The PRC National People’s Congress has published on its website a basic outline of the numeric goals of the 12th Five Year Plan, as follows:

The draft of China’s 12th Five-Year Plan (2011-2015) was submitted Saturday to the National People’s Congress (NPC), the top legislature for reviewing.

Following are the key targets of the draft:

Economic targets

• GDP to grow by 7 percent annually on average
• More than 45 million jobs to be created in urban areas
• Urban registered unemployment to be kept at less than 5 percent
• Prices to be kept generally stable

Economic restructuring

• Increased domestic consumption
• Breakthrough in emerging strategic industries
• Service sector value-added output to account for 47 percent of GDP, up 4 percentage points
• Urbanization rate to reach 51.5 percent, up 4 percentage points

Innovation

• Expenditures on research and development to account for 2.2 percent of GDP
• 3.3 patents per 10,000 people

Environment & clean energy

• Non-fossil fuel to account for 11.4 percent of primary energy consumption
• Water consumption per unit of value-added industrial output to be cut by 30 percent
• Energy consumption per unit of GDP to be by 16 percent
• Carbon dioxide emission per unit of GDP to be cut by 17 percent
• Forest coverage rate to rise to 21.66 percent and forest stock to increase by 600 million cubic meters

Agriculture

• Annual grain production capacity to be no less than 540 million tones
• Farmland reserves to be no less than 1.818 billion mu

Livelihood

• Population to be no larger than 1.39 billion
• Life span per person to increase by one year
• Pension schemes to cover all rural residents and 357 million urban residents
• Construction and Renovation of 36 million apartments for low-income families
• Minimum wage standard to increase by no less than 13 percent on average each year

Social management

• Improved public service for both urban and rural residents;
• Improved democracy and legal system;
• Better social management system for greater social harmony;
• More than 10 percent of all residents will be registered as community volunteers.

Reform

• Encourage qualified enterprises to list on stock markets
• In-depth reform in monopoly industries for easier market entry and more competition
• Improved government efficiency and credibility

The stated goals roughly follow the CPC Opinion on the Plan discussed in my previous blog post. The following are particularly important/interesting to note:

The GDP growth target is reduced to 7%

The reliance on pseudo-accurate numbers to give the document an air of scientific precision. My favorite is the rise in forest coverage by 21.66 percent.

As always, there is no mention of HOW the plan will be implemented or HOW the plan will be financed.

What do you think?

I then explain the various options foreign companies have for going into China — still essentially confined to going it alone as a Wholly Foreign Owned Entity (WFOE, a/k/a Wholly Owned Foreign Entity or Enterprise or WOFE), Representative Office (Rep Office) or partnering with a Chinese company in the form of a Joint Venture (JV).  

Then we start talking about what sort of entity makes sense for this particular company. Nine out of ten times, the company wants to go into China on its own as a WFOE and that is where the problem sometimes starts. The company has heard that China is very capitalistic and “wide open” and did not know that is not really the case, particularly as it relates to foreign companies. 

China has what it calls its “Catalog for the Guidance of Foreign Invested Enterprises.” This catalog divides foreign investment into “encouraged,” “restricted” and “prohibited” investments. Foreign companies cannot invest in prohibited industries and foreign investment in restricted industries typically requires the foreign company joint venture with a Chinese company. Industries that are not classified into any of the three categories are generally assumed to be permitted.

So every once in a while, I have to inform the American or European company that it simply cannot go into China at all or that it can only do so if and when it has found a Chinese company with which it can joint venture. The moral of the story is that it makes sense to find out whether your proposed company can work in China at all, and to do so before funding market and operations research or China trips.

But this research is oftentimes not so simple and that is because a lot depends on how the business is defined when the application is made. The business scope is relevant to the catalog on foreign investment because a business sometimes can fit within one or more categories of the catalog and how you describe your business scope on your WFOE application can make the difference between approval and rejection. You sometimes can massage the description of your business scope to obtain more favorable classification.

