Sample Essay on Chinese Commercial law

Introduction

Background of China’s Hotel market

China’s economy has been going through exceptional structural growth and development driven by the rise of tertiary sector and consumption rates (Davidson 29). With the country’s steady growth in GDP, the hotel sector is more likely to continue adjusting thus elevating other service sectors. Most hotel owners and investors are increasingly becoming richer with the financial gains derived mostly from the sales of selective hotel products (Davidson 31). Notably, the market-wide hotel tenancy has also increased consistently in line with the growth in GDP averaging the economic gains. In essence, the ‘new normal’ global economy is transforming China’s hotel industry with constant restructuring and market segmentation. With the upsurge in domestic tourism, hotel tenancy has been on the rise implying increased revenue and expansion. Similarly, due to the growth in real estate developers in China’s hotel sector, the current developments in the industry are expected to continue (Davidson 34). Additionally, future investors driven by the market growth will also accelerate industrial growth. Notably, with the country set to host the 2022 Olympic Games coupled with a strong growth in outbound tourism, China’s hotel industry rise is a reality.

Purpose of evaluating joint venture in China

Joint ventures are strategic investment opportunities and are widely viewed as the cheapest way of gaining entry into the Chinese hotel industry. Just like in most foreign markets in other parts of the world, succeeding as a sole proprietor in the Chinese market is difficult. Strict commercial laws that demands that a foreign institution must possess minority ownership in enterprises (Kaye, Marianna, and William 497) guide most business practices in the China. As such, joint ventures in the Chinese markets are very common although the difficulties associated with managing such entities are apparent. A proper evaluation of these joint ventures in China is, therefore, a necessary condition. The strict commercial legislations in China entail that joint ventures will always be an option despite of the apparent risks that are associated with such endeavors. Any foreign company operating in the Chinese market must make a choice between investing through joint ventures and opting not to enter into the market (Kaye, Marianna, and William 497).

This entails a number of ‘best’ practices permitting an increased probability of success of these entities. The primary purpose of this evaluation is to carry out a careful selection of the Chinese joint venture partner to enhance chances of success and survival in a market so much maligned with market competition. These include a prudent consideration of the company’s experience in the Chinese market, veracity, level of expertise and networking. This in most cases entails the interested company sending a group of experts into the Chinese market as a demonstration of commitment to invest into the specified industry. The foreign firm interested in investing in the Chinese market is also obliged to carry out an in-depth shortlisting of potential partners, their management criteria, and stakeholders. The company must also carry out a serious background check on the potential partner to ensure that the decision they will make will be in best of their interest. This will include checking whether the company has any pending civil litigation and pending debts with the suppliers and other market players (Kaye, Marianna, and William 499). In addition, the company must carry out interviews with the potential partner’s customers and other active partners that are already operational in the industry. The principal objective is to certify that the future partner is honest enough with a verified trail record of performance in the market.

Given the many risks associated with joint risks, possible access into a competitive market should only be activated when necessary. A potential industry investor should be active in exploring all possible alternatives during planning phases (Kaye, Marianna, and William 507). The core focus should also be placed on the long-term market competition, as the potential partner may be a future market rival. Not all vital facets surrounding any form of partnership should be taken for granted whatsoever. Knowing the motive of the potential partner before any active involvement in the market is also a necessary condition that cannot be ignored whatsoever. For instance, if the poetical partner is planning to produce related product or services while still active in the joint venture, the risks of competition is even bigger.

Evaluation of the joint venture will also ensure a thorough definition of the markets and products that the company will be venturing. An additional significant purpose of evaluating joint ventures in China is to warrantee the calibration of technological transferal. All the contractual agreements should be taken into keen consideration embodied in strong structural principals. Any transfer of technological application should be conducted based on viable agreements between the joint venture parties to eliminate any potential backlash. All the employees inherent from both parties should also be subjected to a range of discretion and non-competence settlements. An investor coming into China for the first time must first register a trademark before investing.

Scope of the legal issues

A joint venture can be described based on a number of facts entailing diverse business objectives and affiliated with strategic interests in the global market. All the partners in a joint venture contribute equally to the accomplishment of the stipulated objectives. A number of lawful issues, however, must be taken into due contemplation before scheduling for a joint venture agreement. For instance, both parties must subscribe to a noncompetition agreement form where all parties must agree not to compete with each other during the same period or at the expiry of the venture. This provision is purely based on customers’ geographic locations, for instance, both parties to the joint venture must have a pre-existing client connection before making any commitment. There is also the provision on concealment that is an explicit definition of the diverse obligations of the parties to the enterprise (joint venture).

