Foreign companies often encounter numerous legal and administrative obstacles when entering and operating in the Chinese market. To help navigate these challenges and avoid common pitfalls, this guide outlines the key hurdles you may face. Below are the six main challenges of doing business in China.
Challenge 1: Currency restrictions and foreign exchange controls
The State Administration of Foreign Exchange (SAFE), founded in 1979, regulates foreign exchange activities in China. Their strict foreign exchange policies and complicated administrative procedures can be complex and challenging for foreign businesses to navigate.
The SAFE enforces a system of capital controls, limiting money movement in and out of the country. This means foreign companies must register capital investments and loans from abroad beforehand. Failing to understand and comply with these regulations could hinder a foreign company’s operations, and delays in approvals or blocked transactions could disrupt a business’s continuity.
Challenge 2: Intellectual property rights and forced technology transfer
Challenges in enforcing intellectual property rights (IPR) in China may be another issue for foreign companies amidst the challenges of doing business in China. Enforcing IPR is difficult because of obstacles in obtaining evidence, limited damage awards and foreign companies’ failure to register their IP rights in China promptly.
The Chinese government has taken a step to improve the IP environment by incorporating relevant provisions in the Foreign Investment Law (FIL). Article 22 of the revised FIL, adopted during the Second Session of the 13th National People’s Congress on 15 March 2019, mandates the protection of intellectual property rights for foreign investors and foreign-funded enterprises. Specifically, it prohibits any administrative department or staff member from coercing technology transfers through administrative means. This revision indicates stricter IPR protection and improved the trust issue to a certain extent. However, many foreign companies remain cautious about entering the Chinese market and disclosing their intellectual properties to Chinese businesses.
Challenge 3: Language and cultural barriers
The language barrier is another challenge for foreign companies seeking to enter the Chinese market. Chinese isn’t just a language but a complex system with dialects like Wu (Shanghai dialect), Gan (Jiangxi dialect), Min (Fujian/Taiwan Hokkien), Kejia (Hakka), Xiang (Hunan), Yue (Canton) and Ping (Guangxi), alongside Mandarin and Cantonese. While some dialects have mutual understanding due to minor differences, others are distinct. Basic Chinese knowledge isn’t enough for business interactions.
Foreigners without an educational or professional background in China often find it difficult to communicate in Chinese. Moreover, English isn’t an official or business language in China, although many Chinese individuals can speak it. However, accents and language differences create challenges for both Chinese and foreign companies.
Therefore, foreign companies aiming to enter the Chinese market should consider hiring professional translators who understand local accents, slang, and idioms to facilitate effective communication.
Moreover, a skilled translator can help overcome cultural barriers. Chinese culture has several elements that necessitate adjusting the wording or approach. One main aspect is the concept of face or miànzi. In simple terms, disrespectful actions or words can lead to a loss of face for counterparts, while gestures like gifts or awards can enhance face. Apart from this, numerous other elements of Chinese culture require consideration when engaging in business in China.
Challenge 4: Visa application
The visa application process for China is a notable challenge for foreigners due to its complexity and diverse visa options. There are various types of visas available, each catering to specific purposes of travel. Foreigners must carefully choose the appropriate visa type based on the nature of their visit, which can be challenging given the difficulties of the application requirements and eligibility criteria. Understanding the visa categories and ensuring compliance with documentation and submission procedures can be challenging for individuals unfamiliar with the Chinese visa system. For this reason, getting through this process correctly and efficiently is a big obstacle for foreign visitors to China.
Below is a table of the different types of visas available and their purposes:
| 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
Due to China’s economic growth, many foreign companies are either already operating or planning to enter the Chinese market. The number of foreign business operations in the Chinese market has surpassed one million since 2019.
Competition arises not only 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 gain market share. With their local expertise and understanding of the Chinese market, domestic companies have become strong competitors for foreign firms entering China.
Additionally, Chinese governments sometimes favour national champions (companies that receive regulatory protections, tax benefits and subsidies), giving them an advantage over foreign competitors in the local market.
Challenge 6: Managing sales and distribution properly
China’s vast market requires effective sales and distribution strategies. Foreign companies must choose the proper channels, manage distribution networks, and adapt to local consumer preferences.
Managing sales and distribution in China requires a strategic approach. China has diverse distribution channels, including wholesalers, retailers, e-commerce platforms, and agents.
- Wholesalers and distributors: Work with local wholesalers or distributors with established networks. They can help you reach a wider audience.
- E-commerce platforms: Leverage popular platforms like Alibaba’s Tmall, JD.com, and Pinduoduo for online sales.
- Retail stores: If the company sells physical products, consider partnering with retail stores or opening branded stores.
Developing trust with Chinese partners, distributors, agents, suppliers, and customers is also essential. Building strong relationships and understanding local business practices are critical for long-term success.
China’s market is vast and dynamic. Flexibility, adaptability, and a long-term perspective are key to successful sales and distribution in this unique market.
Conclusion
While the Chinese market holds immense potential for foreign businesses, it also presents several challenges that need careful consideration and strategic planning. The top six challenges discussed in this article highlight the multifaceted nature of doing business in China. Despite these challenges, it is important to note that the Chinese government has improved the business environment, particularly in areas like IPR protection and foreign investment regulations.
Therefore, foreign companies can benefit from opportunities in the Chinese market by adopting a proactive and adaptable approach that accounts for the unique dynamics and complexities of doing business in China.
Contact our teams for expert support and further information about entering the market and setting up a legal entity in China.
Maxime Van ‘t Klooster, Partner, m.vantklooster@acclime.com
Florian Braunsteiner, Commercial Director, f.braunsteiner@acclime.com
Contact our teams for expert support and further information about corporate governance in China to ensure you are compliant in the market.
Maxime Van ‘t Klooster, Partner, m.vantklooster@acclime.com
Celia Cui, Manager of CoSec Services, c.cui@acclime.com
Christophe Marquis, Director, Shanghai, c.marquis@acclime.com
