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Ebner Stolz China

Upcoming Webinar: China Cross-Border Data Transfer

SAFE THE DATE. We are pleased to invite you to our upcoming webinar:

China Cross-Border Data Transfer: Cybersecurity Strategy, Compliance & Cross-Border Resilience

21 October 2026 11am (CET) / 5pm (China time)

Experts from T-Detecon, Q-Bridges and Ebner Stolz China will discuss the latest regulatory, cybersecurity and strategic developments affecting cross-border data transfers between China and global headquarters.

The webinar will combine legal, technical and management perspectives and provide practical guidance for foreign companies operating in China.

Key topics will include:

  • China cross-border data transfer requirements and recent regulatory developments
  • Lessons learned from recent enforcement cases
  • Data mapping, classification and cross-border data assessments
  • Cybersecurity strategy and cross-border resilience
  • China – HQ data governance and operating models
  • Cybersecurity readiness and maturity assessments
  • Practical steps companies should take now

The session is designed for management, legal and IT leaders who need to understand what data is transferred, which risks exist and how to establish a compliant and resilient China-HQ setup.

How can we help you?

Philipp Senff

Partner

  • +86 21 6330 9962
  • philipp.senff@cn.ebnerstolz.com
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  • All team members

China’s New Regulation on the Protection of Trade Secrets

Executive Summary

On February 24, 2026, the State Administration for Market Regulation (“SAMR”) promulgated the Regulation on the Protection of Trade Secrets (“Regulation”), which took effect on June 1, 2026, simultaneously repealing the Several Provisions on Prohibiting Infringement of Trade Secrets issued by the former State Administration for Industry and Commerce in 1995 (“1995 Provisions”). The Regulation expands from 12 articles to 31, transforming trade secret protection from a set of general prohibitions into a comprehensive regime built upon the Anti-Unfair Competition Law (“AUCL”). It modernizes trade secret law for the digital economy, expressly bringing data, algorithms, and code within scope, and addressing emerging scenarios such as electronic intrusion and remote-work security.

For foreign companies operating in or with China, the Regulation signals a shift toward proactive compliance, as enterprises are expected to establish internal trade secret management systems rather than relying solely on post-infringement remedies.

We recommend that foreign companies promptly assess their trade secret portfolios and protection measures against the Regulation’s standards, including reviewing their classification and protection frameworks, updating employment agreements and non-disclosure agreements, and ensuring that confidentiality provisions are sufficiently specific and aligned with applicable data security, cybersecurity, and export control regimes in China.

Detailed Content

1. Key Innovations

Prior Framework (1995 Provisions + AUCL)the Regulation
ScopeGeneral references to technical and business information “Practical utility” requiredData, algorithms, code, and computer programs expressly protected “Practical utility” abolished – commercial value alone suffices
Infringement categoriesBroadly statedSystematized across acquisition, disclosure/use, breach of duty, indirect infringement, third-party liability
Confidentiality measuresGenerally referencedEight enumerated categories with specific examples, including remote-work and cross-border scenarios
Rights holdersTrade secret ownersOwners, licensees, and authorized persons may independently file complaints
EnforcementNot procedurally specifiedFull procedural chain: complaint → preliminary evidence → filing → investigation → presumption mechanism → penalty
PenaltiesUp to RMB 200,000RMB 100,000–1,000,000 (standard) RMB 1,000,000–5,000,000 (serious) Confiscation of illegal gains
Extraterritorial reachNot addressedExpressly covers foreign conduct affecting China’s market
Enterprise dutiesNot specifiedEnterprises are encouraged to establish trade secret management systems

2. Expanded Definition of Trade Secrets

The Regulation defines trade secrets as technical information, business information, and other commercial information that meets the following criteria: 

  1. The information is not publicly known. 
  2. It possesses commercial value. 
  3. The rights holder has taken corresponding confidentiality measures to protect it.

The table below sets out the scope of technical information and business information under the Regulation:

Technical InformationBusiness Information
information relating to technical activities, including but not limited to:

Structures
Raw materials
Formulas
Materials
Samples
Patterns
Processes
Methods
Data
Algorithms
Computer programs
Code
information relating to business activities, including but not limited to:

Creative concepts
Management
Sales
Finance
Plans
Samples
Customer information (including customer names, addresses, contact details, transaction habits, and intentions)

With respect to the technical information, the explicit inclusion of code is a new addition, enabling software companies to protect source code through trade secret law in addition to copyright registration. The inclusion of data and algorithms addresses the core assets of AI and data-driven enterprises.

An important conceptual shift from the 1995 Provisions is the abolition of the requirement that trade secrets possess “practical utility”. Under the Regulation, commercial value, whether actual or potential, is the sole value standard. This reflects the reality that in innovation-intensive industries, even information that does not yet have immediate practical application may confer significant competitive advantage.

3. The Three Elements of Trade Secrets

Under the Regulation, information qualifies as a trade secret only if all three elements are satisfied:

ElementCore Test
1. Not Publicly KnownNot generally known or easily accessible
2. Commercial ValueActual or potential economic value
3. Confidentiality MeasuresReasonable measures taken to maintain secrecy

3.1 Not publicly known

Core standard

  • Not generally known to relevant personnel in the field.
  • Not easily accessible through lawful means.

Key points

  • The Regulation assesses whether information is publicly known at the time of the alleged infringement, which means that subsequent public disclosure does not affect a prior finding of infringement.
  • General knowledge, industry practice, and information obtainable from marketed products or public channels (e.g., publications, media, exhibitions) are excluded.
  • Information derived from public channels may still qualify if it has been organized, improved, or processed.

3.2 Commercial value

Core standard

Commercial value includes both actual and potential economic benefits.

  • Actual value: increased assets, revenue or profit growth.
  • Potential value: user growth, cost reduction, shortened R&D timelines, increased transaction opportunities, and enhanced reputation.

Key points

Interim research results and failed experimental data or technical solutions may also has commercial value if they meet the above criteria of actual or potential value.

3.3 Confidentiality measures

Core standard

The right holder shall adopt reasonable and corresponding measures to maintain secrecy.

  • Includes contractual, organizational, physical, and technical measures:
    • Contractual: confidentiality agreements or clauses.
    • Organizational: Internal policies, training, and written notices.
    • Physical: restrictions on entry to facilities and differentiated management of sensitive areas.
    • Technical: role-based access, data anonymization, and log tracking.
    • Judicial practice insights

Merely executing a confidentiality agreement does not automatically ensure that the information will be recognized as a trade secret. Courts in certain regions have rejected claims where:

  • The scope of protected information is defined in overly broad or generic terms; or
  • Specific protected information is not clearly identified.

Companies must ensure that their agreements and internal policies identify protected information with sufficient specificity, clearly communicate the scope of confidentiality obligations, and implement measures that would, under normal circumstances, be adequate to prevent disclosure.

4. Systematized Infringement Framework

The Regulation define prohibited conduct across five dimensions, significantly refining the broadly worded framework under the 1995 Provisions.

CategoryKey Focus
Improper AcquisitionHow secrets are obtained
Disclosure and UseHow secrets are exploited
Breach of ObligationsViolation of confidentiality duties
Indirect InfringementInducing or assisting infringement
Third-party LiabilityLiability of downstream recipients

4.1 Improper acquisition

The Regulation prohibits obtaining trade secrets through theft, bribery, fraud, coercion, electronic intrusion, or other improper means. The improper means include the following:

  • Unauthorized or excessive contact with, possession of, or copying of documents, items, materials, or raw materials containing or from which trade secrets can be derived.

This rule extends the concept of “theft” beyond the direct carrier to indirect carriers.

  • Bribery, coercion, or deception of rights holders’ employees, former employees, or other persons to obtain trade secrets.
  • Unauthorized or excessive access to digital office systems, servers, email accounts, cloud drives, and application accounts, or obtaining trade secrets through malicious programs or vulnerability attacks. 

This definition is notably broader than traditional “hacking” and also covers employees using valid credentials for unauthorized purposes (e.g., bulk downloading before departure).

  • Downloading or transmitting trade secrets to electronic devices, email accounts, or cloud storage not controlled by the rights holder after authorization expires.

4.2 Disclosure and use 

The Regulation prohibits disclosing improperly obtained trade secrets, using them, or allowing others to use them. 

TypeScope
DisclosureDirect useUse after modification or improvementPassive use (e.g., using a competitor’s trade secret to avoid failed research paths)
UseMaking information publicly known or readily accessible

4.3 Breach of confidentiality obligations 

The Regulation prohibits violating confidentiality obligations or the rights holder’s confidentiality requirements. Specifically, confidentiality obligations may arise from multiple sources: 

SourceDescription
ContractualExpress confidentiality clauses
ImplicationBased on the contract purpose, trade customs, and good faith
Express DemandsSpecific confidentiality requests by the rights holder
Internal RulesCompany policies and internal regulations

4.4 Indirect infringement 

The Regulation prohibits instigating, inducing, or assisting others to infringe trade secrets. Detailed examples include: 

  • Explicitly or implicitly inciting or directing others to infringe.
  • Explicitly or implicitly inducing others through material rewards or job promises.
  • Providing funds, technology, or equipment with knowledge that the recipient is infringing. 

This provision targets the common practice of poaching competitors’ employees to obtain trade secrets. The inclusion of “implicit” inducement, through suggestion rather than explicit instruction, is significant, though in practice its application will require careful factual assessment. Where a recipient has actually used trade secrets brought by a new employee, the finding of joint infringement will ordinarily follow, unless the recipient can provide evidence that it was misled by the employee and had no knowledge of the use of such trade secrets. Where no use has yet occurred, proving implicit inducement requires substantial evidence and the alleged inducer may rebut the presumption through alternative explanations.

4.5 Third-party liability 

The Regulation extends liability to third parties who knowingly acquire, use, or disclose infringed trade secrets, and applies to both operators and non-operators, including natural persons, legal persons, and non-legal person organizations. 

In assessing whether a third party “knew or should have known”, the Regulation requires a multi-factor analysis considering the following:

  • Degree of confidentiality of the information.
  • The reasonableness of the acquisition channel and method.
  • The transaction price.
  • The relationship between the third party and the rights holder.
  • Industry practice.

5. Safe Harbors

The Regulation codifies five circumstances that do not generally constitute trade secret infringement:

  • Independent discovery or self-development.
  • Reverse engineering, including disassembly, surveying, and analysis of products obtained through public channels. 

Notably, Chinese judicial practice establishes three conditions for a valid reverse-engineering defense: 

  • The product must have been lawfully obtained from public channels.
  • The person conducting the reverse engineering must not have had prior access to the trade secret.
  • The party asserting the defense must provide actual R&D evidence documenting the reverse-engineering process.
  • Former employees of the rights holder using general knowledge, skills, and industry experience acquired in the course of their employment. 

This provision protects employees’ fundamental right to earn a livelihood and change employment, while preventing employers from unduly restricting the use of employees’ general skills and experience. However, the boundary between permissible application of general skills and impermissible reproduction of trade secrets requires careful delineation: an employee who naturally applies broadly transferable professional experience does not infringe, but one who deliberately memorizes, reproduces, or replicates specific parameters, formulas, source code, or detailed business information of the former employer crosses the line into infringement.

  • Disclosure to state organs for the purpose of exposing illegal or criminal acts or safeguarding national security or the public interest.
  • Other circumstances not constituting infringement.

6. Administrative Enforcement System

The Regulation establishes a comprehensive administrative enforcement framework that addresses the traditional challenges of trade secret protection:

  • Difficulty in discovery.
  • High evidentiary burdens.
  • Inconsistent enforcement standards.

6.1 Expanded rights holders 

The Regulation defines rights holders to include not only trade secret owners but also licensees and authorized persons, who may independently file complaints with market supervision authorities. This significantly broadens access to administrative remedies, and a licensee discovering infringement no longer needs to rely on the owner to act.

6.2 Structured complaint and evidence framework 

When filing a complaint, rights holders should provide preliminary evidence demonstrating the formation process and timing of the commercial information, its non-public nature, its commercial value, and the confidentiality measures adopted. They can also provide specific leads, such as indications that confidentiality measures have been breached or that the trade secret has actually been obtained by the alleged infringer.

6.3 Presumption of infringement and burden shifting 

One of the Regulation’s most practically significant innovations is the codification of the “access +substantial similarity” rule developed in judicial practice. Where evidence shows that the alleged infringer’s information is substantially identical to the claimed trade secret and the alleged infringer had the opportunity to access it, competent authorities may presume infringement, unless the alleged infringer proves lawful acquisition or use. This mechanism substantially reduces the evidentiary burden on rights holders, who in practice often lack direct evidence of infringement.

7. Penalties

The Regulation establishes a two-tier penalty framework, representing a substantial increase over the prior maximum fine of RMB 200,000:

  • Standard infringement: Order to cease the unlawful conduct, confiscation of illegal gains, and a fine of RMB 100,000 to 1,000,000 (approximately EUR 13,000 to 130,000).
  • Serious circumstances: Fine of RMB 1,000,000 to 5,000,000 (approximately EUR 130,000 to 650,000). The Regulation defines serious circumstances to include significant direct losses to the rights holder, major adverse impact on business operations, harm to national or public interests, and repeat infringement within two years of a prior administrative penalty.

