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Import from China Guide

(Basic information about import from China and list of potentional most popular scams)

Import from China

Introduction

If you are starting to cooperate with a Chinese company, you should take a closer look at the business climate of China. Especially, you should be well aware of the specific conditions of doing business in China and the risks connected with it. Credit rating agencies give China rating B, which means generally bad payment behavior and elevated risk. But this is the risk considered worth taking by many. Despite the growing job costs, China is still the world’s most important outsourcing destination; it offers the superb network of suppliers, excellent infrastructure and talented, dedicated workforce.

The growing interest towards starting cooperation with China can be seen from the growing number of inquiries about contractors from China. For example in 2011 we received 25% more inquiries than the year before. Many companies are willing to get credible information about their potential Chinese trade partners, which is undoubtedly a harder task than checking the condition of European companies.

So, how to do business safely with the Chinese? How to avoid risk and misunderstandings when you have no previous experience?

First of all, we have to remember that according to the Chinese law, every trade relationships between Chinese companies and their partners should be confirmed by the written contract. This should be done only in the case in which we are sure that the company we are dealing with has a valid registration. Therefore, it is necessary to check the company’s tax office registration.

Why the dangers of trading with China arise?

Since the last 20 years, China has more or less 10% of GDP growth per year. China has undergone the changes unknown to other countries – from the undeveloped, third world country it become the world’s second largest economy (and will become the first, leaving U.S.A behind, in the next 10-15 years). East coast cities are one of the most developed in the world, and more than 400 millions of people moved from countryside to the cities.

We should also remember that all of those changes take place in a country that has a great 5000 years of history; furthermore, Chinese culture is completely different than ours.

There are two main reasons behind the problems with China trade:

  • The first group of reasons is related with cultural differences. Since we have been doing business with European or American companies, we got used to the certain standards,etiquette and rules. Asian business culture is completely different; the lack of knowledge about it may cause many mistakes, which will irrevocably result in major problems in business. This topic will be throughoutly analyzed in the next part of our guide.
  • Another group of reasons is related with the specificity of the Chinese market. The economy is growing fast, changes also happen fast, thousands of new factories are opened. Unfortunately, China is the country of big social inequality, many people are trying to get rich by all means, they do not hesitate to exploit the lack of knowledge of foreign investors. Western businessmen don’t know the local culture and customs and experience the language barrier, so they cannot research for suitable laws or regulations. The fraudulent companies usually take advantage from the current state of foreign trade in China: almost every company in the world has some bonds with China, everybody knows that China is the world’s biggest supplier, everybody wants to import goods, the faster (and cheaper) the better. This situation is often exploited by fraudulent companies.

Non-existent company

Symptoms

Almost every businessman, who was doing business with Chinese companies, has encountered non-existent (not officially registered) company. It is a very common phenomenon in China – we may find those companies on B2B platforms such as alibaba.com or made-in-china.com, as well as on trade fairs, in most cases those companies are not registered and have no legal status.

It is often caused by the desire to earn money fast and catching up with the “Chinese Dream”. We eventually discover that the whole company is fake, but it is always an impressively detailed fake: those “ghost companies” have their stands on international trade fairs, they receive business visitors, show them around the offices and factory lines. After sending pre-payment, nobody answers company’s phones, not to mention faxes and emails. This is undoubtedly one of the biggest dangers with business in China, without some knowledge about Chinese culture and language we cannot possibly protect ourselves against it.

Way of handling

If you cooperate with European or American companies, you often check the company’s tax office registration. The same thing can be done with the Chinese companies – why send thousands of dollars without even knowing who are you dealing with? Only by checking the registration you may ensure that the Chinese company really exists.

Trading company instead of a factory

Symptoms

There are almost four million various companies registered in China. Thousands of thousands are present in the internet, on trade fairs and so on – but which one of those are the factories?

