How to Handle China's Slowing Economy

It may not be foolproof, but a good contract goes a long way toward protecting your company when the Chinese economy slows.

The China lawyers at my firm have been receiving a lot of emails similar to this one lately:

Hi. I run a _________ company in _________  and we have come upon a situation with one of our customers. A part of our business is renting out _________ machines. One of our customers just went out of business. Since this customer owes a substantial amount of rent to its landlord, the landlord has locked the shop down with all equipment, including our machine (which our customer was leasing to own), still inside. The landlord is saying it will release everything only after reaching agreement with our customer. But since the owner and all significant employees of our customer have left town, I don’t think that will ever happen.

The situation is vague as many things are here, but we would like to get our machine back.

Does the landlord have the right to keep our property (the machine) and if not, if there is anything worthwhile that we can do about it?

Here was our response:

Without reviewing your lease contract with your customer we have no way to know what you can and should do. If you have a really good contract (preferably in Chinese and chopped by your customer) that makes clear that the ______ machines belong to you unless and until your customer fully pays for them, then you should show that to the landlord and the odds are good it will let you walk off with your machines. If you don’t have such a contract, I wish you good luck because at that point it is not likely to be very clear who owns what.

Emails like this one reflect a larger issue. In 2012, I wrote a piece for the Wall Street Journal entitled China’s Slowdown and You, on the impact China’s slowing economy was having on foreign companies doing business with China. In it I asserted the following:

  • The Chinese government “is more concerned with social harmony than with economic numbers” and so it will continue encouraging wage growth even though higher wages make China’s factories less competitive.
  • China highly values the contentment of its citizens’ and that means it will continue getting tougher on foreigners, just as it has always done when times are tough. Everything foreign businesses do will be under heightened scrutiny.

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  • The Chinese authorities are throwing new roadblocks in the way of foreigners seeking to form businesses in China. Beijing and local governments are increasingly eager to distinguish between “contributing” and “noncontributing” foreigners, which means it has never been easier for well-funded, nonpolluting foreign companies to secure approval to operate in China — and it has never been tougher for foreign companies that pollute, pay low wages, or have no plans to hire Chinese employees.
  • Chinese manufacturers, particularly those that compete with companies from lower-wage countries like Vietnam and Bangladesh, are suffering — in particular in low-tech, low-wage industries such as manufacturing of textiles, clothing, shoes and low-end electronics and toys. Foreign companies that do business with Chinese companies in these industries must keep up their guard.
  • The key to weathering China’s slowdown will be for foreign companies to go back to basics. They need to think afresh about what they contribute to China’s economy and how that is likely to shape policy makers’ opinions. They should focus on scrupulous regulatory compliance and conduct (or re-conduct due diligence on the companies with which they conduct business.

Though the above is still true today, the news for foreign companies doing business in or with China isn’t all bad. A greater number of China businesses are getting savvier, more sophisticated and more international. Even though China’s low-end companies are suffering, its high-end companies are getting bigger and deeper, as they strive to provide a product or a service (or a product and a service) that can compete anywhere. The existence of such Chinese companies is not new; my point is that these are the companies that are proliferating and growing in strength (or at least not shutting down), and more Chinese companies are realizing that stepping up their game is the best way for them to survive. For more on this trend check out The New Role Of Written Contracts For Product Purchases In China.

China’s most recent economic hiccup is a double-edged sword for Chinese manufacturers. On the one hand, the renminbi’s devaluation improves the competitiveness of Chinese manufacturers that don’t source many components from outside China. On the other hand, Chinese manufacturers are increasingly cut off from funding sources, and those that were undercapitalized to begin with are headed for trouble. And foreign customers are the last to know, and the first to suffer. With this in mind, our best advice to protect your financial interests is (1) document all transactions in simple, concise language so that if there is a fight over the failing Chinese company’s assets, it will be clear what actually belongs to you, and (2) do your utmost to determine the financial wherewithal of your Chinese counter-parties before you pay one cent.

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In other words, the importance of choosing your China partner and having a good contract with such companies has never been greater. These two steps aren’t foolproof, but if you do both you’re a lot less likely to get burned, China slowdown or not.


Dan Harris is a founding member of Harris Moure, an international law firm with lawyers in Seattle, Chicago, Beijing, and Qingdao. He is also a co-editor of the China Law Blog. You can reach him by email at firm@harrismoure.com.