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Image couretsy of Reuters: Carlos Barria

During the 27th to the 29th of October, the Fourth Plenary Session of the 18th Party Congress was held in Beijing. The meeting addressed legal reform, and issued a number of policy changes in regards to strengthening the judicial system vis-à-vis local government in order to create a more predictable legal environment.  Some of the plenum’s proposals included removing the influence of local power-holders over courts and moving responsibility for court funding and personnel appointments away from the local government.

Furthermore, the plenum communiqué, issued last week, vaguely hinted at greater citizen participation in policymaking and also urged for the creation of greater review- and punishment mechanisms within administrative bodies. It also detailed establishing record reporting for “leading cadres’ interference with judicial activities”. These policy shifts, aimed at increasing government transparency, can be seen as steps towards a more pro-active approach to ensure stability in China, according to Malin Oud, an expert on human rights who was previously a UN consultant and head of the Raoul Wallenberg institute. For the past 30 years, GDP growth and stability has been the main focus but recent reform signals a move to address issues such as the environment, government transparency and the legal system to deflate public discontent, rather than dealing with it after the fact, Oud concludes.

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Shanghai. China's state council has amended the process for how companies disclose credit information via the Provisional Rules on Enterprise Information Disclosure act which took effect on October 1 this year. The new disclosure rules require all companies, foreign and domestic in the PRC to submit annual credit reports for public disclosure via the publicly available Enterprise Credit and Information Disclosure System which can be accessed on a real-time basis.

Companies are now required to submit annual reports which replace the former annual inspections. The annual reports which has to be submitted in Chinese, has to include liquidity status, equity investments, subscribed capital, among other things. Declaration of formerly required information such as work force, total assets and liabilities, operating revenue and profits is no longer mandatory under the new law, whereas in the past, companies where required to submit audited financial statements during the annual inspection. The companies themselves are responsible to submit the reports. Failure to submit these reports could lead to being put on a blacklist, which could severely restrict future business activities.

The Provisional Rules on Enterprise Information Disclosure is part of a bigger overhaul of the Company Law, which started last year when China's State Council issued the Plan on the Reform of the Registered Capital Registration System, where some of the major changes included elimination of minimum required capital requirements (with some exceptions) and other amendments aimed at liberalized capital contribution scheduling requirements. The overall goal with this latest legislation is to increase transparency and simplify public access to credit information.

- This is good news for anyone evaluating suppliers and potential business partners in China, says Per Linden, CEO of the consulting firm Scandic Sourcing, located in Shanghai, who is regularly identifying suitable suppliers for Western firms looking to outsource production to China. "One year ago, credit disclosure companies stopped getting access to tax reports, which made it difficult to make credit checks of Chinese companies. To get accurate info, we had to ask the companies themselves to disclose their annual audit reports, which they may or may not do. Now, the publicly available Credit and Information Disclosure System circumvents all that, and I think this is a big step towards simplifying credit checks in China.

fornandermåns

During the fall of 2010, Scandic Sourcing helped the company Notisum start up their company Envitool in China. Envitool offers companies which are operating in China a tool which enables them to continously stay updated regarding changes in rules and regulations for Chinese environment-, work environment-, and CSR legislation. Måns Fornander moved to China in 2013 to work as a sales manager for the company.


How did it begin?


During 2012-2013 I visited our team in Shanghai about every second month, and during last summer I expressed a wish to move here permanently, so during the fall I moved here with my wife.


Was it easy to assimilate yourself to the Chinese society? 

 

Yes, when I came to the office we rented by Scandic Sourcing; there were many Swedes around so it was easy to start talking to people and join the community. Scandic Sourcing became a bit of a gateway into the Chinese society for me.


What are you doing here in Shanghai?

 

I am responsible for coaching our sales team and to develop Envitool on the Chinese market.


How is it like to coach a Chinese sales team, compared to Sweden?


The differences that exist are quite big in terms of business culture. In Sweden you are supposed to have opinions and share your view on things, but that is not as common in China. We have been focusing a lot of effort to letting our employees feel free to disagree, and to let them know that all opinions are valuable and important. We have thus been able to build a great team here in Shanghai which stays year after year, since we have put so much conscious effort into building a constructive and open business culture, which I think might be quite different from many Chinese counterparts.


How do you handle your recruiting of the Chinese staff here in Shanghai? 


Well, since we have put so much effort into involving our employees into our culture, we've been able to create a work environment where people thrive and feel like they are developing professionally, so we rarely have recruiting needs. And the good thing about using a consulting firm is that the few times we need to recruit staff, Scandic Sourcing takes care of that, they do interviews, conduct background checks and gives us a finished list of candidates to choose from.

 

månsenvitool

Envitool have established their operations in China in modern offices spaces in downtown Shanghai with Scandic Sourcing's business Support Office which enables companies to quickly establish themselves in China without experiencing the administrative hurdles.


What experiences do you have from hiring a consulting firm like Scandic Sourcing to handle HR/accounting/company registration, etc.?


It was a very flexible and easy way to quickly establish and run operations in China - especially considering all the red tape involved in setting up a business in China.


Finally, do you have any advice for those who wants to establish their company in China?


Have patience and do as much research as you can, and if you don't have time or the resources to establish everything in China yourself - hire a consulting firm - it's the best way to establish your company quickly in China.

 

Case Study

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When locating specific suppliers in China, business clusters are usually a good place to start. A business cluster is defined as a geographical concentration of interrelated businesses which benefits from the co-location in a number of ways as well as a value added production chain. If you are looking for aluminum products, source in Nanhai, if you are looking for linen products, turn to Suihua in Heilongjiang, IT and circuit boards, source in Suzhou, etc. Knowing about these clusters is valuable knowledge when deciding about where to set up operations, outsource production or find suppliers in China.