These penalties apply to both legal entities and individuals involved in the infringement, regardless of their role within the company or organization. 

8. Extraterritorial Application and Enterprise Compliance Obligations

8.1 Extraterritorial reach 

The Regulation expressly provides that infringing acts committed outside China that disrupt domestic market competition or harm the lawful rights and interests of domestic operators are subject to the Regulation. This means that foreign parent companies and entities with no physical presence in China may face administrative action if their conduct. For example, infringement of trade secrets from a Chinese joint venture partner may fall within the scope of the Regulation. 

While administrative enforcement with extraterritorial effect faces practical challenges, including evidence collection abroad, potential conflicts of law, and international comity considerations, the provision establishes a clear legal basis for action and signals China’s intent to protect domestic enterprises in cross-border scenarios.

8.2 Enterprise compliance obligations 

The Regulation establishes a multi-stakeholder governance model, shifting trade secret protection from a reactive, post-infringement approach toward proactive and preventive governance. The Regulation also encourages social supervision through whistleblowing while requiring authorities to maintain the confidentiality of whistleblower identities.

  • Market supervision authorities are required to guide enterprises in establishing trade secret protection systems through education, training, and compliance outreach. 
  • Enterprises themselves bear the primary responsibility for protecting their trade secrets, and shall, taking into account their industry, technology, and competitive environment, implement effective internal controls and compliance management systems. 
  • Industry organizations are encouraged to issue trade secret protection standards and compliance guidelines and to exercise self-regulatory functions.

Practical Implications for Foreign Companies

The Regulation materially reshapes the trade secret protection landscape for foreign companies operating in or with China.

Opportunities

Foreign companies benefit from a more predictable enforcement regime with lower evidentiary hurdles. The presumption of infringement mechanism makes it easier to prove misappropriation, While the recognition of digital assets provides a stronger legal basis for protecting software, algorithms, and data. The expanded definition of rights holders and higher penalties further enhance enforcement effectiveness.

Compliance Risks

At the same time, compliance expectations are significantly heightened. Companies must implement clear, specific, and well-documented confidentiality measures, as generic protections are unlikely to suffice.

In addition, a single dataset may trigger multiple regulatory regimes (e.g., trade secrets, data security, personal information, and export controls), requiring integrated compliance.

Recruitment from competitors carries increased risk under the indirect infringement rules, and foreign parent companies may face exposure under the extraterritoriality provisions even without a physical presence in China.

Recommendations

We recommend that companies take the following steps:

  • Conduct a trade secret review
    Classify and inventory all technical and business information held in or accessible from China, including data, algorithms, code, interim R&D results, failed experimental data, and customer analytics. The broadened scope of protectable information means more assets than previously recognized may qualify and require protection.
  • Strengthen confidentiality agreements with specificity
    Review and update employment agreements, NDAs, and joint venture contracts to define protected trade secrets with sufficient particularity. Chinese courts have rejected claims where confidentiality clauses were overly broad or generic. Agreements should identify categories of protected information, specify confidentiality obligations, and address post-employment duties.
  • Implement the technical safeguards the Regulation expressly recognizes
    Deploy role-based access controls, permission tiers, data encryption, watermarking, download tracking, and operation log trails, particularly for remote work and cross-border collaboration scenarios. These measures serve both as protection and as evidence of compliance.
  • Review the recruitment and departure procedures
    When hiring from competitors, document legitimate recruitment processes and avoid incentive packages, whether explicit or implicit, that could be characterized as inducement to misappropriate trade secrets. For departing employees, implement timely access-right adjustments and exit protocols that document the return, deletion, or destruction of trade secret materials and confirm continuing confidentiality obligations.
  • Maintain evidence trails
    Record when and how information was developed, who had access, and what confidentiality measures were in place. This directly supports the preliminary evidence requirements of Article 18 and will be critical in any enforcement action.
  • Integrate compliance across regimes
    Treat trade secret protection not as a standalone IP function but as part of an integrated compliance framework that also covers data security, cybersecurity, export controls, and personal information protection. The overlapping regulatory treatment of digital assets under Chinese law make siloed compliance approaches increasingly difficult to sustain.

How can we help you?

Merlin Song

Associate

  • +86 21 6330 9962 ext. 839
  • merlin.song@cn.ebnerstolz.com
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Simplified Measures for Small Scale Personal Information Handlers – Key Takeaways and Commercial Implications

On 3 April 2026, the Cyberspace Administration of China (“CAC”) published the Draft Provisions on Simplified Personal Information Protection Measures for Small Scale Personal Information Handlers (the “Draft Provisions”). The Draft Provisions are designed to offer a proportionate, lighter touch compliance path for handlers whose scale, capability and risk profile justify less burdensome rules – without sacrificing the core protection of personal information and individual rights.

This briefing summarizes the main areas of simplification under the Draft Provisions and the potential impact that the new rules – once implemented – may have on commercial activities involving the processing of personal information.

I. Who is a “small scale handler”?

The Draft Provisions set a single, bright‑line test: processing personal information of fewer than 100,000 individuals.

  • No reference to registered capital, headcount, revenue or industry sector. The focus is purely on the scale of processing activities – i.e., the exposure to risk.
  • In practice, such handlers are typically not data‑driven businesses. Personal information is an ancillary element of operations rather than a core asset.

II. Where are the main simplifications?

Privacy policy – less is more

Content – only three items are required:

  1. Who is processing (handler’s name);
  2. Who to contact for exercising rights (designated person and contact details);
  3. How: purposes, methods, categories, retention period. For sensitive personal information, also necessity and impact on individual rights.

Form – flexible:

  • Offline businesses may post a prominent notice on their premises.
  • Online businesses may embed the disclosure in their service agreement, a separate privacy policy document is not mandatory.

“Free‑rider” mechanism – if an online platform, industrial park or property manager (collectively, the “Platform”) has issued a uniform privacy policy, and the small‑scale handler agrees to comply and is named in that policy, the handler need not issue its own. The same free‑rider mechanism applies to compliance audits and privacy impact assessments (“PIA”): if the Platform has already done the audit or PIA, the small‑scale handler using that platform may skip repeating the exercise.

Notice obligation – leaner but condition‑driven

Previously, a handler had to both publicize the privacy policy and separately notify individuals before processing (e.g., via pop‑ups, interactive prompts, SMS, email).

Under the Draft Provisions, the separate notification step can be waived if all of the following are met:

  • No sensitive personal information is collected;
  • Processing is strictly necessary for providing the product or service;
  • The information is not shared externally; and
  • The privacy policy has been made public.

In that case, making the privacy policy publicly available alone fulfills the notice obligation.

Cross‑border data transfers – procedural relief is limited

The article 11 of the Draft Provisions lists scenarios exempted from standard cross‑border formalities (security assessment, standard contract filing, certification). However, these exemptions do not materially expand the scope already available under the Regulations on Promoting and Regulating Cross‑border Data Flows (March 2024)[1].

In particular:

  • For sensitive personal information (biometrics, financial data, health data, location tracking, etc.), outbound transfers remain restricted.
  • The thresholds triggering mandatory security assessment or standard contract filing remain unchanged.

One genuine procedural simplification: under the Draft Provisions, certain data export security assessments that previously had to be reviewed by the CAC directly may be partially delegated to provincial CAC offices, with the final approval still at the central level.

Compliance audit – longer cycle, simpler method

  • Frequency: every five years (compared to every two years for handlers processing >10 million individuals under the general compliance Audit Measures).
  • Method: a self‑assessment checklist replaces a full‑scale external audit. The substantive audit items are not drastically reduced, but the method is far lighter.

III. Practical bottom line

Generally speaking, the Draft Provisions do not waive substantive obligations. They aim to reduce complexity so that small‑scale handlers can achieve compliance in a more concise, business‑pragmatic manner.

If your China subsidiary processes <100,000 individuals and is truly independent in its data decision‑making, the Draft Provisions offer meaningful cost and administrative relief.

However, be cautious: group‑wide data integration (e.g., global CRM, centralised HR systems, shared marketing platforms) may undermine a claim to “small‑scale” status. Regulators will look at substance, not form.

Cross‑border transfers remain a high‑stakes area – the procedural relief is narrow. Do not rely on the Draft Provisions to sidestep standard export mechanisms.

We will continue to monitor the final version of the rules (comments close 3 May 2026) and provide updates as the regime crystallizes.

  • Processing sensitive personal information;
  • Cross‑border data transfers;
  • Data security incident response; and
  • Accountability for high‑risk processing activities.

For foreign‑invested companies

  • If your China subsidiary processes <100,000 individuals and is truly independent in its data decision‑making, the Draft Provisions offer meaningful cost and administrative relief.
  • However, be cautious: group‑wide data integration (e.g., global CRM, centralised HR systems, shared marketing platforms) may undermine a claim to “small‑scale” status. Regulators will look at substance, not form.
  • Cross‑border transfers remain a high‑stakes area – the procedural relief is narrow. Do not rely on the Draft Provisions to sidestep standard export mechanisms.

We will continue to monitor the final version of the rules (comments close 3 May 2026) and provide updates as the regime crystallizes.

Annotations

[1] The Regulations on Promoting and Regulating Cross-border Data Flows (issued in March 2024) introduced certain exemptions / waivers for cross-border data transfer activities that meet specific conditions. For a detailed discussion, please refer to our previous article: Deepening China’s Legal Framework on Data Protection: from the Cybersecurity Law to the Regulations on Promoting and Regulating Cross-border Data Flows. [link here]

How can we help you?

Sharon Hu

Senior Associate

  • +86 21 6330 9962 ext. 828
  • sharon.hu@cn.ebnerstolz.com
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Embracing the new era of delayed retirement in China

In recent years, the topic of delayed retirement has become a focal point of discussion across various sectors. As societies evolve and demographics shift, the traditional concept of retirement is undergoing significant changes. The implementation of this policy will be closely related to individuals and enterprises.

On 13 September 2024, the 11th session of the Standing Committee of the 14th National People’s Congress officially approved a decision to implement a phased extension of the statutory retirement age (effective from1 January 2025)

The delayed retirement policy aims to gradually increase the retirement age for both men and women and pension contribution period. This move is essential to maintain a sustainable labor force and address the challenges posed by an aging population. The policy will be implemented in a phased manner, ensuring a smooth transition for workers and employers alike.

Key Points of the Policy:

Gradually raise the mandatory retirement age

 Original retirement ageNew retirement ageIncreaseCompletion Cycle
Male60 years old63 years old3 years  15 Years  
Female cadre55 years old58 years old3 years
Female employee50 years old55 years old5 years
  • The statutory retirement age for male employees and female employees whose original statutory retirement age was 60 and 55 years old shall be increased by one month every four months to 63 and 58 years respectively.
  • For female employees whose original statutory retirement age was 50 years old, the statutory retirement age shall be extended by one month every two months and gradually extended to 55 years old.

Gradually raise the minimum contribution period for basic pensions

YearMinimum payment period of the current yearYearMinimum payment period of the current year
202515 years203216 years + 6 months
202615 years203317 years
202715 years203417 years + 6 months
202815 years203518 years
202915 years203618 years + 6 months
203015years + 6 months203719 years
203116 years203819 years + 6 months
From 2039, the minimum contribution period will increase to 20 years

Notes:

This gradual raise will start from 1 January, 2030.

For employees who reach the statutory retirement age but have not met the minimum contribution period, they may extend contributions or make a lump-sum payment to qualify for a monthly basic pension after retirement.

Flexible retirement system

Employees who have met the minimum contribution requirement may elect to retire on a flexible basis, with the option to retire up to three years earlier or later than the statutory retirement age, but early retirement cannot be earlier than the original retirement age.

Potential Impacts

  • On the Labor Market: By extending the working years, the policy aims to mitigate the impact of an aging population on the labor market. This will help maintain productivity levels and support economic growth.
  • On Pension Sustainability: By extending the working years, the policy aims to reduce the financial burden on the pension system. This is crucial for ensuring the long-term sustainability of pension benefits for future retirees.
  • On Individuals: For some employees, the opportunity to work longer may provide financial security and a sense of purpose. However, it is also important to consider the potential impact on work-life balance and the need for adequate support systems for older workers.

Practical Recommendations

Update Employment Documents: Employment documents such as labor contracts and employee handbooks need to be updated to reflect the new statutory retirement age. For flexible retirement, prepare separate agreement or confirmation templates in advance for practical needs.

  • Enhance HR Management Processes and Update Company Policies for Flexible Retirement:
  • Collect additional information on employees’ birth dates and social security contribution periods to identify potential flexible retirement dates, confirm employees’ willingness, and plan the retirement process in advance.
  • Update company policies to clearly define conditions for work handover procedures, advance notice requirements, and compensation for damages related to early or delayed retirement, providing guidance for employees.

The delayed retirement policy represents a significant shift in our approach to aging and work. It is a response to the evolving needs of our society and economy. We will continue to monitor its implementation and provide updates in the future.