BUT — and this is why I am writing this post now — if you under or overreach on the description of your business scope, you might find yourselves in big trouble.  We are getting an increasing number of calls from American companies in trouble with the Chinese government for doing things in their business that were not mentioned in the business scope section of their initial WFOE.

In some cases, the companies have admitted to us that they were never “really comfortable” with the business scope mentioned in their applications, but that the company they had used to form their WFOE had “pushed” them into it as it would “make things much easier.” In some cases, the scope of the business changed after the application was submitted and the company had failed to secure approval in advance for the change. And in some cases, the company probably would never have been approved at all had it been upfront and honest in its application. In nearly all instances, the companies had managed to secure local approval but were now in trouble with Beijing, which constantly is auditing these applications. In one instance, the local government went back and changed its mind, probably after conducting an audit of its own.

I cannot go into any more detail on these matters, but I can give this advice: applying for a WFOE in China involves a heck of a lot more than just filling out a form and getting approval. It does matter for what you get approved and you (or whomever you are using for your WFOE application) need to know China’s foreign investment catalog inside and out before applying. You then must tailor your application to meet both the requirements of the foreign investment catalog AND the reality of what you will be doing in China. A failure to comply on both fronts will lead to, at best, a rejection of your application and, at worst, being shut down months or years later.

If you take away nothing from this post, please at least understand that your getting local government approval for your WFOE does not mean you are out of the woods. There is little to no benefit in getting approval for a non-conforming WFOE.  

A major task for this year is the adoption of a 12th Five Year Plan by the National People’s Congress. This plan will be adopted during the March meetings of the National People’s Congress and the CPC. Guidance for the plan was adopted by the CPC last October in two critical documents: 

The Opinion of the CPC Central Committee on Establishing the 12th Five Year Plan (中共中央关于制定国民经济和社会发展第十二个五年规划的建议) (the Opinion) adopted on October 18, 2010

Explanation of the Opinion (央关于制定国民经济和社会发展第十二个五年规划的建议的说明) authored by Wen Jiabao and presented to the CPC Central Committee on October 15, 2010.

This preliminary review is based on those documents and on government and research institutes that have put out papers in response to those documents.

I. China’s Ten Major Challenges

The goal of the Chinese regulators is for China to become a moderately prosperous country by 2020. The current five year period will be critical in meeting that goal. China has recently reached a level where its per capita GDP equals $US4,000. Its goal is to achieve a $US10,000 per capita GDP by the year 2020. This is a critical transition. It is generally believed to be relatively easy for a country to achieve the $4,000 number. It is common, however, for countries to stall out in GDP growth and never achieve the $10,000 goal. 

The goal of the 12th Five Year plan is to prevent China’s growth from stalling. In the Opinion, the CPC identifies 10 factors that threaten the continued development of the Chinese economy:

1. Resource constraints: energy and raw materials.
2. Mismatch in investment and imbalance in consumption.
3. Income disparity.
4. Weakness in capacity for domestic innovation.
5. Production structure is not rational: too much heavy industry, not enough service.
6. Agriculture foundation is thin and weak.
7. Urban/rural development is not coordinated.
8. Employment system is imbalanced.
9. Social contradictions are progressively more apparent.
10. Obstacles to scientific development continue to exist and are difficult to remove.

II. The Theoretical Solution

Before discussing the concrete outline of the plan, the Party sets out the theoretical approach that will serve as the guide:

A. The Main Theme: Scientific Development

• “During the period of the 12th Five Year Plan, economic development remains the key to resolution of all problems.” (Wen Jiabao, quoting from the Opinion)
• Development must be “scientific,” practical (unconstrained by ideology), human centered, and sustainable.

B. The Main Line: “China must rapidly engage in a complete transformation of its form of economic development.”

It cannot be stressed sufficiently how radical is the proposed remedy. The idea is not to refine the current system, but to completely transform the current system in the brief period of five years. This is a bold goal.

