Investing In China: Hiring, Firing And Labor Law

One of China's major attractions for foreign investors is its low labor costs. In the central provinces entry-level laborers can be hired for as little at US$60 per month and college graduates work for as little as US$150 per month, although labor costs in the more affluent coastal provinces are about three times as high. Furthermore, because there is a shortage of skilled labor and white collar management in the coastal provinces, additional incentives might be required to attract highly qualified employees (this is not so much of a problem in the central and western provinces). Employers can be recruited and hired directly in most cases, although there are many public and private employment agencies that will assist the foreign investor in recruiting qualified staff. In joint ventures, the Chinese partner is usually responsible for recruitment, although this is something that can be negotiated between the parties.

Employment law in China is in some ways more protective of employees than US labor law. Labor matters in China are generally governed by the P.R.C. Employment Law (although certain other national legislation also provides guidance). Where national law is silent, provincial and local laws apply, but in the event of a conflict between provincial/local laws and the Employment Law, the Employment Law prevails, much in the way as federal law trumps state law in the US.

Employment contracts are generally required and normally stipulate probation periods of no more than six months. A thirty-day advance notice and good cause are normally required in order to fire an employee after the expiration of the probation period (although employee incompetence and company business reverses considered good cause subject to certain restrictions). An employee can be immediately fired for serious misconduct.

The eight-hour workday and the forty-hour workweek are standard for blue collar employees, overtime pay is mandated by law, and there are legal limitations on how much overtime can be required. Paid leave is also required, although the required length varies according to local regulations (usually not exceeding two weeks per year). There are special protections on the type of labor that can be assigned to women and teenagers, and the minimum working age is 16. None of this should be unfamiliar to those familiar with prevailing US labor practices.

A prospective foreign investor would do well to keep abreast of breaking developments in this area, because the law is rapidly evolving.

Nevertheless, Chinese labor law does include certain unique features that foreign investors should be aware of:

(1) In the event of a labor dispute, arbitration is required before the case can be taken to court.

(2) There are three funds to which both employer and employee must contribute:

1. Endowment Insurance (a kind of social welfare fund) - the employee contributes 5% of his salary, employer pays an amount equal to about one-fourth of the employee's salary (amounts vary by locality).

2. Unemployment Insurance - the employee pays 1.0%, employer pays 2.0%.

3. Hospitalization Insurance - Employee pays 2.0%, employer pays 8.0 %.

In each of the foregoing cases, the employer deducts the employee portion from the employee's paycheck, but must pay the employer's portion out of its own pocket in addition to the employee's regular wages. Also keep in mind that the foregoing amounts may vary somewhat according to locality. There are also certain funds that employers must contribute to, such as an employee labor union fund (generally about 2% of payroll).

David A. Carnes is a California attorney currently working as a legal advisor for California Industrial City (Zhengzhou) Development Co., Ltd. in Zhengzhou, China. His website is Start a Company in China.

Investing on Internet Ethics

The focus of Ethics and the Internet (E&I) are on us rather than on the technology itself. At great human and economic cost, resources drawn from governments, industry and the academic communities have been assembled into a collection of interconnected networks called the Internet. Begun as a vehicle for experimental network research in the mid-1970's, the Internet has become an important national infrastructure supporting an increasingly widespread, multi-disciplinary community of researchers ranging, from computer scientists and electrical engineers, to mathematicians, medical researchers, astronomers and space scientists.

As is true of other common infrastructures (e.g., roads, water reservoirs and delivery systems, and the power generation and distribution network), there is widespread dependence on the Internet by its users for the support of day-to-day activities. The reliable operation of the Internet, and the responsible use of its resources, is of common interest and concern for its users, operators and sponsors. Network infrastructures underscore the need to reiterate the professional responsibility every Internet user bears to colleagues and to the sponsors of the system. Abuse of the system thus, becomes a matter above and beyond simple professional ethics.

Information means power. This old maxim has become more and more pertinent in our modern information society. The development of information technology has been dashing and, if future predictions are anything to go by, the pace of change will only increase. Ethical and moral issues in computer ethics and are among the most vital social aspects of information technology. But, there are currently two major problems in the area. First, inconsistent moral behavior, leading to immoral acts such as virus creation and capital theft and second, lack of awareness concerning information technology security and IT-related crimes. Not even IT experts have an adequate knowledge of computer ethics, though there is every indication that ethics should be a part of their professional baggage. As for the development of ethical skills, it is not just a matter of education; rather, it is an on-going process that every professional should be aware of.

Educational institutions play an important role in this respect. In addition to imparting technical knowledge, they should also teach computer ethics. Educational issues and ethical awareness are important as they provide the motivation for complying with learned ethical principles. Ethical decision-making formulas and applicable theories are helpful for sharing information about the application of ethics. This information can then be disseminated by educational institutions. Professionals must have the capability to make broad-minded, objective ethical decisions based on know-how. They also have to do their level best to create a working environment and atmosphere where ethical dilemmas can be discussed openly, objectively and constructively.

