Protecting Your IPR at China Trade Fairs and Exhibitions(0)
One of the main concerns many foreign investors have when approaching the Chinese trade fair circuit is how to protect ones intellectual property while at a fair.
The norms aimed at enforcing intellectual property rights during exhibitions are relatively new. This special set of administrative norms was promulgated by the MOC and SAIC on January 10, 2006 and entered into force on March 1, 2006. In the past, enforcement of rights during exhibitions was not regulated, which led to ineffectual protection against even the most flagrant infringements. Frequent conflicts between different authorities arose as to determine which authority was responsible for taking measures of enforcement. Due to the unclear definition of competences between different offices, it frequently occurred that decisions made by one authority were not accepted or executed by another one, bringing the case to a deadlock and giving the infringers enough time to get rid of the incriminating evidence. The new legislation has drawn a clear line as to which authorities are competent to intervene during exhibitions in case of infringement. Hopefully this will help solve some problems of the past.
If a trade fair lasts three days or longer, trade fair organizers are obliged to establish a complaint center for IPR related issues. In all other cases, the local IPR authorities are encouraged to step up their efforts to offer consulting and monitoring services.
Foreign companies attending exhibitions or trade fairs in China should do their homework in order to make sure that their intellectual property rights are protected and can be enforced in case of infringements. Trade fairs often serve as a monitoring tool where illegal copies of a product can be detected.
Before participating in a trade fair, a company needs to check whether its products are registered in China in the form of patents, utility models, design patents or trade marks. Copies of the relevant documents should be available on the spot.
In case the exhibiting company has a local lawyer in China, it is advisable to inform them in advance about participation in the trade fair. The lawyer should be provided with the necessary documents and be available during the time of the exhibition.
As mentioned above, trade fair organizers are obliged to set up a complaint center for IPR issues if the fair lasts at least three days. It is useful to establish contact with this complaint center before the trade fair starts and figure out what legal means they have in case of infringements, e.g. whether they have the right to clear stands or to expel an infringer.
If the trade fair lasts only one or two days and the organizers do not provide a complaint center, the exhibiting company can check whether local enforcement authorities such as the Administration for Industry and Commerce (AIC), the Public Security Bureau (PSB), or the Technical Supervision Bureau (TSB) will be present at the trade fair. If not, they may at least provide a contact person who can be addressed in case of infringements. If authorities show little ambition to be supportive, it might be useful to cooperate with other firms attending the trade fair or contact a national chamber of commerce in order to increase the pressure on the authorities.
Questions that should be addressed when talking to the complaint center or the local enforcement authorities are: how will they react to a case of infringement; what evidence and in what form is necessary to document a case of infringement; what are the possibilities of forcing an infringer to stop exhibiting an infringing product; what are the time frames for the infringer to react to a complaint; what are the chances to use the means of a preliminary injunction; what amount of down payment would be required in the case of a preliminary injunction.
China exhibition organizers usually provide exhibitor information on their websites. Checking the websites of competitors in advance might reveal potential infringements and allows more time to prepare adequate enforcement action. An exhibiting company might also know some ?usual suspects? that have infringed its products in the past; so it would be advisable to check whether these will be represented at the trade fair as well.
As part of the preparation, a company should also spend some time considering what information it makes available to the public in the form of brochures or samples. Everything that is given away could serve as an inspiration or instruction manual for potential illegal copies.
Dealing with infringements
Social Security in China(0)
This is especially true when employees come from different cities in China or have different working locations.
There are six categories of social security in China. They are:
As a general rule, employers should make a contribution to each of these types of social security on behalf of their employees. Employees are also required to make contributions to some of them. The contributions are set as a percentage of average monthly salary.
Because the funds are administered by divisions of local governments, the percentages that should be contributed by employee and employer differ depending on the town in which their employees are resident. In China this is known as the person?s hukou. Therefore the social security contribution that the employer should pay on behalf of two employees earning the same salary, one from Shanghai and one from neighboring Kunshan for instance, can be quite different. Similarly, the amount of individual income tax paid by these two employees will also be different, as social security contributions made by the employee are deductible against tax (up to a certain limit).
Social structure of China(0)
[ By Adam Livermore, Senior Associate, Dezan Shira & Associates ]
In an increasingly competitive market for skilled labor, foreign-invested companies are restructuring their salary packages as a means of hiring and retaining quality staff. For this article, we outline the fundamental components of salary in China and introduce some of the structures being used by companies to increase retention and motivation levels in their staff. We also introduce the relatively new concept of outsourcing of China payroll management services in China ? a business that is becoming more popular as the operations of foreign invested enterprises in China become more diversified and complex.
