If Part 1 of this series focused on what brands must do to prepare before signing with a Chinese distributor, Part 2 explores the more difficult scenario: what happens if that relationship breaks down?

As Zarina Kanji, Managing Director UK & Europe at WPIC, puts it: “The best thing is to avoid getting stuck in the first place.” But if things do go wrong, whether the distributor isn’t delivering, the market strategy has changed, or the working relationship has simply soured, brands must move swiftly, strategically and with clarity.

“Trust is absolutely fundamental in Asia,” says Kanji. “It’s a region where relationships matter. The number of UK brands and beauty partners is small, people talk. If you can keep things professional and polite, you’ll stand a better chance of exiting on good terms.”

That’s not always easy, but it’s critical. “If you’re planning to stay in the Chinese market, you’ll need to line up a new partner and manage the transition carefully,” she explains. “Platforms like Alibaba or an agency like WPIC can sometimes support the handover. The new partner might help with transferring stock, keeping the store live and downtime minimal. But this is only possible if the breakup isn’t acrimonious.”

If tempers flare or the relationship turns hostile, things can spiral quickly: stores shut down, sales data is lost, and customer reviews disappear. “In the worst-case scenario,” she adds, “it’s a reminder of why doing due diligence upfront— and retaining ownership of your store — is so important.”

A phased approach—not a scorched earth

Kristina Koehler-Coluccia, Head of Business Advisory at Woodburn Accountants & Advisors, has seen this scenario play out many times, including with long-established brands.

“I’ve worked with companies that started with wholesale, then expanded into e-commerce and even hired staff. When the time was right, they decided to set up their own company in China. But instead of cutting ties with their distributor, they took a phased approach.” In this case, the company drew up a list of everything the distributor controlled — logistics, warehousing, customs clearance — and identified what to take back in-house and what to leave in place.

“Just because the distributor’s no longer right for the e-commerce or brand management side, doesn’t mean they’re not good at operations,” says Koehler-Coluccia. “So rather than burn the bridge, keep them doing what they’re good at. It also avoids triggering hostility.”

This type of staged transition can be particularly valuable for brands that rely on physical stock management. “Distributors don’t always just run the store,” she says. “They may also hold your inventory, fulfil orders, or handle customer service. You need to think about the whole supply chain, not just the front end.”

If it turns ugly, get legal, get local

But what if the distributor won’t cooperate? What if they refuse to transfer ownership of assets – or worse, continue using your brand? “If it turns ugly, you need a Chinese lawyer,” says Koehler-Coluccia. “Don’t try to manage this through a UK firm. Chinese law, Chinese platforms – this is where you need expertise on the ground.”

The first step is to review your contract. Hopefully, it includes clear terms on asset ownership and an exit clause (as advised in Part 1). If the distributor has no licensing rights and doesn’t own the trademark, you have leverage. “If they’re still using your brand post-termination, you can stop shipping,” she says. “That gets their attention. Meanwhile, your legal team can engage directly with the platform—whether that’s Tmall, JD, or another.”

She also recommends reaching out to the platform itself. “Tmall and JD don’t want this conflict either,” she explains. “They earn off your sales. They want to keep your brand active. You can get a client manager, and in some cases, they’ll help you change usernames and passwords. But you need a lawyer to do this—it’s not a simple customer service job.”

Keep your company structure in mind

For brands with serious long-term ambitions in China, one option is to incorporate locally. “Platforms will only let you own your store directly if you have a Chinese entity,” explains Koehler-Coluccia. “So many companies we work with start by using a distributor, but then form their own local company to take over.” That local entity can then contract directly with the platform, manage invoicing, repatriate profits, and even hire staff. “You can still outsource warehousing and logistics, even keep the same partner in a reduced role,” she adds. “But you control the brand and the data.”

For brands exiting completely, the priorities are slightly different. “If you’re done with the market,” says Kanji, “then the key is to get everything closed as quickly and cleanly as possible. Connect with the platforms and ask to close the stores, retrieve any stock, reclaim your platform deposit and close contracts—especially if you’ve got months left and nothing’s happening.”

Think strategically, not emotionally

In Kanji’s experience, British brands often get caught up in the heat of a bad situation. “But think long term,” she advises. “If you might want to come back to China, then it’s worth leaving on good terms.”

She recommends again using the CBBC, DBT, or approaching platforms directly for guidance. “There are people who’ve done this before and can help. Don’t go it alone.” And ultimately, as Koehler-Coluccia points out, this is about thinking operationally. “Too many brands only think about the e-commerce channel. But if you’ve been doing wholesale too, that’s a whole different relationship. Do a SWOT analysis. What are your distributor’s strengths? Where are the weaknesses? How much can you do yourself—and how much do you need help with?” She concludes with a reminder: “If your distributor has done a good job with logistics, why change it? The goal is to regain control, not destroy what’s working.”

Part 1 Recap: What to do before engaging a Chinese distributor
Read the first feature in this two-part series for a full breakdown of how to choose the right distributor, avoid common mistakes, and ensure you retain control of your brand in China.

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It’s no secret that the Chinese market offers immense opportunities for international brands. But engaging a distributor without thorough preparation can leave businesses exposed, misrepresented, or worse, locked out of their own success. Two experts, Zarina Kanji, Managing Director UK & Europe at WPIC, and Kristina Koehler-Coluccia, Head of Business Advisory at Woodburn Accountants & Advisors, offer a clear-eyed look at the key steps British companies must take before signing anything.

The first lesson: do your homework. “Due diligence is everything,” says Kanji. “Ask for case studies from the distributor of companies they have worked with before and speak to them about their experience with that distributor. Ask partners within the network for their insights. It’s a relatively small community, so introductions are possible. Speak to other brands about their experience—but be discerning. Some may have had a bad story, but that might be down to getting the price wrong, or targeting the wrong market.”

She recommends using networks like the China-Britain Business Council (CBBC) and the Department for Business and Trade (DBT) to get introductions and independent perspectives. But due diligence isn’t just about reputation, it’s also about understanding what’s actually being offered.

“Governance is important,” she says. “You need to know the breadth of services on offer. Is it an end-to-end service? Are they only running social campaigns, or are they also providing logistics, data reporting, and customer service? Some brands charge less, but do a lot less. You have to understand what’s required of you as the brand.”

For example, larger partners like WPIC may put 10 to 15 people on a single brand account. But smaller partners often require brands to provide considerable input, time and resources of their own. If your internal team can’t handle the load, the relationship may suffer.

Know your value…and your size

A common mistake, Kanji warns, is choosing a distributor that’s either too big or too small. “If your brand is under £10 million in annual turnover, don’t go for a giant partner like Baozun. You’ll be competing with Nike or Lululemon and you simply won’t get the attention.”

Instead, she advises finding partners at a comparable size. “You want someone who sees value in your business and is incentivised to make it grow, not just to hit quotas.”

Own your store. Protect your IP.

