6 Major Restrictions Relating To Doing Business in China

Prabhat Nigam

13 Sep, 2022

Most of the businesses who wish to get their product manufactured and want to gain access to a greater market, look forward to china because of its manufacturing prowess and population size of $1.4 billion people. This makes it China a very attractive destination for expansion of their business. However, the ease of doing business in China is not a cakewalk, it offers a significant number of restrictions in doing business in China’s domestic market.

This piece of writing gives an overview of the 6 major restrictions faced by foreign investors and promoters in doing business in China.  

What are the restrictions related to doing business in China?  

Following are the 6 major restrictions in doing business in China:

1. Enforcement of Intellectual Property rights: Chinese intellectual property regime has been notorious when it comes to enforcement of Intellectual property rights in the jurisdiction of China. Theft of IP is the biggest restriction in entering the Chinese market. According to some estimates released by major journals, it is estimated that US alone has suffered a loss of $600 billion due to IP theft in china due to lack of adequate and effective regulatory framework in place.

Counterfeiting is considered as a menace by the foreign companies. Some organisations confirm that global corporations have suffered a loss equivalent to 20 of the global revenue due to the malpractices of counterfeiting and this is as high as in software companies to the tune of 90 percent.

Because of such a weak regulatory framework, China has been put among one of the countries on US Trade Office watch list which targets those countries which do not have adequate intellectual property protection and enforcement and do not offer adequate market access on grounds of IP protection.  

Additionally, the law related Intellectual property China recognises the rule of ‘First to file’^[1] unlike other jurisdictions where the rule is ‘First to Use’ when it comes to registration of intellectual property rights in China. Therefore, it is recommended that any foreign national company who is contemplating the thought of doing business in China must register their IP rights as early as possible in China before someone else does in China.

• Negative List Ruling System: Before any company wishes to start doing business in China, it should first do a thorough research on the negative list ruling system which is released by the Chinese government from time to time. The negative list ruling system includes two negative lists i.e. the Foreign Investment Negative List (FINL) and the Market Access Negative List (MANL). These lists contain such business sectors where the foreign investors have been restricted from doing their business. So foreign promoters can invest only in those business sectors which are not covered in the negative lists mentioned above.
• FINL: Back in 2017, China had introduced “FINL+ pre-entry national treatment” mechanism to govern foreign investment. Apart from the sectors mentioned in the FINL category all the outside firms are given equal opportunities available to Chinese domestic firms.
• MANL:  The market access negative list provides a list of areas or sectors where private investment is prohibited from both foreign and domestic companies. MANL is one step ahead in putting restrictions on the doing business in China.

• Intimidating and threatening behaviour from local Chinese partner: There have been quite a number of instances in the past where the local Chinese partner has used intimidating behaviour and tactics of threatening the foreign investors in furtherance of a legal dispute. There have been instances where the foreign investor has been stopped from leaving or exiting business unless a heavy fees or payment is made.

• Infamous Travel bans: The Chinese law can impose a travel ban on the foreign nationals who have been involved in some kind of business or legal dispute in China and they have been prohibited from exiting China until their case has been resolved which can take several years to complete. Such travel ban can last for an indefinite period. It is a possibility that an individual may not be aware that he has been put on the list of travel ban and then he might be stopped, interviewed and refused from boarding.

• Restrictions from Bureaucracy and government: Another important factor that has been highlighted by most of the foreign firms in expanding their business in China is the bureaucratic control and red-tapism in obtaining business permits and licenses and the process being unnecessarily lengthy and bureaucratic.

Another associated factor restricting doing of business in China is the lack transparency in the government working and the corruption by the state in the quest of the doing business in China.

• Lack of market access: Chinese economy being detached from the world is another factor which contributes to the restrictions on doing business in China. Since China has been detached from the major Global payment systems of the world having its own digital payment system and also from connecting with the rest of world through digital media such as Google, Facebook etc. also makes it difficult for the world to gain access to the Chinese market being unaware of their habits and behaviours etc.

The practice of protectionism is also very much prevalent in China where their goal is to build their own, domestic, home grown business giants and for this they have restricted access of the global giants from accessing the domestic Chinese market. Global players like Visa, Mastercard, American Express have been barred from entering the Chinese market and instead government and political support has been provided to their domestic giants such as Alipay, Wechat etc. showing signs of protectionism and restrictions from foreign players gaining access to the 1.4 billion strong Chinese market. 

Conclusion 

China, while offering a business environment in its territory, works with the objective of putting restrictions on doing business in China when the Chinese domestic sector has developed enough capabilities in certain specific areas and makes the business environment favourable in those sectors where it lacks the requisite know-how. By offering attractive business ecosystem, china attracts investment in areas its domestic sector lacks expertise and infrastructure and slowly builds its capabilities in that sector. Once, the Chinese domestic sector has developed the requisite capabilities, it again makes it unfavourable for the foreign investors to make investment in that sector.

Read Our Article: Company Registration Process in China: A Step by Step Guide