By Richard Bartlett and Laurance Yuan King & Wood Mallesons’ Finance & Capital Markets group

The Chinese market, while similar or identical in many aspects to other markets, is also unique in certain respects.  Sometimes these differences are obvious but sometimes they are not. Whether you are entering the China market for the first time or growing your existing business, it can be crucial to be able to identify and manage these differences, many of which may not be immediately apparent.

相较全球市场,中国市场是存在一些特质的。个别情况下,这些特质较为突显。不管是初来乍到还是在中国市场已打下些许基础,熟稔并懂得利用这些特质来为我所用,尤为关键。而这些特质,有的显而易见,有的则不易察觉。 

The purpose of this article is to help and inform foreign lawyers and business people, based in or connected with China, in relation to some of the issues and differences in practice that they may encounter while working in China. In particular, it aims to provide an awareness of issues, of which they may not be wholly aware when they first arrive in or start working with China, but which may impact the businesses they work for or their ability to manage or advise those businesses.

在中国工作、营商或与中国有合作关系的外国律师和商人,他们在中国会遇到各式各样意想不到的“文化差异”。本篇文章就试图剖解这些差异,并提示那些他们尚未接触或意识到、但无论如何都不容忽视的种种差异,否则会给他们在中国的生意、工作带来不必要的困扰与阻碍。

Organized into 19 stand-alone law topics, this article presents perspectives and on-the-ground experience from an experienced legal counsel in China. There is also a very useful guide to managing and improving communications where foreign languages are an issue, as well as an introduction to the wide use of WeChat for business here.

基于多年在中国做法律顾问的经历,作者将本篇划分成19个话题从不同维度介绍在中国工作和营商应具备哪些“法商”,介绍了中国法与英美法的区别,讲述方式既严谨又不失趣味!其中讲述的“翻译语意的丢失”(Lost in translation)让人忍俊不禁,令我们认识到平时口语中那些无伤大雅的“漏译、错译”导致的理解偏差,在关键时刻或许酿成大错。作者在最后还介绍了当下中国最火的社交APP“微信”如何在商务场景中得到广泛使用。

1. Property rights in China

According to the Constitution of the People’s Republic of China and other relevant laws relating to land and its use, Chinese individuals cannot privately own land (although they can own the buildings on land).  The Constitution states that land in urban areas is owned by the state, while land in rural and suburban areas is owned by the state or by local collectives.

Nevertheless, individuals can acquire rights to use the land for designated maximum periods of time; land may be used for residential purposes for up to seventy years while for industrial purposes the maximum “land use right” is for fifty years, for example. According to the 2007 Property Rights Law, the term of the land used for residential purposes will be automatically renewed on expiry and the term of the land used for industrial purposes will be renewed “pursuant to law” although there is no indication if a further fee will be charged for their extended use.

Owners of land use rights can transfer these rights to others through sale, exchange, or gift and may also mortgage or lease such land in certain regulated circumstances. The treatment of urban land often differs to rural land in this regard.

However, all individual user rights are subsidiary to this concept of public ownership. Land is not owned by individuals, but rather is used and dealt with by them, essentially subject to the terms of the contract between the state and the initial user of that land. It is the user rights (and obligations) which, subject to law and regulation, are owned and can be dealt with.

2. Legal professional privilege

The concept of legal professional privilege, or “attorney-client privilege”, does not expressly exist under PRC law. While Article 38 of the Lawyers’ Law does require a lawyer to keep confidential certain information regarding the client or any other person which has come to their knowledge in the course of their practice, this is not an express privilege that any lawyer or their client should assume attaches to their confidential communications.

This means that in China, it is prudent to treat any communications between an attorney and a client as information that may need to be produced as evidence if so requested by a Court. Many bodies in China other than the Courts have statutory power to demand information and even to effect searches of people and property so it is prudent to treat any such information as something that can be demanded or even taken away by such bodies exercising their legitimate powers.

This may require reminding clients, including in-house clients, who may be accustomed to an unrestricted information and opinion flow with their in-house lawyers, that these communications will not be privileged in China.

3. Labour law, employee handbooks and zero tolerance

There are two main laws governing labour law in PRC:

  • Labour Law (中华人民共和国劳动法) (implemented 1995); and
  • Labour Contract Law of the People’s Republic of China (中华人民共和国劳动合同法) (implemented 2008).