Perhaps the most critical red flag is giving away too much control, too early. “Make sure you own your store in China,” says Kanji. “The worst-case scenario is handing ownership of your Tmall or JD store to the distributor. Once they have that, they have the upper hand. That’s where the most costly and complex challenges come from.”

Koehler-Coluccia agrees emphatically. “There must be a clause in the distribution agreement that clearly states: all collateral belongs to the brand,” she says. “That includes the Tmall and JD stores, the inventory, all the digital assets. And if the contract ends, there must be a clean transfer of those assets back to the brand.”

In practice, she adds, this means spelling everything out in the contract—including an itemised list of what the distributor is setting up, and who owns what. Too often, British companies rely on UK lawyers for contracts that will be enforced in China. “Don’t do that,” she says. “Hire a Chinese law firm. You’re playing by Chinese rules—use someone who knows the game.”

Plan your exit before you start

One of Koehler-Coluccia’s most repeated mantras is simple: have an exit strategy. “There needs to be a section in the contract that says: if this doesn’t work, here’s how we unwind it. That includes transferring stores, assets, remaining stock. Don’t wait until things go wrong to figure that out.” It’s also worth accounting for the possibility that the distributor might lose money on the venture. “If they spend on marketing or logistics and don’t see ROI, what happens? That needs to be agreed up front—whether that’s clawback clauses or refund triggers.”

Understand the costs…and how to get paid

The Chinese e-commerce ecosystem is expensive and complex. Brands must factor in multiple layers of fees: platform deposits (for Tmall, JD, etc.), annual platform charges, partner fees, and campaign costs. All of these need to be fully itemised from the beginning.

“Get a full breakdown,” says Kanji. “You need to know what the fees are, what frequency they’re paid, and what happens if something goes wrong. Budgeting without this knowledge is asking for trouble.”

Remittance is another challenge. How will profits be repatriated? What’s the process for converting RMB back into pounds? These issues need to be clarified up front, with support from tax and legal advisors familiar with Chinese rules.

Stay involved from day one

For companies that assume the distributor will handle everything, both experts sound a stark warning. “Too many brands just want to delegate,” says Koehler-Coluccia. “They don’t have the internal capacity, so they assume they can just hand it off and watch the money roll in. That’s a fantasy.” Instead, she stresses the need for active involvement: “Set KPIs. Have monthly meetings. Monitor performance. If targets aren’t being hit, have that conversation early.”

It’s not uncommon, she says, for companies to ignore the setup process, then try to take control later, only to find the distributor has more leverage than expected.

“They’ll say: we put in the capital, the resources, the attention. And now you want to terminate us? If you’re not willing to pay attention from day one, what do you expect?”

Choose partners with platform access and influence

Relationships still matter in China, particularly when it comes to access and visibility. “Ask how long they’ve been in business, and how well integrated they are with platforms like Alibaba, Douyin, Xiaohongshu (RED),” says Kanji. “At WPIC, we have longstanding partnerships, so we get early access to marketing campaigns or new tools. That gives our clients first-mover advantage. Some agencies don’t have those connections., they can’t pull favours, they can’t get you in early.” That kind of platform integration can be the difference between a flagship campaign and being lost in the crowd.

Eyes wide open

Ultimately, both Kanji and Koehler-Coluccia stress the same thing: be realistic. China is not a plug-and-play market. It takes time, investment, clarity, and ongoing engagement. British brands that treat their Chinese distributor as a plug-in growth engine are almost always disappointed. But with the right preparation, the right legal safeguards, and a partner aligned to your scale and ambition, the rewards can be substantial. As Koehler-Coluccia puts it, “You can’t just hand it off and hope. This is your brand. Protect it.”

Read Part 2 here: What to do if your relationship with a Chinese distributor goes wrong

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In an era where facial recognition technology is increasingly embedded in daily life, from unlocking smartphones to streamlining payments, China has introduced robust regulations to ensure its responsible use. On March 21, 2025, the Cyberspace Administration of China (CAC) and the Ministry of Public Security (MPS) released the Security Management Measures for the Application of Facial Recognition Technology, effective from June 1, 2025. These measures, supplemented by a clarifying notice from the CAC on March 30, 2025, mandate registration for companies processing facial data of over 100,000 individuals and provide a clear framework for compliance. For British businesses operating in or entering the Chinese market, understanding and adhering to these rules is essential to safeguard operations and protect personal data.

The New Regulatory Landscape

China’s facial recognition regulations are part of a broader effort to strengthen data protection under the Personal Information Protection Law (PIPL), enacted in 2021. The Security Management Measures aim to balance innovation with the protection of individual privacy, addressing concerns about the misuse of sensitive biometric data. The rules apply to any organisation, domestic or foreign, processing facial recognition data in China, with a particular focus on those handling large datasets. According to the CAC, companies storing facial data of more than 100,000 individuals must register with their provincial-level cyberspace administration within 30 working days of reaching this threshold.

Recognising the compliance burden, the CAC introduced a grace period for companies that hit this threshold before June 1, 2025, allowing them until July 14, 2025, to complete registration. This transitional measure reflects China’s pragmatic approach to implementation, ensuring businesses have time to adapt without immediate disruption. Additionally, the CAC issued detailed ‘Instructions for Filling in the Facial Recognition Technology Application Filing System (First Edition)’, accessible via the Personal Information Protection Business System or the National Cyberspace Administration Government Affairs Hall on the CAC’s website. These guidelines outline the registration process, required documentation, and compliance expectations, making it easier for companies to navigate the system.

Why Compliance Matters

Facial recognition technology is widely used in China across sectors like retail, finance and security, but its rapid adoption has raised concerns about privacy and data security. China’s facial recognition market is projected to reach £7.2 billion by 2027, driven by applications in smart cities and public safety. However, high-profile cases, such as the 2021 fine imposed on a Hangzhou zoo for collecting facial data without consent, underscore the risks of non-compliance. The zoo was ordered to delete the data and issue a public apology, highlighting China’s growing emphasis on enforcement.

For British businesses, compliance is not just about avoiding penalties; it’s about building trust in a market where data protection is increasingly scrutinised. Robust cybersecurity measures, including compliance with data laws, are critical for protecting investments in China. Failure to register or properly handle facial data could result in fines, operational restrictions, or reputational damage, particularly for companies in sectors like technology, retail, or hospitality that rely on facial recognition for customer engagement.

How to Register: A Step-by-Step Guide

The registration process is designed to be straightforward, with all steps completed online via the Personal Information Protection Business System. Companies must first create an account on the platform before uploading the required documents, which include:

• A Basic Information Form of Personal Information Processor, detailing the company’s operations and data processing activities.
• A Facial Recognition Technology Application Record Form, outlining the scope and purpose of facial data use.
• A Personal Information Protection Impact Assessment (PIPIA), assessing the legality, necessity, and risks of data processing.
• Scanned copies of the Unified Social Credit Code Certificate, legal representative’s ID, agent’s ID, Power of Attorney, and Letter of Commitment, all stamped with the company’s official seal.