 

Formation

Business clusters usually form spontaneously by the work of market forces, or develop out of pre-existing special economic zones, such as the information and technology clusters in Beijing and Shenzhou and the electronics and biotech clusters in Shanghai’s Pudong area. There are export driven clusters, resource-driven clusters, market driven clusters, and so forth, depending on their geographical location.

 

The tailors of Cixi

Regional specializations are nothing new to China. One interesting example is the tailoring center of Cixi in Ningbo which traditionally served as a major clothing manufacturer to Beijing from 1680’s to the 1930’s. When the local government looked for ways of growing their region, they looked back in history, and transformed factories producing military uniforms to instead produce more specialized garments, and gave support to local business owners. The Cixi cluster now produces around 5% of China’s total textile output.


Other notable specialized clusters are Datang in Sichuan province which produces some 6 billion pairs of socks each year, or the city of Dongguan in the Pearl River Delta which creates a third of the world’s supply of magnetic recording devices used in computer hard drives.

 

Differences between clusters and Special Economic Zones

Sometimes a specialized cluster develops out of China’s many Special Economic Zones (SEZs), but most of the time they do not, and a business cluster differs quite a bit from SEZs generally speaking, in that the SEZ usually receives more foreign direct investments, have stronger focus on export with closer links to the global markets, and usually have greater access to technology. Conversely, a business cluster tends to operate in more labor intense, low-tech environments where local government support isn’t quite as enthusiastic as in a SEZ.

 

Industrial Parks

In some cases, the local government supports the specialized cluster by establishing an industrial park, which in effect is a government entity. If you are establishing a factory in China, locating in an industrial park can offer some unique benefits, such as proximity to local officials, tax authorities, environmental inspectors, etc., who usually have offices in the industrial parks. This proximity can facilitate increased Guanxi with such officials, and offer unique advantages, as one well connected Chief Finance Officer said in an article in Asia magazine: “For other companies it will take three months to get one approval. For us, maybe three days”.

 

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Where to look

The vast majority of China’s industrial clusters are located near China’s east coast, where infrastructure is much more developed than in the west. A survey made in 2006 of 138 foreign and domestic logistics companies by real estate firm Jones Lang LaSalle, found that over 80% of their warehouses were located in just three different regions: the Yangtze River Delta, the Pearl River Delta and Greater Bohai Bay.


 

Dive deeper:

Finding Suppliers in China.

perlindenscandicsourcing

Background: When President Xi Jinping was inaugurated, he vowed to crack down on corruption in the communist party which was seen as a threat to stability in China. In several speeches since he took over the reins of the Communist Party last November, the President has warned that corruption could lead to "the collapse of the Party and the downfall of the state". A massive anti-corruption campaign has since followed suit. This is only expected to be stepped up in 2014, as Xi Jinping continue to wage what he calls the "war on corruption".

The war has already been waged to some effect, as it has led to countless arrests of low- and high level officials alike during last year. Also, the new measures has started to change the culture of gift giving and lavish banquets usually associated with communist party officials. Per Linden, CEO of Scandic Sourcing, has operated in China for over 11 years and has seen the changes first hand:


So much of doing business in China is about building relationships, or "Guanxi", with decision makers, local officials and such. Much of that has traditionally been through giving gifts and indulging in lavish dinners. How has this been affected by Xi Jinpings anti-corruption campaign?

Per Linden: There has been a revolution in the approach to gift giving and entertainment. For us who have spent many years doing business in China and having endured endless lunches and dinners drinking the kerosene like Chinese "bajiu" in smoke filled rooms, the change is remarkable, and very welcomed.

Much has happened in the last year but it started earlier than that. Already 2 years ago you started to see a trend were the senior government host at a dinner table did not drink alcohol. It was often the younger ambitious officials who set this example. Drinking with the guest was left to the underlings. In the last few months government employees have stopped offering "Baijiu" for lunch. Wine and beer is still allowed. We are also happy to also see much more restraint when it comes to smoking.

Western media is searching for a crisis in china, but few have noticed this crisis in the entertainment industry. The stock price of Gweichou Moutai, the premium brand in Chinese "Bajiu" liquor has dropped in nearly half, causing losses in the range of tens of billions RMB. There was also a recent announcement that Chinese government officials will not be allowed to spend government money on Chinese new year gifts this year. This is a multi billion dollar industry in China.

The government has also allowed social media to expose government officials who spent too much. While before officials often parked their cars outside the front door of expensive restaurants, they now park around the corner some with their number plates covered, if they dare to visit such a place at all.

 

How have you traditionally handled gift giving in China (i.e before Xi Jinping's anti corruption measures)? Can you give some background with examples of how that worked practically as you were building Guanxi and doing business here?

Per Linden: You have to give gifts in China. It is a way to show respect. You will for sure break your domestic corruption rules. You have to adapt to the local culture to some extent, but you need to draw the line somewhere and you need very clear policies for your organization. I have always worked with the policy to give gifts with a company logo or if I need to give something more expensive, something that represent Swedish culture and art.

 

What is currently the best approach for building Guanxi under the Xi Jinping regime?

Per Linden: Building Guanxi is a process. It cannot be achieved with a single gift or dinner. Like in other places in the world and in any relationship, it is important to spend the time, to communicate and show respect and reciprocal politeness. At the same time, we have to realize that if you are not Chinese and don't speak Chinese there is only so much you can achieve regarding Guanxi in China.

The really good news is that the new policy to some extent level the playing field for foreign companies when it comes to dealing with pure corruption such as direct request for cash.
It is much easier for businesses to say no due to Chinese government policy than the internal polices of a foreign company.


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