Don’t Be Fooled By a Local Partner

Chinese don't trust other Chinese that they don't know.  Why are foreigners so trusting? Asks an English Speaking Chinese Lawyer

Background on Doing Business in China

Doing business in China is not easy. However, a local partner may help you navigate the Chinese business landscape easier. With a good partner you won't have to worry about most of the headaches that come with the climate. A local partner can help you understand the law of the land, Chinese culture, especially with potential clients and the government, business etiquette, etc. Maybe you are focused only on business; however, it’s important to find a reliable partner.

Recently I was involved with a case regarding an overseas investor and his or her local partner. We’ll call the local partner, P, and my client, C, for this writing. P was from the same country as C, however, P had a Chinese spouse and had lived in China, more than five years. C intended to set up a restaurant and was advised by P, ‘only Chinese may rent space zoned for restaurants.’ Essentially, P persuaded C to release investment funds to P letting P’s spouse oversee formation of the restaurant.

I smelled a rat when I heard this story. 

P lied to C’s face. In China any foreigner may set up a WOFE [Wholly Owned Foreign Enterprise]. Additionally, foreigners may serve in whatever capacity his or her enterprise entails.

Some foreigners will choose to find a local partner. One of the benefits of forming a partnership with a local is you will pay less in registered capital. In the case of P&C, P should have discussed options with C. However, the mistake’s been made. P admitted the investment was made by C. But C didn’t run the enterprise; P controlled all aspects of the restaurant. Under P’s control, the entity soon went bankrupt. C invested and lost more than 1 million RMB.

My client’s story is one of many. In my opinion, you may cooperate with a local partner, but before you enter into any agreement consult with a local lawyer. Make sure you understand the terms and conditions. During contract formation I suggest you hire an independent accountant who can make sure all money invested, is accounted for.