How to Set up Representative Offices in China

1. There are three principal business models for foreign companies seeking to establish themselves in China: Joint Ventures, Wholly Foreign-Owned Companies, and Representative Offices (ROs).

2. Foreign companies are often wary about establishing a permanent office in China, in view of the high running costs and the complexities of setting up an RO.

3. There is no substitute for having a person on the ground in China to monitor local economic trends, identify business opportunities, liaise with potential customers, deal with local officials, and build up a corporate presence. Not all agents can be relied upon to perform these tasks to the standards a company requires.

What Does an RO Do?

4. The Chinese distinguish between a “representative office” (RO) and a fully-fledged “branch office” of a foreign company. An RO must be in place before the company can have a branch in China. Permission to “up-grade” an office is at the discretion of the Chinese authorities.

5. Foreign companies’ ROs are not allowed to transact business directly in China. Chinese regulations only allow them to “build relations and provide technical support”. But this does mean that they are able to carry out the liaison activities with Chinese government and commercial organs, which are essential to successful business in China.

6. ROs operate under two sets of Chinese legislation, the Interim Regulations for Control of Resident Representative Offices in China, issued in 1980, and the 1983 Procedures for the Registration & Administration of Resident Representative Offices of Foreign Enterprises in China. ROs for banks and other financial institutions are governed by separate regulations. In addition, some municipalities and provincial governments have rules of their own, covering specific areas. Local differences can be confusing. For example, although there is no nationwide duty-free import policy for ROs, Tianjin allows the duty-free import of two cars per RO, and Dalian has no restrictions whatsoever.

7. In general ROs are allowed to do the following :-

• Liaise with the foreign company’s Chinese trading counterparts.

• Liaise with the host organisation and host Ministry for specific projects.

• Organise business meetings, and business visits from company headquarters. In this respect, ROs can often help obtain business visas more easily for visitors.

• Conduct public relations work.

• Undertake local administration.

8. The official limits on ROs’ activities are not clearly defined. A number of business representatives in ROs have found loopholes in the regulations prohibiting revenue-earning activities. As a result, in 1993 the Chinese Government introduced a tax on ROs’ “unofficial” income. But companies should be aware that violating the official restrictions on ROs’ activities might also result in the suspension of the company’s business activities in China, together with a fine.

Where Should the RO be Based?

9. The most popular sites for ROs are Beijing, Shanghai, Guangzhou or Shenzhen. Beijing’s advantages are that it gives access to Government departments, Embassies and other foreign businesses.

10. Shanghai is experiencing a period of rapid economic development, and may be a good site for the RO of a company setting up a Joint Venture there. Guangzhou is a useful base for companies with operations in South China. Shenzhen, the Special Economic Zone (SEZ) across the border from Hong Kong, is a major workshop for companies sub-contracting to Hong Kong firms. A number of overseas firms have set up ROs in China’s other SEZs or Open Coastal Cities.

Applying for an Office Licence

11. All foreign companies wishing to open an RO must obtain Chinese Government approval. The decision lies with the Ministry of Commerce (MOFCOM), which is now the sole supervisory agency for all except companies operating in the financial sector, who must apply to the People’s Bank of China (PBOC).

12. The foreign company needs first of all to obtain a letter of invitation from a “host organisation”, a local sponsor which is usually a Chinese company with which the foreign firm has had business dealings in the past. Sponsors can also be selected from among the consultancies, which are attached to Government bodies such as MOFCOM or the Foreign Enterprise Service Corporation (FESCO).

13. The Chinese sponsor’s letter introduces the foreign company to MOFCOM (and the PBOC in the case of financial firms), and recommends that the company be permitted to establish an RO. The Ministry will then give the foreign company a list of documents that need to be submitted before an application can be considered. These documents will normally include :-

• A letter from the company Chairman, identifying the company representative.

• A complete list of the Board of Directors.

• Articles of association.

• Annual company reports for the previous three years, plus the most recent balance sheets and profit/loss accounts from company headquarters, and financial statements from the main bank.

• An explanation of the foreign company’s areas of business interest.

• The address of the premises to be used for the RO, if available.

