, creative and eye-catching content that convey the values of a brand can be the key for content marketing campaigns.

  1. Pay-Per-Click Marketing (PPC)

Pay-Per-Click marketing refers to the strategy that drives traffic to a business’s website through paid advertisements. Businesses post an advertisement on an online platform and pay a certain fee each time this advertisement is clicked by an Internet user. Keyword research plays a most significant role in a PPC campaign. There is an extremely popular ‘cyberspeak’ on Chinese social media called “种草” (“Zhong Cao”). This means the desire to buy a particular product or experience something, or influencing or being influenced to long for a particular product or experience. The basic logic for “Zhongcao” is “approaching from different perspectives and then giving an unintended exposure to the product”. Brands actively develop their new products and products with new USP’s by implementing advertising campaigns to attract people’s attention.

 

  1. Social Media Marketing

Social media marketing is a strategy to promote brand awareness, drive traffic and establish social trust by engaging people on social media and online discussion. Nowadays, the factors and media that influence consumer decisions have changed, so it is essential to create active and recurring content to attract consumers’ attention and give them the necessary information when they make decisions and conduct searches. In China, businesses often hire professionals to manage their social media accounts, including publishing new product releases, replying to followers’ messages, and initiating online discussions. Businesses also collaborate with celebrities and KOLs (Key Opinion Leaders) to promote brand awareness through online interaction on social media platforms. In recent years, more and more businesses also use social media platforms as direct sales channels. The most popular social media platforms in China include Weibo, RED, Douyin (TikTok), and WeChat public accounts. Because of interpersonal trust between KOLs and their followers on specific social media platforms, this way of marketing can increase brand awareness and shorten the time before a consumer decides to purchase. Furthermore, it can reduce the marketing expenses of brands while simultaneous long-tail effects on the content KOL are provided.

A report of “2019 China Digital Marketing Trends“, released by AdMaster, includes a total number of 240 samples (110 brand advertisers are included). The report mentions that, at the level of social media marketing, KOL marketing is gradually being regarded by brands as a top priority in social media communication, occupying 60% of the digital marketing industry. Live stream and short video contribute 55% of the digital marketing industry, then followed by official public account operation, with a proportion of 54%.

To make sure the best practice of marketing, Chinese companies usually implement mixed digital marketing strategies but with different emphases.

 

Most commonly used social media platforms in China:

  • Wechat: WeChat is the most popular social media in China. WeChat has now reached 24 billion monthly active usersin the first quarter of 2021, making it the 5th most popular/used social media platform worldwide. WeChat has a lot of features consisting of voice messaging,  text messaging and video calls, such as group messaging and calls. Wechat can also be used for payments, short video creation and sharing, creating posts on their newsfeed, live streams, games, and official accounts (which can be registered by individuals and by organizations). It also provides services like payment for living expenses, and QR codes for public transportation and mobile top-ups etc.
  • Sina Weibo—also known as Weibo, is a micro-blogging site in China released in 2009. Given the character limits it is usually labelled as the Chinese version of Twitter. With nearly 500 million users on the platform, it is the second most popular social media in China. Users can upload images, videos and gifs for information sharing and the opportunity to engage with each other. Organizations, corporations, and celebrities from different fields joined Weibo to interact and share information with their followers, customers, and fans.
  • QQ—QQ is the first popular chat app developed by Tencent. While WeChat has become the market leader, QQ still prevails among younger users. The advantage for QQ is that it does not require phone numbers to sign up, which attracts youngsters to register when they are not even allowed to have their own phones yet.
  • Zhihu— Zhihu can be seen as a Chinese equivalent of Quora, it is the largest online question-and-answer sharing community in China. It is reported that Zhihu had over 85 million monthly active users in the first quarter of 2021.
  • TikTok–In China, TikTok is known as Douyin, and it is the most popular video-sharing platform nowadays. This short-form video platform is rich in various genres with plenty of corporate accounts publishing creative video clips on it.
  • Xiaohongshu—also known as RED or Little Red Book, it is a social media and cross-border e-commerce platform. The latest data of Red shows that it currently has over 100 million monthly active users, with nearly 300 million notes (shared information with upmost 1000 characters) released in 2020. More than 90% of the platform’s users are female, who use the app for both searching and conducting research on skincare and cosmetic products as well as popular brands in various areas. Most of the users are white-collar, the urban middle-class, exquisite mothers, and urban Gen Zers with strong spending power. As a result, the platform comes with the attribute of recommendation by KOLs and a high purchase conversion rate naturally.
  • Toutiao – Toutiao is the hottest news and information platform right now, not only do official company accounts publish formal news, but it is available for individuals to create content in different fields as well. Readers can leave comments to the writers for interaction.