The CAC reviews submissions within 15 working days, updating the application status to “Filing Completed,” “Returned for Improvement,” or “Review Failed.” If supplementary materials are required, companies have 10 working days to provide them, or the process is terminated. The CBBC advises seeking professional support, such as from its Information Systems team, to ensure compliance with China’s data laws and to localise global systems effectively.

Conducting a Personal Information Protection Impact Assessment (PIPIA)

A cornerstone of the new regulations is the requirement to conduct a PIPIA, as mandated by the PIPL. This assessment evaluates the legality, legitimacy, and necessity of facial data processing, alongside the potential impact on individual rights and the effectiveness of protective measures. The Filing Instructions provide a tailored template for facial recognition, requiring companies to disclose technical specifications, data collection and storage methods, standard operating procedures, and the ethical basis for data use. For example, companies must clarify whether facial data is used for automated decision-making, such as targeted advertising, and detail the infrastructure and technology providers involved.

The PIPIA process encourages transparency and accountability, aligning with international best practices. The PIPIA requirement has driven companies to adopt more robust data governance frameworks, enhancing trust among consumers and regulators alike.

Easing the Transition

The CAC’s notice reflects a pragmatic approach to regulation, balancing enforcement with flexibility. The grace period for pre-June 2025 data processors and the detailed Filing Instructions demonstrate China’s commitment to supporting businesses during this transition. For British companies, this is an opportunity to align with China’s evolving data protection regime while leveraging tools like the CBBC’s Business Guides, which offer insights into regulatory compliance and market navigation.

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What’s the AFSL all about?

The AFSL is China’s way of responding to what it sees as unfair economic measures, like sanctions or trade restrictions, from other countries targeting Chinese companies or citizens. It’s largely a reaction to actions from places like the US or EU, especially since trade tensions have ramped up in recent years. For British businesses with a presence in China, whether in tech, manufacturing, or education, the law matters because it could affect how you manage compliance across different markets. The new regulations spell out who might be targeted, what measures could apply, and how you can respond if needed, giving UK firms a clearer picture to work with.

Who might the AFSL affect?

Under Article 3 of the AFSL, China can take “countermeasures” against individuals or organisations involved in what it considers “discriminatory or restrictive measures” against Chinese interests. The new rules clarify this could include:

• People or companies directly involved in creating or enforcing foreign sanctions.
• Senior managers or controllers of those organisations.
• Businesses linked to or controlled by those on the “countermeasure list.”

If you’re on this list, you might face things like visa restrictions, limits on working with Chinese partners, or having assets in China frozen. For a British firm, this could mean a pause on collaborations with local suppliers or restricted access to funds in China. However, there’s a process to appeal, and the regulations suggest decisions aren’t made lightly.

What happens if you don’t follow the rules?

The AFSL asks companies in China to align with its countermeasures, like not enforcing foreign sanctions against Chinese entities. If you don’t comply, you could face restrictions on doing business in China or, in some cases, lawsuits from Chinese companies or individuals who feel impacted. The law’s a bit vague on whether it applies only to actions in China, so there’s a chance that complying with UK sanctions could raise questions under the AFSL. For British businesses with global operations, this means you’ll need to think carefully about how to balance compliance across jurisdictions, but it’s manageable with the right planning.

What’s new in the 2025 regulations?

The State Council’s latest rules give more detail on how the AFSL works, which is helpful for British firms looking to stay compliant. Here’s what you need to know:

Thoughtful assessments

Before applying countermeasures, the State Council must investigate and assess whether they’re necessary. This means decisions should be well-considered, giving UK businesses some reassurance that measures won’t come out of the blue. You can also apply to have measures lifted if you show you’re compliant.

What can be affected?

The rules clarify that “property” includes things like cash, intellectual property, or bank deposits in China. For a British company with assets like patents or investments in China, it’s worth keeping this in mind when planning.

Broader business activities

Countermeasures might touch sectors like education, technology or tourism. If you’re a UK university with partnerships in China or a tech firm with local operations, it’s a good idea to check how your activities align with the AFSL.

Options for resolution

If a Chinese entity believes your actions support foreign sanctions, it could file a lawsuit seeking compensation. But you can also appeal countermeasures by showing you’ve addressed any issues, like through compliance training or internal audits. This gives British firms a way to resolve disputes constructively.

How has the AFSL been used?

China has applied the AFSL a few times already. In July 2021, it targeted US individuals, like former Commerce Secretary Wilbur Ross, over sanctions related to Hong Kong. More recently, in October and December 2024, it hit US defence firms with measures like asset freezes over arms sales to Taiwan. While no British companies have been named yet, these examples show the law is in play, especially for firms in sensitive sectors like tech or defence. For UK businesses, it’s a signal to stay informed, but not a reason to panic.

How can British businesses stay prepared?

The updated AFSL regulations highlight the need for British companies to be proactive, but they also offer clarity and options for staying compliant. The key is to plan smartly without getting overwhelmed. Here’s how:

• Check your operations to see if UK or international sanctions might overlap with the AFSL.
• Work with experts to understand the law’s nuances.
• Run compliance audits to ensure your business aligns with Chinese regulations.
• Stay updated on changes to the AFSL, as its scope might evolve.

For instance, a British retailer sourcing goods from China while following UK trade rules should review whether those rules could be seen as “discriminatory” in China. A quick compliance check can keep things running smoothly.

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China’s new patent extensions: A game-changer for innovators

Exclusivity for pharmaceuticals in China has taken a giant leap forward with the introduction of new patent term extension (PTE), a concept that originated in the US with the Hatch-Waxman Act of 1984. This move, part of an economic agreement with the US in January 2020, became effective with the new Chinese Patent Law and detailed guidelines published in January 2024.

The law allows for up to five years additional term for patents covering new drugs, with the total effective term not exceeding 14 years from the drug’s marketing approval date. The new PTE provisions apply to product patents, preparation method patents, and medical use patents of an active pharmaceutical ingredient in a “new drug”.

To qualify for PTE, the patent must be valid, not previously extended, and include drug-related technical solutions. Only one patent term can be extended per drug. The China National Intellectual Property Administration (CNIPA) examines PTE requests, allowing for observations or amendments before making a decision, which can be challenged.

The protection scope of PTE is narrower than the original patent, limited to the new drug for an approved indication. A new indication can support a new PTE but will only cover the new indication underlying the PTE.

China’s AI tool revolutionises copyright protection

China has unveiled the Copyright AI Intelligent Review Tool (版权AI智审), a groundbreaking advancement in IP law. This innovative system uses artificial intelligence to assist in the review and protection of copyrighted works, offering a robust digital solution to the challenges faced by courts and legal professionals. The tool streamlines the process of assessing originality, innovation, and potential copyright infringement.

One of the tool’s standout features is its advanced image recognition capability, which performs “image-to-image” searches to trace the origins of visual works and identify original creators, essential for establishing copyright ownership. Additionally, it evaluates the degree of innovation in a work and quantitatively assesses the similarity between images, aiding in potential copyright infringement determinations. Integrated within court management platforms, the tool provides judges with analytical resources during proceedings, enhancing decision-making and streamlining case resolutions with a high success rate in identifying similar designs.

