Labor Law is a relatively new phenomenon in China, with the first comprehensive law passed

in 1994. The new law, adopted by the National People’s Congress (NPC) on 29th June 2007,

looked to redress some of the poor working conditions found in China, particularly for the

average worker. Prior to the passage of this law, most Chinese employee’s in small-medium sized

firms lacked employment contracts. Morever, they were short-term, giving employers the flexibility to

frequently bring in a new, often cheaper hires whenever they saw fit.

It is a mistake for foreign investors to either become extremely nervous about their China operations or to be excessively complacent. Fraud and non-compliance issues for many Foreign Invested Enterprises are serious issues and in the majority of cases these companies already have their suspicions. Common indicators are abnormal transactions, high turnover of staff (in some cases no turnover at all), fluctuating bookkeeping records and possibly no profit-making for overly long periods of time.

It would be wrong to second guess every decision by the management in China. It would be wrong to expect everything in China to operate like back home. However, it is equally wrong to place blind

trust in management and accept any problem which arises in being “that’s China”.

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Fraud and Corporate Governance in Foreign Invested Enterprises in China

By Klaus Koehler, Managing Director, Klako Group

Many small to medium-sized companies come to China with the idea that establishing their Representative Office, Limited Company – Wholly Foreign Owned or Joint Venture will be an easy and quick process. However, after going through the establishment process, hiring local employees, whether it be managerial staff or lower levels and during the startup period, foreign investors are finding that in China “everything takes much longer than expected and nothing ever turns out the way one imagines.” 

Problems in Foreign Invested Enterprises (FIEs) can vary from outright criminal activity to serious non-compliance issues. Many of these problems are foreseeable but due to a lack of poor management and lack of control from the foreign investors, these issues are frequent and can cause not only monetary punishments but also jail time.

Many problems in FIEs can be traced back to their initial establishment and the project’s structure. There will often be a disconnection between the reality and the great expectations of the foreign investor. The incoming management will often be placed under additional pressure to meet the unrealistic expectations. It is recommended that when establishing your entity in China, a detailed business plan is created in order to make the procedure more smooth. Be prepared for unexpected occurrences and delays in the startup period.

 

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All information in this report is verified to the best of our ability and is assumed to be correct at time of release; however, Klako Group does not accept responsibility for any losses arising from reliance on the information provided within.

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Interview with Mr. Darron Barrows, the director of Total Global Steel Asia Limited

Our company was established in 1999. Headquarters in London and we have subsidiaries in Frankfurt, Freetown, Dubai, Hong Kong and Shanghai. Our London Company has membership to the European Climate Exchange, BlueNext and the London Metal Exchange amongst others and we offer customers brokerage in all major commodities including carbon. We also supply physical metals and have long standing supply relationships with raw materials providers globally, including Chinese Steel mills.

Our Chinese company (Total Global China) is a Limited Company Wholly-Foreign Owned and under our business scope we provide carbon and environmental-related services.

To read full interview, please click here to view magazine (PDF file)