Working with Chinese companies is nothing new for foreign businesses around the world. Perhaps you’re buying from them, selling services, or working with them in China itself. Most of the time these business agreements are benign and everyone turns out happy, but the risks are well-documented, too.
For instance, we’ve all heard stories of foreign buyers finding a Chinese company that seems suitable online, sending money for an order, and then losing the funds after the ‘vendor’ disappears. There have also been instances in the news of a Chinese company appropriating a foreign businesses’ IP, such as their trademarks.
So, what can a foreign buyer do to assure that they’re dealing with whom they believe they are? In this post, we're going to examine why and how to find basic company information and shareholder structure which can give you a lot of helpful information when vetting a future Chinese business partner's company.
Common Red Flags
These days, more than ever, it’s simple to log on, go to Alibaba, for example, and search for a Chinese company; especially if you’re trying to purchase some goods or materials.
But is it safe to assume since they’re listed online that they’re ‘safe’ to do business with and then go ahead?
The simple answer is: It depends on how much risk you’re willing to take.
There are 3 common red flags or dangers facing you when dealing with a new Chinese company, regardless of if you’re buying from or working with them.
- They have a history of ‘bad behavior,’ such as tax evasion or having court judgements against them.
- They are not who they say they are. For instance, a trading company telling you that they’re a manufacturer when in fact they are merely a middleman posing as one (meaning that your visibility and control over your supply chain is sorely lacking).
- They are using a local office, say in the USA, to deal with customers, but the work is done in China. This opens you up to IP abuse as you may only sign an agreement with the local company, while the Chinese one is not bound by one.
Of course, online company listings aren’t going to give you any of this information. So, unless you’re being given a word-of-mouth recommendation that a company is reputable, it makes sense to run some company checks to uncover any red flags before starting a business relationship.
But what can be found out and by whom?
Performing checks on Chinese companies
Let’s assume you have found a Chinese company you’re interested in dealing with.
Now, plan for the worst and perform checks on them before signing agreements or placing orders.
For most Western businesses finding in-depth information that can speak to a Chinese company’s trustworthiness is difficult as everything is in Chinese. But the good news is, a lot of helpful information can be found online about Chinese companies these days thanks to rigorous checks and information storage when companies are set up and maintained for tax purposes (as you will find out if you set up a WFOE in China).
Here’s what you can and should find out when evaluating whether a company is a suitable business partner:
- Company name - this is a given, but is the name on record the same as the name the business gave you? If not, why not? Are they hiding something?
- Company address - see above. Confirming name and address helps weed out scammer and traders posing as manufacturers.
- Unified social credit code - this will appear on a company’s Chinese business license and can be referenced with official tax records to demonstrate that a company is authentic.
- Company status - is the company still in operation? If not, this is not a good sign that a company is being honest with you.
- Registered capital - has the company invested enough money to function as the business it is meant to be for approximately the first 2 years of expenses? For instance, a manufacturing facility must register far more money (at least half a million RMB) than a service company due to the lower financial demands of the latter. If the registered capital is too low for the business this company is saying they’re in, that’s a red flag.
- Shareholder structure & legal representative - this helps you to know who you’re dealing with or should be. Do these names appear anywhere on documents you’ve been given?
- Date of establishment - cross-check this with what you know. If the company is very newly established, proceed with caution.
As you can see, this information helps you to verify that your potential partner or supplier is legitimate.
An example of Hongda’s company check report
Here at Hongda, we perform the checks on Chinese companies for you. A report will be created outlining a lot of the above information in English that will help you make your decision. Here’s a report (with identifying information obscured for confidentiality):
You should cross-reference this information with the information you’ve been given by the company and that you can find online.
This will help you to make a more informed decision with a great deal more peace of mind.
What does it cost and how to get started with your check?
A Chinese company check report like this costs 450 USD and will be available for you in 3 working days.
Before starting work, it will help us for you to provide us with as much company information as possible about this company to be investigated. That would include, company name, address, contact names (such as the manager, etc), telephone number, website, etc.
Reports are issued in Chinese and English, and if you have any questions about the company and report we will be happy to answer them in English as a follow-up.
You can contact us any time to discuss starting your check.