The focus of transformation is as follows:

1. From export led consumption to domestic led consumption.

• From excessive reliance on exports to balance between export, import and domestic consumption.
• From reliance on foreign technology to reliance on domestic innovation.
• From reliance on “old” energy and materials and industries to creation of a low-carbon /new-materials based economy.

III. Ten Point Outline of the 12th Five Year Plan

A. In order to address the 10 challenges, and in accordance with the theoretical approach, the CPC proposes that the 12th Five Year Plan focus on 10 major areas, as follows:

1. Expand domestic consumption while maintaining stable economic development.

• Unleash domestic consumption This will be done through the measures at item seven below.
• Coordinate consumption, investment and export to create a balanced economy.

2. Modernize agriculture to create the new socialist rural village. .

• Modernize agriculture through mechanization and measures that allow larger farms.
• Invest in agriculture infrastructure, especially in waterworks.
• Create non-agricultural rural employment.
• Improve legal and financial development mechanisms.
• Improve agricultural service business in areas such as wholesaling, warehousing, processing, transportation and marketing.

3. Develop a modern, balanced industrial and trade structure.

• Develop service trade. Services currently contribute to less than 40% of GDP. The goal is to raise this number to 70% or higher.
• Develop modern energy and integrated logistics.
• Develop marine resources.

4. Advance the integration between regions and encourage stable urbanization.

• Combat regional disparities.
• Eliminate the urban/rural distinction. Cities at the second tier and lower must accept rural migrants. The goal is to provide for industrial/service employment for agricultural laborers in areas close to their current residence. This will be done to avoid a mass migration of rural residents into the tier one cities.

5. Promote energy saving and environmental protection.

Currently, for every 1% increase in GDP, China’s energy use increases by 1% or more. If this rate continues, China will need to increase its energy consumption by 2.5 times to achieve its 2020 economic goal. To put this into perspective, this would mean increasing the current consumption of coal from the current 3.6 billion tons per year to an astronomical 7.9 billion tons a year. No one in China thinks this can be done. One major way to reduce the amount of energy required for the Chinese economy is to implement energy saving practices throughout the economy. A second way to reduce is to shift from hydrocarbon based energy to alternative energy sources. The new plan advocates an all out program in this area.

6. Create an innovation driven society by encouraging education and training of the workforce.

The plan seeks to shift China from its role as the factory of the world to a new role as a technological innovator for the world. There are two components to this approach:

• China will need to become a domestic innovator in all areas of current modern technology, with an emphasis on practical industrial applications.
• Where China is not capable of domestic innovation, China will continue to import technology from advanced economies. However, China will seek to actively domesticate that technology through a program of “assimilate and re-invent.” The recent program for production in engines for high speed rail is offered as an example of the “assimilate and re-invent” approach.

7. Establish a comprehensive public social welfare system.

In order to meet the goal of unleashing domestic consumption, China has to move to a policy that puts more disposable income in the hands of its citizens. The plan proposed the following approach:

a. Labor and employment

China must provide jobs for a growing workforce. There are two key areas:

– It is estimated that over the next ten years, 200 million persons will be shifted from agricultural labor to urban industrial/service labor. Jobs for these persons consistent with their training must be provided.

– Currently, China’s colleges produce far more graduates than the economy can absorb. Entry level jobs for college and technical school graduates must be provided. Education must also be adjusted to accord with the realities of the job market.

b. Wages

Chinese wage are abnormally low. Most planners are pushing for tripling of the average wage for factory workers during this 5 year plan.

c. Provide comprehensive government benefit programs, especially retirement pensions.

d. Provide government funded medical services with comprehensive basic coverage by the end of 2011.

e. Maintain active population control.

It is interesting to note that two major issues are not effectively considered in the plan: the first is the cost of housing and the second is the cost of high school and college education. Though there has been some discussion of constructing low income housing, the measures proposed will do little or nothing to address the problem of affordable housing in China’s major cities.