How can we help you?

Rita Yu

Senior Manager

  • +86 21 6330 9962, ext. 802
  • rita.yu@cn.ebnerstolz.com
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6× or Downgrade: Decoding China’s Tightened Enforcement of Foreign Work Permit Rules in 2026

I. Core Update: Higher Thresholds, Tighter Scrutiny, Stricter Enforcement

Effective February 2026, China has simultaneously enforced strict salary-multiplier-linked classification reviews with heightened scrutiny across all application stages, ending pandemic-era flexibilities. Specifically:

  1. Uniform and strict enforcement of higher salary thresholds: Category A (high-end talent) now requires 6 times the local average social wage (e.g., Shanghai: RMB 74,604/month; Beijing: RMB 71,622/month. Previously, the threshold in both cities was RMB 50,000, representing an increase of over 40%). Category B (professional talent) now also requires 4 times the average wage.
  2. Stringent enforcement of the statutory retirement age[1]: For Category B and C permits, while the previous regulation already stipulated an age limit of 60, leniency and transition periods were often granted. Such flexibility is no longer available.

These standards are now hardcoded into the State Administration of Foreign Experts Affairs approval system (the “System”); applications below this threshold will be automatically rejected.

This nationwide tightening is not an abrupt crackdown but a systemic upgrade of China’s talent strategy: First, it marks a return to statutory standards. The 2017 Classification Standards already stipulated these multipliers, and pandemic-era leniency has ended with economic normalization. Additionally, it embodies the selection for identifying and attracting high-value talent, ensuring that those who are granted work permits bring genuinely irreplaceable skills and value.

II. Classification Guide: China’s Work Permit Categories (A, B, C)

Work permits are managed under a tiered system in China. The classification determines application difficulty, visa validity, and renewal conditions. Key differentiators are as follows:

CategoryCore Criteria (Common)Key Thresholds (2026)Notes
Category A1. High Salary: ≥6× avg. wage 2. Internationally recognized achievements (Nobel, academician, etc.)Monthly Salary ≥6× local avg. wagePost-admission supplementation allowed; Max 5-yr permit; No age limit
Category B1. Bachelor’s + 2 yrs exp 2. High Salary: ≥4× avg. wage 3. Language teacher (native + bachelor’s/certificate)Monthly Salary ≥4× local avg. wage Age ≤ statutory retirement age, strict review/
Category C1. Fresh graduates in designated areas. 2. Short-term internship (<90 days)
3. Special occupations (deep-sea fishing, etc.)
Quota-based; No salary multiplier path Age ≤ statutory retirement age, strict review/

III. Compliance Perspective: Key Considerations & Recommendations

Based on recent policy enforcement, we recommend paying attention to the following points when planning for foreign employee onboarding or renewals:

  1. Substantive Review for Category A
    The System automatically cross-verifies Individual Income Tax payment receipts with the declared salary. Fluctuations causing the annual average to fall below the threshold will pose significant risks upon renewal. We thus advise building a compliance buffer into compensation design.
  2. Age Limit for Category B and C
    Renewals for Category B and C personnel over statutory retirement age will now be directly rejected by the System. Unless an upgrade to Category A is feasible (e.g., by meeting the high salary or achievement criteria), we advise planning for succession well in advance.
  3. Plan Ahead, Allow Lead Time
    Applications downgraded to Category B typically require notarized degrees and police clearance certificates—whereas under Category A, such documentation might have been eligible for post-admission supplementation—which can take weeks to obtain from the home country. It is recommended to start the renewal process at least 3 months in advance.

We are committed to providing you with the latest policy insights and practical support. Should you have any questions regarding the classification assessment of specific employees, compensation structure design, or renewal strategies, please do not hesitate to contact us.

[1] China implemented a progressive delayed retirement policy since January 2025. The statutory retirement age is no longer simply 60 for men and 55 for women; it may increase by several months based on individual birth dates, following a specific calculation method. Here you can find updated information on the delayed retirement policy.

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Understanding China’s New Anti-Extraterritorial Rules for Sino-EU Cooperation

On April 7, 2026, the State Council of the People’s Republic of China promulgated the Regulation on Countering Unjustified Extraterritorial Jurisdiction by Foreign States (hereinafter referred to as the “Anti-Extraterritorial Regulation” or “Regulation”), which took effect on the same date. This regulation marks a new milestone in China’s efforts to counter foreign long-arm jurisdiction and establishes a systematic framework covering the identification, publication, blocking, countermeasures and remedies against unjustified extraterritorial measures imposed by foreign jurisdictions. Marking the first enforcement practice under the new Regulation, China’s Ministry of Justice ruled on 15 May 2026 that the EU’s cross-border probe into Nuctech under its Foreign Subsidies Regulation amounts to unjustified extraterritorial jurisdiction.

Constrained by EU legislations, including recent regulations related to Russia and labor compliance, many European companies may, out of internal compliance obligations, impose rigorous reviews, shift liabilities or even unilaterally terminate cooperation with their Chinese partners, either directly or through their Chinese subsidiaries. Against the backdrop of China’s continuously strengthened legal regime to counter improper extraterritorial jurisdiction, Chinese enterprises now have clear legal tools to respond to unfair measures from foreign governments and other entities. It is therefore essential for all domestic and foreign stakeholders to fully understand the rules set out under the newly effective Anti-Extraterritorial Regulation.

This article interprets the core provisions of the Regulation and puts forward preliminary assessments for European enterprises.

Risks & Criteria

Based on the four criteria stipulated in the Anti-Extraterritorial Regulation and prevailing international practices, we identify the following common scenarios that carry risks of being deemed unjustified extraterritorial jurisdiction:

  1. Secondary Sanctions
    Issued by the Office of Foreign Assets Control (OFAC) of the U.S. Department of the Treasury, secondary sanctions mandate Chinese entities to terminate normal transactions with third countries or third parties. A recent example dates to 25 April 2026, when the U.S. government added a petrochemical enterprise in Dalian, China, to its Specially Designated Nationals (SDN) List, alleging it was a major purchaser of crude oil and petroleum products originating from Iran.
  2. Excessive Data Collection
    Demands under foreign domestic laws for access to sensitive information concerning Chinese enterprises’ domestic supply chains, client data, production layout or technical materials.
  3. Discriminatory Trade Restrictions
    Measures adopted pursuant to foreign domestic laws that require differential and discriminatory treatment against Chinese entities, such as exclusion from business cooperation, suspension of product supply and technical services, etc. For example, it is not uncommon to see foreign companies unilaterally terminate contractual relationships with Chinese partners over perceived sanction risks. Most recently, on May 19, the European Parliament approved new trade defense instruments, which will cut duty-free steel import quotas into the EU by 47% and raise tariffs on steel imports exceeding quotas from 25% to 50%. The move targets China’s alleged excess steel capacity, which the EU claims disrupts its domestic industry. Chian’s Ministry of Commerce has indicated that corresponding countermeasures will be rolled out once these new trade rules take effect.

The core objectives of the Anti-Extraterritorial Regulation can be summarized in three aspects: identifying what is the unjustified extraterritorial jurisdiction, blocking the enforcement of such measures, and imposing countermeasures against parties that initiate unjustified extraterritorial acts. From a practical perspective, the Regulation brings following mechanisms to Chinese enterprises:

  • First, enterprises may apply to competent authorities for a formal ruling on whether a foreign measure constitutes unjustified extraterritorial jurisdiction, when receiving official requests for information disclosure or investigative cooperation from foreign governments and business partners, or when seeking legal grounds to decline such foreign requests.
  • Second, competent authorities are empowered to issue prohibition orders (the “Prohibition Order”) to halt non-compliant assisting or enforcing activities.
  • Third, a list of malicious entities (the “List of Malicious Entities”) has been established to impose targeted sanctions on foreign parties that instigate unjustified extraterritorial jurisdiction.
  • Fourth, affected Chinese enterprises are entitled to initiate civil litigation to seek legal redress.

Impact on European Stakeholders

How exactly will these mechanisms impact European stakeholders? We elaborate on the implications below.

Given the complex and evolving geopolitical landscape worldwide, European companies are naturally required to comply with local laws and regulations. Restrictions imposed on their Chinese partners due to regional compliance obligations are understandable under current circumstances.

Nevertheless, European enterprises should take full account of the comprehensive response mechanism established by China under the Anti-Extraterritorial Regulation, even when taking restrictive actions against Chinese partners out of EU compliance requirements, whether acting directly or via their Chinese subsidiaries.

Under the new rules, Chinese enterprises subjected to external pressure have the right to report relevant circumstances to the Ministry of Justice and apply for official identification rulings. Where a measure or a requirement is confirmed as unjustified extraterritorial jurisdiction, Chinese enterprises are legally obligated to refuse compliance with foreign mandates and will be held liable if they choose to cooperate.

In addition, competent authorities may proactively investigate potential violations and adopt the following measures:

  1. Include foreign entities that initiate or participate in unjustified extraterritorial jurisdiction on the List of Malicious Entities. Targeted restrictions will then apply, including entry bans, seizure of onshore assets, prohibitions on new investments in China, suspension of import and export activities, and a ban on domestic entities providing data and personal information to listed parties.
  2. Issue Prohibition Orders targeting all relevant parties, both domestic and overseas, that assist in or carry out unjustified extraterritorial measures. The effect of such orders extends extraterritorially. The orders apply not only to Chinese partners pressured by European side to participate in investigations or disclose sensitive data, but also to local affiliates of European groups that act on instructions from their parent companies. Any act of assistance or implementation may be subject to these prohibitions. Any party, either inside or outside China, that violates a Prohibition Order will face a range of regulatory penalties, including restrictions on government procurement participation, import and export operations, cross-border data transmission, personnel entry and exit, as well as monetary fines.

Furthermore, the Anti-Extraterritorial Regulation provides a clear judicial remedy route. Chinese enterprises may file lawsuits in domestic courts against foreign governments, overseas companies and their onshore affiliates that impose unjustified extraterritorial jurisdiction, to claim compensation for resultant losses.

Summary

In short, Chinese enterprises have both the right and obligation under law to reject unjustified extraterritorial requirements and hold relevant parties accountable.

European companies should note that China’s robust legal framework against unjustified extraterritorial jurisdiction is fully enforceable. All parties, domestic or foreign, involved in initiating, assisting or implementing such measures will face regulatory actions covering trade, personnel mobility and property rights.

Against a volatile geopolitical backdrop, unilateral extraterritorial practices risk running afoul of China’s legal provisions. Pressuring Chinese partners in this regard will likely lead to legal disputes and disrupt bilateral cooperation. We hope parties will observe laws and regulations of both jurisdictions, resolve differences through dialogue, and refrain from resorting to coercive measures. This will help sustain sound and stable cooperation between China and Europe within a compliant framework.

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Seat in China, Enforceable in Europe: Key Takeaways from China’s Revised Arbitration Law

Effective from 1 March 2026, the newly revised Arbitration Law of the People’s Republic of China (the “New Arbitration Law”) has officially entered into force. This represents the most significant comprehensive revision of China’s arbitration system since its enactment in 1994.

We are pleased to present the key highlights of the New Arbitration Law and its substantial benefits for your company in resolving China-related commercial disputes.

I. A Solid Foundation: Enforceability of Chinese Arbitral Awards in Europe

Before discussing the changes introduced by the New Arbitration Law, we would like to emphasize an unchanging and solid foundation: China is a member state of the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the “New York Convention”), which means that commercial arbitral awards rendered in China can be recognized and enforced in the courts of over 170 contracting states, including the vast majority of European countries.

II. Highlights of the New Law: Institutional Innovations Aligned with International Standards

One of the core objectives of this revision is to enhance the international competitiveness of China’s arbitration system and establish China as a preferred seat for international commercial arbitration. The New Arbitration Law incorporates numerous aspects that align with internationally accepted rules.

  1. Introduction of the “Seat of Arbitration”, Clarifying the Nationality of Awards

The New Arbitration Law introduces the concept of the seat of arbitration. Parties may agree in writing on the seat of arbitration. This concept is critical because it determines the procedural law governing the arbitration and the “nationality” of the award.

The New Arbitration Law explicitly provides that an arbitral award shall be deemed to be made at the seat of arbitration. This means that the nationality of an award no longer depends on the “place of the arbitral institution’s headquarters” but on the seat agreed upon by the parties. This reform fundamentally resolves the long-standing issue of uncertainty regarding the nationality of awards in cross-border disputes. Specifically:

  • For example, if the contract states that disputes shall be arbitrated by the International Chamber of Commerce International Court of Arbitration (ICC) with the seat of arbitration being Shanghai, the award is deemed to be made in Shanghai rather than in Paris. Prior to this reform, such an award would have been stateless—with no legal home in either France or China—creating an awkward legal limbo for enforcement.
  • For the above award:
    (i) Any application to set aside the award in China now could be filed with a court in China;
    (ii) Enforcement of the award within China is governed by Chinese law;
    (iii) For recognition and enforcement outside China (e.g., in European countries), the award may be enforced as a Chinese award under the New York Convention, providing procedural clarity and predictability.
  1. Introduction of Ad Hoc Arbitration, Enhancing Flexibility

The New Arbitration Law allows parties to opt for ad hoc arbitration, which is arbitration administered by the parties themselves without a standing arbitral institution, in foreign-related maritime disputes or disputes involving enterprises in specific regions such as pilot free trade zones.