The tool offers several benefits, including ease of use and cost efficiency. Its user-friendly interface is easy for judges and court staff to navigate, reducing the need for extensive training and lowering litigation costs by streamlining the evidence-gathering process. By automating the analysis of copyright cases, the tool significantly reduces the time required for assessments and minimises human error, leading to more precise rulings. Furthermore, it strengthens copyright law enforcement, empowering legal professionals to protect creators’ rights and combat infringement effectively.

In conclusion, the Copyright AI Intelligent Review Tool emerges as a vital resource for enhancing copyright litigation processes in today’s landscape where technology converges with law. Currently focused on image copyright infringement cases, it is anticipated that the tool will expand into broader applications in the future.

CNIPA’s good faith rule: Ensuring fair play in patents and trade marks

Revised Rules for the Implementation of the Patent Law came into effect on 20 January 2024. Article 11 of these Rules provides that “The patent application shall be made in accordance with the good-faith principle”. This principle, introduced to ensure ethical behaviour in intellectual property applications, aims to prevent the abuse of patent and trademark rights.

In patent examination, the principle, effective since June 2021, requires genuine invention activities and prohibits falsified applications or those intended to harm public interests. The 2024 implementation rules further emphasise adherence to good faith.

For trademarks, the principle has been in place since 2013 to prevent dishonest behaviours such as registering trademarks without intent to use or imitating well-known trademarks. Specific provisions published in 2019 detail behaviours that violate this principle.

The CNIPA can reject applications violating the good faith principle, maintaining a fair and transparent IP system in China. This helps promote ethical practices and strengthens the integrity of patent and trademark examinations.

CNIPA unveils new guidelines on trade mark license recordal procedure

On October 29, 2024, the China Intellectual Property Administration (CNIPA) released the Guidelines on Trade Mark License Recordal Procedure to help entities understand the law provisions and procedures related to the trade mark license recordal, and to clarify the validity of trade mark licenses.

A trade mark license is an agreement where the licensor (the trade mark owner) allows another party (the licensee) to use their registered trade mark under certain conditions.

According to the Guidelines, the licensor shall report the license to the CNIPA for recordal.  A trade mark license not filed for recordal shall not be used against a third party in good faith. The CNIPA shall announce the recordal of trade mark licenses that meet relevant regulations, and the public can search for specific information at https://sbj.cnipa.gov.cn/sbj/index.html.

Moreover, the two parties of a license may expressly stipulate in the trade mark license on the following matters, including, but not limited to: the basic information of the trade mark, information on the items of goods or services, form of license, term of license, type and restriction of license, goods quality guarantee, and contract breach liabilities.

PPH improvement initiative: A boost for patent processing

In a bid to further enhance the user experience of the Patent Prosecution Highway (PPH), April 2024 saw the China National Intellectual Property Administration (CNIPA) join the “PPH Improvement Initiative”, which involves cooperation between the world’s five leading IP offices in China, the United States, Europe, Japan and the Republic of Korea.

The objective of this initiative is for patent offices to strive for an average response time from examiner to applicant to be three months (including from grant of a PPH request to the first official action), thereby providing PPH users with a more predictable examination cycle.

The Patent Prosecution Highway (PPH) Improvement Initiative offers several benefits for businesses and applicants. It aims to expedite patent processing, reducing the average duration for PPH requests to about three months, and provides a more predictable examination cycle. Enhanced cooperation between leading IP offices, including those in Europe and the UK, and work sharing between patent offices can streamline and make the patent application process more efficient. This initiative ultimately helps applicants by making patent applications in China and other jurisdictions involved faster, more predictable, and more efficient.

Lydia Topping is a trainee patent attorney and Peter Mumford is a senior associate with Potter Clarkson LLP, a full-service European intellectual property law firm.

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It is therefore imperative that all companies in China understand the types of behaviours that are illegal under China’s criminal and anti unfair competition laws. This article discusses China’s legislation on commercial corruption and offers advice on preventing acts of fraud, embezzlement and bribery in China-based businesses.

The number of corruption cases that are investigated in China has been rising ever since the launch of a concerted anti-corruption campaign, which has implicated officials of all levels. Although the anti-corruption campaign has focused mainly on state corruption and public officials, the campaign has also touched upon the private sector, including foreign companies and multinationals. The most high-profile bribery case involving a foreign MNC was the 2014 case in which the British pharmaceutical company GlaxoSmithKline (GSK) was fined RMB 3 billion (£350,000) for bribing doctors and hospitals to promote its products.

What are the most common types of commercial corruption in China?

Some of the most common types of corruption seen in commercial settings are those involving bribery authorised by senior management, which often involves gaining benefits that are in the interest of the company itself. This may involve bribery of clients or channel partners in exchange for services or products, including tangible and intangible favours, such as the promise of more orders, better promotional channels or increased website traffic.

Bribery committed by individual employees, meanwhile, is more commonly conducted for personal interest and can include acts of nepotism by people in sales, purchasing or management positions buying products or services from relatives or friends.

The main pieces of legislation penalising commercial corruption in China are:

• The Criminal Law of the PRC (the “Criminal Law”: 1979; revised 2020)
• The Anti Unfair Competition Law the PRC (the “Anti Unfair Competition Law”: 1993)
• The Supervision Law of the PRC (the “Supervision Law”: 2018)

The Criminal Law penalises extortion and bribery of a public official, commercial bribery and embezzlement. This law states that foreigners who commit a crime against the State of China or a Chinese citizen outside of Chinese territory are still liable for punishment under criminal law, provided the crime is punishable by minimum fixed-term imprisonment.

In 2021, the Criminal Law was amended to increase the penalty for bribery in the private sector to be equal to that of the public sector. Previously, the penalty for bribery for “non-state functionaries” was lower than for state functionaries.

Meanwhile, under the Anti Unfair Competition Law, commercial bribery is classified as an “act of unfair competition” and is punishable by law.

In 2018, China passed the Supervision Law and established a new government body, the CCDI, to act as an anti-corruption supervisory body over all levels of government. Notably, it also enables the CCDI to seek international cooperation to extradite individuals that are involved in corruption cases who may have left or fled China, or seize, freeze, or confiscate their overseas assets.

How to prevent corruption in your company

There are a few steps that companies can implement to reduce the risk of corruption among employees.

Reimbursement policy
Formulating a detailed reimbursement policy can help identify suspicious behaviours that may constitute fraud or corruption. This should include a detailed description of the types of expenses that are eligible for reimbursement and under which circumstances employees can be reimbursed, as well as details on expenses and scenarios that are not considered reimbursable.

Code of conduct for hiring vendors
To prevent favouritism when hiring vendors, it is important to implement a code of conduct that employees must follow when searching and vetting potential suppliers. This may include formulating vendor selection procedures and implementing mechanisms for conducting background checks to ensure there is no conflict of interest in hiring them.

