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Archive for the ‘Legal Perspective of Transactions in China’ Category

In efforts to gain a physical presence in China, many U.S. businesses open representative offices on the ground.  This is a relatively low-cost and low-hassle way to gain a physical presence in China for foreign businesses.  However,  a representative office requires a chief representative to run it, and most times U.S. businesses will seek a Chinese national to fill that position. 

Unfortunately, Chinese national chief representatives are often caught between playing by U.S. rules (i.e. acting within the legal bounds imposed by the U.S. headquarters) and Chinese rules.  Despite being illegal, bribes and other forms of coercion are all too common in China, and U.S. businesses need to be sure that their China office conforms to U.S. legal and ethical standards. 

Regardless of the “when in Rome” mindset that a China-based representative office manager may have, the U.S. headquarters will most certainly be judged by U.S. standards.

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seaport

Back when I was heavily involved in procuring products from China, Chinese manufacturers were scrambling to get their products into the States.  The payment terms on contracts were loose and flexible, providing much wiggle-room for the American buyers.   Long lines of credit and long-term consignment agreements were not out of the ordinary.  And now that the U.S. economy has taken a hit, these chickens have come home to roost.     

Automobile part and sub-part suppliers based in China have felt and are continuing to feel the pain of slow sales.  Textile and furniture manufacturers in Guangdong Province have been holding on for better times.  They should have protected themselves and not been so hasty to get their products exported– instead they signed contracts hastily.  Hindsight is 20-20, but at least Chinese exporters will now remember these simple rules when exporting and how to assess your buyer:

Know your buyer

  •  How many years has your buyer been in business?
  •  Who owns the company?
  • Who else has this company done business with?
  • What is the financial status of the company?
  • How much cash does the company have on hand?
  • How large is their line of credit?

  Contract Terms

  Make sure there is a written document which contains the material contract terms, these terms include:

  • the time, place, and form of payment
  • penalties and interest for non-payment
  • dispute resolution process (mediation, arbitration, or court proceeding)
  • choice of law provision
  • strict time limitations on quality claims
  • timely inspection and verification of quality of goods
  • a clause regarding attorney’s fees
  • a provision discussing the nature of the transaction
  • other defaults and ability to request financial disclosure

Determine Your Capacity and Risk Tolerance

  •  Think about what is a good credit limit for clients
  • Revisit the business relationship periodically
    • See if the people you trust have changed, or if the financial relationship has changed.
    • Give a call or send an email to see how operations are running

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