8. Encourage cultural production in order to increase China’s “soft power”.

China will seek to make its case for the world to avoid misunderstanding China’s goals and its role within the world economy.

9. Increase the pace of reform of the economy.

• Financial market reform, especially the RMB.
• Energy price reform and price reform of other economic inputs (raw materials).

10. Continue with liberalization and “opening-up” to the outside, but on a new track.

• Shift from export only to a balance between export and import.
• Shift from inbound investment only to a balance between inbound and outbound investment. China will continue with its “going out” policy.
• Actively participate in international economic governance.

UPDATE: The Wall Street Journal Real Time Blog, in its post, “National People’s Congress: Not Just a Rubber Stamp Session” and Christina Larson of Foreign Policy in her post, ”What will be in China’s next Five Year Plan?” both cite to our post and then do an excellent job providing additional analysis of what we should be expecting from the Plan.

The weird thing is that my post to which All Roads refers, never once mentions the word “consultant” and, near as I can tell, had absolutely nothing to do with the issues All Roads raises in his post. I am not sure if All Roads mistook someone else’s post for mine or if he accidentally linked to the wrong post on our blog. Either way, I am glad for his mistake as it now gives me the opportunity to agree wholeheartedly with him and to expand a bit on his post.

All Roads’ post talks of how there “has never been a true debate about the role of a consultant, or how firms should look to work with these people/ organizations. A debate that I would say is sorely needed. Not because I think that there is anything wrong with the ‘China consultant’, but because I feel there is a disconnect between the value that these people/organizations provide, what the client needs, and how an engagement should be structured for success”

All Roads then provides two very good and very recent examples in his work as a China consultant where his clients hired him to consult on China and then failed to heed his advice, at their own peril. All Roads then concludes his post by nothing that “there is absolutely nothing wrong with the ‘China Consultant’.

I agree 110%.

And because I am not a China consultant, my perspective is fully neutral. 

Clients are always asking me and other lawyers in my firm for business advice and we are always very reluctant to give it. We are reluctant to give it because we are lawyers not consultants. If a client asks us whether we think their business should locate in Shanghai or in Chengdu, we might tell them that Shanghai courts/judges are much better than Chengdu courts/judges and so their IP will likely be better protected in Shanghai than in Chengdu, but we are not the people to talk to about rental rates, wage rates, electricity prices, water rates, quality of work force, etc. We have some idea of those things because we hear about them all them time from our clients, but our knowledge is mostly anecdotal. 

We refer those clients to China consultants. If they have questions regarding how they can best get their product from Qingdao to Quincy, we refer them to logistics consultants. If their question is whether their office in Dalian will really be that much cheaper than in Shenzhen, we refer them to real estate consultants. If their question is how much it will cost for them to build such and such kind of facility in Chongqing, we refer them to China operational consultants. If their question is where they should go for good and cheap widgets, we refer them to sourcing consultants. If the question is whether it makes sense for them to translate their English brand names into Chinese, we refer them to branding consultants. If their question is whether there is a need for their product or service in China, we refer them to marketing consultants. If they need help with financial or tax matters, we refer them to financial and/or accounting consultants.

Occassionally, clients push to have my law firm do these sorts of things for them and our response to that is always the same: if you want to pay lawyer rates to have us do things at which we have never claimed expertise, you can, but I strongly suggest you use those who actually do these things ever day. We are batting 1000 in that no client has ever retained us for any of the above. And that is because I view China consultants as absolutely critical in many circumstances. I often then tell them to be suspicious of lawyers who claim to “consult” in addition to practicting law.  

I have worked with dozens of “China consultants” and, almost without exception, I have found that when used properly, they bring real value to the companies that retain them. Until today, I never even knew there was a dispute about this, but if there is, please let the record reflect that I stand with the consultants on this one.  

What do you think? Consultants, good or bad?