It is also advisable to delegate the responsibility of hiring vendors to several employees and implement a tiered approval procedure to avoid the decision being given to one sole employee. This will reduce the risk that one employee will seek to hire a certain vendor solely for personal benefit.

Management of company chops
Finally, it is also important to maintain firm management over the use of company chops to prevent their misuse. Company chops provide a strong legal basis in China and can be misappropriated by employees to sanction contracts, processes and more without the company’s knowledge.

To do this, it is advisable to form an internal policy for the use of company chops and ensure strict supervision of their use during daily operations. This policy may include measures such as implementing a tiered approval policy for the use of the company chop and ensuring the company chop is kept in a safe and never used without the knowledge or permission of the persons in charge.

It is also advisable to delegate the responsibility of managing and overseeing the use of the company chop to more than one employee to avoid giving too much power to one individual. Many foreign companies in China will often give the responsibility of managing the company chop to one employee, often the legal representative, which reduces the ability of the company to maintain independent oversight over how it is used and increases the risk of its misuse.

What to do if you discover corruption in your company

There are several steps that a company should take in the event that an act of embezzlement, fraud or bribery is discovered, depending on the type and severity of the violation.

The first step is to initiate an independent investigation of the incident, carried out either by an internal audit and compliance team or by a third-party company.

Depending on the outcome of the investigation, the company can then decide how to proceed, which may include actions such as:

• Persuading the employees involved to resign
• Terminating the employees involved for reasons such as severe violation of the labour contract, code of conduct or staff handbook
• Terminating contracts and services with vendors involved
• Carrying out public relations or crisis management campaigns if the situation has been revealed to the public and caused damage to the company’s reputation
• Reporting the situation to the police if it cannot be resolved between the parties involved

Note that reporting a case of internal corruption to the police is an unlikely step to take in practice as it runs the risk of jeopardising the company’s reputation and may implicate the company itself for legal liability. This step is usually only necessary if the company is required to defend itself legally in cases where its reputation or credibility is at stake.

In addition, although it is illegal under Chinese law, it is fairly unusual for the police to investigate cases of commercial corruption by individuals. Exceptions are usually made in cases where the activity causes harm to consumers, the State, or other stakeholders, or the scope of the illegal activity is particularly large or egregious.

Get immediate access to the China market with Launchpad, CBBC’s flagship market entry service. Call +44 (0)20 7802 2000 or email enquiries@cbbc.org now to find out more.

A version of this article was first published as ‘How to prevent and deal with corruption in your China business’ by Dezan Shira & Associates’ China Briefing.

The post How to Prevent and Deal with Corruption in Your China Business appeared first on Focus - China Britain Business Council.

Last Friday, China’s National Development & Reform Commission (NDRC) and Ministry of Commerce (MofCom) published draft revisions to the Market Access Negative List (hereafter referred to as ‘the List’). The List should not be confused with the Foreign Investment Negative List.

The List is usually officially published in December and outlines the rules for investment in various sectors for all market entities, including state-owned enterprises (SOEs), private companies, joint venture partnerships (JVs) and wholly foreign-owned enterprises (WFOEs). Each year, NDRC and MofCom divide the list into two categories, ‘prohibited’ and ‘restricted’ markets — this year’s edition is no different.

The industries listed as ‘prohibited’ are all off-limits to market actors, meaning that firms are not allowed to invest, partner or takeover any entity involved in that particular industry. This year’s list has attracted more attention than usual in foreign media because news collection, editing and broadcasting could become a prohibited industry. It is worth noting that items listed under ‘prohibited’ are usually ostensibly related to government activity or national security.

This year’s list has attracted more attention than usual in foreign media because news collection, editing and broadcasting could become a prohibited industry

Sectors determined to be ‘restricted’ are open to investment but only under the condition that the investor applies for access from whichever ministry oversees that particular industry. Industries considered ‘restricted’ include motor vehicle production and hotel management, to provide two examples. Foreign and domestic investors alike can assume that any area not covered by the list is open to investment and that there is no need to seek prior approval.

The 2021 draft sees the number of industries where involvement is either restricted or prohibited cut from 123 items in 2020 to 117. While that suggests that China’s economy is becoming more open, investors must consult the Market Access Negative List alongside the Foreign Investment Negative List and the Free Trade Zone Negative List for Foreign Investment, and these frequently contradict one another. As a result, the list does not appear to open China’s economy further to foreign investors as much as might be expected.

What’s coming off the list?

Seven items look set to come off the list and concern the financial services sector, leasing, and the provision of business services:

• Information transmission, software, and technology services: The entry has been adapted to no longer include the wording “No foreign satellites may be leased, nor may a foreign information provider set up an international communications gateway without permission”
• Stocks and mergers & acquisitions: The entry has been adapted to no longer include the wording “Stocks, mergers, and acquisitions of listed companies cannot be listed without prior permission”
• Foreign statistical analysis: In the leasing and business services industries, the wording “Foreign statistics related businesses cannot operate without a licence” has been removed from the text
• Water conservation and public facilities management: Permission might no longer be needed to install lightning protection equipment in spaces close to water
• Education sector: Companies wanting to provide security training might no longer need to obtain permission to do so
• Public health: Restrictions on the types of companies that can work with medical radioactive products could be lifted
• Online finance: Restrictions on online financial information are set to be eased

What is joining the list?

This year’s list is marginally shorter, coming in at 117 items. However, the business activities that NDRC and MofCom have added or expanded on in this year’s edition include cryptocurrency mining and the investment of “non-public” capital into a range of publishing activities, including live broadcasts, news-gathering, editing and broadcasting entities, and the operation of news.

Neither the inclusion of cryptocurrency mining or the restrictions on China’s media sector represents a new ban; the government had already indicated to investors through other pronouncements and channels that they are off-limits. However, their inclusion serves as a way of reiterating that such industries are not in line with the Party’s perception of China’s economy — over the last year, the government has sought proactively to ensure that companies operating within the media space are not “polluting” society or publishing content that violates the core values of socialism, for example.

In the case of China’s media sector, its inclusion is indicative of a sustained push by the government to take an even tighter grip on the reins as entry limits on internet-based news services for non-public capital were added in the 2020 List.

What has caught our attention?

Firstly, the fact that NDRC and MofCom provided less than five working days for businesses to respond with comments follows a trend where the public is increasingly being given less time to give their input on policy — public consultations used to run for as long as one month.

Secondly, businesses need greater clarity from NDRC and MofCom to ascertain whether Item Code: 10006 — which relates to prohibitions on news-media related operations involving non-public capital, and its provisions concerning “live broadcasting” — would cover foreign sporting events, such as the Premier League and Wimbledon.

Thirdly, despite a spate of opening up activity of late, the construction industry remains on the list, requiring all private construction companies to be approved as qualified construction enterprises. While the relevant requirements outlined on the List are equal for Chinese and foreign-invested enterprises, the reality is that foreign businesses find it harder than their Chinese counterparts to obtain such qualifications.

