Starting an eBusiness to Service Mainland China is Not eZ

So you want to sell products to Chinese consumers over the internet. It seems simple enough. Register a domain name. Stock a warehouse with goods that your market researcher has told you the Chinese will gobble up. Setup an online payment collection system. And start shipping. If you've already got an eShop going, you could even just have it translated into Chinese and start exploiting vast market overnight. If only it were so easy...

In the latest China Legal Developments Bulletin, Baker McKenzie has a thorough article on "Internet Business Law in China for US Companies" exploring the hurdles and solutions to conducting an internet business with Chinese customers.

The most significant hurdle is China's foreign exchange regime. The authors note that the "vast majority of potential customers in China cannot or will not pay in US dollars and the Chinese currency, the Renminbi, is not freely tradable." The most onerous exchange controls have been loosened, but the company needs to have a way to accept RMB. When the RMB is remitted to the US, documentation showing that it was for permitted business purposes is required and SAFE must approve of the remittance. Some customers will have foreign exchange plastic, which will make this easier for the company.

The import taxes on goods are considerable, and are composed of the import duty, import level VAT, and consumption tax. The article notes that international courier services often offer customs clearing services for merchants.

I knew that China heavily restricted the operation of telecoms services by foreigners, but I wasn't aware of the wide array of services that fall under the telecoms umbrella. A JV is required, and foreign ownership is limited to 49% in a basic telecoms service, and 50% in a value-added service. Basic telecoms services are services that require a telecom infrastructure. The article lists the most important value-added telecoms services as

(1) online data processing (e.g.online banking, auctions, payment processing, and back-office functions), (2) data storage services, (3) Internet information services (e.g. Internet content providers (“ICPs”)), (4) data hosting, (5) Internet access services (e.g. Internet service providers (“ISPs”)), and (6) call centers (e.g. centers providing technical or training assistance online or by telephone).

Only 19 value-added services have received approval. That's not say that creative solutions have not been found. They have. The article does not discuss the success rate, but it does say that the solutions are risky, and gives an example of an early one that failed. Solutions have included renting the license of a Chinese company (which cost many foreign companies dearly when MIIT wanted them out of China Unicom's equity, yet is still seemingly popular), leasing equipment to a licensed Chinese company that provides the services on behalf of the foreign company, and establishing a Chinese entity with a business scope that includes some technology functions and then operating ultra vires. The authors suggest that the biggest threat to a company operating in these grey areas is high-profile success.

A good article with some nice jumping off points.