For European companies seeking greater procedural control and reduced institutional administrative costs, this provides a new and flexible dispute resolution option.

  1. Strengthened Court Support and Improved Interim Measures

The New Arbitration Law further reinforces judicial support for arbitration, achieving a triple breakthrough in interim measures: three types of measures + pre-arbitration measures + timely handling by the court.

DimensionOld Arbitration LawNew Arbitration Law
Types of MeasuresPreservation of property, preservation of evidenceNewly adds preservation of conduct (i.e., interim injunctions)
TimingOnly during arbitrationNewly adds pre-arbitration preservation
  1. Confirmation of the Validity of Online Arbitration, Enhancing Procedural Efficiency

In line with the trend of digitalization, the New Arbitration Law explicitly recognizes that online arbitration has the same legal effect as offline arbitration. Without the need to travel to China, this will significantly reduce travel costs and time, greatly enhancing the efficiency of cross-border dispute resolution.

  1. Improved Arbitrator Disclosure and Co-arbitrators Mechanism

The New Arbitration Law introduces dual improvements in the arbitrator system:

  • Enhanced disclosure obligations: The New Arbitration Law requires arbitrators to make a written disclosure of any circumstances that may give rise to justifiable doubts as to their independence or impartiality, enhancing tribunal transparency.
  • Innovation in the method of appointing the presiding arbitrator: The power to appoint the presiding arbitrator has shifted from the institution’s head, or joint appointment by the parties, to “the two arbitrators trusted by the parties” (i.e., the co-arbitrators). Under the previous rules, as parties rarely reached a joint agreement, the presiding arbitrator was in most cases appointed by the institution’s head. This created an impression of administrative intervention and was limited by the head’s personal perspective. Under the New Arbitration Law, with the presiding arbitrator appointed by the co-arbitrators, the presiding arbitrator is appointed by the co-arbitrators, making consensus easier to achieve and improving efficiency. Moreover, this mechanism fully aligns with mainstream international arbitration practices.

III. Comprehensive Benefits for European Companies

In summary, the New Arbitration Law will bring the following concrete benefits:

  • Enhanced Predictability: Even if you choose foreign institutions like the ICC, HKIAC, or SIAC to administer the case, as long as the seat is agreed to be in China, you will obtain a stable Chinese award that is capable of recognition and enforcement by European courts pursuant to the New York Convention.
  • Improved Procedural Fairness: Enhanced interim measures, improved arbitrator disclosure obligations, and the presiding arbitrator appointment mechanism make the entire arbitration process more transparent and fairer.
  • Cost and Efficiency Optimization: The legitimization of online arbitration and the introduction of ad hoc arbitration provide you with more flexible and cost-effective options.

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Sharon Hu

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Key Points Analysis of “Interpretation on Several Issues Concerning the Application of Law in the Trial of Labor Dispute Cases (II)”

On August 1, 2025, the Supreme People’s Court issued the “Interpretation on Several Issues Concerning the Application of Law in the Trial of Labor Dispute Cases (II)” (hereinafter referred to as “Interpretation II”), which came into force on September 1 of the same year. This significant judicial interpretation directly affects several aspects of employment management and thus deserves high attention from employers.

This article aims to interpret the key provisions of the Interpretation II and the new adjudication rules established thereby, assisting employers in optimizing their employment management systems and achieving timely compliance with the requirements of the new regulations.

I. Affiliated Enterprises Shall Jointly Bear Liability for Payment of Labor Remuneration in Cases of Mixed Employment Without Written Labor Contracts

Prevalent Shared Employment and Disputes

In practice, the shared employment of employees among affiliated companies is prevalent. This has long given rise to disputes regarding the identification of labor relations and the determination of which entity bears the obligation to pay remuneration.

Interpretation II on Shared Employment​

Article 3 of the Interpretation II clarifies that if an employee works for multiple affiliated entities either alternately or concurrently, the determination of labor relationship shall first be based on whether there is a written labor contract:

  • If a written labor contract has been signed, the labor relationship shall be confirmed in accordance with the labor contract;
  • If there is no written labor contract, the court shall determine the labor relationship by comprehensively examining factors such as the entity exercising management over the employee, working hours, job content, the payer of remuneration, and the contributor of social insurance.

The court shall also uphold the employee’s claim that all affiliated entities shall jointly assume liability for the payment of wages and other benefits. However, if the affiliated entities have entered into a valid agreement on the employee’s remuneration and benefits with the employee’s consent, such agreement shall prevail.

II. Foreign Enterprises Legally Included as Participants in Labor Dispute Litigation

Current Status of Representative Offices

Under existing laws permanent representative offices of foreign entities are not recognized as eligible employers. They may only hire staff through foreign affairs service providers via labor dispatch arrangements.

In legal practice, while representative offices are often accepted as valid parties in lawsuits and share liability with dispatch agencies, some lack sufficient assets to settle debts. This leads parties to frequently seek to involve the parent foreign enterprise in the liability. However, inconsistent rulings across different courts have created uncertainty in the application of the law.​

Interpretation II on Representative Offices​

Article 5 of the Interpretation II clarifies that representative offices have the status to participate in lawsuits. It also grants parties the right to apply to include the foreign enterprise as a litigation participant. Specifically, if a representative office has no independent property or has been dissolved, the parties may apply for the foreign enterprise represented by such representative office to bear legal liability.  This provision resolves the ambiguity in judicial practice and provides clearer legal guidance for labor dispute cases involving foreign enterprise representative offices. ​

III. No Double Wages Paid During the Period Deemed as Having Concluded an Open-ended Labor Contract

Current Legal Provisions

The Labor Contract Law stipulates that if an employer fails to conclude a written labor contract with the employee for more than one month but less than one year from the date of employment, it shall pay the worker double wages on a monthly basis.​

Furthermore, if an employer fails to conclude a written labor contract with the employee for one year from the date of employment, it shall be deemed that the employer has concluded an open-ended labor contract with the employee from the day after the expiration of one year from the date of employment.

Clear Views in Interpretation II​

Interpretation II explicitly states that double wages for failure to sign a labor contract are generally supported for a maximum of 11 months, andno double wages need to be paid during the “deemed open-ended” period after one year.​

Double wages are punitive compensation rather than labor remuneration, and their application shall be based on the principle of fault liability. Interpretation II clearly points out that if an employer can prove that the failure to conclude a written labor contract is due to the employee’s intentional act or gross negligence, and the employer has indeed fulfilled its obligation of good-faith negotiation, the employer may be exempted from liability.

IV. Clarifying the Special Circumstances of “Consecutively Concluding Two Fixed-Term Labor Contracts”

Employee’s Right to Open-Ended Contracts

Under the Labor Contract Law, if statutory requirements are satisfied, an employee shall be entitled to request the employer to enter into an open-ended labor contract once two consecutive fixed-term labor contracts have been concluded.​

In judicial practice, however, due to different interpretations of what constitutes “consecutively concluding two fixed-term labor contracts,” employers have adopted various tactics to evade their statutory obligation to enter into open-ended labor contracts.

For instance, some enterprises, seeking to avoid concluding open-ended labor contracts with employees, arrange for affiliated entities to alternately enter into labor contracts with employees. This practice is intended to prevent a single employer from meeting the condition of having concluded two consecutive fixed-term labor contracts with the same employee. While existing laws stipulate that in such cases, the employee’s working years with the original employer should be calculated into their tenure with the new employer, there remains no clear rule on whether the “number of labor contracts concluded should be calculated cumulatively.”

Additionally, some companies, aiming to streamline management, often agree with employees on terms like “automatic renewal of the labor contract upon expiration” or “extension of the contract term.” In practice, there is frequent debate over whether such arrangements qualify as “consecutively entering into two fixed-term labor contracts.”

Interpretation II on “Consecutive Fixed-Term Contracts”

Article 10 of the Interpretation II clarifies the above controversial situations by explicitly stipulating that the provision of “consecutively concluding two fixed-term labor contracts” shall apply in the following scenarios:

  1. The agreed extension of the labor contract term accumulates to one year or more, and the extended term has expired.

    Prior to the issuance of Interpretation II, some regions treated any extension of the labor contract term as the employer having consecutively concluded two labor contracts with the employee. Other regions, however, formulated provisions on whether such extensions would be deemed as concluding two fixed-term labor contracts based on the extended period after the modification of the labor contract. For example, in regions such as Jiangsu, it was stipulated that if the accumulated extension of the labor contract term between the employer and the employee exceeds six months, it shall be deemed that both parties have consecutively concluded two fixed-term labor contracts.

    Article 10 of Interpretation II adopts the perspective of regions like Jiangsu but extends the period for “being deemed as consecutively concluding labor contracts” to “one year,” which is more lenient to employers compared to the provisions in Jiangsu and other regions.
  2. The employer and the employee have agreed that the labor contract will automatically renew upon expiration, and the renewal term has expired.

    In practice, some enterprises stipulate that the labor contract will automatically renew upon expiration to reduce the risk of “double wages” arising from forgetting to renew the written contract after its expiration. However, this approach may infringe upon the employee’s right to request the conclusion of an open-ended labor contract. Article 10 of Interpretation II clearly stipulates that if the labor contract term is automatically renewed upon expiration, after the expiration of the renewal term, it shall be deemed that both parties have consecutively concluded two fixed-term labor contracts.
  3. Employees continue to work at the original workplace and position for reasons not attributable to the employee, the employer changes the subject concluding the labor contract but continues to exercise labor management over the employee, and the contract term has expired.

    For some enterprises operating in a group manner that may establish and operate multiple entities simultaneously, they may utilize different entities to renew labor contracts with employees alternately, thereby evading the obligation to conclude open-ended labor contracts with employees. In such cases, Interpretation II clearly stipulates that if “the employer changes the subject concluding the labor contract,” the number of concluded labor contracts shall be calculated cumulatively, which further protects the legitimate rights and interests of employees.
  4. Re-signing a labor contract in violation of the principle of good faith, and the term has expired.

V. Validity of Non-Compete Agreements During Employment

Abuse of Non-Compete Clauses and Related Disputes

The purpose of establishing non-compete clauses is to protect employers’ trade secrets. However, in practice, some employers abuse non-compete restrictions by imposing unreasonable non-compete obligations, through signed non-compete clauses, on employees who have no obligation to maintain confidentiality. For example, concluding non-compete agreements with grassroots employees such as security guards and cleaners. This restricts employees’ freedom of employment to a certain extent, which is largely inconsistent with the intended purpose of the non-compete system.

In addition, among the current laws and regulations related to non-compete restrictions, most provisions focus on employees after the termination or dissolution of labor contracts, with no detailed regulations on non-compete obligations during employment. This has led to disputes over in-service non-compete clauses, such as whether signed in-service non-compete clauses are valid, and whether employers are required to pay economic compensation to employees for such in-service clauses.

Interpretation II imposes restrictions on the application of non-compete restrictions

Drawing on the summary of trial experiences in recent years, Interpretation II has explicitly regulated the application of non-compete clauses:​

Article 13 of Interpretation II

If an employee requests the people’s court to confirm that a non-compete clause is not effective on the grounds that the employee is not aware of or has no access to the employer’s trade secrets and confidentiality matters related to intellectual property, the people’s court shall support such request in accordance with the law.

If the scope, territory, duration, and other contents stipulated in a non-compete clause are incompatible with the trade secrets and confidentiality matters related to intellectual property that the employee is aware of or has access to, and the employee requests the people’s court to confirm that the excessively unreasonable part of the non-compete clause is invalid, the people’s court shall support such request in accordance with the law.

Notably, Article 13 of Interpretation II stipulates that for employees who are not aware of or have no access to the employer’s trade secrets and confidentiality matters related to intellectual property, the non-compete clauses they signed shall be deemed “not effective” rather than “invalid.” This means that if the employee does not claim the invalidity of the non-compete clause to the court, the clause may remain effective, and the employee may request the employer to pay economic compensation in accordance with the non-compete agreement. However, specific circumstances shall be subject to subsequent judicial practice results.

Article 14 of Interpretation II

If an employer concludes an in-service non-compete clause with senior managers, senior technical personnel, or other personnel obligated to maintain confidentiality, and the employee requests the people’s court to confirm the non-compete clause is invalid on the grounds that in-service non-compete clauses cannot be agreed upon or that no economic compensation has been paid, the people’s court shall not support such request.

Article 14 of Interpretation II addresses the aforementioned controversial issues by affirming the validity of in-service non-compete clauses. It also indicates that since employees already enjoy employment opportunities and salary benefits from the employer during their tenure, it is inappropriate to require the employer to pay non-compete economic compensation.

VI. Illegally dismissed employees may demand reinstatement, with wages paid during arbitration and litigation.

Previous Judicial Disputes

In previous judicial practice, there was no uniform standard for adjudicating employees’ claims for resuming labor relations after employers illegally terminated labor contracts.