These, and other relevant laws, help create a relatively employee-friendly body of laws compared to some other jurisdictions, reflecting a desire by the central government to provide adequate and even strong protection to employees. However, it is also likely a reaction to the relatively weak position many employees have experienced in the workplace since the reforms to the Chinese economy that began in the 1980s. One of the results of these reforms was a freeing up of the labour market from a fairly rigid system based on government allocated jobs that were often for life to, for many people, surviving in what has become a true market for labour. In some ways the law is now playing “catch-up” with the new market based reality.

Disciplinary action

This can lead to unintended difficulties for some foreign business, who are focused on compliance but who are also used to less constraint in their home jurisdiction when managing legal issues relating to employment. As a result, giving legal advice on disciplinary action to local management can also involve advising foreign or offshore management on the rights enjoyed by employees and warning of the pitfalls of hasty decision making.

Under Chinese law, the penalties for unfair dismissal can be expensive for an employer and the ultimate sanction can, in addition to financial compensation, be a requirement to reinstate the unfairly dismissed employee (unfair dismissal can lead, at the employee’s election, to either reinstatement with back pay or a double severance payment).  For these reasons, many business try first to negotiate the outcome of disciplinary issues with the staff involved before taking unilateral action, despite this meaning they may forego an opportunity to make a statement about expected behavior.

Being aware of these risks before taking action will be useful for any business to help it manage the risk of large expense, ultimately being unable to dismiss someone and because labour disputes can occasionally become more personal. There have been some instances where family members of staff call or even visit HR staff and management if their family member is the subject of disciplinary action at the workplace. These visits can become time and resource consuming for the office and staff concerned.

Employee handbooks

HR departments usually expend a lot of effort making sure all obligations and duties are clearly and expressly spelt out to employees as this is an important part of any disciplinary action; there must be a clearly spelt out obligation. An employer should not rely upon a Court to assume that there exists a general expectation of good faith from an employee.

While this means all information and training sessions usually require employees to sign to confirm their attendance, which can later be used as proof by their employer that what is expected of an employee has been made clear and explained, the main vehicle for clearly spelling out employees’ duties and obligations is the employee handbook. The employee handbook is not just a useful guide to help employees learn about the business of which they are a part, as something with a similar name may be outside of China, but is also an essential part of the contract between the employee and employer that explains in detail what is expected of the employee. To become an effective handbook under Chinese law and usable in legal proceedings there must have been a “democratic procedure” where the draft handbook or a subsequent amendment is first discussed with all employees or their representatives, followed by a “publicising procedure” which can take the form of an acknowledgment in writing by each employee that they have read and understood the handbook.

For these reasons, the employee handbook is usually a very important document helping form the legal basis of most disciplinary action.

Zero tolerance

Breaches of so called “zero tolerance” policies are unlikely to be accepted as the sole justification for instant dismissal by a PRC Court. Rather, Courts in China will probably focus on the damage to the employer that has been or may be caused by the breach of the relevant policy. This means, while all obligations should be spelt out clearly in any such policy, those obligations and their consequences still need to be reasonable. It is unlikely that a Court will accept zero tolerance as meaning an automatic punishment (including dismissal) unless the employer has suffered significant and proportionate harm to its business or interests to merit that punishment.

4. Anti-bribery and corruption

To help prevent but also to assist in the management of any breaches of anti-bribery and corruption laws, a business should ensure that it has appropriate policies for staff to follow and that it can demonstrate that it has maintained a comprehensive and practical staff training system explaining those policies.

Courts will often take into account when deciding these matters what precautions a business has taken to try to prevent their occurrence in the first place. That means that not only does a business need to show it has run a carefully targeted and sufficiently frequent training program around those policies but also needs to be able to prove all relevant employees have attended these trainings (with signed records of attendance by employees).

5. Unannounced searches

As with any other jurisdiction, the Police or certain other authorities or regulators in China enjoy or can obtain the power to search business premises without prior notification to the business itself. Some such unannounced searches that have taken place in China in the recent past have been at the premises of well-known international businesses. This can lead to not only disruption of the running of the business but also worldwide negative publicity and investigation from regulators in other jurisdictions.

A good search protocol will not only help local staff manage such searches but can also form the basis of a communications plan directed to shareholders, the media and international regulators as well as being part of prudent risk control by management and the board of directors.