1. I love my country — the United States.

2. Of course I believe in human rights.

3. The US should strive to be a beacon on human rights.

4. When appropriate, and in ways that are appropriate, the US should encourage other countries to maintain human rights as well. Not in an idiotic Jimmy Carter sort of way, but in a sophisticated Henry Kissinger/Bill Clinton/Ronald Reagan sort of way.

5. I supported Hillary Clinton for president up until the very last minute.

But Hillary (and Barack), would you please get a damn clue on human rights, would you please stop embarrassing my country, would you please stop being such hypocrites, and would you please stop using human rights as a way to advance your popularity at home. I am referring to the US (on today of all days) blasting China for human rights violations that mostly took place 20 years ago. I say today of all days because today is the day that President Obama is making nice to Saudi Arabia while touting his next day speech in Egypt. I am not saying that Obama should not be engaging in diplomacy with those two countries, but they are about as far from paragons of human rights as one can get. As we lawyers like to say, let’s look at the evidence:

1. Saudi Arabia is a country which denies the most basic of human rights to more than half of its population. Women are second class citizans and non-Muslims and homosexuals are denied virtually any rights. Criminals are not just executed, they are beheaded after thier execution. And does anyone seriously doubt that highly placed Saudi governmental figures funded 9/11 and continue to fund terrorism and extremism around the world?

2. President Mubarak is a bit more sophisticated than the Princes who control Saudi Arabia, which means only that he wears nice suits while imprisoning, torturing, or killing anyone who questions his authority or his health or his age or his autocratic lifetime rule or his passing on his “throne” to his son. This country too represses all its non-Muslims, having already driven most of them out and now working very hard to do the same with the rest. To the extent Egypt looks good, it is only because those striving to take over would probably be even worse.

If you are female, where would you rather be, Egypt/Saudi Arabia or China?

If you are a homosexual, where would you rather be, Egypt/Saudi Arabia or China?

If you are practice a religion other than Islam, where would you rather be, Egypt/Saudi Arabia or China?

If you are against the government in power, where would you rather be, Egypt/Saudi Arabia or China?

If you are going to be charged with a crime, where would you rather be, Egypt/Saudi Arabia or China?

If you are a journalist, where would you rather be, Egypt/Saudi Arabia or China?

We all know China is the answer to every single question set out above.

I am not condoning China but I do think that public denunciations of it are counterproductive in terms of effecting positive change there and I think they make us look downright stupid when we make no such denunciations of Saudi Arabia and Egypt.

I would prefer that we talk human rights with China in private, not in public. And if we are going to talk human rights a la Jimmy Carter, can we at least start the conversation with Iran, North Korea, Egypt, Syria, Libya, Sudan, Zimbabwe Saudi Arabia, Yemen, Somalia, or Iraq (yes Iraq, which though our “close ally” is really just your standard Middle East thugacracy). If we did that, the world might actually believe we are doing so because we care and not to gain political advantage at home.

Let’s get a human rights policy in place and stick with it, people. Near as I can tell, we still have none.

What do you think?

What I find so amazing about recent events in Libya is how the United States has rushed in to condemn Ghaddifi for doing what he has always done, which is to murder and brutalize his own people. I cannot help but view this as a case of the United States (and the world) not caring until they are embarassed when the killings show up on CNN. I do not agree with those in the United States and elsewhere who are talking about putting American troops’ lives at risk to intervene in Libya’s civil war.

The world did not want American intervention a few months ago and the world should not want it now. If anyone is going to stop the now public killings in Libya, it should be the Arab League (has that group ever actually done anything?), if it so chooses. The United States should and must stay out. And if the United States has the impulse to assist groups opposing their own government, I suggest it start with Iran, because at this point it is not clear that the fighting in Libya is that between a dicator and democrats as opposed to one part of the country fighting with another over oil.  

The article puts forth the following propositions:

1. Big Western companies often do not know how to litigate in China. They think the way to litigate in China is by having their BigLaw Western firm run everything and that is a big mistake.