For example, judicial cases in Jiangsu Province show that if an employer can provide evidence proving that the trust foundation with the employee has broken down and the employer explicitly refuses to resume the labor relationship, the court will generally not order the employer to continue performing the labor contract.

However, arbitration institutions and courts in Beijing hold different views. The judicial standards in Beijing for determining “impossibility of continued performance” are relatively strict. It is rather difficult for employers to obtain support when they cite only the breakdown of trust or the replacement of the original position as grounds for being unable to continue performing the contract.

Meanwhile, there were differences in provisions across regions regarding the wage payment standards and liability bearing during the labor recovery period. Specifically, there was a certain controversy over whether employees’ wages during the period of resuming labor relations should be paid according to the basic wage or the minimum wage.

Some regions hold that wages should be paid in full according to the amount when the employee was normally working, while others argue that it should be determined comprehensively by considering factors such as whether the employee actually provided labor and whether the employer was at fault. As a result, similar cases may lead to completely different adjudication results in different regions.​

Clarifications in Interpretation II

Interpretation II clearly lists six circumstances under which a labor contract “cannot continue to be performed,” including but not limited to the employer declaring bankruptcy, the employer dissolving, and the employee retiring. Paragraph 6 of the interpretation clearly states that the “inability to continue performing” a labor contract must be based on other “objective” circumstances rather than subjective judgments.

Therefore, in previous judicial practice, reasons such as the loss of a foundation of trust between the employer and the employee can no longer be used alone as a basis for determining that the labor contract cannot continue to be performed.​

We can further understand that, in practice, if the employer has already hired a new employee for the position during the arbitration process, the arbitral tribunal may not support the reinstatement of the labor relationship and may instead encourage negotiation on compensation. This is particularly applicable when the termination was based on organizational restructuring and the responsibilities of the new employee differ significantly from those of the original position. However, if the new employee’s duties remain substantially the same, the employer may be deemed to have acted in bad faith, and the ruling is likely to favor the employee’s claim for reinstatement.

In addition, Interpretation II has stipulated the wage payment standards and liability bearing during the period of disputes over the termination or dissolution of labor contracts:

  • Wages during the dispute period shall be calculated according to the wage standard when the employee provides normal labor.

If both the employer and the employee are at fault for the termination or dissolution of the labor contract, each party shall bear corresponding responsibilities.

VII. Agreements and Undertakings on Exempting Employers from Social Insurance Contributions are Invalid

Article 19 of Interpretation II invalidates any agreement or undertaking between employers and employees to forgo social insurance. When an employer fails to pay such insurance lawfully, employees may terminate the labor contract under the Labor Contract Law and claim economic compensation. The court shall uphold the employees’ claims.

This provision first explicitly invalidates all agreements or undertakings to refrain from paying social insurance premiums. If an employee claims that the employer should make supplementary social insurance contributions, the employer shall do so accordingly. It further stipulates that after making such supplementary contributions, the employer may request the employee to return any social insurance compensation that may have been paid.

Notably, this provision supports employees’ claims for economic compensation arising from forced resignation on the grounds of the employer’s failure to pay social insurance, even if the employee had previously executed a waiver regarding such contributions. Prior to this, there were discrepancies in judicial practice across regions: some regions held that if an employee, after executing a waiver of the employer’s obligation to pay social insurance premiums, subsequently claimed forced termination of the labor contract on the grounds of non-payment, such conduct would violate the principle of good faith, and the court would not support the claim for economic compensation.

Other regions, however, held the opposite view, maintaining that the waiver of social insurance contributions violates mandatory legal provisions and is thus invalid, and that employees are still entitled to claim economic compensation for forced termination of the labor contract on the grounds of non-payment of social insurance.

Now, Article 19 of Interpretation II clearly states that if an employer, with the employee’s consent via a waiver, fails to pay social insurance, the employee is entitled to claim forced termination of the labor contract and request economic compensation on this ground, regardless of factors such as the subjective intent or fault of both parties.

VIII. Abolition of Provisions Treating Employments of Pension Recipients as Service Relations

Interpretation II has abolished the provision in Interpretation I that “if an employer and a recruited retired person have a labor dispute and file a lawsuit, the people’s court shall handle it as a service relationship.”​  Specifically, the possibility of establishing a labor relationship (as opposed to a pure service relationship)concerning certain areas between an employer and a person who has already enjoyed retirement benefits is not excluded.

The relevant provisions on employers recruiting retired employees shall be subject to the Interim Provisions on the Protection of Basic Rights and Interests of Over-aged Workers which are to be promulgated soon.  These provisions stipulate that employers recruiting people who have enjoyed retirement benefits shall enter into a written employment agreement with them. To a certain extent, such a written employment agreement is a document that falls between a labor contract and a service contract, creating a mixture of positions as an employee and as a service provider.

Employers shall ensure that such employees are entitled to basic rights and interests including labor remuneration, rest and leave, labor safety and health, and work-related injury protection. It is our understanding that these aspects should be handled by reference to the requirements of the Labor Contract Law. However, with regard to matters such as the term, modification, and termination of the service agreement, the provisions are relatively similar to the handling methods applicable to service contracts governing a pure service relationship. For employers that re-employ or recruit people who have already enjoyed retirement benefits, it is necessary to continue paying attention to the subsequent issuance of relevant regulations. We will also provide a timely update on the topic for your information.​

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Dr. Gerald Neumann

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China Issues New Guidelines on Employment Competition Restrictions

Background

The Ministry of Human Resources and Social Security (MOHRSS) has formally issued the Compliance Guidelines for the Implementation of Post-Employment Competition Restrictions by Enterprises, providing comprehensive guidance for employers on the lawful application of competition restrictions. Below is a structured overview of the key provisions:

Preconditions for Implementing Non-Compete Restrictions

Employers shall first identify and define the scope of their trade secrets. Restrictions should be applied only when necessary and reasonable. Employers are encouraged to prioritize alternative measures such as:

  • Controlling access to confidential information;
  • Encrypting sensitive data;
  • Implementing reasonable declassification periods;

If non-compete restrictions are implemented, a necessity assessment shall be conducted.

Scope of Personnel Subject to Non-Compete Restrictions

In accordance with the Labor Contract Law, non-compete restrictions shall apply only to senior management personnel, senior technical personnel, and other personnel with confidentiality obligations.

When a company agrees on non-compete obligations with other personnel who have confidentiality obligations, it shall inform them of the reasons in advance and specify the details of the trade secrets to be protected.

Employees who only possess general professional knowledge and skills in the industry and have access only to the company’s general business information do notfall into the category of personnel with confidentiality obligations.

Scope and Geographical Limitations

Companies shall, to the greatest extent possible, make specific and clear agreements on the scope of companies where employees are prohibited from working; if conditions permit, a list of such enterprises may be provided.

The geographic scope of non-compete restrictions shall be consistent with the scope of the enterprise’s business operations. Without sufficient reasons, it is generally not allowed to agree on a nationwide or global scope. If the agreed scope is nationwide or global, sufficient reasons must be fully stated in the agreement.

Amount of Economic Compensation for Non-Compete

The monthly economic compensation paid by an enterprise to an employee shall generally not be less than 30% of the employee’s average monthly wage in the 12 months prior to the termination or dissolution of the labor contract, and shall not be less than the minimum wage standard of the place where the labor contract is performed.

If the non-compete period exceeds 1 year, the monthly economic compensation shall generally not be less than 50% of the employee’s average monthly wage in the 12 months prior to the termination or dissolution of the labor contract (this is a new provision not previously in place).

Liquidated Damages

The amount of liquidated damages shall be reasonably determined based on the potential economic losses caused by the employee’s disclosure of trade secrets and the amount of non-compete economic compensation paid by the employer to the employee.

Generally, it shall not exceed 5 times the total amount of the agreed non-compete economic compensation. This will effectively restrict the practice of many enterprises setting excessively high liquidated damages.

Invalidity of Advance Payment of Economic Compensation During Employment

The Guidelines also stipulate that after the termination or dissolution of the labor contract, the employer shall promptly pay the non-compete economic compensation to the employee in monetary form on a monthly basis during the non-compete period.

It shall not refuse to pay on the grounds that the non-compete compensation has been included in the wages, bonuses, etc. paid to the employee in daily work.


These updated guidelines represent a substantial step in standardizing competition restriction practices across China. We recommend employers carefully review existing agreements and policies to ensure full compliance with the new requirements, particularly regarding compensation thresholds and payment timing.

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Dr. Gerald Neumann

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Deepening China’s Legal Framework on Data Protection: from the Cybersecurity Law to the Regulations on Promoting and Regulating Cross-border Data Flows

Back in year 2015, China made cybersecurity an integrated part of its national security with the introduction of the National Security Law (NSL). This laid the groundwork for further regulations, and on 1 June 2017, the Cybersecurity Law (CSL) came into effect. The CSL sets broad rules for companies to follow in managing and protecting their online networks. In 2021, China continued to strengthen its legal framework with the implementation of the Data Security Law (DSL) and the Personal Information Protection Law (PIPL). Together, these laws created clearer rules for how data should be handled. With additional guidelines and supporting regulations, China has built a comprehensive system to oversee both data security and cybersecurity for businesses.

In March 2024, the Cyberspace Administration of China (CAC) introduced the Regulations on Promoting and Regulating Cross-border Data Flows (the 2024 Regulation). This new regulation highlights the growing focus on data protection and marks a key step in China’s control over how data can move across borders. With this update, it is a good time to explore several important topics under China’s legal framework for data protection, including data classification, personal information protection and supervision of cross-border data transfers, especially to understand how these rules and changes would impact foreign businesses operating in China.

Obligations of Critical Information Infrastructure Operators (CIIOs) under CSL

The CSL governs the construction, operation, maintenance and use of networks, as well as the oversight of cybersecurity within China. A key provision, Article 31, emphasizes the protection of critical information infrastructures (CIIs) in vital sectors and industries, like energy, transportation, finance, public services, e-government, and communications and information services, as well as other CIIs where any data that, once tampered with, damaged or leaked, may significantly endanger national security, economic operation, livelihood of people and public interest.

CIIOs in China are required to store all personal information and important data collected and generated within the country. If there is a need to transfer abroad, CIIOs must first complete a data security review through CAC’s data export reporting system (https://sjcj.cac.gov.cn), following guidelines set by the CAC and the State Council. Additionally, CIIOs must perform an annual security and risk assessment of their networks, either by themselves or entrusting cybersecurity service agencies. The results, together with any recommended improvements, should be submitted to the relevant authorities, with the Ministry of Public Security currently leading CIIs protection nationally, whereas sectoral regulators will be responsible for developing rules for designating CIIs in their areas of responsibility, and the CAC plays a coordinating role.

DSL and data classification

The DSL governs data processing activities within China and related security check. It has extraterritorial reach with respect to data processing carried out outside China if such activities threaten national security, public interests, or the legitimate rights and interests of Chinese citizens and organizations.

The DSL introduces a data classification system that is structured hierarchically, categorizing data based on its significance. Different levels of protection standards and requirements are executed accordingly. At the top is “core data,” which is defined to include data crucial to national security, lifeline of national economy, important aspects of people’s livelihoods, and major public interests. Any data that is important enough to affect political security will also fall under the category of “core data.”

The next level is “important data,” the detailed definition and scope of which will be outlined in “important data catalogues.” National authorities, alongside regional, departmental and industrial regulators shall have the discretion to develop their own catalogues for important data within their respective domains. So far we note that a nationwide guideline for identifying “important data” has been published already and shall take effect from October 2024 whilst some industries (to name a few, industrial, automotive, telecommunications) have released their own rules or guidance on “important data” identification. Overall, as what is generally provided for in the DSL, “important data” should cover such critical data that, once tampered with, damaged, leaked or illegally obtained or used, may directly endanger national security, economic operation, social stability, and public health and safety.

“Important data” handlers are required to fulfil the following major obligations in their data processing activities: (1) designation of a specific responsible person and establishment of an internal management organization to handle data security, (2) data encryption and back-up, (3) conduct of risk assessment in respect of processing activities and report to regulators, (4) performance of data security review on data export, (5) filing of “important data” catalogue that is stipulated by the data processor itself with regulators. By now this last requirement only applies to handlers in industrial and informatization sectors. With the entry into effect of the upcoming Regulations on Network Data Security Management from 2025, all network data handlers will then be required to identify and file the “important data” they process with regulators.

PIPL and cross-border data transfer

China’s PIPL shares many goals with the EU’s General Data Protection Regulation (GDPR), aiming to strengthen individuals’ rights to control how their personal information is collected and used by third parties. The PIPL also has extraterritorial reach, applying to activities conducted outside China that are aimed at providing products or services to individuals in China or analyzing their behaviors. In the spirit of such enhanced protection for individual data subjects, “personal information” is broadly defined as information that is capable of identifying natural persons to the exclusion only of irreversibly anonymized information. A sub-category of “sensitive personal information” is also introduced which a higher level of protection is accorded to. The sensitiveness relates to data subjects’ biometrics, religious beliefs, health, finances, geographical locations and personal information of young children no older than 14 years.