A good way to prepare can be to issue instructions to help staff who are present for the first few hours of such a search. It is quite likely that an unannounced search could begin when senior management and internal lawyers are not in the office and the aim of instructions would be to guide those staff on how to react to the search until senior management or lawyers arrive and who to notify in the meantime.

Written instructions which are always kept at the workplace can guide staff how to cooperate, to ask them as soon as it is safe to do so to alert senior management about the search, to gather as much information about the search and the officials conducting the search and, where possible, to make a record of all documents copied or taken, all assets taken and all conversations and questions asked, and responses given.

6. Arbitration or the Courts, and the recognition of foreign judgments

One of the main reasons parties to agreements involving China or Chinese entities prefer to include arbitration clauses is the ease of enforcement. Unlike foreign court judgments, which are difficult to enforce in China especially if there is no treaty between the forum country and China, arbitral awards are enforceable globally, including in China and 155 other countries, pursuant to the New York Convention.

In 2016, KWM found an overall average enforcement rate of foreign arbitral awards by Courts in China of just under 70%, with enforcement rates substantially improving in recent years.

However, while it is still anecdotally very difficult to get enforcement of foreign Court judgments in China, there has recently been enforcement of a US Court decision in the Wuhan Court (in 2017 from a judgment of a Los Angeles Superior Court) and of a judgment of the Singapore High Court by the Nanjing Intermediate People’s Court (in late 2016).

7. Contract law

The Contract Law of the People’s Republic of China came into effect in 1999 and emphasises freedom of contract, party equality, fairness, good faith and public interest as fundamental principles of this law. It contains many concepts familiar to lawyers and parties to contracts in many other jurisdictions.

Unless otherwise provided in law, parties to a foreign-related contract in China are free to choose the governing law. This means that they are free to choose PRC governing law but can also choose other governing laws, such as Hong Kong, England or Singapore for example.  A contract with a foreign contractual party is typically deemed as a foreign-related contract.

8. Tort law

The Tort Liability Law of the People’s Republic of China went into effect as of July 1, 2010. This law consolidates the basic principles of tortious liability into a single piece of legislation, and also includes the tort of product liability. Producers and sellers of product should take note of the inclusion of punitive damages as a remedy for the tort of product liability.

9. Criminal law

As you would expect, China’s criminal law is applicable to anyone, Chinese or foreign, who commits a crime in the PRC (including within the territorial waters and space of the PRC).

In light of recent arrests of employees from gaming companies doing business in or connected with China, it may be prudent for foreign-based executives of any business to check if the relevant onshore entity has any unresolved disputes within China.

10. Directors’ duty of care

The concept of fiduciary duty was introduced into the Company Law of the People’s Republic of China in 2005. This duty involves the duty of care and the duty of loyalty. Some activities, the breach of which is considered a breach of these duties, are listed in the Company Law itself. The Company Law does not provide further information on what else may constitute a fiduciary duty. This may be one reason as to why there have been few fiduciary lawsuits brought before the Courts since 2005.

11. Bankruptcy and the Courts

Some knowledge of the bankruptcy laws in China is helpful, even for those who do not practice in bankruptcy law, if you have become used to relying on bankruptcy as the ultimate end process or sanction when enforcing contractual claims.

Significantly, while there is a bankruptcy law in China, it does not apply to individuals; only enterprises. There is no bankruptcy for individuals in the Chinese legal system at present. In addition to this, there are other constraints on the Courts’ ability to order a sale of an individual’s assets including their home in certain circumstances.

In relation to enterprises (businesses, companies, state-owned enterprises etc.), while the bankruptcy law can give leverage to litigants the outcome is not always as certain as a plaintiff may desire. Litigants, even when they obtain an order for bankruptcy, can experience difficulty finding buyers for assets, often related to the quality of the asset itself (which can sometimes be due to inadequate due diligence when the security was taken), or finding a market for that asset, or sometimes because minimum reserve prices set by Courts are too high.

12. Relations with regulators

It is likely that your local colleagues will be much better at managing the relationship and interacting with regulators. Often, these colleagues have been hired from the regulators themselves or had an entire career’s experience of dealing with regulators and so have a clear understanding of each regulator’s requirements and motivations.