For instance, ensuring the safety of all private transactions and data is a sole obligation of parties to the venture. Each party must feel safe and comfortable when sharing vital information that may be crucial in assisting the venture to attain its stipulated objectives. Both parties should also define agreements on opportunities provisions describing what type of opportunities do fall within the jurisdiction of the Joint Venture. A crucial issue spins around the best ways through which the joint venture will make similar decisions on whether to pursue a particular business opportunity. For instance, one party to the venture may be skeptical about pursuing a certain opportunity while the other may be comfortable with it. This calls for all the venture parties to agree to subscribe to the varied prospects that may arise in the market. Another important legal issue is the liquidation clause that stipulates whether the joint venture parties are in a position to effectively terminate the agreement. Terminating an agreement must be based on the various winding clauses that both parties must first subscribe to.

Current situation of the JVs in China’s hotel market

The first joint venture hotel was commenced in China back in the 1980s involving the Jianguo Hotel that was involved with another Hotel from Hong Kong. Currently, the country has seen experienced massive growth in the Hotel industry, a fact accredited to the increasing GDP. Most multinational hotels venturing into the Chinese market can only succeed through joint ventures and ownerships. Joint venture hotels in China comprises of about 2 % of the total hotels in China. Before the recent growth of the multinational investments majorly from foreign hotel groups, China was recording relatively poor growth in the industry. This can be traced back to a record of poor planning coupled with uncoordinated management of functions, an explicit explanation of the declining nature of the Chinese hotel industry. However, there has been an increase in the number of foreign hotels that have started expanding their interest in the country.

The basic description of JVs law

All joint ventures in China are strictly regulated by the commercial laws with a viable legal regime that permits the formation and application of contractual Joint ventures in the country. When a foreign multinational company is willing to invest in China, the company must duly complete a number of Joint venture documents before being allowed by the Chinese authorities. The primary aim is to test competence and to dismiss any potential monopoly. These documents are filled in a foreign dialect and the services of a quality local Translation Company is involved in Chinese translations. The documents further outlines such markets that the company will be allowed to operate in with an option of investing in other relevant sector as a feasible expansion program. The other purpose of the JVs documents is to ascertain whether the company is in a good position to comply with all relevant legislations and administrative requirements, strict observance of the Chinese business moral and ethical standards, conducting transactions in purely good faith, and subjecting themselves to full government supervision and regulations.

The possible period and restrictions of the partnership is also explicitly stipulated under these crucial documents. China being a very profitable market for the establishment of a hotel despite the vivid challenges that are associated with such activities requires competence and diligence. As aforementioned, one feasible method of venturing into the Chinese hotel industry is through the creation of joint ventures between foreign multinationals and Chinese entities. A joint venture can be described as types of corporation pitting two or more affiliate parties who together pool their respective resources in the accomplishment of common business purposes.

The basic situation of China’s hotel market

Most hotels gaining entry into the Chinese hotel industry have been facing a number of challenges that have discouraged some of these foreign companies. For instance, these international hotel investors have been in the past subjected to unpredictable government policy (commercial laws) related to the instituting and administration of these hotels. Moreover, the Chinese private sectors have not established appropriate mechanism to successfully regulate the industry without necessary relying on the stipulated commercial legislations. In addition, the responsibility and influence of China’s cultural sensitivity can also be attributed to the slow pace of growth of the country’s hotel industry. Given that most of the foreign hotels in the country do enter through joint ventures, it is important that they articulately comprehend the country’s cultural complexities (also known as Guanxi) (Shenkar 83).

This stresses on the importance of initiating a viable relationship with other players in the industry and with the society. Whereas, most foreign and domestic hotels that are seeking to expand operations in the country do experience a vital challenge of scarce skilled expertise. This is particularly common among luxury hotels players who are obliged to increase their number of employees (Shenkar 88). Manual work in China is in most cases viewed as an ‘insult’ to individual ego implying that getting workforces to work in the construction sites is undeniably difficult. The development of these international hotels, for instance, the Hilton has been a success in most parts of China. A prediction on the future performance of the international hotels in China can be recognized as a success. Companies such as the Hilton hotel have constructively impacted the industry’s aggregate revenues with their constant investment in the market.

What is the legal issue involved from JVs in hotel market?

A Hotel Joint Venture is in most instances limited in terms of time of operation and jurisdiction with strict regulations from Chinese government authorities. Some of the advantages of a joint venture include; the inherent ability to freely access the workforce and equipment of a partner to the ‘partnership’ and accessing the Chinese’s affiliate company sales and supply network already established within the country (Shenkar 88). A joint venture will allow the foreign company to articulately access the type of relationship existing between the Chinese’s company market competitors and a potential reduction in the red tape among other administrative disturbances. However, the potential rise in conflicts between JV partners and the vulnerability to the constant advent of technological applications coupled with a potential dispute over how to share profits are some of the apparent challenges facing this type of corporation.