Before handlers can process any personal information, one of the following conditions should be fulfilled:

  • obtain informed consent from data subject. Where consent is not required:
  • if the intended data processing is necessary for the conclusion or performance of a contract to which the individual concerned is a party, or for the implementation of human resource management
  • if it is necessary for the fulfilment of legal duties or obligations
  • if it is necessary for responding to public health emergencies or for protecting people’s life, health or property in emergency situations;
  • for news reporting on a matter of public concern and to the reasonable extent
  • processing of personal information that has been disclosed and to the reasonable extent
  • accurate and complete disclosure of all major details relating to the intended processing activities to the data subjects concerned. Major items include:
  • contact details of processors
  • how data will be processed and for how long it will be retained. Also, the purpose thereof and the scope of personal information to be involved
  • methods and procedures for individuals to exercise their rights to protect their personal information

When it comes to “sensitive personal information,” additional requirements are imposed. They are: (1) specific purpose and necessity for the intended processing activities must be identified, (2) separate prior consent is a must, and (3) pre-processing impact assessment should be conducted. This last procedural requirement will also come into play in other circumstances where there is an international data transfer, delegation of data processing activities or provision of the data concerned to other data handlers, or where data processing is required for automated decision making process.

In addition to these requirements that need to be fulfilled before data handlers can proceed with any processing activities, the PIPL imposes several rules on code of conduct when processing is performed.

For example, processing should be limited only to the minimum extent that is required for the purpose intended. Once the purpose is satisfied, data processed should be deleted from record. Several data protection mechanisms should also be put in place. Amongst others, personal data handlers are required to formulate internal management and operational protocols in respect of data processing, as well as contingency plans when security emergencies occur. Regular self-audits, training organization and technical measures implementation are also needed for personal information protection. The PIPL further requires data localization if the volume of data to be processed achieves certain threshold. This volume-based assessment also matters in determination of the question on whether an information protection officer should be appointed. Though for both cases, where the specific thresholds lie is yet to be confirmed by regulators.

International data transfer is another area of practice that may trigger biggest compliance risk for MNCs operating businesses in China, since more often than not and for many foreign investments we observe, the actual administration and management lies overseas.

Extra requirements and codes of conduct need to be followed by processors transferring personal data abroad:

  • approval from competent authorities is required for data transfer to foreign regulators and governmental authorities
  • pre-export impact assessment should be conducted and the results be recorded for three years
  • complete and accurate disclosure of information on overseas recipient(s), the purpose and manner of processing by the latter(s), scope of personal data involved as well as the methods and procedures for individuals to exercise their rights to protect their personal information
  • separate prior consent from data subjects is to be obtained
  • completion of one of the following administrative procedural requirements: i. security review, ii. personal information protection certification, or iii. execution of cross-border data transfer contract

Having said the above, we saw a legal trend with the introduction of the 2024 Regulation to relax the administrative procedural burden that was previously exerted on personal data exporter. Now an extensive list of exemptions has been implemented following the entry into effect thereof; to name a few:

  • to carry out cross-border human resources management in the company
  • to fulfill a contract to which the data subject is a party; this will cover a wide range of cross-border activities (e.g., shopping, courier, payment, bank account opening, visa application)
  • non-sensitive personal information transfers by data handlers that are not critical information infrastructure operators and the aggregate volume of data to be exported is less than 100,000 data subjects within the current year
  • to conduct international trade, cross-border transportation, academic cooperation, cross-border production and manufacture, as well as marketing, if no important data or personal information is involved in the export

Kindly note that the exemptions from the abovementioned procedural requirements do not however release data handlers from complying with other existing requirements mentioned above, which are obtainment of separate prior consent, completion of pre-export impact assessment, and full disclosure of information on recipient(s).

Practical implications

  • With the introduction of a categorical and hierarchical protection system based on the importance of data, it is advisable for multinational companies to implement ongoing monitor in terms of the type, significance and quantity of the data collected, stored, processed, transferred and used during their business operations, and implement the appropriate protection mechanisms
  • Due regard to be accorded to catalogues of “important data” that are or will be issued by regional and industrial authorities as basis for the assessment and identification in respect of the significance of data concerned
  • Multinational companies seeking to transferring data abroad including without limitation to foreign regulators would be prudent to seek legal advice before undertaking such activities
  • Marketing activities that use personal data to assess data subjects’ behavior, interest, financial and credit status, health conditions, and to ultimately form a decision through automated decision making systems are regulated under Chinese laws. Pre-processing impact assessment should be completed

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Dr. Gerald Neumann

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Social insurance alert

The Shanghai authorities recently issued several policies governing the new practice of social security collection and the contribution of employment injury insurance. We summarize the key points of these policies and their implications below.

I. Transition of social security collection from the Social Security Bureau to the Tax Authority

Announcement on the Optimization and Adjustment of the Process of Declaration and Payment of Social Security Premiums, Announcement No. 2 of 2023, by the State Administration of Taxation Shanghai Municipal Tax Authority, jointly with other competent authorities in Shanghai Municipality (effective from 1 December 2023)

According to the announcement, from 1 December 2023, employers shall make social security declaration and payment directly with the tax authority. In the past, the declaration and payment were handled separately with the social security bureau and the tax authority. 

This is a further step in the transition of the collection authority from the social security administration to the tax authority, which has been under discussion nationwide for years.

In addition to Shanghai, authorities in some other municipalities and provinces in China also made similar announcements to implement the new practice in their justifications from December 2023.

The new practice divides the responsibilities as follows. 

The Social Security Bureau is in charge of:

  • Social security registration for employers;
  • Social security registration for employees;
  • Social security contribution records;
  • Verification of social security benefits (e.g. pension, work-related injury insurance).

The Tax Authority is in charge of: 

  • Social security declarations by employers;
  • Social security payments by employers.

However, in most areas, the transition of certain crucial responsibilities such as the determination of the social security contribution base and the conduct of social security inspection, is still pending. The exception is Guangdong Province (excluding Shenzhen and Dongguan), which has taken a regulatory step further by assigning the entire chain of social security responsibilities from social security information registration, declaration, determination of contribution base, collection, inspection, dispute settlement etc. to the relevant tax authorities. 

What are the implications of this new practice?

  • Late payment interests
    Let’s take Shanghai as an example. In the past, supplementary social security declarations and payments were handled by the social security authority and were not subject to late payment interest. With the integration of social security declaration and payment into the tax system, supplementary social security payments will be subject to a late payment interest at a daily rate of 0.05%. 
  • Social security inspection
    In the long term, the transition of social security collection function to the tax authority implies the possibility that the tax authority will be able to identify irregularities in the social security contribution base on the basis of the income information collected in the tax system and thus, if necessary, carry out a social security inspection. This may result in further restrictions on the flexibility of the social security arrangement for certain employers.   

II. Work-related injury insurance relationship is effective upon successful registration by the employer

Opinions of the Shanghai Municipal Bureau of Human Resources and Social Security on Several Issues Concerning the Implementation Measures for Work-Related Injury Insurance of the Shanghai Municipality, Announcement No. 28 of 2023, by Shanghai Municipal Human Resources and Social Security Bureau (effective from 1 December 2023)

The Opinions aim to clarify the uncertainties and resolve the problems in the implementation practice of the work-injury insurance in Shanghai. 

According to the Opinions, the work-related injury insurance relationship of the employees shall take effect from the time the employer registers them for work-related injury insurance. 

This implies a potential liability for work-related injuries in the period upon employment start before the registration with the social security authority, despite the fact that the full social security declaration for the first employment month can be made in the month following the start of employment. This can be seen as an indication that employers shall make the registration for onboarding employees as early as possible.

III. Work-injury insurance for Overage Employees and Interns in Shanghai

Opinions on the Trial Implementation of Participation in Work-Related Injury Insurance by Employees Beyond the Statutory Retirement Age and Interns in Shanghai, Announcement No. 30 of 2023, by the Shanghai Municipal Human Resources and Social Security Bureau, jointly with other competent authorities in Shanghai Municipality (effective from 1 December 2023)

According to the Opinions, from 1 December 2023, employers within the jurisdiction of Shanghai Municipality may register their overage employees (not over 65 years old) and interns (enrolled students in Shanghai) for the work-related injury insurance under a specific type of insurance.

Adapting to the needs in the practice of the new era, this will further strengthen the work-related injury insurance system, protect the legitimate rights of employees and diversify the work-related injury risks at the employers.

In the context of these new regulations, we recommend that employers conduct regular compliance checks to review their social security declaration practice and make corrections where appropriate and necessary.

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Dr. Gerald Neumann

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15-day China visa-free policy for France, Germany, Italy, Netherlands, Spain and Malaysia

On 24 November 2023, the spokesperson of the Chinese Ministry of Foreign Affairs announced that, China has decided to expand the scope of its unilateral visa-free policy and implement unilateral visa-free entry for six more countries on a trial basis. According to the official notice, from 1 December 2023 to 30 November 2024, travelers with ordinary passports of France, Germany, Italy, the Netherlands, Spain and Malaysia may enter China on a visa-free basis for the purposes of business, tourism, visiting relatives and friends, transit through China. The visa-free stay must not exceed 15 days.

Travelers that do not meet the conditions of visa-free entry shall still apply for a Chinese visa before entering the country.

This is a major step in a series of loosened entry policies by the Chinese government in the post-pandemic period in order to further promote the exchange of people and to maintain a high level of opening up to the world.

Following the announcement by the Ministry of Foreign Affairs, Chinese embassies in France, Germany, the Netherlands and Malaysia also released information on their official websites to notify the policy.

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Dr. Gerald Neumann

Rechtsanwalt & Partner

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Webinar invitation: Supply Chain Diversification in the Far East

On 16 November, Gerald Neumann will share his opinion in the webinar themed in “Supply Chain Diversification in the Far East – Managing Risks in China and Seizing Opportunities in ASEAN Countries”.

What to expect in the webinar

Gerald will focus his topic on “Trends and case studies on tax practice in China”. And especially he will address the questions raised up by a majority of companies with Chinese subsidiaries – “Are there still tax incentives for foreign investments or foreign employees?” and “What is the current practice in tax offences?”

Besides Gerald’s part, the topic “Corporate De-risking in China” delivered by Dr. Jörg-Michael Scheil from SNB Law will give an overview of current legal risks, and topics of “investment in Vietnam and Thailand” will be introduced to enable a general understanding.

How to join the webinar

This is a half day webinar from 09:30 AM to 12:30 PM.

Please feel free to contact Gerald (gerald.neumann@cn.ebnerstolz.com) for more details if you are interested in the webinar.

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Dr. Gerald Neumann

Attorney at law & Partner

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Carry out business activities throughout China – Are you well prepared for the branch registration?

On 27 July 2021, the State Council of the People’s Republic of China published the “Administrative Regulation on the Registration of Market Participants” (State Council Order No. 746), which will come into effect on 1 March 2022. The regulation now standardizes a unified registration obligation for all types of market participants as well as their branches in China. The term of “market participants” is defined as the natural persons, legal persons and unincorporated organizations that engage in profit-oriented business activities in the People’s Republic of China.

According to the regulations, a market participant shall only register one domicile or main business premise as a basis for the business registration. A market participant may render services or carry out business activities outside its registered place in a different province or city. If such activities reach a certain level, the market participant shall file the business registration of a branch.

If a company (or other type of market participant) fails to file for branch registration in accordance with the regulations, the local authorities (i.e., Administration of Market Regulations, in brief “AMR”) have right to order the company to complete the branch registration or to close the unlicensed business operation. It can also impose on the company a penalty up to CNY100,000 or, if the operation adversely impacted society or human safety up to CNY500,000.

However, the critical level at which branch registration becomes necessary is not clearly defined in the available rules. Since the end of 2020, the local AMR authorities have been increasingly taking action against companies that hire field staff for purpose of business operations in the locations without officially registered branches. Recently, some companies are requested by the local authorities to register a branch for any business activities outside the company’s registered place. According to our opinion, once the company rents an office in a different city, then the company shall register a branch.

According to the tax administration rules, upon the completion of the branch registration with AMR, the branch shall file its registration with the tax authority. The tax authority will assess the applicable taxes of the branch and determine the routine tax filing formalities to be fulfilled by the branch.

Although the branch registration is not a new requirement provided by State Council Order No. 746, we estimate the local authorities would intensify their administration on branches registration in their jurisdictions. We suggest you review your business activities in China (particularly services and sales activities) that are carried out by your staff located outside the registered address of your headquarter and seek professional advices from your advisors regarding the legal and tax implications of the branch office registration.

Please feel free to contact us if you need further information or assistance.

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Lena Li

Paralegal

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Noteworthy changes of the tax implications to the cross-border remittance of services fees and other non-trade items

The payment of service fees, interest, royalties and dividend shall be subject to a tax withholding mechanism and declared with the tax authority (regulatory basis: article 37 of the Corporate Income Tax law). If the payment is above USD 50,000, the Chinese payer shall complete the requested tax formalities and obtain the tax filing notice from the tax bureau before making the bank remittance (regulatory basis: STA and MOF Public Announcement [2013] No. 40).