Finally, private enterprises wanting to provide arts examinations — such as those for music grades — still need approval from the Ministry of Culture and Tourism before providing assessments, despite the assessed content not being politically sensitive.

CBBC View

CBBC has responded to the public call for comment and welcomes the removal of items from the List. We anticipate that the removal of these items will improve the ease of doing business for private enterprises operating in these areas. Whether the Market Access Negative List opens the China market to foreign firms, only time will tell. CBBC looks forward to the publication of a complementary revised Foreign Investment Negative List.

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The Hong Kong National Security Law (NSL) provoked considerable conversation when introduced by China’s National People’s Congress (NPC) in June 2020. Spooked by its seemingly sudden introduction, foreign business leaders took to the press, predicting that the new law could cause multinational companies to “vote with their feet” and leave the market. Portrayed by Chinese state media and Party-affiliated or Party-leaning analysts and think tanks as an essential piece of legislation that has “restored freedom from fear… following the social unrest in 2019,” how has international business responded to the NSL, one year later?

Background

The NSL was brought into law by decree of the Standing Committee of the NPC, bypassing the Hong Kong Legislative Council (LegCo) as a Mainland Chinese law applicable in Hong Kong under Annex III of the Hong Kong Basic Law (the de facto constitution of Hong Kong that was agreed to implement the Sino-British Joint Declaration in 1997).

That Hong Kong would introduce its own security law was one of the articles of the Basic Law. However, the LegCo never enforced Article 23 due to its unpopularity with the electorate. Fast forward to 2019, however, and the Chinese Government appeared to call time on the LegCo’s deliberations and took matters into its own hands.

Running to 66 articles, the NSL criminalises activities deemed to be associated with secession, succession, terrorism, and collusion; the maximum sentence for these crimes is life in prison. Applying to Hong Kong citizens, residents, non-permanent residents, and companies alike, businesses were quick to ask questions relating to how it would affect the business environment, considering that companies could face fines if convicted and foreign NGOs would be subject to stricter monitoring.

The business response

The NSL has changed how multinationals consider Hong Kong. That said, few have decided to air these concerns publicly, with the majority taking the approach of ensuring quietly that they are compliant rather than endorsing or criticising the NSL. While Hong Kong’s position has not changed on most ‘Ease of Doing Businesses’ indices, multinational companies acknowledge that it has affected the character of the market in a significant way – particularly with regard to employee safeguarding and the handling of data.

The criticism that the NSL makes the SAR just like any other Chinese city finds interesting application when reflecting on how multinational companies consider the market. After all, many multinationals maintain a presence in Hong Kong for the express purpose of doing business in Mainland China and have a long history of being compliant with similar legislation there – ergo, why should they then not accept the situation in Hong Kong? But that is a question outside the scope of this update.

Beyond the personnel and security ramifications of the NSL, three particularly interesting issues affecting business have emerged since its introduction.

The US Government ending Hong Kong’s ‘Special Status’ under US law

Two weeks after the NSL’s introduction, the Trump Administration announced that it was ending preferential economic treatment for Hong Kong through executive order. Speaking in the Rose Garden at the White House after the order’s signing, President Trump described the situation as, “No special privileges [for Hong Kong], no special economic treatment, and no export of sensitive technologies.”

The US and Hong Kong had maintained a special trading status under two agreements signed in the 1980s, that allowed Hong Kong to enjoy lower trade tariffs and a separate customs framework in its dealing with the US. But, it is worth noting that the executive order has no bearing on Hong Kong’s international position as a separate customs territory, because that is recognised by the World Trade Organization (WTO).

However, ending Hong Kong’s ‘Special Status’ under US law has potentially affected the city’s attractiveness as a re-export hub, which was one of the reasons it was so appealing to multinationals in the first place. This legislation primarily impacts companies that incorporate the US into their supply chains, which many UK multinationals do, including automobile manufacturers, semi-conductor & software design companies, and providers of medical devices. In the past, companies could use Hong Kong as a re-export hub, meaning that goods that go through Hong Kong to the US but have come from elsewhere – like China for instance – could avoid the tariffs that the Trump Administration placed on China.

Now that Hong Kong’s ‘Special Status’ is gone, the city is arguably no more attractive than any other port in China when considering supply chain management. The impact on Hong Kong has been substantial. Re-exports to the US previously constituted 7.9% of Hong Kong trade, and in 2019 were worth some $38 billion (£27.3 billion).

But by 2020, that number had fallen to 3.2% or $16 billion (£11.5 billion). To put that figure into context, the value of reexports from Hong Kong to other key markets, including Taiwan, Malaysia, and South Korea, increased by 18%, 2.8% and 9.1%, respectively over 2020, while re-exports to the Mainland (which introduced onerous quarantine policies on mariners, impacting exporters) decreased by 4.7%, still far short of the 58% decrease that US re-exports suffered.

The structural reasons for companies using Hong Kong as an Asia-Pacific hub remain in place – low tax rates, good geographic location, and convertibility of currency

Intensifying competition between Hong Kong and Singapore to attract multinationals

Since the introduction of the NSL, analysts have had their sights set on Singapore, anticipating an exodus of multinationals looking to sell across the Asia-Pacific and into China, but from somewhere deemed safer in terms of national security issues.

When surveyed in August 2020, 23% of US companies with offices in Hong Kong indicated that they were thinking of leaving the territory, according to the American Chamber of Commerce. Meanwhile, 13% had reportedly already taken steps to move out of the city. Furthermore, nine out of 10 respondents listed Singapore as their preferred destination for their relocation.

That said, the majority of companies appear to be staying put for now. After all, the structural reasons for companies using Hong Kong as an Asia-Pacific hub remain in place – low tax rates, good geographic location, and convertibility of currency, for example. Furthermore, the Chinese government’s interest in a Singapore model is well known and, one can assume, businesses anticipate that such a framework will quickly find application in Hong Kong. Singapore scores poorly on measures like freedom of the press and government accountability, but ranks in the top 5% on Rule of Law, according to the World Bank.

However, there is a risk Hong Kong’s ability to be perceived as a leading global centre for Rule of Law is being undermined by the NSL, as a steadily growing number of respected jurists elect to leave their positions on the Hong Kong bench and companies choose to pursue commercial arbitration in Singapore, London or Paris instead; Singapore received 479 new arbitration cases in 2019 to Hong Kong’s 308.

While companies are not announcing a departure, they are quietly buying up office space and apartments in Singapore for their Hong Kong-based staff. Despite travel restrictions and local restrictions on viewing properties, 260 units were sold to foreigners in Singapore in the first nine months of 2020 and 75% of such buyers were from Hong Kong or Mainland China, according to PropNex Realty, Singapore’s largest private real estate company; this is lower than the same period in 2019 (306 units) but nonetheless notable, given the expected impact of the pandemic.

Putting the NSL to one side, businesses and their employees are also reportedly beginning to shift towards Singapore because of the city’s relatively relaxed quarantine policies.