The primary challenge of initiating a joint venture into the Chinese market is the insufficient market knowledge that most of these foreign multinationals have ranging from legal to socio-economic factors (Shenkar 89). In reducing such potential risks that are associated with joint ventures, it advisable to make an explicit agreement on how to manage a joint venture involving a Chinese partner. In addition, the foreign company must ensure that they have majority rights in the control of the establishment to eliminate any possible legal backlash. Article three of the Chinese commercial laws is very explicit in its assertions. The article provides for the legitimate formation of a joint venture inside China’s trade territory. The provision further provides for the restriction and guidance of the foreign company’s jurisdiction in China.

A legal issue case study for joint venture between Hilton hotel and Wanda Real Estate Company

The Hilton hotel is a multinational hospitality corporation operating in different countries in various parts of the world. The company owns some of the most celebrated and expensive hotel openings around the earth. The primary objective of the company is to remain one of the market leaders in the hospitality industry with an inspiration of showing kindness and being generous in its service delivery. The company, in cooperation with the Wanda Real Estate group has in the past managed to open up active braches of the Hilton hotel in various parts of China. A pipeline of Hilton hotel development in China is currently being supervised and managed by the same Wanda Real Estate company. Wanda group is undeniably a leading real estate company in China with investments amounting into billions of shillings. With more upscale Hilton hotel developments in various parts of China under their supervision, the partnership between these two major industry players can be described as ‘effective’. The company has been in partnership with the hotel corporation developing several hotel branches in the country. Hilton hotel considers the Chinese market as a key ‘market’ and are keen to cement their control of this indisputably large market niche.

Legal issues involved

A critical analysis of this case study reveals that the primary constraints that existed in this partnership could be attributed to the limited accessibility of relevant market information. Essentially, in China’s hotel industry, the development and provision of appropriate an relevant information that is accessible to hotel companies wishing to enter into this market is limited to the number of projects that they can effective execute. In fact, there are a number of legal constraints ranging from paper works to repressive Chinese commercial laws that have constantly proven to be ‘ineffective’. Such relevant information that Wanda Real Estate company provided to the Hilton hotel included; information concerning possible future projects with signed documents indicating intent and the potential scale of development initiative with Wanda as the sustainable joint venture partners. Additionally, this partnership targeted acquisitions, which amounted to billions of cash in investments and were extremely demanded by the public. Another primary legal constraint revolved around the authenticity and accuracy of data and information on market trends in the Hotel industry that were gathered from the Chinese government archives. Additionally, there was a possibility of the socio-economic condition varying given the large number of competitors in the Chinese hotel industry.

Sub question of Law encouraging JVs in hotel market

Tax reduction

The possible transfer of company vital assets when committing to a joint venture may involve certain tax consequences (Leung 405). This is because when transferring assets, the value of stamp duty and capital addition taxes increases considerably. Per se, parties to the joint venture are obliged to structure their various transactions in such a way that a tax reduction can be realized. For example, both parties may decide not to initiate any transfer of assets (Leung 408). This will instead give the partnerships (joint venture) the absolute right to these assets as an alternative to transferring their ownerships. However, this will entail a thorough consultation with competent tax advisers who will design the best way to go about it (Leung 409). All resources imported into China by the joint venture shall be liable to exception from taxation in accordance with the Chinese taxation legislations. Unless the Chinese Government restricts the item, taxes on various commodities meant to be exported shall be reduced considerably. Also, the joint venture shall be exempted from remitting taxes especially on imported raw materials to be used in the production process as clearly stipulated under relevant Chinese tax provisions.

Tax refund

Depending on the situation, a joint venture in the Chinese market is always taxed as a corporation with no possibility of tax refund. The flow of profits in a partnership is distributed among members depending on the levels of investment and commitment into the business. Given that profits that are accrued in this type of business arrangement is divided among members, tax liability or rather corporate taxation scheme is a responsibility of the parties. The venture itself doesn’t operate as a legal person and, hence holds no liability to tax filings on any other flow of cash (Leung 415). Under Chinese commercial laws, a joint venture is not considered as a ‘business structure’ implying that it does not require any legal proof of existence as long it fulfills its tax obligations.