2. Big Western companies often lose and lose big in China and then when that happens they blame China. 

He is 100% right and I will raise him one by saying the same thing is true in reverse with respect to Chinese companies in the United States and the same thing is true just about everywhere.  

Let me explain.

Gao’s thesis is that multinational companies “allow their beliefs and assumptions about cultural differences to prevent them from seeing the reality of the [litigation] situation in front of them.” He then talks about a China IP litigation matter lost at the lower court by Schneider Electcic and then settled by Schneider without pursuing all possible appeals. Gao notes how “to many observers, this case offered a clear example of how Western multinationals simply cannot get a fair hearing in Chinese courts,” but Gao writes on how “things could have turned out very differently” for Schneider.  

Gao lists the following as what went wrong on Schneider’s case:

Schneider hired multiple law firms, both Chinese and foreign. On an informal basis, Schneider consulted still other firms (including my firm, Fangda Partners, on an unpaid basis). But since foreign firms are barred from appearing in Chinese courts, the firm that actually argued the case before the court was a relatively small Beijing firm. However, strategy and arguments were chiefly formulated by a large and well-known British firm, which coached the Chinese firm.

If Schneider had been sued in any other country, would it have used the same strategy? I doubt it. In Europe or the United States, Schneider would have immediately sought the best litigators with experience in the relevant jurisdiction. Instead, it opted for a team of firms led by a familiar international name–albeit one that, by Chinese law, could have zero experience of Chinese courts.

In contrast, Chint hired only one medium-sized Chinese firm hailing from Wenzhou, where the case was heard. From accounts I received from Schneider in-house lawyers who attended the trial, these shrewd and articulate lawyers outmatched their Beijing adversaries in court thanks in part to their thorough understanding of the issues.

Gao then talks of how he thinks Schneider still could have prevailed on appeal, but instead, chose to settle:  

So why did Schneider settle for more than half the damages award? The president of Schneider’s China operations told the Financial Times at the time that the company was “happy to stop fighting.” (A spokesperson for Schneider declined to comment for this article.)

Perhaps the company had had enough of what many regard as the unpredictable, inscrutable Chinese court system. Avoiding the courts at any and all cost has long been the dominant litigation strategy of multinationals in China. Like poor Bouriscot [of Madame Butterfly fame], they can become so fixated on the differences between China and the West that they cast more sober analysis aside. 

Now I have absolutely no idea what happened in the Schneider case (beyond what other people have said about it) nor do I have any idea of what Schneider’s chances on appeal would have been, but I can tell you that I have many times seen what Mr. Gao describes. I have seen it with foreign companies in China and elsewhere and I have seen it with Chinese and Korean and Russian companies in the United States. I have even seen it with American companies in other states.  The “it” to which I am referring is an over-reliance on existing counsel and an unwillingness to delegate sufficient authority to local litigation counsel.

I would love to be able to tell my own stories to be able to back all of this up, but I cannot talk about the times I have seen this sorts of mistakes, without either revealing client confidences, angering clients and attorneys who I do not wish to anger, or both. So you will just have to trust me when I say Mr. Gao is speaking the truth and that when you have a case in a foreign country, you should seek out top-flight local counsel and give them enough authority to actually run your case.

When you are involved in a litigation matter in a foreign country, you are on someone else’s turf and usually the best way to try to neutralize that is to use the right local attorneys. I do not care how good your United States or British attorney is, that attorney does not know the local Chinese courts and judges as well as Chinese lawyers who are allowed to appear in Chinese courts. Your regular counsel can and should play a role in much of your litigaiton oversees, but that role should usually be more in the nature of in-house litigation counsel, not first chair trial counsel.  

What do you think?

Because my firm is in a tech center and because so many of our existing clients are in tech or tech related businesses, we get a fairly steady stream of people/companies who come to us ready to make their fortune on China’s Internet, without having even the slightest clue how different it is. This article is for them and I highly recommend it for anyone else interested in marketing or selling or whatever on China’s Internet. 