Data safeguarding

Multinationals that use Hong Kong as a hub to store their Asia-Pacific customer or R&D data are also beginning to re-evaluate their position in the territory. Some worry that enforcement of the NSL could lead to requests from Beijing for user data, making Hong Kong a less attractive place for tech companies resistant to China’s data review policies.

According to Article 43 of the NSL:

“When handling cases of crimes endangering national security, the Hong Kong Special Administrative Region government police department for the preservation of national security may employ the various measures that the extant laws of the Hong Kong Special Administrative Region allow the police and other law enforcement departments to take when investigating serious crimes, and may employ the following measures… (1) search premises, vehicles, boats, aircraft and other relevant places and electronic devices that may contain evidence of an offence… (4) Requiring persons who published information or the related service providers to remove information or provide assistance.”

As a result, the NSL is seen to override Hong Kong’s original legal system, potentially making it a less attractive destination for Asia-Pacific headquarters. If this is the case, it is a significant blow to MNCs, for Hong Kong has developed into the region’s hub for submarine internet cables and satellites because of business’ enthusiasm for the territory’s geographical location, meaning that it will be hard for companies to find similar services elsewhere.

While perhaps no longer suitable for a regional headquarters, companies that transfer data in and out of the Mainland still see an opportunity in the NSL as it pertains to data management: It could expedite the development of the GBA data regime. However, that role could be moving out of Hong Kong too, for Guangdong Province recently announced that it plans to build a common data platform for the GBA and a data trading market in Shenzhen to regulate data travelling between the Mainland, Macau and Hong Kong more thoroughly.

The CBBC view

The introduction of the NSL has the potential to change the role that Hong Kong is most suited to play in the Asia-Pacific operations of multinational companies. There are now attractive alternative markets (not least, Singapore) within which an Asia-Pacific hub could be established. Whether Hong Kong can retain its status as a gateway into Mainland China will probably depend on the role given to it within the GBA. Decades of interest from multinational companies looking to establish an APAC hub in Hong Kong has resulted in it having the optimal infrastructure from which to direct a large, regional business; the business environment is supportive too – e.g., Hong Kong has a lot to offer companies looking to re-direct goods and services into China through the CEPA Agreement. However, Beijing appears intent on bringing Hong Kong in line with its neighbouring GBA cities and ending its special treatment, meaning that it is not inconceivable that cities such as Guangdong, which has excellent shipping and data management capabilities in its own right, could – in the future – impede on the territory’s status as a gateway to China.

The post How has China’s National Security Law impacted Hong Kong business a year on? appeared first on Focus - China Britain Business Council.

On 14 May 2021, China issued a revision to the Regulations on the Implementation of the Law of the People’s Republic of China on the Promotion of Privately-run Schools. The modifications come into effect on 1 September 2021. While seeking to improve and regulate the growth of the private education sector in China, the modifications also stipulate that private educational institutions must strictly support the public welfare nature of education.

What is the current landscape of international private education in China?

International schools in China can be roughly divided into three types: 1) pure international schools that only accept foreign passport holders (some of which have been renamed in their license as ‘expat family children schools’); 2) private bilingual schools operating an international programme; and 3) public schools that operate an international division.

According to The Development Report of International Schools in China, as of 2020, there were 535 private bilingual schools in China, a number that has demonstrated steady growth for the past 5 years. Conversely, the number of private expat-only schools declined to 113 from a peak of 126 in 2017.

British-style education retains a strong reputation in China. The number of British-style schools has been growing significantly in recent years, with over 60 campuses in China. In 2020 alone, cities like Haikou, Dongguan, Xiamen, Changsha, Shijiazhuang, and Changchun celebrated the launch of their first British-style schools.

Any strategy for an education group looking at Asia is incomplete unless we have presence in China — Gwen Byrom, Director of Education Strategy, NLCS International

What does the new Private Education Promotion Law say?

The revisions to the law mainly target private schools carrying out compulsory education (the nine years starting from age six) for Chinese nationals. In principle, schools that only admit the children of foreign nationals are not affected by these revisions.

One of the key strategies behind the revisions is preventing public schools from turning into private schools, as seen in Articles 7 and 8 (read the full text of the law in Chinese here), as well as making access to schools more equitable by prohibiting entrance exams and cross-district enrolment.

The law also touches on school leadership. Article 25 states that members of decision-making bodies such as the board of directors should be Chinese nationals. However, this does not mean that schools cannot have foreign principals or management staff, for example.

According to Article 29, private schools offering compulsory education should not use foreign teaching materials, and that any foreign teaching materials used in other schools should comply with relevant laws and regulations.

It was noted during a recent DIT-CBBC webinar on the outlook of UK-China collaborations in school education that no foreign materials does not necessarily mean that curriculum materials from the UK or other countries cannot be used as supplementary materials to widen student learning. This is particularly true for subjects such as English, ICT, PE and art, although schools should still carefully review all materials to ensure that they do not include sensitive content.

Why have these changes come about?

The changes to the law come as China attempts to standardise education and make access to education more equal, as suggested by the definition of education as “public welfare.”

China has taken aim at educational costs as part of measures aimed at reversing the country’s declining birthrate. Despite a relaxation of the one-child policy in 2016 (recently revised to a “three-child policy”), some young urban Chinese are deciding not to have children due to the high costs of childcare and early childhood education. Some statistics even show that urban Chinese families spend up to a quarter of their family income on education.

As a result, other recent measures include tightening regulations around off-campus private tutoring services, which have been able to charge parents concerned about the child’s academic achievement increasingly high fees. On 15 June, the Ministry of Education established the Off-Campus Education and Training Department to oversee the curricula, operations, qualifications, and capital sources of tutoring organisations.

The next step for school ventures in China

The new regulations governing private education are complex, but the outlook remains optimistic for British education companies looking to enter the Chinese market.

Michelle Liang, COO of Wellington College China noted during the aforementioned webinar that the regulations underscore the importance of working with a trustworthy local partner who can help you to understand the local regulatory environment, especially for new school brands.

During the same webinar, Maxine Lu, general principal of Xiehe Education Group, suggested that schools think about how to develop a more holistic approach to education that runs from K-12 (Key Stages 1-5 in British National Curriculum terms) and beyond, and an approach that helps children develop into well-rounded individuals, rather than just preparing them to take international examinations such as iGCSEs.

She also stressed the importance of offering professional development for teachers and leveraging the advantages of a combination of expats, local Chinese and overseas return Chinese teachers. This focus on teacher training could also be an opportunity for companies in the professional development field.

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On 10 June, the Standing Committee of China’s National People’s Congress approved a sweeping law designed to counter foreign sanctions on Chinese officials and major Chinese companies. Signed into law the same day through a presidential order by Xi Jinping, the new measures codify a number of retaliatory actions that Beijing has already taken in response to Western sanctions. But the Anti-Foreign Law is very broadly written, meaning that foreign companies trading with China might fairly easily find themselves within the geopolitical crosshairs, despite their efforts to avoid this.

This briefing explains the new Anti-Foreign Sanctions Law, how it differs from what has come before, and how UK companies trading in and with China should consider it now that both the UK and China have applied tit-for-tat sanctions against each another.