However, it will help to understand that regulators’ offices are almost always replicated from the top down, so that there is usually a head office in Beijing, and then one in each of the provincial capitals, followed by the large provincial cities, to the regional areas and smaller towns etc. This can mean that a business will not only need to meet with the relevant regulator’s national office but it will also likely mean that interaction will be required at the same regulator’s offices in the relevant province, city or region. This can also lead to a business receiving a different or a nuanced interpretation of relevant laws and regulations from different located offices of the same regulatory department, depending upon that office’s understanding of the relevant law and how it determines it needs to be applied within its jurisdiction of responsibility. This can lead to different offices of the same regulator making different requirements of businesses based on the same laws or regulations, but may also present opportunities, depending on the circumstances.

Also, it is not uncommon for businesses to receive communications and instructions from regulators in the form of what is known as “window guidance”. Window guidance is often used in China and can range from spoken instructions to penciled notes on official policy documents. Its purpose is usually to encourage regulated entities to keep to official guidelines and is often aligned with policy for the macro-economy.

13. Competition law

The Chinese anti-trust regime is relatively young. The Anti-Monopoly Law came into effect in 2008 and applies throughout all of the PRC (excluding Hong Kong and Macao). This law (to some extent in conjunction with the Anti-Unfair Competition Law and the Price Law) regulates monopolistic agreements among, abuse of dominant market positions by, and anti-competitive concentration of, business operators.

The anti-trust laws can result in:

  • market abuse claims as a result of complaints raised by other operators or consumers, or investigations conducted by government officials;
  • investigations of possible cartels to see if companies are collaborating with competitors in price fixing, production limitation, market allocation or restricting the procurement and development of new technology or new equipment;
  • companies needing to apply for clearance from the Ministry of Commerce (often referred to as “MOFCOM”) for the purpose of merger control when acquiring assets or shares, or establishing joint ventures; or
  • investigations for striking vertical agreements that might eliminate or restrict competition, including any conduct involving resale price maintenance or allocation of an area for operation or marketing.

To avoid or minimise the risk of the above, businesses may need to consider developing tailored compliance programs and to review business contracts and policies to identify contract terms or business practices that might contradict these laws.

14. Tax

China has a complex system of taxation, which is constantly developing, including enterprise income tax, individual income tax, value-added tax, consumption tax, land value-added tax, stamp duties and real estate tax. Also, local surcharges are levied on top of value-added tax and consumption tax, such as (local) education surcharge levies and urban maintenance and construction taxes for example.

In addition to the above there are also some other forms of taxation or levies applicable to certain investment or business activities, such as a deed tax, as well as motor vehicle taxes.

Like many other countries, China has adopted both the residence and source concepts in its taxation system so that income may be taxed because of the residency of a corporate or an individual (regardless of where in the world it is earned) as well as because that income was derived from sources within that country (i.e. within China).

15. Foreign direct investment

In the past few months (of 2017) China has taken steps to further encourage foreign investors into the China market including relaxing control on the access of foreign capital into the China market as well as streamlining approval processes.

A significant change has been made to the “Catalogue for the Guidance of Industries for Foreign Investment” so that there are now less restricted and prohibited industries. This catalogue encourages greater foreign investment in high-end manufacturing and technology as well as environmental protection and energy conservation. There are also relaxations on previous restrictions on foreign investment in mining, manufacturing and services sectors.

Also, new foreign investments that are not restricted or prohibited by this catalogue now no longer need Ministry of Commerce approval but rather just have to file with the Ministry. This should lead to shorter processing times and greater convenience.

16. SAFE restrictions and the repatriation of profits

Since China began opening up in the middle 1980s and foreigners started investing into China, there have always been restrictions on the movement and transfer of funds into and out of China.

While the trend over the past several years has been a relaxation of these restrictions, there has been a perceived tightening of restrictions by SAFE (The State Administration of Foreign Exchange) and PBOC (The People’s Bank of China) in late 2016 continuing into 2017, on flows of funds out of China. However, there has since been some relaxing of these restrictions with a resultant easing in cross border capital outflows.

One significant change has been the removal by SAFE of restrictions on the repatriation into China of the proceeds of offshore debt where that debt is guaranteed by a Chinese onshore entity (also known as a “neibaowaidai” structure). This should lead to more flexibility and a greater range of options for domestic enterprises looking to take advantage of offshore loan markets.

