Following up on the last post, there’s another terrific post on the China Law blog (linked to China Briefing) that cuts to the same point: it’s difficult to secure property rights if there are huge barriers to acquiring deeds/title or doing business in the country. China Law’s Dan Harris says:
It makes my blood boil because, quite frankly, there are a number of consultants out there who are essentially lying to their clients about what it takes to form a company in China. They make it sound easy and cheap and so when I tell them it is difficult and expensive, they often think I am trying to put one over on them. Part of the problem is that in many countries it is easy and cheap to form a company. In China it is not easy and if it is cheap, something is wrong and something will go wrong. One large part of the problem is minimum registered capital. Chinese law says it must be at least 100,000 RMB, which equals roughly $13,000. So the fly by night company formation consultants use this to claim that the minimum capital requirement is $13,000 and so when we tell prospective clients we expect their minimum capital requirement to be around $240,000, some of them are thinking we just must not be very connected.
Without exception, every single UESer who has had connections with China and every single law student I know who has lived there, says that they have great connections. This is part of the noise in the system that you need to filter out when thinking about business in the country. Read: you should assume everyone thinks they have connections and that these connections are also seeking out the best deals. So we ought not to be seduced by this siren song.
Rather, as Dan counsels, consider more realistic expectations should you want to create a long-term wealth-generating enterprise (and be prepared to renegotiate the terms):
Every company in China must have a stated registered capital. The registered capital includes all of the components of the initial investment in the company, including its start up cash, contributed property, and transferred intellectual property. Where the registered capital is small, the entire amount must be contributed immediately upon formation of the company. If the amount is large, it may be contributed in installments. … It is also a crime to withdraw registered capital after it has been contributed. The purpose of registered capital is to provide some notice to creditors of the capital adequacy of the company. Because of this, Chinese regulators take very seriously the rules regarding registered capital. …
Many foreign investors think registered capital is some sort of security deposit that they can never utilize. This is not true. On the other hand, some foreign enterprises believe they can simply withdraw their registered capital after the Chinese company begins normal business operations. This also is not true. Once the capital is contributed to the Chinese company, it can never be withdrawn. The only way to get funds from the Chinese company out of China is by repatriating profits or by liquidating the Chinese company.
If you haven’t gotten the hint already, read the entire damn post. So usually the cost of doing business in China will be higher than you think, as it certainly is in Indonesia. These are not business backwaters of the United States crying out for investment by Americans. We know that a free flow of labor would be in their best interests, but that’s not their idea of fun either. That’s economic actors dealing with differing time horizons (thereby seeing different payoffs for various actions) for you. But the main point I am raising here relates back to the previous post’s discussion on property. Promoting legal certainty and investor property rights would go a long way toward healthier, more prosperous interactions between the nations of the earth:
The moment Westerners were able to focus on the title of a house and not just the house itself, they achieved a huge advantage over the rest of humanity. With titles, shares and property laws, people could suddenly go beyond looking at their assets as they are (houses used for shelter) to thinking about what they could be (security for credit to start or expand a business). Through widespread, integrated property systems, Western nations inadvertently created a staircase that allowed their citizens to climb out of the grubby basement of the material world into the realm where capital is created.
The poor are not the problem we think they are, but the solution to their own plight. The time is ripe to take the definition of property away from conservative legal establishments, which see the law as an unmovable edifice, and put it in the hands of politicians who realize that the law is a social consensus.
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