Compensating your employees
Presumably because of its simplicity, a large number of employers still compensate their staff using the most straightforward salary package available to full-time workers in China?a fixed monthly salary with no extra incentives or tax-optimization strategy. Each month, mandatory social security contributions are deducted from each Chinese employee?s gross salary and individual income tax levied on the balance. These contributions do not apply to foreigners.
The employer is then required to make social security contributions on behalf of employees as well. Usually mandatory employer contributions total about 40 to 50 percent of an employee?s base salary. There are a lot of factors contributing to the exact proportion; these are examined in the accompanying article ?Social Security in China.?
Many foreign invested companies in China pay annual bonuses to staff. Sometimes these will be a pre-determined, fixed amount known as the 13th month or 14th month salary. Other times they will take the form of individual or corporate performance bonuses. These kinds of bonus perform two main roles:
1. They provide staff with extra income. Bonuses are often paid before the Chinese Spring Festival when local staff will traditionally spend more money than in an average month.
An employee based in Dalian receives a monthly salary of RMB10,000, giving them an annual salary of RMB120,000. After deduction of mandatory social security, assuming it is an amount of RMB1,687, their monthly income is RMB 8,313. A further deduction of RMB2,000 gives a total on which to base their taxable income each month. According to IIT calculation rules, their monthly tax burden will be RMB888. Therefore, in the absence of any kind of bonus, their annual tax burden will be RMB 10,656.
But if that employee receives a flat monthly salary of RMB 9,000 with an annual bonus of RMB12,000 while still totaling an annual salary of RMB120,000, every month their taxable income will be calculated by subtracting the social security contribution of RMB 1,687 and the deduction of RMB2,000. Therefore their monthly tax burden will only be RMB688. This annualizes to RMB 8256. They will also have another IIT payment to make on their annual bonus. This will be calculated by dividing RMB12,000 by twelve, which equals RMB1,000. The percentage of tax payable on this annual bonus is set by referring to the monthly taxable bracket for employees earning RMB1,000; 10 percent. After taking deductions into account, their tax burden is RMB1,75, and the total IIT contribution for the year will therefore be RMB9,431.
As you can see, by paying an annual bonus on top of a lower monthly flat salary the tax burden for the employee is reduced. In the example above, the amount of the reduction is RMB1,225, or 11.5 percent of the original tax burden. The company should balance this tax advantage with the downside?employees may leave the company immediately after receiving a large bonus. It is no coincidence that March is the peak time for job-hopping in China, and a large exodus around this time can cause operational problems in the following months.
Social Security in China
As investor interest increases on the mainland and overseas, these bourses will continue to grow in importance and market share. Below we profile the main exchanges in Greater China.
Hong Kong Stock Exchange
Founded in 1891 as the Association of Stock Brokers, the Hong Kong Stock Exchange is Asia?s second largest stock exchange, behind the Tokyo Stock Exchange. In terms of market capitalization, it is the world?s seventh-largest stock market. It took the name it has today in 1914, and by 1980, became the only stock exchange in the territory when the four exchanges in operation at the time were unified as the Stock Exchange of Hong Kong Limited. Trading on the new, unified exchange commenced on April 2, 1986.
The Hong Kong Stock Exchange’s leading index is the Hang Seng, which was introduced in 1969 and consists of the 33 largest companies traded on the exchange. It represents around 70 percent of the value of all stocks traded on the Hong Kong exchange.
Shanghai Stock Exchange
The Shanghai Stock Exchange was founded in 1990 and is the largest stock market on the mainland. In terms of market capitalization, it ranks fifth in the world.
There are three main categories of securities listed on the Shanghai Stock Exchange: stocks, bonds, and funds. Bonds traded on the exchange include treasury bonds, corporate bonds, and convertible corporate bonds. The Shanghai Stock Exchange issues two types of stocks: A shares, priced in RMB; and B shares, priced in U.S. dollars. A shares have historically been only available to domestic investors while B shares were available for both foreign and domestic investors. Since 2002 however, foreign investors have been able, with limitations, to trade in A shares under the Qualified Foreign Institutional Investor system. The exchange plans to eventually merge the two types of shares.
Establishing a Foreign Owned Financial Institution in China(0)
[ By Adam Pilger and Richard Hoffmann, Dezan Shira & Associates ]
Setting up a foreign-owned bank in China can be a daunting task, requiring strict adherence to the China Banking Regulatory Commission?s ?Measures for the Implementation of Administrative Licensing Items Concerning Foreign Funded Financial Institutions.? While the CBRC?s requirements for establishing foreign-funded financial institutions are lengthy, and oftentimes inexplicably repetitive, they can be distilled down to three manageable components: setting up the representative office, applying for a business license, and establishing a branch.