14. The documents are sent to MOFCOM, which will respond with a formal application form on which the foreign company will be asked to provide the same information again. MOFCOM will normally take two to three months to make any further enquiries and to reply. Approval to open an RO will then normally be granted. Approval certificates are valid for three years, but still have to be renewed annually. Any change of foreign representative will mean the company has to go through the approval procedures outlined above.

15. Within 30 days of approval having been received, the company then needs to complete other approval procedures, most of which involve registering itself with the following organisations :-

• The local office of the State Administration for Industry & Commerce (SAIC), presenting the same collection of papers as those required by MOFCOM, together with the latter’s approval certificate.

• The Public Security Bureau (PSB) (with respect to future visa applications).

• The Customs Administration (regarding import procedures for personal effects).

• The Tax Bureau. Both the RO and each of its staff members must register with the local tax bureau of the Ministry of Finance.

• The Bank of China (BOC) (regarding company and personal bank accounts). Certain other Chinese banks, including the Bank of Communications and the CITIC Industrial Bank are also authorised to deal with foreign-related business.

Expatriate Workers

16. In addition to the Chief Representative, Chinese law allows an RO to be staffed by other expatriate representatives. Only the ROs for banks and other financial institutions have limits placed on the numbers of expatriates who can be employed (law firms will have the latest details). The larger ROs, which require a number of skilled overseas staff (such as consultants, accountants and interpreters), often appoint them all as “representatives” to avoid being obliged to recruit staff from one of the State Employment agencies (see below).

17. Prospective representatives should register successively with the company’s Chinese sponsor, the local SAIC office, and the local PSB office. The PSB (who will require a set of matching photographs and a registration fee) will grant a foreigner’s residence permit. The representative should at the same time apply for a six-month multiple entry visa. Finally, the applicant should register with the local tax bureau within 30 days of starting work.

How to Find Local Staff

18. Chinese staff for ROs must be supplied by a State employment agency. For the most part, companies are required to recruit personnel from FESCO, but recently other more specialised State bodies have been set up, and to which foreign companies can legitimately apply.

19. Foreign companies usually make their bid for staff to FESCO, who will send for interview a selection of personnel whom they claim meet the company’s conditions. Once staff have been recruited, the company must make a monthly payment to FESCO for staff salaries. In order to offer staff incentives, and to discourage speculative job-hopping, most foreign companies pay staff a separate allowance to make up what would otherwise be quite paltry salaries.

Upgrading to Full Branch

Status

21. Once the RO has been in operation for several years the company may find it appropriate to seek to upgrade it to a full branch office. The circumstances might be the formation of a Joint Venture with a Chinese partner, or some other form of long-term collaboration. The procedures for upgrading an RO to a full operational branch office are quite complex, and vary from one industry to another. Approval will often have to be sought from a number of related Ministries, a process which is usually extremely time-consuming. Clearly, if a British company were to contemplate a step of this kind, its board would need to have made a firm commitment to a long-term relationship with China.

22. Even if a company sets up an operational branch in China, it may still be appropriate to maintain a separate RO, especially if the company is part of a group with other interests in China.

Points Made by Expatriate Managers

23. The following points represent some of the more common views on running ROs expressed by local expatriate managers.

• A number of managers have commented that the effective management of a Chinese RO requires a wide range of skills. A knowledge of Mandarin is a distinct advantage, as is the ability to be an efficient operator under adverse conditions. It is also helpful to know how to transact business with the Chinese bureaucracy.

• According to foreign company representatives based in China, the quality of local personnel can vary widely. It is increasingly difficult to find staff with the right combination of skills. Companies find that they often need to provide basic training in Western business methods and marketing skills. Experience has shown that the best employees should receive financial bonuses over and above the standard salary as an inducement to loyalty.

• The cost of renting property in China is extremely high by world standards, but seems to have levelled for the time being. Telecoms charges are high. The cost of expatriate packages is also very high, in view of accommodation costs, rest and recreation breaks, health insurance and other benefits.

24. Any company contemplating setting up an RO in China is strongly advised first to seek expert legal advice. The Embassy holds a list of law firms with expertise in the China market which is available on request.