Most of the companies that we may find in China are so-called Trading Companies (in fact, intermediaries). It is very easy to establish such a company, even a university undergraduate may run one. Most of the trading companies are named after the factory nearby; sometimes they even pretend to be the factory, which can cause a lot of problems related with payment, invalid certificates and so on.

Way of handling

Doing business with a trading company may be a good choice as well. Sometimes, the factories are not willing to pursue a small contract, but trading companies will do this without hesitation. But the worst happens when something goes wrong – who is to blame then? How about the certificates (CE, ISO), which are held by the manufacturer, but not by the middleman? Sometimes the trading company claims that it produces the ordered goods and possesses all of the necessary documents, which is untrue!

So, if you want to buy goods from an intermediary, the best choice is to buy from Europe-based wholesale company. Doing business in China implies that you are making a big order (container quantities), in this case, placing order at the factory is the most reasonable solution. If you have any doubts about the particular company, we may always check and verify the registration documents.

Lack of certificates and licenses

Symptoms

Currently, China has no free-trade agreements with the EU, so in order to import from China, you should obtain a number of documents, permissions and licenses. Among those necessary documents are export licenses, which every Chinese company doing business with foreigners should have. Many products should have ISO certificates or CE marking (mandatory conformity marking for products sold in the European Economic Area), otherwise, they cannot be sold within EU.

Way of handling

You should always check all the necessary documents provided by the producer – whether they are expired or not, were they prepared for your counterpart. Many companies in China make empty claims about the certificates they possess, but as soon as the cargo is shipped to the destination port you realize that all of those documents were fake. In most cases, certificates are not necessary, but some specific cargo may be stopped at the border by customs authorities if it arrives without certificates. When you decide to import some specialized products, you should do a deep research about those documents.

No valid contract signed

Symptoms

Many Western businessmen make initial price agreement while visiting the Chinese factory, which takes 2-3 days, than the pre-payment is transferred and the production process starts. Most of the Chinese contractors demand us to transfer the pre-payment first (which is more or less 30% of the whole price), and as soon as the cargo is ready for shipping, the remaining 70% is paid. The only paperwork is the pro-forma invoice. When you do business with a Russian or German company, you often require our counterpart to prepare a very detailed contract, the same should be done in case of trading with China.

Way of handling

Some enterpreneurs think that they already have a trade agreement with the Chinese company. During the visitation of the factory, Chinese party may present some English-language sheet of paper entitled “Order form” or “Trade Agreement”, signed by “Mr Jason Wang” or whoever else. You should remember that such a “trade agreement” is invalid and has no legal meaning; because according to the Chinese law every contract must be written in Chinese (translation to English is allowed), the person who signs the agreement must be the person registered as the factory owner in the court. Why the correct trade agreement is so important? Because it helps us to solve the troubles that may arise: warranty repairs, production delays, quality issues…Someone may say that we cannot really enforce our rights in China, but it is untrue. Chinese courts operate more or less the same as the courts anywhere else in the world, but if we present them this fake “Trade Agreement” written in English, we won’t achieve anything.

Transferring money to wrong account number

Symptoms

One of the biggest dangers you may face is when you have been given a wrong account number and we transfer the pre-payment – or the whole amount – to that account. After leaving China you are mostly in touch with our producer by the means of e-mails and fax messages. The rhythm of business in China is a way faster than in Western countries. You may sometimes receive a message in which you are asked to send the payments to the new bank account. This may be a hoax: for example some former employee of the company has our contact details and wants to intercept the money. As soon as the transfer is done, we have no way to get our money back – European banks do not offer any insurance for transfers to China, and in China it is rather unlikely for you to prove that you have been deceived.

Way of handling

The only possible way of handling is an independent inquiry, which helps you to determine whether the particular bank account is owned by our counterpart. It often happens in China that the companies change their account number or ask for a transfer to be made into another (cooperating) company’s bank account. But you should be sure whether or not the given account number is the proper account number.