Recently, the State Taxation Administration (“STA”) has stipulated a couple of tax circulars which introduce changes to the tax treatment pertaining to the settlement of the above mentioned items. We hereby summarize the noteworthy points for your reference as follows:

  1. Starting from 1 September 2021, the Chinese payer is NOT required to withhold the surcharges when withholding VAT for its payment of service fees, interest and royalties.

The above-mentioned “surcharges” generally refer to three types of miscellaneous taxes and charges, i.e., the urban maintenance and construction tax, education fee and local education fee. Those surcharges are currently calculated based on the amount of VAT and consumption tax payment with an aggregate rate ranging from 6% to 12%. Starting from 1 September 2021, those surcharges are not applicable to the import of services, interest and royalties.

According to the Urban Maintenance and Construction Tax Law (President Decree No. 51, “Circular 51”) which takes effect on 1 September 2021, the VAT and consumption tax paid for the import of goods, services or intangible assets are not subject to urban maintenance and construction tax (regulatory basis: article 3 of Circular 51).

On 28 August 2021, the Ministry of Finance (“MOF”) and the STA have jointly stipulated a regulatory circular (MOF and STA Public Announcement [2021] No. 28, “Circular 28”) to further clarify the implementation of Circular 51. According to Circular 28, the above principle in calculating the urban maintenance and construction tax shall apply in a consistent way to the calculation of the education fee and local education fee (regulatory basis: article 2 of Circular 28). In other words, the import of goods, services or intangible assets is not subject to the calculation of the education fee and local education fee.

  1. Starting from 29 June 2021, the put-on-record filing formalities are further simplified when making multiple payments under the same contract.

On 29 June 2021, the STA and the State Administration of Foreign Exchange (SAFE) have jointly stipulated a regulatory circular (STA and SAFE Public Announcement [2021] No. 19, Circular 19). According to Circular 19, for multiple payments under the same contract, the Chinese entity is only required to conduct the put-on-record filing for the first payment that reaches the USD 50,000 threshold.

In view of the above, the Chinese entity’s filing formalities will be simplified when making the subsequent payments under the same contract, which were required to conduct the put-on-record filing whenever the single payment reaches USD 50,000 (regulatory basis: STA and SAFE Public Announcement [2013] No. 40). Kindly note that the above rule is only about the filing procedure for multiple payments under the same contract. The tax declaration and payment obligation shall be assessed based on the relevant tax rules and are not exempted due to the simplified process.

  1. Starting from 29 June 2021, the foreign investor’s dividend reinvestment in China is NOT required to conduct the put-on-record filing with the tax authority.

As stipulated in Circular 19, the dividend reinvestment by the foreign investor is NOT required to be filed with the tax authority starting from 29 June 2021. To give you more background in this regard, starting from 1 Jan 2018, the foreign investor, when using its dividend derived from the Chinese subsidiary to reinvest in China (including setting up new FIEs or the capital increase to the existing subsidiaries), can claim a deferral of the payment of the withholding income tax (“WHT”). Before the promulgation of Circular 19, the dividend reinvestment was required to be filed with the tax authority of the Chinese entity which distributes the dividend to the foreign investor (regulatory basis: STA Public Announcement [2018] No. 53). You may consider approaching the competent tax authority to confirm the local practice and properly keeping the supporting documents internally in case of a review by the tax authority.

If you have any questions of the above or need further information, please feel free to contact us.

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Eloise Yao

Of Counsel

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Tax incentives for Small-scale and Low-profit Enterprises are extended to year 2021

Business-Data-Audit

Since 1 Jan 2019, small-scale and low-profit enterprises that are not engaged in industries prohibited or restricted by the State and that meet the following conditions:

  • taxable profit for the year shall not exceed RMB 3 million;
  • employees shall not exceed 300;
  • assets shall not exceed RMB 50 million;

can enjoy certain tax incentives (regulatory basis: Caishui [2019] No. 13, or “Circular 13”).

On 7 April 2021, the State Taxation Administration (“STA”) has issued a new notice which further reduced the Corporate Income Tax (CIT) burden for the small-scale and low-profit enterprises during the period from 1 January 2021 to 31 December 2022. According to the tax circular (STA Public Notice [2021] No. 8), the CIT for small scale and low profit enterprises is calculated as follows:

  • For the part of the profit within RMB 1 million: effective CIT rate 2.5% (i.e., 12.5% * 20%);
  • For the exceeding amount (i.e., the profit above RMB 1 million but not higher than 3 million): effective CIT rate of 10% (i.e., 50% * 20%).

In view of the above, the small-scale and low-profit enterprises are subject to CIT at maximum 7.5% during 1 Jan 2021 to 31 Dec 2022. If the qualified enterprise’s total profit does not exceed RMB 1 million per year, the effective CIT burden will be 2.5%.

We advise the smaller enterprises in China to review their financial results and assess whether they are eligible to enjoy the above mentioned tax benefits. In addition to CIT, a enterprises classified as small scale VAT payer are exempted from VAT, provided that the revenue does not exceed RMB 150k per month (valid from 1 April 2021 to 31 December 2022). Kindly note that such VAT exemption does not apply to the enterprises that have obtained the general VAT payers status (i.e., general VAT payers are the type of VAT payers that can claim the input VAT credit against the output VAT).

Please feel free to contact us if you need further information or assistance.

How can we help you?

Eloise Yao

Of Counsel

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Legal Representative and Bank Account Opening

According to our observation, more banks require now the actual presence of the legal representative during bank account opening in the respective branch in China. Before, banks often agreed to have the statutory interview with the legal representative by video which seems now to be obsolete.

We were informed that this new practice is based on a recent instruction by the Chinese central state bank.

With regard to the ongoing travel restrictions due to the Covid 19 outbreak, the regulation is particularly inconvenient for such overseas invested companies which keep the legal representative at the headquarter.

Some branches of foreign banks in Shanghai currently still accept that account opening applications are submitted by another person who has been formally authorized by the legal representative, and only request that the original passport of the legal representative is presented to the bank. However, foreign banks may be quite selective with regard to the opening of new corporate accounts.

How can we help you?

Lena Li

Paralegal

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Tax Planning for Small-scale and Low-profit Enterprises during the 2019 Year-end Closing

On 17 January 2019, the State Taxation Administration (“STA”) and the Ministry of Finance (“MOF”) released a new announcement regarding the tax reduction policy for Small-scale and Low-profit Enterprises (“Cai Shui [2019] No. 13”). Cai Shui [2019] No. 13 is valid from 1 January 2019 to 31 December 2021.

In this newsletter, we have summarized the tax reduction policy stipulated by Cai Shui [2019] No. 13 for your reference, as well as our suggestions about the issues to be considered during your year-end closing.

1. Background

According to Cai Shui [2019] No. 13, during the period of 1 January 2019 to 31 December 2021, a small-scale and low-profit enterprise can compute its taxable income at a reduced rate of the taxable profit before applying the 20% enterprise income tax rate. To be specific, if its revenue does not exceed RMB 1 million, the taxable income is computed at 25% of the taxable profit (i.e., the effective tax rate is 5%). If the revenue exceeds RMB 1 million but does not exceed RMB 3 million, the taxable income is computed at 50% of the taxable profit (i.e., the effective tax rate is 10%).

The above-mentioned “small-scale and low-profit enterprises” are defined as those entities that having taxable profit no higher than RMB 3 million, staff no more than 300 person and assets no higher than RMB 50 million.

2. Issues to be considered during your 2019 Year-end closing

Referring to the tax reduction policy mentioned above, we suggest you take the following actions to check whether your accounts have been properly kept for 2019 and whether you are eligible to claim the tax reduction policy as a small-scale and low-profit enterprise:

  • Check and ensure the accruals have been properly booked (e.g. Dec reimbursement, unpaid audit fee for 2019, unpaid salary & annual bonus for 2019, etc.);
  • Check the retained earnings and ensure the amount agree with last year’s audited report;
  • Follow up the inter-company reconciliations;
  • Ensure the financial accounts of inventory agree with physical inventory list;
  • Ensure the goods in transits can be tied with the commercial invoice sent by head office in the latest months;
  • Obtain the bank statements and check with the trial balance (during year-end closing, suppose no reconciliations);
  • Check the foreign exchange valuation for monetary assets and liabilities;
  • Check the long-aging receivables and liabilities and confirm with clients. If it is necessary to charge to P/L, please make adjustment;
  • Accrual of enterprise income tax and prepare the supporting filing documents;
  • Ensure no revenue cut off mistake;
  • Relevant supporting documents for year-end accruals shall be obtained in order to present a true and fair financial statement.

3. Summary

To summarize the above, in order to claim the tax relief stipulated by Cai Shui [2019] No. 13 on a timely basis, all small-scale and low-profit enterprises need to pay more attention to their year-end closing to make sure the revenue and expenses are properly accounted in order to justify the claim of the tax relief policy.

If you have any questions regarding the above, please feel free to contact us.

Loosening foreign investment administrations

On 3 September 2016, the Standing Committee of the National People’s Congress announced the decision on Revising Four Laws including the PRC Laws on Wholly Foreign-owned Enterprises, Sino-Foreign Equity Joint Ventures, Sino-Foreign Cooperative Joint Ventures and the Protection of the Investments of Taiwan Compatriots. On the same day, the Chinese Ministry of Commerce disclosed the Interim Measures for the Record-filing Administration of the Establishment and Change of Foreign-invested Enterprises (Draft for Comment) for public comments as supporting measures (the final version is to be announced).

According to this new amendment on Four Laws, for foreign invested enterprises the relevant approval items not involving the special access administrative measures prescribed by the State shall be subject to record-filing administration. Since 1 October 2016, the record filling under negative list mode for investment administration, which was only adopt by China Pilot Frees Trade Zones, implement throughout the whole China. With loosening the administration on foreign invested enterprise, the benefits of new system are expected to encourage more and more foreign investment national wide.

FCN Join the Congress on Investing in Germany and Sino-German Cooperation

On 22 September 2016 the congress on investing in Germany and Sino-German cooperation was held at Jiaozuo, a major industrial hub in central China, Henan province. Around 100 guests attended the conference including speakers of the German Trade and Invest (GTI), the representatives of German provinces North Rhine-Westphalia and Baden-Wuerttemberg, consulting firms and key leaders from local enterprise and government bureaus. Dr. Neumann spoke about investors requirements for overseas investments.

Myths and necessary adjustments in the “New China”

Guest Article by Dr. Timo Wiegmann (TMG China)

THE “NEW NORMAL” IN CHINA IS FORCING FOREIGN COMPANIES TO RETHINK AND ADAPT TO NOTICEABLY CHANGING CIRCUMSTANCES

Dr-Timo-Wiegmann

Dr. Timo Wiegmann

For companies in the manufacturing industry, China has become over the past three decades an increasingly important production footprint. Initially, the goal was purely to exploit the huge reservoir of cheap Chinese labor in order to produce cost-effectively for the world market. Today, entirely different topics are for most companies on their China-Agenda. The goal: to strengthen their own competitiveness in China and to be locally successful with products and services specially tailored to the Chinese market. With the announcement of the “Made in China 2025” strategy, the Chinese government has now set a clear indication of the future environment and the resultant requirements for the China-Engagement of foreign companies in the coming years: significantly reduced growth rates and an economy that shall be especially stimulate by domestic consumption, sustainability, innovation and a consistent high-tech orientation. For manufacturing companies, this realignment provides a multitude of new growth potential that should be exploited.
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Whenever the Media reports about the Chinese economy in recent weeks and months, it would usually be done in a way that the reader could almost inevitably get only one single impression: China is having serious problems.

It is correct, that the gross domestic product (GDP) of the second largest economy in the world is currently growing slower than it has been in the last 25 years. The country can today only fulfill contigently it’s in recent years determined role as the global growth engine. Foreign trade is weakening. The debt has reached a dimension with most recent 28 billion US dollars which corresponds to almost three times of its own economic performance. In addition to that, mid of 2015 turbulences on the stock market came on top with falling stock prices up to 40 percent within a few weeks – with the result that a market value worth about four billion US dollars have been lost.

Well, should we be genuinely worried about the second largest economy in the world?

In our view, definitely not. Most of what is being commonly spread to the public about the Chinese economy and its future outlook is based on a number of prejudices:

Myth 1: The prospects of the Chinese economy are gloomy and the country is facing a longer period of stagnation.

It is true that China has abandoned the double-digit growth rates of the past. The overall economic performance shall probably rise this year by nearly seven percent. For the upcoming years, economic growth in a range between five and seven percent is expected from today’s perspective. Designating this development as “a long period of stagnation” is absurd, at least on totally unsubstantiated grounds especially if one considers the growth rates we talk about in Germany, Europe and the US.

Today’s growth of around seven percent generate a higher economic output than the fourteen percent from the year 20071 because the economic performance is today many times higher than at that time. This is pure mathematics. It is also interesting to note in this context, that the current decline in overall economic growth rate is accompanied by an increase in the growth rate in the service sector by more than eight percent (8.4 percent). Private consumption lay in the first half of 2015 by more than 10 percent (10.4).2 Perspectively, this is mainly a good sign.