 

Future emphasis in digital marketing in China

  1. Accurate value proposition

Although big data analysis plays a large part in digital marketing, it should not be the ultimate focus of businesses. Besides functionality, the value proposition of a brand is what really attracts and retains consumers. In the Internet era, when searching for a certain product online, people can easily be dazzled and diverted by the hundreds of advertisements. Without a clear value proposition, it is hard for a brand to establish a stable long-term relationship with customers. Under a prosperous economic condition in China, customers often seek a higher-level satisfaction when conducting a purchase besides meeting basic needs. Businesses therefore should consider developing a unique brand culture and a clear value proposition that accurately match the demands of their targeted customers. In this way, customers will perceive a dual satisfaction, both material and spiritual when purchasing these businesses’ products. In this way, an emotional connection is established between the business and its customers, further strengthening the business’ attraction to its customers. On top of that, digital methods should be used to ensure that valid information, high-quality content, and the clear value proposition of a brand are delivered and made visible to the correct group of targeted consumers.

 

  1. Active Online Communities

Since the number of frauds and false information increase as more new brands emerge online, more and more consumers indicate that they value other customers’ feedbacks higher than the information provided by the businesses. In China, consumers tend to search on social media platforms, such as RED, for evaluations provided by other users before purchasing a product. On many social media platforms, there are various online communities consist of people who share the same interest in a certain product, brand, or value. KOLs, regular customers of a brand or people with related professional backgrounds are often regarded as authorities in these online communities. These authorities often hold a substantial influence over consumers in their communities and can sometimes affect market trends. Therefore, it is significant for businesses to build such online communities consisting of their own leads or develop ‘loyal’ regular customers and KOLs who are active in relevant communities. Businesses may also interact with consumers directly and respond to consumers’ questions in online communities through their official accounts. In this way, businesses can not only have a better understanding of consumers’ needs but also establishes social trust with consumers.

 

  1. Conversion rate over traffic

Digital marketing is more than driving traffic. A valid digital marketing strategy should be able to convert public traffic to private traffic, and then to a purchase. A valid digital marketing strategy should ensure that consumers do not find advertisements annoying or treat advertisements as something merely for watching. Businesses should monitor whether a digital marketing strategy is able to encourage consumers to follow the company’s official account on social media platforms, such as RED, Weibo and WeChat, to check the company’s official website, to search for other products provided by the company initiatively, to sign up for the company’s newsletter email list, and to eventually make a purchase.

 

Potential difficulties for foreign companies to implement digital marketing in China

  1. Different mainstream social media platforms

Social media marketing plays an irreplaceable role in digital marketing in both China and foreign countries. Nevertheless, the mainstream social media platforms in China and most western countries differ significantly. In China, mainstream social media platforms used by digital marketing include Wechat, Weibo, RED and Douyin (TikTok). In most western countries, mainstream social media platforms and websites are Facebook, Instagram, Snapchat and YouTube. No matter how successful these western companies’ campaigns are on foreign social media platforms, Chinese consumers do not have access to them since these foreign social media platforms are blocked by firewalls and local bans.

In addition, since foreign companies, especially those that have never entered the Chinese market before, have little or no experience in using Chinese social media platforms, these foreign companies need to spend lots of effort to adapt to these platforms and to understand the stance of branding and advertising in China. It can be hard for these companies to start a successful social media marketing campaign without proper assistance.

 

  1. The gap between online and offline

A digital marketing strategy is most successful when online promotion is combined with offline events. Many Chinese companies hold creative offline events to support online promotion. Companies also invite brand icons for new product releases. Based on customers’ feedback on products and their experiences of offline events, Chinese companies can adjust the strategy of offline events efficiently and flexibly. For foreign companies, such close collaboration between online and offline events is often hard to achieve. The effectiveness of digital marketing is often undermined.

 

  1. Stricter personal information protection policies

During the 13th Standing Committee of the National People’s Congress in 2020, Cybersecurity Law of the People’s Republic of China and Personal Information Protection Law of the People’s Republic of China were published for comments. The Laws prohibit the exploitation of consumers’ personal information. Moreover, these policies will serve as a legal reference when new issues arise. Nevertheless, the definition of exploitation is somewhat ambiguous. Since digital marketing relies on big data analysis heavily, these policies can hinder the implementation of certain digital marketing strategies for both Chinese and foreign companies.

