On June 10th PRI USA hosted the “Critical Areas for China Business Success in 2021 and Beyond” webinar inviting Russell Brown OBE, the Managing Partner of LehmanBrown International Accountants. The webinar covered insights regarding “What Mid-Sized Companies Must Do Now to Thrive in the World’s Largest Growth Market” and discussed some real-life examples of what business has done to make the most of their China endeavour.

Dwight Nordstrom from PRI USA started the presentation by establishing that even though overseas media portrays China negatively, three-fourths of business are optimistic about the market in the recent AmCham Business Survey. China is too profitable to ignore, and its growth is bigger than Europe, the USA, and Japan combined and made more appealing by RCEP (RB-add full name and description), which facilitates trade across Southeast Asia, including Korea and Japan.

The future could be very positive for business, however, the key to their success in China is to have a proper market entry strategy or China strategy if already there. An overseas company cannot change China, but it can navigate through the difficulties; one example is working with partners using RMB rather than the dollar as more suppliers and partners can easily operate. Another issue can be the high tariffs for trading goods. Still, in China, it is possible to negotiate to reduce tariffs, making a considerable difference for a China market strategy, e.g. are you bringing in a finished product or product parts mixing with locally made or sourced parts.

In dealing with China’s current COVID restrictions for inbound overseas travel, the recommendation is to establish a China plan that considers any mission to enter China to last at least six months. If that is not possible, businesses have to optimize their operations in China by keeping in contact with the team, supplier and partners. There are also plenty of opportunities to hire new talent; even if hiring would have to be done via outsourcing or via zoom, there is a lot of professional talent available.

Next, Russell Brown OBE began by explaining his view of the Chinese market. His view was very optimistic due to the pent-up demand following the trade dispute years and Covid, and many new opportunities to take advantage of new economic zones established across China. Currently, even though business representatives cannot travel freely into China, most clients are preparing the necessary documents and strategies for when China opens its borders. While companies wait to launch their China operations, companies should be establishing their presence or reassessing their existing model of operations, review incentives available to businesses, regional offerings and the new zones, reviewing tax structuring and transfer pricing, cost base in China relative to HQ and other countries, assessing the infrastructure, marketing strategy, e-commerce platforms, and distribution methods to name a few.

Financing is a significant issue to all overseas businesses in China as there are strict transfer restrictions on foreign exchange movement, which can hinder or shut down an operation completely where cashflow shortages arise. Therefore, Russell advises businesses to know what their future capital requirements are, to use intercompany accounts receivables and payables to balance cash movement in the payment in the sale and purchase of products, negotiating better credit terms and payment terms, review other intercompany cross border charges for royalties, services, cost-sharing agreements, R&D sharing, and for transfer outside of China, dividends.  In case of potential shortfalls, local funding can be sourced. For example, bank loans can be taken out against assets or the factoring of receivables. What is critical for working capital management is continued rolling cash flow forecasts and then testing these with sensitivity analysis. Forecasts are normally considered an accountant’s duty, but in practice, they are needed.

The webinar was a great success, and LehmanBrown would like to wholeheartedly thank PRI USA for organizing the webinar and inviting Russell Brown OBE to be their guest speakers. For those interested in receiving the slides or would like to see the webinar, please email events@lehmanbrown.com.

If you would like to discuss your situation or China market entry plan, please email enquiries@lehmanbrown.com.