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Path: Sourcing News & Advice
>> Import from
China Advice >> China due diligence: The most
basic things to do

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China due diligence: The most basic things to do

Posted: August 13, 2014

by Dan Harris

Succeeding at doing business in China typically requires a good partner. The
odds of having problems with a Chinese company will be substantially lower if
you are dealing with a “legitimate” Chinese company. That means it makes sense
for you to ascertain that you are dealing with a legitimate Chinese company.

But how do you go about doing that? How can
you distinguish between a Chinese company that is legitimate and one that is
not?

The following are the basics for making that determination:

The first thing you do is ask the Chinese company to send you a copy of
its business license. Do not be afraid to do this. Chinese companies do this
all the time. If the Chinese company refuses to send this to you, walk
away.

You then have someone fluent in Chinese and with knowledge about Chinese
business licenses examine the one that you have been sent. Our China attorneys
typically look for the following:

To determine whether it is real or not. This is done by comparing the
information on the business license provided with the corresponding
information on the relevant Chinese government website — usually the local
State Administration for Industry and Commerce (SAIC). If the business
license you have been provided is fake, you walk away.

To see when the company was formed. We like to compare what the real
business license says against what we were told (by email or whatever) and
also what the Chinese company says on its English language and its Chinese
language website. If different years are given in different places, we get
suspicious and we ask more questions.

To see where the company is located. We like to compare this against
both what we were told (by email or whatever) and also against what the
Chinese company says its English language and its Chinese language website.
If there are different addresses in different places, we get suspicious and
we ask more questions.

To see what the scope of the Chinese business is, as listed on its
registration. If the scope is “consulting” and our client thinks it will be
ordering five million dollars of widgets from a factory, we get really
suspicious. Looking at the scope is a good (though not always fool-proof)
way to determine whether you are dealing with a manufacturer or a
broker.

To see the amount of registered capital. If the amount is too low, the
odds are good that it is not a manufacturer. If the amount is really high,
the odds are good that this is a big company. Note that this information is
not going to be as commonly listed in the future.

Lastly, you should go visit the Chinese company or send someone you truly
trust to do so.

Doing the above is not going to be nearly enough due diligence for big deals,
but it is usually a relatively fast, relatively cheap way to get a good sense
about the Chinese company with whom you are thinking of doing business. The
above will not guarantee you a good long-term relationship, but it oftentimes
will be enough to let you know whether or not you even wish to attempt to form
any relationship at all.

Dan
Harris is founder of the Harris & Moure law firm,
a boutique international law firm focusing on small and medium sized businesses
that operate internationally. China is the fastest growing area for the firm.
Dan writes ChinaLawBlog.com as a
source of China legal and business information.

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