 

  1. Cultural & lingual challenges

For the purposes of the Intercultural Studies Project, culture is defined as the shared patterns of behaviours and interactions, cognitive constructs, and affective understanding that are learned through a process of socialization. These shared patterns identify the members of a cultural group while also distinguishing those of another group. Although globalization and the spreading of the internet have an extent solved the problem, still the local cultures and their understanding matter for effective marketing. China has a 5,000-year history with profound destiny. A deep understanding of the Chinese culture is a challenge for foreign companies, not only because of the complex language system, but the metaphoric meaning can be rich as well. When it comes to digital marketing, things become more complicated. Like Western people, especially for the youth, cyberspeak has been infiltrating into daily communication in China. However, cyberspeak is even changing the original meanings of Chinese characters. It forces reluctant domestic companies to adapt the way they communicate with their target customers. The culture of foreign companies should adapt to local cultures by implementing proper Chinese language in line with their digital marketing branding and promotion. Brands need to know what kind of advertising slogan can be resonated with a particular group of Chinese in the market.

If you want more information about doing business in China, feel free to contact us, Acclime China. Our team can advise you on any queries you may have, and we can offer solutions for doing business in China. 

Five challenges of doing business in China

The Chinese market is a rapidly growing one with tremendous business opportunities. Many foreign companies have been seeking to advance their businesses into the Chinese market in recent years. Nevertheless, opportunities are always accompanied by risks and challenges. Foreign companies may face many obstacles when entering and operating in the Chinese market.  

In order to help you navigate these issues and avoid common pitfalls, we have listed several potential challenges you may encounter. The following is a list of five top challenges of doing business in China.   

Challenge 1: Foreign exchange control 

Founded in 1979, the State Administration of Foreign Exchange (SAFE) oversees all the activities in China’s foreign exchange market. SAFE practices strict foreign exchange policies and complicated administrative procedures. For instance, capital investments and loans from abroad must be registered prior to remittance. Businesses need to be meticulous to meet these compliances. Without a comprehensive knowledge of China’s foreign exchange regulations, foreign companies will face operational challenges and could even encounter legal problems. 

Challenge 2: Intellectual property rights and forced technology transfer 

Challenges in the enforcement of intellectual property rights (IPR) in China may be another issue for foreign companies. Enforcing IPR is difficult because of challenges in obtaining evidence, limited damage awards and the failure of foreign companies to timely register their IP rights in China.  

One step that the Chinese government has taken to improve the IP environment, is to include relevant provisions in the Foreign Investment Law (FIL). In the revised FIL, which was adopted at the Second Session of the 13th National People’s Congress on March 15, 2019, Article 22 stipulates that the State must protect foreign investors’ and foreign-funded enterprises’ intellectual property rights, and “no administrative department or its staff member shall force any transfer of technology by administrative means”. The revised FIL suggests stricter IPR protection and improved the trust issue to a certain extent. Nonetheless, many foreign companies still feel hesitant when deciding whether to enter the Chinese market and make their intellectual properties public to Chinese businesses. 

Challenge 3: Language and cultural barriers 

The language barrier is a challenge for foreign companies that seek to enter the Chinese market.  

Chinese is more than a mere language but a complex language system. Besides Mandarin and Cantonese, there are a variety of dialects in China, including Wu (Shanghai dialect), Gan (Jiangxi dialect), Min (Fujian/Taiwan Hokkien), Kejia (Hakka), Xiang (Hunan), Yue (Canton) and Ping (Guangxi). While some can be mutually understood (slightly different accent, slightly different localisms), others are not the same. Basic knowledge of Chinese does not suffice for business interactions.  

Foreigners without an educational or professional background in China oftentimes find it difficult to communicate in Chinese. In addition, English is neither an official language nor the business language in China. Although many Chinese are able to communicate in English, accents and language habits have proved to be challenges for both Chinese and foreign companies.  

As a result, foreign companies that want to enter the Chinese market should consider hiring professional translators. It is important that the translator is able to understand local accents, slang and idioms. 

