L-R: Geneve DuBois, Tony Alfonso and Qiang Li of DLA Piper

With the hype of trade war between China and the United States, China passed the new Foreign Investment Law on March 15, which will go into effect Jan. 1, 2020. Although the details of this law are still cloudy to the foreign business community, it seems that the intention behind the law is to welcome more foreign investments into China. Foreign investments into China have been increasing in the last five years, mostly through corporate stock purchase. With the passing of the new Foreign Investment Law, more foreign companies and individuals, including many from the United States, are interested in learning about the market and opportunities in China. Many consider China as a high-risk market with potential higher return. However, the reason that most people hesitate about investing in China is their fear of the unknown. We have worked with various brave businesses and individuals with their investments and expansion into China over the years and have witnessed how they overcome fear and challenges and achieve successful results in their ventures. This article focuses on a high-level discussion of some key factors to consideration when investing in China:

Establish China-Oriented Strategies

The strength of U.S. businesses as a whole is their understanding of the importance of having well-established business strategies. However, developing business strategies for the U.S. market versus cross boarder investments are completely different because there are many additional considerations when investing in China that would not be otherwise needed for the U.S. market. For example: • How and when money can flow in and out of China; • Effect of currency exchange rate; • Potential cross boarder tax consequences; • Types of projects or companies in China in which foreign entities can invest; • Political and global economic climate; • Differences in the investment cycle and expected return; and • Effect of the differences in the legal system.

Although it seems daunting to address the additional considerations such as the ones listed above, global businesses generally have no problem establishing good strategies to tackle these issues. The key is to seek help globally from experts, lawyers and consultants who already have experiences in these areas. One tool that experienced experts and lawyers typically utilize is to effectively use the global platform (i.e., advantages provided by different countries) as source of solutions in structuring investments into China.

Investors should consider additional time and expenses needed in the beginning for education, due diligence and connecting with local partners and market. The strategy should be divided into different logical phases and incorporate a clear exit strategy for each phase. Effective tailored China oriented strategies can reduce risks and assist investors in managing investment process and expectations in their investments in China.

Be Aware of Culture Differences

Many U.S. individuals are deceived by the western looking buildings located in the modernized Shanghai, Beijing and other large cities in China and mistakenly think that the modern China must be very similar to the big cities in the western world. This assumption is the root of many problems that U.S. investors face in China. Although the modernized China has been influenced by the western world in the recent years and many local Chinese speak excellent English, there are fundamental differences in business practices and culture between businesses in China and the United States. For example, in China, businesses are built primarily on strong personal relationships and return on investments sometimes is not the only or most important consideration. Due to these reasons, Chinese tend to over consider others' feelings and usually use much softer approach in rejecting or opposing others' offers or ideas. Therefore, they may not come across as straightforward as westerners. This is a main reason why western businesses sometimes complain that they don't really know the true intention of their Chinese counterparts.

The key is to be aware of these cultural differences and to surround yourself with trusted experts who know both cultures and can assist in bridging the gap. Don't rely on a translator to play that role. In fact, hiring a good translator is important as that translator is your “voice” in China, but a translator usually is not trained to bridge culture gaps. It is important to engage experts who can translate verbal and body language, proactively identify and resolve any misunderstanding, facilitate relationships between the U.S. investors and Chinese counterparts, enhance communications between the parties and educate both parties on the differences in their cultures. You will be surprised how much you learn about your own culture when you are learning about other people's culture. It can be fun and rewarding.

Good Local Partner(s)

A good local Chinese partner can be U.S. investor's guide in the China market and can reduce a lot of the investor's anxiety caused by the unknowns of the market and culture. However, it is critical for a certain level of trust to be developed between the parties. This is probably the most challenging step in the past for U.S. investors to expand into China.

In recent years, several global developments have helped to ease the pain to locate and build trusted relationships with local Chinese partner(s). With open door policy of China in the past years, various Chinese companies have ventured out into the U.S. market and already have investments in the United States. These companies generally have large presence and operations in China and are very connected locally with the community and the government. They are also somewhat familiar with the U.S. system and culture so that they can anticipate questions and challenges from U.S. investors into China. These Chinese companies are good choices to partner with for investments in China. The ideal situation would be for both parties to be joint venture partners in their investments in the United States and China and utilize each other's strengths and connections in both markets. When proceeding with this strategy, U.S. investors must be aware of potential change of management team and power and the implications of this change.

Another route to find good Chinese partner(s) is to go through Hong Kong which is a “soft landing” option. Hong Kong business culture is mostly based on the western system, including the U.K.-based common law legal system. U.S. investors would have more in common with Hong Kong companies than with mainland Chinese companies. In addition, many large Hong Kong companies have already been investing in China so they already have in depth experiences in China market as a “foreign” investor. By partnering with a well-established Hong Kong company, U.S. investors can enjoy a more westernized partner who understands China market. U.S. investors should know that Hong Kong companies may have certain limitations in investment in China and they usually do not have the same level of opportunities for investments as mainland Chinese companies.

The most important advantage for U.S. investors to partnering with the two groups stated above is the groups' annexation to the western legal system (United States and Hong Kong). It would be easier for U.S. investors to enforce contract rights in these jurisdictions. Experts, lawyers and consultants who work in these jurisdictions can usually make appropriate introductions and provide guidance in picking the right partner(s) and structuring ownership interests and management control in the joint venture relationships.

Your advisers should not only have the subject matter expertise and experience but should have Chinese team members who speak Mandarin and preferably other Chinese dialects and can connect with the local Chinese people. These types of advisers will have the ability to pick up small things in the parties' behaviors, relationships and interactions which maybe the key to the success of the U.S. investors venture into China.

The new China policy presents a unique opportunity for U.S. investors to expand into the largest rapidly expanding global market. Fear of the unknown should not keep U.S. investors from moving into the China. The right team of advisers and the right local partner can help overcome the complexities and challenges faced by U.S. investors who are starting their journey to expand into the China market. It is important for U.S. investors to choose the right strategy, adviser team and local partner to increase their chances of success in the China market, which will also help bring together United States and China businesses and markets.

Ying Geneve DuBois is a partner and Tony Alfonso is of counsel at DLA Piper in Miami. Qiang Li is the firm's Asia regional co-managing partner in Shanghai.