Setting up the representative office
Representative offices are necessary vehicles for setting up a foreign-funded bank in China (the RO must be held for a period of two years prior to implementation of licensing for a foreign-funded bank). An RO allows foreign staff to obtain required working visas and residence permits and allows the business to legally employ a local staff as well. It paves the way for more extended and substantial future investment, but also has significant limitations?the largest being that an RO cannot engage in direct business activities (for more on representative offices, please see China Briefing?s ?Setting Up Representative Offices in China” from the bookstore at http://shopping.china-briefing.com).
In order to set up an RO, the foreign-funded bank will need to meet the following six conditions:
(1) The foreign-funded bank is located in a country with a sound financial regulatory system
China?s Financial Centers
[ By Chris Devonshire-Ellis, Senior Partner, Dezan Shira & Associates ]
The Financial Street has been designed to become the equivalent of Wall Street in China; huge Chinese banking headquarters are there, while the likes of JPMorgan, Goldman Sachs, Bank of America, UBS and the London Stock Exchange among many others have moved their offices in as well.
The area was developed by the U.S. architectural practice Skidmore, Owings & Merrill, who anchored the district with behemoth buildings, interlinking them with a central park, gardens, courtyards and sculpted pathways, creating a very pleasant urban environment.
Central government incentives for overseas investors have had a significant role in the development of the street. The close proximity to China’s regulators is also viewed as important, as China’s capital markets are still influenced by the government?the first permission to issue RMB debit cards by a foreign bank was granted here to the Bank of East Asia just last month.
In terms of investment incentives, the government hasn?t altered the tax base to accommodate foreign financial services firms. But it is in a position, as long as certain conditions are met, to provide rental rebates on state-owned property on the street, as well as incentives to senior overseas executives posted to Beijing. These include discounts on personal property investment and even vehicle purchases once the executive reaches a certain taxable income level. To some banks, even the rental rebates, if commitment has been made to a certain period, can be substantial, ?running to millions of dollars.?
Establishing a Foreign Owned Financial Institution in China
Wall Street Arrives In Beijing(0)
[ By Chris Devonshire-Ellis, Senior Partner, Dezan Shira & Associates ]
Visitors to Beijing, even long term residents, may be unaware of the development that has taken place the past two years to the west of the district. Yet here it is, a brand new, gleaming city, with its own specific character, home to some of China and the world?s best known financial institutions. Beijing?s Financial Street has arrived. The upcoming Olympics will doubtlessly increase the exposure of the street?s massive wealth and influence to the many visiting international banking executives such as Visa, highlighting the importance of what has become almost a quiet, yet complete, redevelopment of the nation?s finances and financial political geography.
This issue of China Briefing concentrates on the story behind this impressive area, the significance behind it, and the architects, designers, banks and hoteliers that have made the Beijing Financial Street, in a little over two years, the most influential financial powerhouse in the country. It is a district with the potential to rival Tokyo.
The Financial Street was initially planned by the local government of Xicheng District approximately 15 years ago. Over the past decade, the development of the Financial Street has been slow. Only in the past three to four years has the area begun to emerge as an important office submarket and retail catchments area in the capital city.
The previous use for the area had been, during Qing Dynasty court times, as a home for minor royalty, nobility, and artisans to the court at the Forbidden City. Many courtyard homes were built here, typically modest from the outside, yet opulent once inside the main gates. Not for nothing does an old Beijing saying hold true, scathing of new merchant?s incomes:
Development and Who?s Who
The Future of Central China: A Provincial Roadmap(0)
Multinational companies are also now starting to view the region as the next step towards an integrated China strategy, and the consumer population in the second- and third-tier cities on Central China represents a growing, largely untapped domestic market for foreign products and services.
Ideally, Beijing would prefer to see the more northern provinces of Central China become an industrial manufacturing center, as there is more likely to be less environmental impact, and allowing for the more fertile lands in the southern areas to be farmed. However, logistics and infrastructure will not always make this a financially beneficial move for target businesses.
Where air pollution is a big problem for the east coast, Central China?s environmental concerns surround water in both the Yangtze and the Yellow River. For the Yellow River, the problem relates to drastic and increasing shortages in water and rising salinity, whereas along the Yangtze, there are numerous concerns over the environmental impact of the Three Gorges project, particularly on the downstream effects of the dam.
Anhui, a province that traditionally has focused on agriculture, is attracting big international investors as the costs of land and labor rise in China?s coastal regions. In 2007 alone, 499 new foreign enterprises established presences in the province.
Anhui?s main draw, low wages and cheap land, will continue to provide incentives for FDI in the years to come. The provincial capital Hefei, a six-hour bus ride from Shanghai, accounts for about 30 percent of the total investment in the province.