17. Cyber security

New cyber security laws came into force earlier this year (2017) which make cyber security an obligation for any entity storing personal data or who has a network. Also, that personal information and data now has to be stored in China.

Businesses should look to see that they are not in breach of these laws due to sending data that has been collected in China, or which contains personal information of Chinese citizens, outside of China. Also, businesses may need to look at the systems they have in place to protect data integrity and the confidentiality of that data as well as ensuring that they have obtained the consent of the persons whose information is collected. This may in turn require further due diligence to ensure suppliers are in full compliance with this law and ensuring that adequate confidentiality agreements are in place with all necessary suppliers, third parties and contractors.

18. WeChat

Apart from being a great way to pay for things nearly everywhere in China, and just about everybody in China’s social media app of choice, it is also often used in business transactions by parties as a way of arranging meetings, discussing issues and even to send and receive documents. Do not be too surprised to receive marked up copies of important and confidential documents in your or a colleague’s WeChat account accompanied by a small message and a friendly emoji, late on a Friday evening.

Of course, there are no guarantees of confidentiality with WeChat. Also, attachments to messages (such as documents, for example) are only available for a limited period of time. There are ways, if you find yourself or colleagues receiving communications via WeChat, of structuring incoming messages from certain people so that they are automatically forwarded to an email account. While this will not help from a confidentiality point of view, it may be useful if you are not used to checking your WeChat account so regularly and also to avoid missing a window of time to download documents.

19. Lost in translation

Finally, and straying from the strictly business or legal theme, there are some efficiencies to be gained by improving communications or at least being aware of the inefficiencies that can occur, between native and non-native speakers of English.

It is easy for a lot more to be “lost in translation” than is realised when native speakers communicate with non-native speakers. This arises mostly from three main causes; a failure to fully understand what has been communicated, a failure to realise by one party or both that this failure has occurred and (or compounded by) a failure to speak clearly and simply by the native speakers.

A failure to understand can arise because both parties believe, mistakenly, that there has been a successful communication of meaning. However, simple but crucial errors can lead to completely wrong interpretations; did a certain thing happen, or did a certain thing not happen? At conversational speed, small but crucial words, especially if articulated through nuance, euphemism or a colloquialism, can be easily missed. Misunderstanding can also arise because of complexity of subject matter, failure to appreciate subtlety or just too much information to remember in one phrase or conversation in a foreign language.

Often, the non-native speaker will be aware of this failure to understand, but occasionally, neither party will be aware of the error until the consequences of the conversation have materialised, in the form hopefully of just a slightly off-point report or draft letter rather than a catastrophic mistake, where the final product has, say, been built in units of cm’s rather than km’s. Often non-native speakers are keen to be seen as someone with useful second language ability and so may be reluctant to keep interrupting a native language speaker to ask for clarification. Furthermore, misunderstanding some meaning is quite common for non-native speakers during small parts of many conversations until the full picture becomes clearer, and many non-natives have trained themselves to seek understanding by waiting for clues and pointers that can suddenly make a whole narrative become a lot clearer; once a conversation has gone on for too long, however, an admission that the last five or more minutes has been totally incomprehensible, can be embarrassing.

Finally, and perhaps the easiest way to improve communications, is for native speakers of English, when talking to non-native speakers, to do their very best to make everything they say as easy to understand as possible.  Some effective ways to do this are to speak relatively slowly and clearly, think about the clarity and straightforwardness of the delivery, not use idioms, euphemisms, colloquialisms, figures of speech, or anything else that isn’t plain, simple English; avoid sporting metaphors, for example, at all costs. Also, avoid abbreviations, flowery language, nuance or any form of subtlety; communications are much more likely to be successful when they are direct and to the point in a polite and simple way. Consider being direct even when you might be more circumspect or use euphemisms with another native speaker due to the sensitivity of what is being spoken; a direct message will be much more likely to be properly understood by a non-native speaker than a round-about message that skirts the issue. Also, look to give the non-native speaker opportunities to show they have understood or to ask questions for clarity; try to avoid speaking for too long, as this is an easy way for meaning to be lost. Lastly, it is easy for native speakers to dominate meetings and conversations because of their language skill advantage, and this can lead to opinions and information never being aired that may otherwise be very useful.

We at King & Wood Mallesons would be happy to discuss any of the issues with you in future detail and our firm has experts in all areas of PRC law which impact each of these issues who we would be happy to put you in touch with.

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