In 2013, the Chinese per capita income (calculated at the official market exchange rates) amounted to the equivalent of almost 7,000 US dollars to just 13 percent of the US per capita income (53,000 US dollars). The disposable income was not sufficient for excessive consumption. For about five years now, this has begun to change more and more. Income has been continuing to rise for years (see Figure 1).

The population in China is becoming increasingly richer, even though the potential for income growth in the household sector is still very large: In 2010, only eight percent of the Chinese population belonged to the middle-class (defined as a category with an annual income between 15,000 and 33,000 US dollars). According to forecasts, by 2020, nearly 60 percent of the population would belong to this group. The foreseeable or expected trend in personal income may be considered a reliable indication that the economic outlook for China shall be anything but gloomy.

Figure 1: Development of the per capita income in China over the past ten years

Myth 2: China’s economic miracle is based on extensive planning by the state and not on the performance of the private sector

It is true that the state and state-owned enterprises together account for around a third of China’s total investment expenditures3. In highly developed industrial nations, this proportion amounts to less than 5 percent. However, the private sector in China is nowadays already responsible for two thirds of the economic performance. The Chinese economic miracle is therefore not majority based on government investment programs. Furthermore: The efficiency of investment in the private sector is significant higher than that of state enterprises. All of the approximately 250 million additional jobs created in China since 1980 were created in the private sector. And also, in the end, the private sector draws predominant responsibility for export. Myth 2 is therefore likewise not able to withstand a fact check. Lastly it remains myth three:

Myth 3: Chinese companies are good at copying, but not at generating their own substantial innovations4

In Chinese culture, to copy something is imposed as a particial expression of mutual recognition, like a homage to something good. Copying has therefore been a long tradition in China. The annoying problem of piracy is thereby not alleviated; it will be greatly enhanced by a good knowledge why imitating in many sectors within China is part of typical business practice.

This impression overlook, that China has always been a center of innovation. Whether paper, silk, the compass, printing with movable characters, gunpowder or the melting of iron: Many inventions of global importance have their roots in ancient China.

But even today, managers should have China on the radar for their ability to innovate: manufacturing simple products in large quantities and cheaply selling them all over the world – the political leadership of the country has this strategy long past. By 2025, they rather intend to have achieved the transformation from low-cost producers to a high-tech country. But that is not enough: Upon the 100th anniversary in 2049, the People’s Republic should ascend to being the leading “industrial superpower”.5

And that is only possible through innovation. One of the cornerstones of the “Made in China 2025” strategy, which was personally presented by Premier Li Keqiang during the People’s Congress in March 2015, is also the promotion of innovation. China already invested around 200 billion US dollars per year toward innovation. The volume has quadrupled in ten years and is roughly equivalent to two percent of the gross domestic product. Furthermore: Companies are consistently and devotedly supported by the government – by its own admission – due to their innovation activities. According to the future strategy, the aerospace, mobile communications, data processing, e-commerce, biotechnology, high-speed trains and renewable energy fields shall be particularly encouraged in the future6.

That means: China shall no longer only be the workbench of the world but shall seek salvation in selected fields of high technology. The government has recognized that the wage and labor cost increases in recent years no longer quite fit the existing business model of its economy, which produces preferably cheap mass-produced goods. The “Made in China” brand should mainly stand for innovation, quality and efficiency in the future.7 The second-largest economy shall therefore to play a leading role the near future with pioneering technologies and innovations and create additional business opportunities. In some areas such as telecommunications or consumer electronics, this has already been attained. And also: The country has been the world leader in patent applications for years now.

Figure 2: Patent applications in major countries

Figure 3: Trend of patent applications with the five major global patent offices

Even though the quantity and rapid rise in patent applications still does not provide information on the quality of underlying innovations – the bias of a technologically backward China as always referred to this context by western industries should be quickly adopted. As the Mercator Institute for Chinese Studies, one of the world’s largest institutions for research and knowledge about the current China, recently put it in a nutshell: “If China succeeds in implementing its plans, then the country will be on equal footing a competitor with Germany in the field of leading-edge technology”.8

ON THE PATH TO A HIGH-TECH LOCATION

On the path to become a top leading economic power that not only plays a dominant role because of its sheer size and huge domestic market, but also wants to be play at the forefront in innovation and in the high technology, China still has to do some homework. The “Made in China 2025” strategy describes the roadmap to modernize the country and transform the economy from the former low-wage country to a high-tech location. In the course of the planning the Chinese government normally considers an average growth in the gross domestic product of five to seven percent per year. From the political leadership, this dimension has been called the “new normal”. At least 30 to 50 percent of the projected growth shall come from improved factor productivity or from higher automation. This means: in the future, China will more develop better jobs while the supply of cheap labor shall continue to decline. Foreign companies can instead expect a larger number of higher educated and skilled workers. Nearly one in five of the world’s “Technical Graduates” is toady a Chinese nationality.

The planned transformation of the economy and the implementation of the “2025” strategy should be considered against the background of some basic trend developments that shall shape the further progress of the country to a large extent:

Trend 1: Urbanization

China’s society was characterized as traditionally rural. In the course of reform and economic opening, more and more residents were then attracted from the countryside to the cities. Such strong migratory pressures which will particularly acute in tier 2 and tier 3 cities in western China. Following example shall show the expected dimension in the urbanization: Every year, 18 million people are attracted to the cities. It means, that every eight years a new Japan is created. For foreign companies, these cities are becoming more attractive – also and especially in view of the improved infrastructure and the availability of higher qualified potential employees.

Trend 2: Efficiency

In the past, China was the factory of the world and of course will keep this meaning in the future. However, in the next years, we will see a much higher degree of automation in production in Chinese companies. Thus leads to substantial positive economies of scale. Already, 80 percent of air conditioning units, 90 percent of global PCs, 75 percent of solar panels and 60 percent of all shoes are produced today in China. This will not change. But, we shall see in other industries that Chinese companies will exploit the the economies of scale in mass production and will threaten the global market – often on a competitive technological level.

Since labour supply in the face of the imminent decline in working age population and at the same time, the income of workers is continuously increasing, the trend toward higher technicalization and automation in production is logical. This is also officially expressed with the “Made in China 2025” strategy. The political leadership bases its automation and digitization efforts to a large extent on the German “Industry 4.0” approach. And even if the country still has a long way to go: companies should assume that the automation process shall proceed quickly. A patent analysis of the Fraunhofer IAO from March 2015 shows that China especially is a nose ahead in basic technologies for Industry 4.0. Even with the number of patent applications, the country is well ahead of the USA and Germany.9 China is leading not only in terms of the number of patents, but, according to the IAO analysis, also in some highly innovative developments, especially in the fields of energy efficient wireless sensor networks and network structures.

Today, the Middle Kingdom is also the largest market for robotics – one of the most important business regions of foreign suppliers such as Kuka and ABB Robotics. As part of the further spread of robots and other technologies, more and more jobs for simple routines shall disappear. At the same time, there shall be a noticeable increase in higher-value jobs.

Trend 3: Consumption

An increasing number of Chinese people can afford more and more consumption. Today, there are around 300 million consumers in the “Middle Class” with an annual income between 15,000 and 33,000 US dollars. Another 250 million are on the way there. In 2025, according to planning by the political leadership of the country, already 60 percent of the population has reached this income level. Furthermore: Since almost five years, a trend for consumption in China is quite clearly being recognized. This means: More and more Chinese people can not only afford, but they also want to consume more. How the consumer behaviour shall evolve in the future, it is currently not possible to forecast seriously. The fact is, however, that a total of far more income – and hence income for consumption purposes – shall be available. But even if a growing number of people become consumers on the market, it does not mean that sales shall be simple: The Chinese are very selective and very difficult to assess in their individual consumer behavior.

Trend 4: Financial Power

In China, an enormous amount of money is in bank accounts – of companies and of individuals: 15 billion US dollars in the form of bank deposits and in capital accounts. These funds could increasingly flow in future investments. In China, it is already not particularly difficult for investors to come across financial resources. They are plentiful. The challenge for consumers is rather that potential investors are unsure of what to do with their wealth and exactly where to be involved financially. Innovative foreign companies here offer very interesting options to acquire capital and to benefit from the enormous financial power of China. For this purpose, however, they must succeed in order for it to distinguish itself as an attractive potential partner.

Trend 5: Tremendous Availability of Qualified Talents

With more than one billion people, it is only logical that a number of well-trained talents can be found within. There are many things to accuse the Chinese education system, but for sure not of it being without strictness and rigor. Whoever manages to get through it with good grades is highly qualified and smart.

Meanwhile, a growing number of qualified young people from universities are pushing into the market. This year, there were already 17.5 million graduates who left Chinese universities with successful results.10 This growing pool of qualified young academics offers foreign companies interesting opportunities in order to take some of the sting out of the shortage of skilled labor and the associated “competition for highly qualified heads” mainly among mathematicians, scientists, computer specialists and people of related disciplines. Foreign companies, however, should keep in mind that despite the increasing number of qualified young people in individual disciplines, the competition when recruiting shall become harder and also the retention of qualified professionals to their own companies – depending on industry and location – shall remain an ongoing challenge: In China, the targeted headhunting of key personnel belongs to the recruitment culture.

Trend 6: Internet as Economic Factor

Of the approximately 1.37 billion inhabitants of China, almost half are connected to the Internet. China has therefore more than twice as many Internet users than, for example, in the US. One in five Internet users worldwide comes from the Middle Kingdom.11

To whoever takes the metro in China, for example, it immediately becomes apparent: Everyone is somehow involved with his or her smartphone. And the Chinese using the Internet not just for fun, figures from Electronic Commerce showing: The number of online shoppers has already exceeded 300 million. Sales on the Internet are extremely high. The Commerce Department estimates that transactions worth 3 trillion RMB (around 430 billion euros) were made via Internet platforms in 2015. That makes a total of more than 10 percent of the total trade turnover of the vast nation.12

Whoever wants to be successful in business as a company in China needs a convincing web presence. The Internet is a real economic factor in China – especially for businesses that sell to end users. Here, a professionally designed, functioning Online-Shop is now one of the fundamental success factors. Every business in China is therefore required to consider how it can use the Internet in the best possible way as part of its business strategy implementation.

Abb4

Figure 4: Number of online buyers in China and their proportion to the entirety of all buyers

With the political leadership classifying the Internet and the continued development of the Chinese industry to be of eminent importance, it made the presentation of the “Internet Plus” action plan apparent in July of this year. It foresees the application of advanced online technologies – mobile Internet, cloud computing, Big Data and the Internet of Things – in traditional industries.13 The action plan elaborates the development objectives as well as supporting measures for a more efficient use of the Internet in selected key sectors. Namely it includes the agriculture, energy, finance, public utilities, logistics, e-commerce, transport, biology and artificial intelligence. As it seems, the government’s aim is the integration of the Internet in the economic and social sectors to further strengthen and make new industry methods as from 2018 for a main driving force of growth.

The pictures of crisis on the state of the Chinese economy that are particularly drawn in Western media are, in our view, appear badly exaggerated in part. To speak of a crisis or even an economic crash is entirely unfounded with growth of around six to seven percent. China’s economy shall also take a leading role in the global economy with a deceleration in growth – though on the basis of changing industrial structures and as part of a “new” normal.

Manufacturing companies need to rethink their China strategy:

Innovative product and service portfolios combined with an effective sustainability strategy determine future success with increasingly nascent sophisticated Chinese consumers

Partnership conditions ensured for financing and mobilizing capital in the implementation of innovative products and services

The significant increase in the degree of automation and the adjustment of production structures enable a cost-effective provision of services with wages that continue to rise mainly in coastal industrial centers

The continual balancing of the operations network or production footprint to compensate regional factor cost differences between East and West China increases and secures future income in and outside China

Long-term strategy and business model hedging is primarily determined by the willingness and ability to inspire, bind and promote Chinese talents

Only those who are really laying a foundation can successfully act in China in the future, thus ensuring growth and profitability.
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Sources:

1 Source: “The Economist”, 9/12/2015

2 Source for both figures: GIGA Institute of Asian Studies, 7/9/2015

3 “The Economist”, 9/12/2015

4 On the importance of China as a center for R&D and innovation, also see the interview on page 26: “Choosing the right R & D location is critical to success in China”

5 The challenge to Germany, Die Zeit/Online 5/27/2015

6 Source: Handelsblatt/Reuters 5/19/2015

7 The Mercator Institute for Chinese Studies: How does China’s innovation policy prepare for the future, September 2015

8 http://www.zeit.de/wirtschaft/2015-05/china-industrie-technologie-innovation

9 “Industry 4.0: China in the fast lane”, IAO Press Release, 3/30/2015

10 By comparison: in 1998, there were just 1 million university graduates in China

11 http://www.internetlivestats.com/internet-users-by-country/

12 Source: Hong Kong Trade Development Council, March 2014

13 Innovation News DIHK, August 2015/Consulate General of the People’s Republic of China in Munich

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