Anhui is also profiting from processing trade restrictions that are forcing manufacturers in Guangdong and the Yangtze River Delta region to move operations inland. One of the biggest selling points: electricity. Zhejiang and Jiangsu provinces have experienced shortages that Anhui, with a power capacity of 15.8 million kW, has not. Four more power projects were approved last year and will increase capacity to 30 million kW when operational in 2010.
At the Center of the Middle Kingdom: Multinationals Move Inland(0)
[ By Andy Scott, Managing Editor, China Briefing ]
Central China, initially overlooked by many foreign investors as being too far from the ports in Tianjin, Shanghai and Shenzhen, is emerging as an essential destination for multinationals in China.
While still lagging significantly behind the coast, the six Central provinces of Anhui, Henan, Hubei, Hunan, Jiangxi and Shanxi have seen foreign investment take off over the past year, increasing more than 50 percent from 2006. The economies of the six provinces now make up 20 percent of the national total. While the region still needs further reform and opening-up, increased investment in infrastructure, favorable government polices, and rising consumer incomes are driving many to branch out of the hyper-developed coastal regions and move inland.
Location, location, location
Central China boasts some of the most connected cities on the mainland thanks to a well developed rail network. The network integrates dozen of trunk lines and hundreds of branch lines, accounting for 23 percent of the national rail mileage. According to regional authorities, the rail network handles 36 percent of the nation?s passenger flow and 30 percent of the goods traffic.
The importance of the region as a crossroads for China was brought home earlier this year when much of South China up through Hubei and Henan provinces was brought to a standstill by severe winter storms that disrupted train schedules and brought down power grids, leaving millions stranded or without power. According to government figures, the region has seen a 40 percent increase in road and waterway traffic in the last 10 years. Passenger rail traffic has risen 70 percent while goods traffic is up by 85 percent.
Increased spending on infrastructure has allowed cities like Wuhan to better integrate with Beijing, Shanghai, Guangzhou and Hong Kong, as well as European and Central Asia capitals. But will this integration mean increased foreign investment? As was pointed out in the November 2006 issue of China Briefing (available in the archives section of www.china-briefing.com), moving inland brings with it major logistics costs for manufacturers.
For those that move inland, getting to the sea means turning to China?s road, rail, and inland waterway networks to transport their cargo to the coast. While transport infrastructure has grown rapidly in recent years, it still lags industrialized countries ? capacity constraints exist and most of the infrastructure outside the developed eastern coast is not built to handle a modern transport industry.
China Rail map system can handle only around 30 percent of demand for the Yangtze corridor according to a 2007 Jones Lang LaSalle study. A high proportion of the rail network is not double tracked (of 72,000 km of rail, only 24,000 km is dual track), and priority is given to coal and raw materials rather than industrial goods, forcing many manufacturers to resort to trucks to ship their products.
The Future of Central China: A Provincial Roadmap
Managing your joint venture partner(0)
Having conducted your due diligence, negotiated your investments, and agreed to get hitched, you now need to work out the management protocol.
This subject is the topic of much debate, with conflicting points of view. Conducting business also is largely time consuming, emotional and stressful. This is only enhanced in a multi-cultural environment. There will be times both parties feel they are correct. Have you identified the potential areas of differing opinions and decided privately amongst your own foreign colleagues which to tolerate and which not to? It may be wise to draw up a blueprint of potential areas of disagreement and work out in which your China partner is more likely to have the expertise, and in which you are. It is common sense.
Many companies leave the entire operations up to the Chinese partner to run. This is a crucial mistake. A new business needs all the support it can get. You need to invest in a foreign manager to keep an eye on things, especially during the early stages. Correct systems, accounting, and quality control issues all need to be taken care of. You have standards; ensure these are implemented and operational in your JV. The ideal solution is an expat manager ? if not for the long-term, then certainly for the initial development stages. However, the general manager is responsible for the operations of the business. It is wise to make this one of your personnel.
For the longer term, it is better for JVs to have strong Chinese management in place. The reason for this is the difference in basic fundamentals of economic understanding between Chinese and expatriate managers. As Jack Perkowski, chairman of Asimco, one of China’s most successful companies, told me earlier in the year, Chinese managers have a better appreciation of Chinese costs. Consider the US$100 and RMB100 bill.
They have many similarities. They are the highest denomination in their respective countries. Both have pictures of national leaders on them. Yet in America, US$100 is not considered a lot of money. However, in China, RMB100 is considered a lot of money, despite the exchange rate showing it to be worth just US$14. Chinese managers therefore have a far greater understanding of the fundamental dynamics of how much RMB100 is worth than an expatriate manager and this is a key attribute when conducting financial transactions in buying and selling supplies, products and services in China.