China Business Journal

Gary Biehn, Chair of our Business Department, and Associate Chunsheng Lu, born and educated in China and a member of our China Practice Group, recently visited The People’s Republic of China. The focal point of the trip was participation at the World Trade Center’s 36th General Assembly held in Shanghai and numerous meetings with clients, strategic partners and the expanding network of China based professionals that work closely with our clients. Mr. Lu filed this report on his return to China, a dynamic, rapidly changing country.

Shanghai and Nanjing

Our first stop was Shanghai, site of the World Trade Center’s 36th General Assembly, hosted by WTC Shanghai. More than 650 attendees took part in a wide range of briefings, work sessions, business meetings and cultural events. The participants included about 200 delegates from China and 425 from other countries. The General Assembly received extensive media and television exposure.

During our time in Shanghai, we gained first-hand knowledge of the city’s renowned economic development over the past decade, and we had an excellent opportunity to interact with other professionals and businesspersons from around the world. We also visited our local contacts and clients in Shanghai, with whom White and Williams has been working on various projects. Visiting Shanghai also provided an opportunity to meet with representatives of a Shanghai based company to further discuss a joint venture that we are structuring and negotiating on behalf of an Italian based client.

While in Shanghai, we also took a one day trip to Nanjing, the current capital of Jiangsu province and the ancient capital of China during six dynasties. The city, with a 2500 year long history, is energetic in its economic growth. While in Nanjing we were hosted by the managing partner of the largest and most prominent law firm in Jiangsu province. Our visit included a tour of the city’s 75 square kilometer economic development zone, which has attracted firms from around the world including Siemens and Motorola (which has established a research and development center there). We saw a grassland fenced with blue plastic boards carrying the name of one of the many American industries which have moved their global research and development centers to Nanjing.

Fuzhou

Our next stop was Fuzhou, an approximately 11/2 hour flight from Shangai. We were asked to speak at a business conference sponsored by one of our clients. The client is establishing a global commerce center in Philadelphia for qualified small-to-medium foreign companies — primarily Chinese companies — that wish to trade in the U.S. market.

Fuzhou is a city of similar size to Philadelphia. International commerce first came to Fuzhou as a result of the British presence in China. In 1842, the Qing dynasty (1644-1911) was forced by the British government to open five cities, including Fuzhou, for British trade after the first Opium War. Today, in the Chinatown section of almost any American city, the majority of Chinese immigrants are from Fuzhou, and most of them are active in business. In stark contrast to its attitude toward international business in 1842, the central government of China has now established a “Going Global” policy system. Each individual province has also issued various local policies that encourage Chinese companies to go overseas. For example, in Fujian province (where Fuzhou is located), the provincial government will grant RMB100,000 to any processing and trading company that exports over one million US dollars in goods per year. More attractively, if such a company can successfully establish a distribution network overseas, it may obtain a government grant of RMB1,000,000.

Last year, Chinese companies flexed their muscles by bidding for or acquiring high-profile Western brands. Few in the States had heard of the Chinese computer maker Lenovo until it bought the personal computer business of IBM for USD$1.75 billion. Similarly, not many Westerners knew of TCL, a Chinese TV manufacturer, until it purchased Thomson, the French television manufacturer that owns the RCA brand.

It certainly was not easy for the Chinese to accept forced trade with the British in 1842; it is even harder for Chinese companies to survive and excel in today’s business world, even though a freer trade system is in existence. A free market economy can be as brutal as one dominated by a monopoly when a company becomes weaker than its competitors. Today’s Chinese companies are trying to expand their markets, to acquire new technology, to build international brands, or to improve the marketing and sales of their own brands.

The Fuzhou conference was well organized. There were about two hundred business representatives in attendance. Our presentation included an overview of legal issues facing companies that do business in the United States as well as a summary of how Chinese businesspersons can obtain Visas for business trips to the Philadelphia region and for establishing a business in our region. Cameras flashed intermittently throughout the conference. After the formal presentations, the Chinese business representatives asked many questions about the formation, governance, and operation of a business entity in Pennsylvania; customs and business immigration. As of the date of this report, an initial group of approximately 40 Fujian businesses have applied to be the initial group of businesses to locate at the Philadelphia Global Commerce Center, which is scheduled to open in the first quarter of 2006.

Hong Kong

Hong Kong has one of the world’s freest economies, with the free flow of capital, free trade, and a free market. It is the world’s eleventh-largest economy and the third-largest in Asia, after Japan and China. In addition to its impressive economic status, Hong Kong is a strikingly beautiful city. At night, the whole metropolis floats above the Victorian Harbor, which leaves a lasting impression on visitors to this beautiful city.

With the help of the Hong Kong Trade Development Council, we had a very active schedule of briefings and one-on-one business appointments with potential trading partners. Hong Kong is known as a major platform for businesses entering the Chinese market. The free trade agreement between Hong Kong and China gives Hong Kong preferential access to China. Because Hong Kong is next to one of the world’s fastest-growing manufacturing regions — the Pearl River delta — many companies in that region have also chosen Hong Kong as the prime location of their trading departments. This, along with other factors, makes Hong Kong the world’s busiest sea and air cargo center.

One of the primary goals of our Hong Kong trip was to screen and perform preliminary due diligence on potential joint venture partners for several clients in the States. This process included visits to three trading companies located in Kuai Chung, each with manufacturing facilities in China (within 1 1/2 hours travel from Hong Kong). It has been our experience that many clients feel more comfortable with expanding their business into the Chinese market via Hong Kong, as opposed to via direct investment in mainland China. This is understandable, as Hong Kong provides U.S. companies with a familiar and transparent legal system. In addition, the tax system is very favorable: 17.5 percent profits tax; 16 percent maximum salaries tax; no VAT, sales tax, or capital gains tax; and no withholding tax on dividends and interest.

The night before we left for the States, we had dinner with two British lawyers from a prominent international law firm with which White and Williams has worked closely for over 5 years. Interestingly, our hosts indicated that they considered returning to England in 1997 after China regained sovereign control of Hong Kong, but the growth of the practice and the key role that the Hong Kong legal system plays in the China equation, makes a return to England unlikely. As vibrant, prosperous, and safe as it is, Hong Kong is in many ways an ideal locale for international enterprises, and should be given careful consideration as part of a United States based company’s China strategy.

Return Home

We returned to the United States refreshed by the abundance of economic opportunity and growth. There remain political and legal barriers to conducting business with and in China, but experienced counsel and advisors can help usher companies past such hurdles.