Tips to vet a Chinese partner
When it comes to choosing a business partner in China, due diligence is a must. This is probably one of the most important things you will do before setting up a running business in the country. A local partner with good standing will surely be of great help to you, while a bad one could ruin your reputation.
However, many foreign companies or professionals looking to start a business in China often fail to do even the most basic research on their potential Chinese partners and later find themselves dealing with legal and logistic complications.
Running a basic reference check, even preliminary, on the Chinese business partner being considered could help avoid future unpleasant surprises.
As the second largest market in the world, China offers extremely attractive opportunities. But doing business in this country requires a different set of rules, especially when it comes to relationships and partnerships.
Different regions in China -Mainland, Hong Kong, Taiwan and Macau-enact different laws and are treated as individual jurisdictions. Chinese is the only official language in Mainland China. For this reason, you should not believe in a company’s name given in English since it can be easily changed, and it is not recognized by the law.
There are a few official channels that can be used to conduct a search on a Chinese company registered in Mainland China. However, all the information available from those sources will be in Chinese, which could be a challenge for a foreign company.
Local lawyers may do a comprehensive company search and provide a report in English, which normally contains the basic registration information (such as domicile, registered and paid-in capital, business scope, senior management), the credit references (such as mortgage, pledge, other encumbrance over assets), the effective rulings or judgments involving the target company as a litigant and the courts’ enforcement records (if any).
There are thousands of courts nationwide in China at four levels (magistrate courts, intermediate courts, high courts and Supreme Court). However, there is no integrated system to search or review all the cases of those courts adjudicated or in the progress of trial.
Moreover, a non-litigant is not allowed to get access to a case ongoing unless specially approved. But the Supreme Court sponsors an online platform where one can search the judgments and rulings issued and uploaded by the local courts. Findings of the company’s involvement in those proceedings may help get a sense of its financial status.
If needed, records on intellectual property rights registered and owned by the company can be requested. This process may take more time.
For privacy protection reasons, financial statements or transactional records of a company cannot be accessed by a third party without an order issued by a Chinese judicial authority.
Information such as turnover or revenue of a specific product or service is difficult to obtain if the company does not disclose it voluntarily in public domain.
Another option is to search all the business information pertinent to the company published in the news, press releases and other public media. Nevertheless, the information available may not be accurate or even exaggerated as they are usually provided by the company itself.
To make sure of the credibility of your potential Chinese business partner, it is recommended to operate a business review, collecting speeches from customers, press, former employees, and every possible organism that came in contact with the firm. This will help you get an accurate picture of it, thus avoiding any case of falsified legal fillings and financials.
Due diligence on a potential partner is a must. Nonetheless, background checks are not a substitute for meeting overseas collaborators in person or hiring a trusted agent to do so. This is particularly important when working with a factory, since problems at the plant with quality, on-time delivery, product safety, or labor practices could hurt the company’s reputation.
Verifying the existence at the address given by a company that may become your business partner in China is recommended. This will allow you to have an idea of its size and capabilities, especially if it is a factory.
Once again, the visit does not necessarily illustrate a company’s substantiality inherent, from a legal point of view – the workshop could be leased from others, and an insolvent entity might stay in a decent office waiting for a liquidator.
Eventually, after having found the ideal business partner in China, you should look in depth into its primary motives, interests and decisions; in order to build a long-term and successful relationship.
When doing business in any unfamiliar cultural environment, ask someone who knows the language and culture to explain the local conventions. The clearer the communication with a partner, the stronger the partnership will be.
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DISCLAIMER: All information in this article is verified to the best of our ability and is assumed to be correct at time of release; however, Woodburn Accountants & Advisors does not accept responsibility for any losses arising from reliance on the information provided within. The information provided is for general guidance and does not replace specialized advice.