A joint venture in most cases experiences very exceptional tax disputes given that the Chinese commercial legislations consider it a form of partnership. The imbursement of taxes in this form of partnership according to chapter 9 of the Chinese laws on JVs will be in agreement to various legislations of China Republic (Leung 416). All employees working at the hotel shall remit individual income taxes. All possible taxes directed towards the joint venture shall be subjected to serious review by the management in accordance with set legislations especially on the duty free commodities that shall be imported into the Chinese market. This implies that there are no provisions on tax refunds under the Chinese tax laws.

Government support for export

As aforementioned, the only support that the Chinese government shall offer is a potential reduction on taxes levied against exports. The core reason is to encourage internal production and limit imports ensuring self-sufficiency in the long run. Provided the item for exported is not under any restriction from the state, the Chinese government will offer full support to all export activities conducted by the joint venture.

Higher currency exchange rate for invest into Bank of China

Any recorded losses or possible gains guided by the Chinese standard currencies will define any difference in the exchange rates systems. As such, the high exchange rates, which are normally as a result of different market exchanges, will not affect the operations of the Joint Venture. There will be no exception especially in the procedures relating to exchange rates systems.

Sub question of law restricting JVs in hotel market

Limit invest industries

In an effort aim at limiting foreign investment companies operating in China, the corporation applying to start a joint venture shall be subjected to a range of competency tests. An approval for operations shall be denied based on a number of feasible reasons (Lu 147). For instance, if the company shall have been proved to violate any of the Chinese commercial laws and a detriment to China’s trade freedom, the permit shall be refuted. Furthermore, any company that shall have violated any of the Chinese laws will be rendered incapable of operating in the Chinese market (Lu 148). Additionally, a foreign company that shall have not conformed to certain provisions as highlighted in the country’s economic projections, for instance legislations on pollution, shall be denied permit to operate in China. An investment partner should command at least more than 25 % in total investment in the desired field in China (Lu 149). This will be regarded as valuable partner capable of sustaining market pressures and among other dynamics.

How legal issues would affect joint venture hotels in future

A joint venture is a good opportunity to carry out an in-depth assessment of the market dynamics based on the strengths of the competitors and styles of management. The aforementioned legal provisions that do govern the operations of a joint venture will ensure that only such partner with the ability to steer the partnership into success is chosen. The legislations also provide a ground to trust and make joint decisive efforts towards the attainment of set aims and purposes. These legal issues will provide grounds under which various conflicts between the joint venture partners shall be approached and sorted with discretion.             

Conclusion

Hotel joint ventures in China are on the rise with most investors viewing it as an opportunity to expand operations and acquire more in terms of assets and market control. Foreign companies entering the Chinese market need to be cushioned against number legal restrictions in the China’s hotel industry. Joint venture is the only easy way through which a foreign company can claim a fair share of market among other commercial benefits. China remains to be a strange market setting for many multinational corporations both in terms of legal and cultural complexities. As such, Chinese trade brings the insight and competence into an arrangement coupled with comprehensive business network that in long run benefits both parties. In addition, a Chinese business partner in a joint venture will help in cementing a viable relationship with other relevant government authorities and the private sector. In essence, a joint venture is a form of successful market entry under reduced monetary constraints given the complex legislations that governs commercial entities in the Chinese hotel industry.

 

Work Cited

Davidson, William H. “Creating and Managing Joint Ventures in China.” California Management Review 29.4 (1987).

Kaye, Marianna, and William GK Taylor. “Expatriate culture shock in China: a study in the Beijing hotel industry.” Journal of Managerial Psychology 12.8 (1997): 496-510. A study of outsourcing strategy: a case involving the hotel industry in Shanghai, China. International Journal of Hospitality Management

Leung, Chi Kin. “Locational characteristics of foreign equity joint venture investment in China, 1979–1985.” The Professional Geographer 42.4 (1990): 403-421.

Leung, Kwok, Zhongming Wang, and Peter B. Smith. “Job attitudes and organizational justice in joint venture hotels in China: the role of expatriate managers.” International Journal of Human Resource Management 12.6 (2001): 926-945.

Li, Ji, Kevin Lam, and Gongming Qian. “Does culture affect behavior and performance of firms? The case of joint ventures in China.” Journal of International Business Studies (2001): 115-131.

Lu, Yadong. “Joint venture success in China: How should we select a good partner?.” Journal of World Business 33.2 (1998): 145-166.

Pine, Ray. “China’s hotel industry: serving a massive market.” The Cornell Hotel and Restaurant Administration Quarterly 43.3 (2002): 61-70.

Shenkar, Oded. “International joint ventures’ problems in China: Risks and remedies.” Long Range Planning 23.3 (1990): 82-90.

Yu, Larry, and Gu Huimin. “Hotel reform in China a SWOT analysis.” Cornell Hotel and Restaurant Administration Quarterly 46.2 (2005): 153-169.