Furthermore, a good translator can also assist in overcoming cultural barriers. There are many aspects of Chinese culture which requires people to adjust their wording or approach. The main example is “face” or “miànzi”. An oversimplification of “face” is that actions and words which are disrespectful may cause “loss of face” to counterparts. Whilst gifts, awards and other respect-giving actions may “give face”. Besides face, there are many different elements of Chinese culture to consider when doing business in China.  

Challenge 4: Visa application 

There are various types of visas you can apply for. You need to carefully choose the type of visa you apply for since your eligibility depends on the purpose of your visit to China. The table below outlines a description of each type of visa. 

Currently, during the Covid pandemic, it has become increasingly difficult to get approval for all kinds of visas. 

Visa Type  Visa Description 
C – crew members  Issued to foreign crew members entering China on international planes, vessels of trains. 
D – permanent residents  Issued to foreigners who intend to stay in China permanently. 
F – non-business exchanges and visits  Issued to foreigners who go to China for non-business activities, such as exchanges, volunteer work, visits, giving lectures and other activities. 
G – China Transit Visa  Issued to those who intend to transit through China. 
J – foreign journalists  Issued to foreign journalists. 

The J1 visa is for journalists staying in China for more than six months. 

The J2 visa is for journalists staying in China for less than six months. 

L – tourist  Issued to foreigners who intend to travel to China. 
M – business or trade purposes  Issued to foreigners to conduct business and trade activities, such as visiting clients, negotiating with clients and signing contracts. 
Q – family reunion  Issued to relatives of Chinese citizens or foreigners living in China with a permanent residence permit. 

The Q1 visa is for a stay of longer than six months. 

The Q2 is for a stay of less than six months. 

R – high-level talent and skill  Issued to those who are high-level talents or whose skills are urgently needed in China. 
S – private visit  Issued to foreigners who intend to visit family members working or studying in China. 

The S1 visa is issued to foreigners staying in China for longer than six months. 

The S2 visa is issued to foreigners staying in China for less than six months. 

X – studying in China  Issued to foreigners who wish to study in China. 

The X1 visa is for students studying in China for more than six months. 

The X2 visa is for students studying in China for less than six months. 

Z – work in China  Issued to foreigners who intend to work in China 

Challenge 5: Fierce business competition 

Because of China’s economic growth, there has been an increasing number of foreign companies that are already in or intend to enter the Chinese market. The total number of foreign business operations in the Chinese market has long exceeded 1 million since 2019.  

Competition not only comes from fellow foreign businesses but also from domestic Chinese companies. In recent years, many domestic Chinese companies have been improving the quality of their products and services to compete with foreign companies and to occupy market shares. With advantages in local knowledge and familiarity with the Chinese market, domestic Chinese companies have become ever stronger rivals for foreign companies that intend to enter the Chinese market. Moreover, Chinese governments do sometimes tend to favour national champions- companies that enjoy regulatory protections, tax breaks and subsidies that offer an advantage in their home markets against foreign competitors. 

Conclusion 

In spite of the above challenges that foreign companies may face, the Chinese market still proves to be an attractive one with great business potentials. Do not let those obstacles barricade your entrance to or development in the Chinese market. Through the assistance of Acclime, we will overcome these barriers together.  

Profit repatriation: Transferring money out of China

When establishing an entity in China, the end goal is to achieve success and generate profits. The main objective of this article is to explore how companies can repatriate profits from China while optimising profit and reducing tax liability.

As China’s market and Renminbi (RMB) are gradually opening up, the Chinese government has implemented various measures to guarantee financial stability while providing efficient financial support.

Even though the frameworks have developed more explicit standards and simplified procedures, foreign investors are still required to navigate a series of compliance hurdles imposed by intricate legal and regulatory frameworks. As such, it is essential to develop an effective strategy for reducing unnecessary risks and expenses.

There are multiple options companies have to get profit out of China. The main method used by companies in China is the issuing of dividends. Alternative options are the use of service fees, payment of royalties, inter-company loans, and cash pooling. 

Issuing dividends

Profits earned by subsidiaries in China (referred to in this article as Foreign-Invested Enterprises or FIE) can be repatriated to their parent companies through issuing dividends. To begin the remitting of profits towards the parent company, subsidiaries must comply with prerequisites and file the required paperwork. The paperwork at least required with preparing for dividend distribution is: 

  •  Business License
  • A recent audit report of paid-in capital
  • External auditor’s report
  • Certificate of tax filing
  • Tax payable receipt
  • Relevant board resolution on profit distribution

The entire procedure may take two to four weeks, though it can take longer for complex cases.