What do you think?

I have no doubts about China Policy Pod not just because I have been friends with Josh for some time (though that is a factor), but because many years ago he had an excellent blog and, more importantly, he churned out really first rate podcast interviews for AmCham’s China Brief Insight over the last couple of years (including an interview with me regarding Joint Ventures in China). The fact that Josh is already three for three with excellent podcasts on his new site also certainly does not dissuade me. 

Josh has a Masters Degree from Columbia University’s School of International and Public Affairs and he is a true policy wonk. If you are interested in the China big picture, I highly recommend you check out China Policy Pod. 

This guide is also free and it is amazing. It consists of 245 pages and it does a better job than any book I have seen in describing and graphing China’s regions, provinces and cities. I have seen other books that have sought to do what this book does, and most fall flat, mostly regurgitating a bunch of boring government generated statistics. This guide is also replete with statistics, but it does such a nice job in compiling them and graphing them that it makes for a fascinating and highly informative read. 

It is going to be the book to which I refer clients seeking to know more about the colossus that is China and I highly recommend it to anyone doing business in or with China, or just interested.

What do you think. 

The 19th Session of the 11th National People’s Congress last week revised the criminal code to provide that it is a crime for a company to intentionally withhold the wages of employees. A company that does this is subject to criminal fines and the responsible individuals are subject to imprisonment for up to seven years.

This is obviously a very significant issueand we are not surprised by this law change.

We are frequently contacted by owners of WFOEs in China who are experiencing financial difficulties. Very often the owner/manager reports that the company is behind on paying wages. Our advice alawys is to deal with the wage issue immediately because local officials will not allow a company to liquidate or restructure when wages are outstanding.

Now, our advice on wages is even more critical.

If you do not pay your wages, there is a good chance that you, as the manager/owner, will be charged with a crime and you could face seven years in a Chinese jail. Note also that this law change has retroactive effect. That is, if you failed to pay employees before the law was passed and that failure to pay continues, you are subject to criminal prosecution.

The new legislation is as follows:

1. Article 276(1) of the Criminal Code is revised to provide that wilfull withholding of employee wages with is a crime. The elements of the crime are as follows:

a. The company has the means with which to pay the wages.

b. The company willfully withholds payment of wages by either refusing to pay or by intentionally transferring assets to escape liability for payment.

c. The situation is serious or the effects are severe.

2. The company is subject to fine. Persons within the company who are directly responsible are subject to fine and imprisonment. Imprisonment is up to three years where the situation is serious and up to 7 years where the effects are severe.

There are several points that are not clear. The most important are:

1. How does a company demonstrate that it does not have the means to pay? A simple statement will not work. In our opinion, the only way to ensure that there is clearly no means to pay is to file for a formal petition in bankruptcy or to go through the complex economic based layoff system prescribed by the Labor Contract Law. 

2. Who is directly responsible? For a normal WFOE, this will certainly include the general manager and the Representative Director. It will also likely include accounting or related personnel if they are actually responsible for making the wage payment decision. This almost certainly means this applies to the foreign Representative Director, even if that person is based outside of China and is not involved in day to day decision making.

You cannot rely on these possible defenses to liability. You must take payment of wages seriously. You do not want to be in the position of making a defense after you have been arrested for a serious crime. Chinese employees have become very aggressive about ensuring their foreign employers pay their wages. This weapon will be added to the employee arsenal and we expect the weapon to be used aggressively.

In the past, we always stressed to our clients that if they were not going to pay their Chinese employees, they had better leave China before making that clear as we have been involved in a number of hostage situations involving non-payment of debts. We have also always stressed that their failure to pay those wages will almost certainly mean that their company will never be allowed back into China and many of those connected with the company will likely be barred as well. 

We will now be telling them that if they stay in China or seek to return to China at some later date, they run the very real risk of going to the big house for a long time. 

What do you think?