Staying legal in China’s expanding markets
In association with The Week and CBBC
China is a territory rich in potential for UK tech companies, with a hunger for technology and innovation. Yet organisations wanting to capitalise on these opportunities must sometimes overcome high legal and regulatory barriers. China is increasingly open to overseas tech investors and the burden of regulation is lower than ever before. Yet there are still likely to be some significant legal, commercial and ethical differences with the UK that tech businesses would be wise to acquaint themselves with.
Lists and licenses
Chinese regulations have loosened up considerably over the last few years, as the government works to bring high-tech firms and investment into the country. There are hundreds of development zones in China focused on technology and innovation, while the reform of China’s Foreign Investment Law in 2019 has also reduced many concerns for foreign tech firms around IP rights and tech transfer.
Yet, companies still need to check that they can legally operate in China before they start setting up a new business or Chinese office. This starts with consulting two negative lists – the Foreign Investment Negative List and the Market Access Negative List – to ensure that their work doesn’t constitute a restricted or prohibited activity. The lists aren’t particularly extensive, and you can find guidance on them here. They may also need to seek any licenses, permits and approvals that working in specific sectors might require, just as any local Chinese company would.
What’s more, the Chinese government has an Unreliable Entity List, which restricts or prohibits companies named on the list while operating in China. Though there may be little chance your company will end up on the list, this could affect your plans if you rely on suppliers that do.
It’s best to do your research early. There are licenses to operate a website or a web-based service, along with customs and licensing restrictions that govern the import or manufacture of IT equipment or electronic goods. To obtain these licenses, products may need independent testing from accredited laboratories, while technical documents and product samples may need inspection. Technologies related to encryption, virtual private networks or cybersecurity may also be subject to additional controls. A new UK government website, aimed specifically at tech businesses setting up in China, has guidance and a range of useful resources that can talk you through some of the basic requirements and help you work out your initial steps.
China’s Corporate Social Credit System (CSCS) is another consideration. This applies to all companies working in China, without exception, and rates them across a range of government-selected metrics, with the government collecting relevant data on how each company is meeting or failing to meet its goals, with appropriate penalties and rewards. Don’t get too nervous – many of the metrics cover basic practices, such as paying taxes on time and holding all requisite licenses – but companies are also expected to meet environmental and product quality standards and ensure that any partners comply too. You can meet all of your CSCS goals, yet still get penalised for using a supplier that has failed to meet theirs.
On top of this, China also has its own workers’ rights regulations, covering everything from how you work with independent contractors to employee handbooks and written contracts.
This might seem like a lot of red tape to get through, but your best tool to cut through it is preparation and research. There are many legal advisers and market entry consultancies that can help firms to navigate these regulatory barriers, and working with local consultants or specialists who understand your industry can help you meet your legal requirements and counter any regulatory challenges. The Digital and Tech China website has some useful info on the areas to look into before hiring or going into partnership with local companies or consultants, and you can also get useful advice from the China Britain Business Council (CBBC) and the Department for International Trade, and techUK, the body that supports UK tech businesses looking to work internationally. CBBC also offers a basic due diligence service to help you vet Chinese suppliers and partners.
Intelligence and security
Tech businesses tend to have a large digital component, making them all the more likely to be affected by China’s cybersecurity and data regulations. China’s Cybersecurity Law includes provisions on how data is collected, stored and transferred. In some circumstances, companies may need to seek government approval for the cross-border transfer of personal data or important data, and as a general rule of thumb data should be located on Chinese servers.
It’s also worth being aware of China’s National Intelligence Law. This states that all Chinese organisations (as well as Chinese citizens) are obliged to provide support and assistance to state intelligence bodies and keep secret any state intelligence work they become aware of – or party to. The same applies to Chinese subsidiaries of Western multinationals. These laws may affect how you decide to structure your China business, how data is controlled and how you manage your core IP, so it's wise to get advice on potential issues early on. You can find out more about these laws and their likely impact by heading to this UK Government online resource.
IP protection is one area where Chinese regulations have improved, making it easier for foreign businesses working in China to protect their intellectual property and trademarks. Keep in mind, though, that the onus remains on UK tech companies to file any necessary patents and obtain copyright protection before they launch. China, like many markets, has a first-to-file trademark system, so international trademarks are not automatically protected unless they are registered in China first. This leaves the way open for a Chinese entity to register your trademark, then use it to block your product or request a payment for its transfer.
Copyright and IP problems still cost UK businesses in China millions of pounds every year, but it’s really just a case of ‘forewarned is forearmed.’ Thanks to the IP-protection legislation that emerged with the Foreign Investment Law, UK firms now have more legal protection over IP and can request enforcement relief. Meanwhile, the UK Intellectual Property Office has an online IP Health Check tool you can use to identify and secure your IP assets, and there’s a range of useful information about intellectual property in China on this dedicated UK Government page. Understand both the value of your assets and the risks, and your halfway to securing your IP.
UK Regulations Count
UK businesses that want to work in China still need to consider relevant legislation back at home. Most recently, the UK government announced a package of measures to help ensure UK companies are not complicit in, or profiting from, human rights issues in Xinjiang. The UK government also has restrictions around selling products into China that might have military applications or be used in human rights abuses. The UK has export controls that state which strategic military and dual-use items need specific authorisation and an export license, and it’s only sensible to check any products or services being sold against these first.
Business operations in China are also covered by the UK bribery act, which ensures that UK businesses operating in other territories avoid improper business activities, particularly in public procurements. Since 2016, China has had its own tighter anti-bribery legislation, too. You can avoid falling foul of either law by monitoring your company’s activities and following due diligence on local representatives and partners. You can find advice here to help ensure that both you and any Chinese partners or employees stay on the right side of the law.
Conflicts and disputes can emerge between businesses in China, just as they do in the UK, and this may put UK companies in contact with China’s complex court system. There are many different types of court, ranging from the Central Supreme People’s Court to local Basic People’s Courts, and the processes and outcomes can vary according to the court’s type or location. Cases can be long and challenging to resolve, which might explain why many foreign companies prefer to resolve them through arbitration as opposed to litigation. In fact, arbitration clauses are built-into many contracts, setting out how things will work in the event of a dispute.
Written contracts and agreements are as crucial in China as they are elsewhere, but need to be drawn up in compliance with Chinese law and stamped with the official red stamp of the partner company. Again, bringing in local legal expertise is a sensible idea. For IP disputes, China now has two specific IP court divisions in Beijing, along with Internet Courts in Beijing, Guangzhou and Hangzhou to handle any disputes over online products and services. Again, your safest bet before any legal action is to refer to a local legal expert.
Meeting all these legal and regulatory requirements can be a challenge, but it’s part and parcel of doing business inside China. There are opportunities out there for high-tech firms to take advantage of, but you have to lay the legal groundwork first.