Next to filing the required paperwork, several legal requirements must be fulfilled before a dividend distribution is approved. These are the following: 

  • Payment of annual Corporate Income Tax (CIT) and withholding tax.

The CIT usually amounts to a total of 25%. In some cases, the FIE may apply a reduced rate of withholding tax depending on the Double Tax Avoidance Agreement (DTA) between China and its home country.

  • Covering of accrued losses from the previous year
  • 10% of the after-tax income must be set aside in a profit reserve fund (until the reserve fund is equal to 50% of the FIE’s registered capital).
  • An external audit by a Chinese accounting firm

After filing the required documents, making the required tax payments and profit reservations and receiving approval from the State Administration of Foreign Exchange (SAFE), the company can distribute dividends via overseas transactions at its Chinese bank.

Alternative options 

There are also several alternative options for cash repatriation out of China. Next, this article will examine paying service fees, royalties and cash pooling. These methods can avoid CIT (usually 25%) and dividend withholding tax; however, they are subject to other taxes and conditions.

Service fees

By providing certain business services (e.g. marketing, accounting, technical support) to the FIE, the Parent Company can repatriate funds as a service fee. If the income is deemed China-sourced (which is typically the case), the FIE may have to withhold CIT (usually 5-10%), VAT (usually 6%), and surtaxes on behalf of the parent company to comply with regulations. Moreover, the agreement that is the basis for the transactions must be carefully structured to specify the type of service and the source of income. 

Royalties

The parent company can charge royalties to its FIE. Royalties are fees for using intellectual property (IP) such as trademark, patents, technology, and copyright. Taxes on royalty payments are subject to withholding tax on corporate income (usually between 5-10%), VAT (usually 6%), and other surtaxes. To qualify for a DTA benefit, the company needs to submit an application to the tax authorities, together with a Statement of Beneficial Ownership.

Cash pooling

The Cash Pooling system allows companies to centralise and utilise their balance more efficiently. Since China’s restrictions on cross-border financing have been gradually eased and various cash pooling arrangements are now available, however, some restrictions may continue to apply. In cash pooling, there are two main options to consider: 

Inter-company loans

When the parent company provides inbound loans to the FIE, it receives interest from the FIE. These interest payments are tax-deductible (for CIT purposes) if the interest rate is set in line with current market norms and follows the arm’s length principle. The strict foreign debt quota, a restriction on the debt FIE is allowed to carry connected to the total investment and the registered capital, are calculated based on the FIE’s net asset value and the level of potential risk. All foreign debt must be registered with the SAFE, and interest payments are subject to withholding taxes. Unlike registered capital contributions, loans can be repaid easily as a means to transfer excess cash out of China.

Cross-border cash pooling

To complement the restriction on the inter-company loan system, the Chinese government created additional regulations for various forms of cash pooling aimed at increasing liquidity in cross-border financing. Cross-border cash pooling in China was separated into two types by currency—RMB and foreign currency—until the government launched a new integrated program in 2019, implemented in 2021.

Since 2014, China has permitted multinational companies to operate cross-border RMB and foreign currency cash pooling, subject to certain conditions.

In March 2019, the SAFE published an amended Circular to integrate foreign debt quota, outbound loan quota, and cross-border payments. The main improvements: 

  1. Support for both currencies
  2. Streamlined account structure and procedural requirements,
  3. Consolidated quotas. 

To be eligible for this system, companies must first clear their previous borrowing and lending and complete filing with the local SAFE authorities. This amended Circular leaves room for debatable questions on whether the new measure is stricter than the previous one.

Conclusion

For companies repatriating their profits out of China, dividend distribution is the most straightforward strategy; however, it entails some legal conditions and preparation. Alternatively, inter-company payments are relatively simpler, however, they are based on merit and involve supervision from the tax authorities. China has tried to ease liquidity management by extending and consolidating the cross-border cash pooling system. However, the current requirements do not make cash pooling an easy alternative in practice (yet).

As a result, FIEs are advised to thoroughly examine their repatriation plan before they commence with any procedure. A flexible approach is highly recommended based on the company’s financial circumstances, investment strategy, and objectives.

At Acclime China, our goal is to support our clients to become successful in China. We understand that profit repatriation is a crucial step in the process of success. Our team is specialised in helping you decide the best approach for you, based on your specific financials. For insights and support, feel free to reach out to us.

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