Background

The Anti-Foreign Sanctions Law is the latest piece of legislation to emerge from a trade-defence-instrument-promulgation-plan that Beijing has been working on for close to a decade. In January 2021, the Chinese government updated the ‘Unreliable Entities List’ and the ‘Measures for Security Review of Foreign Investment.’ Later in the month, China’s Ministry of Commerce (MOFCOM) issued new ‘blocking rules’ to target Secondary Sanctions – i.e. the application of sanctions in third countries – in situations where China considers its companies to be being unfairly and “unjustifiably” penalised by foreign parties, be they governments, businesses or individuals.

Beijing has been working on its capability in the formulation of trade defence instruments since 2014. Back then, instruments – such as the Export Control Law – were considered to be complex pieces of legislation that sophisticated actors in international trade should have, but they weren’t considered to be a priority. Fast forward to the Trump Administration, however, and pieces of legislation that had been shelved were rushed into law to counter perceived US aggression in trade, and at least six laws and regulations that could be considered trade defence instruments were brought into law (2016, Foreign Trade Law; 2020 Foreign Investment Law; 2020 Unreliable Entity List; 2021 Rules of Counteracting the Unjustified ExtraTerritorial Application of Foreign Legislation & Other Measures; 2021 Personal Information Protection Law; and 2021 Anti-Foreign Sanctions Law).

Coming in at 16 articles long, the Anti-Foreign Sanctions Law has been touted by Chinese state media as a “long overdue legal weapon, needed to defer the West from interfering in China’s affairs.” Proponents of this line of argument make the case that the Anti-Foreign Sanctions Law is similar to the European Union’s ‘blocking statute’ – which was also designed to counter US sanctions – but that comparison ignores the fact that the EU’s blocking statute contains an appeal mechanism, while China’s Anti-Foreign Sanctions Law does not. What is clear, however, is that China now has a legal “basis for damages claims against multinational and Chinese companies who are seen as aiders and abettors if they comply with foreign sanctions to discriminate against China and its national interests,” according to Mini vandePol, head of Baker McKenzie’s Asia-Pacific compliance and investigations group.

Looking at geopolitics more broadly, China is late to the sanctions game and it has a much less expansive regime of counter-sanctions than the US and the EU. As a result, foreign companies shouldn’t be too surprised that China has taken steps to enhance its legal instruments in this area, as that is a part of being a sophisticated actor in international trade.

The big question is: How often will China use its new anti-foreign sanctions legislation, and how broadly? In the case of the EU’s blocking statute, it is more a piece of legislation that Brussels likes to have on its books to wield as a political tool rather than an actionable law. There is a good chance that the same is true for China’s new Anti-Foreign Sanctions Legislation. From a practical perspective, why would the Chinese Government go to the trouble of opening legal proceedings against a foreign firm – which would undoubtedly bring a foreign embassy into the fold – when a visit by the Public Security Bureau to the offices of that company in China to remind them of their patriotic duty would do just as well?

Therefore, the conclusion that one should draw is that the Anti-Foreign Sanctions Law has been brought in to operate as a political tool in the same way that the US, the EU, Australia, Canada and Mexico all utilise similar statutes. The difference in the case of China, however, is that in those other markets companies have access to legal recourse, which is not something afforded to them in the PRC.

What does the Anti-Foreign Sanctions Law enable the Chinese government to do?

It is not yet clear how Beijing intends to use this new measure. This ambiguity is difficult for foreign businesses in China because it further separates companies’ experience of dealing with China from other analogous markets, adding to their compliance burden. There are reports that MNCs in the market are beginning to develop their own China-specific standards and operations separate from their global operations to contend with the country’s unique legal landscape.

Companies should assume that the law has an extraterritorial effect, and if it doesn’t, that it will be used in conjunction with January’s Blocking Measures to achieve it

Taking the Anti-Foreign Sanctions Law as written, it empowers the State Council to do the following:

“[The] Relevant departments of the State Council” may claim damages or seize assets from companies deemed to be aiding the enforcement of foreign sanctions against China; note, the Law will be applicable in Hong Kong as well (Article 6).

Any organisation or individual deemed to be acting in such a way will find themselves on a blacklist (Article 4).

Those blacklisted could be denied entry into China or deported from the country. Their assets in China can be sealed, seized or frozen. Entities within China could be restricted from engaging in all forms of transactions, cooperation or other activities, potentially limiting the investment activities of blacklisted entities in China. Blacklisted individuals could find their relatives and the organisations of which they are senior managers or have control over placed on the list (Article 5).

Blacklisted individuals or companies have no grounds to appeal – the State Council’s decision is final (Article 7). However, the State Council does reserve the right to later suspend, modify or cancel countermeasures it introduces against an entity deemed to be in breach, if the circumstances change; the State Council is also required to announce publicly that it has taken this step (Articles 8 & 9).

Chinese individuals and companies (one should assume that this includes the Chinese subsidiaries of UK MNCs) are obliged to implement any countermeasures handed down by the State Council (Article 11), and any party found to have failed to implement the countermeasures will face further investigation to ascertain whether implementation is within its power or not, i.e. – why they haven’t done it. (Article 14).

The State Council will investigate cases where the Anti-Foreign Sanctions Law might have been breached in the event that a Chinese party files a lawsuit at the People’s Court accusing a foreign party of having damaged their business interests by adhering to foreign sanctions (Article 12). Significantly, the text of Article 12 does not define further the scope of whether a foreign party has acted against the interests of China, merely stating that China will act against “discriminatory restrictive measures taken by foreign countries against Chinese citizens and organisations”. It also does not define the scope of conduct constituting “implementation” or “assistance in implementation.”

Finally, companies should assume that the law has an extraterritorial effect, and if it doesn’t, that it will be used in conjunction with January’s Blocking Measures to achieve it.

The CBBC view

China’s arsenal of trade defence instruments is becoming more sophisticated by the month, and the addition of the Anti-Foreign Sanctions Law only amplifies the risk to UK companies and individuals trading in and with China.

Whether the Anti-Foreign Sanctions Law will actually be used remains to be seen. For comparison, for all the concern surrounding the Unreliable Entities List, one remains to be published. Furthermore, CBBC is yet to hear from a company that has come under investigation under China’s ‘Blocking Measures.’

The main thing to consider is that the Anti-Foreign Sanctions Law serves the purpose of providing a legislative base to measures that China has taken already – i.e., the application of sanctions on foreign parties that it considers to be damaging its interests. As a result, companies are already aware of the threat and are beginning to act accordingly. It is also worth remembering that China has a whole host of other informal measures that it would probably deploy before utilising the Anti-Foreign Sanctions Law, such as inspections by the PSB. As a result, in all probability, a company would have ample warning before finding itself at the sharp end of these measures.

UK companies trading in and with China are advised to ensure that they remain well informed of their obligations in both markets concerning sanctions and their legal obligations surrounding business activities such as sourcing and conducting due diligence on the companies with which they are doing business.

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