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IPG has seen great development in China over the past decade, but worries that many recent developments projects are occurring to quickly and without proposer feasibility studies. Opportunities abound in China, but the recent issues with retail and residential space notes an issue that can kick investors in the butt – China has a real estate bubble that may be ready to pop. The bubble may be bringing opportunities to the more creative investors.

The Financial Times has noted that:

  • As crowds shouted and pushed for the latest iPhone in Beijing on Friday, a glitzy mall across the street was bathed in silence, with just a handful of shoppers hunting for bargains.
  • The frenzy at the Apple store underscored the rise of the Chinese consumer, a development that analysts say is needed to support the global economy and make China’s growth more sustainable.
  • But the empty SOHO complex cast a different light on what is happening in the world’s second-largest economy: consumption is rising, but not nearly as fast as vast shopping centres are being built.
  • A boom in the number of malls without a matching increase in actual shopping gets to the heart of what analysts see as the fundamental problem of the Chinese economy: too much investment, too little consumption.
  • “There was an exponential two or three years where record numbers of malls were built around the country,” said Frank Marriott, senior director for Asia at property consultant Savills. “It has to take a bit of a breather.”
  • Within a half-hour walk from Beijing’s fashionable Sanlitun district, eight shopping complexes have opened in recent years. While one mall called the Village – home to the Apple store that was pelted with eggs on Friday – is bustling, many of the others are visibly struggling.

We will be posting articles, in the near future, for investors interested in capitalizing on the Chinese real estate bubble.

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As those of you who have read my blog over the past 6 or 7 years (I can’t even remember how long I have been writing it) you know that I have always been a big fan of Hong Kong. Ever since 1989 when I sailed into Hong Kong on U.S. Navy ship as a young U.S. Marine Officer I have been enthralled with the city.

While the dramatic beauty of Central and the sky scrapers overlooking Victoria Harbor against a backdrop of lush green mountains, the iconic Star Ferry and other attractions make it my favorite city in the world, it is the business climate and rule of law that make it the best place in the world to do business.

I have written about this in Hong Kong and the Rule of Law and Hong Kong Phooey and numerous other articles on the topic. I also advise my clients from all over the world on using Hong Kong as the only legal corporate structural platform for their entry into China and South East Asia. Well, we now have another reason to support Hong Kong as a market entry, financial and administrative center for China operations – regardless of the scope of business.

China’s State Administration of Taxation just announced a change in the rules governing the withholding tax that foreign investors pay on dividends repatriated from their share of investments in Chinese companies. Companies and shareholders based in countries outside Mainland China (such as the United Kingdom, Hong Kong and Singapore) that have double taxation agreements (DTAs) with China will only have to pay 5% in withholding tax on the dividends they receive from Chinese companies, instead of the usual 10% payable by companies and shareholders resident in countries without DTAs (U.S. and many EU companies).

Although the reduced rate has been available for several years Hong Kong holding companies did not meet the ‘substantial business activity’ requirement which has in effect been removed. So, now there is even more reason to use Hong Kong as the structural platform for you operations in China and beyond.

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We have dealt with hundreds of clients over the past decade within our operations in China and, overwhelmingly, those company clients that have failed have fell into the below categories.

To note, the vast majority of the clients that have retained us from the beginning of their entry and have heeded our advice have succeeded (some, however, have not – China is loaded with risks).

Some we have, in recent years, advised, strongly, to look to greener pastures with lower labor costs, thus, foregoing our services of winding-up a company in China because of low margins caused by increased labor costs (most have not listened).

The clients that have listened have used our Southeast Asian/South Asia market entry services. Our favorite destination, for most low-skill manufacturing, these days, is Bangladesh and Cambodia. We are finding most low-margin and low value-added businesses should consider, first, Bangladesh and Cambodia and forgo China and other markets with drastically increasing labor, tax and compliance requirements. The Chinese government is even advising this.

However, China is becoming the must-be investment destination for those in consumer products, industries that can capitalize on the growing Chinese middle class, tech and medical equipment manufacturing companies and manufacturing that requires skilled labor at labor costs that are much lower than OECD economies (Korea beware).

We have had a few clients, over the years, squeezed out because of reduced margins or a failure to be able to capture on the Chinese middle class (normally poor market research), but few that had the typical shareholder dispute and government compliance issues that are increasingly the bread-and-butter of our China law firm. Regrettably, many of these bread-and-butter clients, previously, have hired legal and business professionals that were nothing but hacks or utilized counsel with no experience in China (flying out a couple of times a year and no office in China is a clear sign of a hack)

Here is our list. If you have any to add, drop me a comment and I will likely add your comment to the list:

  • Wrong joint venture partner. We find many people have done little to no due diligence on the partner and finds, quickly, that the partner is a shark. A shark with friends in the government and teeth that love to bite.
  • No or poorly drafted shareholder agreements. Must be drafted by an experienced international attorney doing business in China. A guy from the West coast U.S. that flies in for a few cases a year is not adequate. Some of these guys are great marketers: beware and screen counsel.
  • No feasibility study. Legal, Technical and Cost. Again, not from a guy sitting on a sofa in NY. We refer to the best for technical and cost work. However, the best is not cheap and the process won’t simply take a couple of weeks. Good guys in this business are systematic. Systematic guys need time. Trust us, we have never seen an opportunity simply disappear.
  • Flagrant violations of Chinese law. If you are in the local newspaper, call your lawyer quickly. Know the law and follow the law to the tee. Compliance doesn’t, simply, mean hiring a Chinese compliance officer that graduated from law school last year. It, also, doesn’t mean hiring a lawyer sitting on a sofa in NY.
  • Stepping on the wrong guys toes. Easily avoided. Stay low and dry. The head of our China Practice Team was a U.S. Marine officer and he has learned to always keep his head down and his socks dry.
  • No Friends in China. Read: “How to Make Friends and Influence People” by Dale Carnegie and make a lot of Chinese friends and hire people that have a lot of friends in China.
  • No IP Protection Strategy. I wrote so much about this on this blog that I am not going to bore you.
  • No Internal Processes to Check Quality of Products. If you are producing junk – its your own fault. Build a system and no junk will be produced. If you can’t build a system, we know a Swiss guy that builds systems that will drive you nuts, but will, without a doubt, end in a quality product. Unless you sell junk (scrap metal, trash incineration etc.), then, keep up the good work.
  • No Understanding of Chinese Consumer Behavior. We use the best company in market research in Asia (and these guys are quite small). All clients that we have referred have been satisfied, because they are not simply performing surveys, but understand how to read consumers. Simply, Idea Analytics is the best, since they use the best algoritism (weed out the clutter) and have experience with reading Asian consumers.
  • Hiring the Wrong Senior Employees. Executive recruiters operating based on contingency, only, will normally feed you anything and often the anything is crap. If you have crap working for you, you will produce crap. Some of the international head hunters operating in China are no better. We have referred to two recruiters in China and had minimal issues with them (communication is not great though), but this is because if they won’t feed us crap, since we will feed them nil in the future and give them an ear full.