Jonathon Hardcastle writes articles on many topics including Investing, Business, and Finance

Investing In China: Proposed Foreign Investment

If you are considering setting up a company in the People's Republic of China (the "PRC") you should be aware that Chinese law is more protective of employees than the laws of many western nations, particularly the United States. The current PRC Labor Law was enacted in 1994; however, a new PRC Foreign Investment, intended to supplement the Labor Law, is expected to come into force at the end of 2006. This new law contains both bad news and good news from the point of view of the foreign investor; however, in general it further strengthens the protection of employees.

The Bad News:

Severance Pay

Because it is difficult under the PRC Labor Law to terminate open-term labor contracts, employers usually prefer fixed terms. The Labor Contract Law will address this issue by requiring employers to pay severance compensation to employees on fixed term labor contracts if these contracts are not renewed at the end of the contract term. The proposed compensation is at least one month's salary for each year of service.

Company Rules/Employee Handbooks

No provision in the employee handbook or other rules affecting the employee's "personal interest" may be put into force absent consultation with the labor union or other employee representative body (under Chinese law, virtually all employees are required to be unionized).

A Shorter Probationary Period

Currently, the probationary period may be agreed between the employer and employee in the labor contract, but the maximum probation may not exceed 6 months. The Foreign Investment shortens this period to one month for non-technical work and two months for most technical work (the six-month maximum is still retained for "senior technical work", probably because these highly skilled employees are seen as less vulnerable in the employment market. This is significant because it easier to fire an employee during the probationary period than afterwards.

Non-Competition Clauses

Foreign invested companies in particular have tended to insert post-employment non-competition clauses into labor contracts in order to protect their intellectual property rights in China's "wild west" business atmosphere. Although the Foreign Investment allows post-employment non-competition restrictions, it will limit their enforceability to two years and restrict the geographical area of applicability to areas where actual competition is likely to occur. In this respect the reform will render Chinese law more similar to US law, since the current Labor Law does not impose any geographic restrictions at all (but does permits a maximum duration of up to three years). The Foreign Investment goes even further, however, by requiring the employer "buy" a non-competition clause by paying a minimum compensation equal to the employee's annual salary upon termination of the labor contract. It is still unclear what, if any compensation will be due the employee if the period of restriction is less than a year.

Contract Interpretation

Any ambiguous term in a labor contract will be construed in favor of the employee. This rule does little more that codify what has long been the prevailing practice in PRC courts.

Representative Offices

The current Labor Law requires Representative Offices to go through designated agencies such as FESCO (similar to Manpower in the United States) in order to hire employees. The new Foreign Investment offers Representative Offices greater flexibility by allowing them to directly contract with employees for their first year of employment.

In summary, the new Labor Law will restrict foreign investor's flexibility and make it more expensive for them to operate. The only good news is that Representative Offices will find it somewhat easier to operate. Typically, the new Foreign Investment does not bother to define terms like "technical", "senior technical"; and "personal interest" However, foreign investors have long been used to waiting months and even years for ambiguous terms in Chinese law to be defined through the further issuance of "implementing regulations" to supplement the main law; meanwhile the government's actual implementation of the law in particular cases will be closely watched.

David A. Carnes is a California attorney currently working as a legal advisor for California Industrial City (Zhengzhou) Development Co., Ltd. in Zhengzhou, China. His website is Start a Company in China.

Investing In China: Tax Incentives

The People's Republic of China offers a variety of tax breaks and financial incentives to encourage inbound investment.

National government incentives vary based on how much money you are investing and whether or not your project is located in one of China's special economic zones; local incentives vary by jurisdiction according to relative bargaining power. The tendency in recent years has been for China's central and western provinces, who have been starved of foreign investment in comparison with well-fed coastal cities like Shanghai and Beijing, to offer incentive packages that are considerably more generous than those offered to foreign investors 'back east'. The national government is now actively encouraging foreign investors to pour money into China's relatively undeveloped hinterlands in order to spread wealth more evenly throughout the country and stem the flow of economic migrants to the coast.

China's standard corporate tax rate is set at 30%. However, in certain locations the rate can decrease dramatically. Enterprises located in certain areas designated as "open to foreign investment" pay only 24%. The favored children among overseas investors, however, are enterprises located in national-level economic and technical development zones, such as certain industrial parks like Suzhou Industrial Park (near Shanghai) and California Industrial City (in central China). They enjoy a permanent corporate tax rate of only 15% - but even that rate only kicks in during the sixth profit-making year. The rate is zero for these enterprises during their first two profit-making years, and rises to only 7.5% for the following three years, before returning to 15% for the sixth year. Any enterprise classified by the P.R.C. government as a "Technologically Advanced Enterprise" or an "Export Oriented Enterprise" (an enterprise with an export value of at least 70% of its production value during any given year) enjoy a corporate tax rate of only 10% for their sixth through tenth profit-making years.

China offers further tax incentives for enterprises that reinvest their profits domestically, and these incentives operate in addition to rather than in replacement of the above tax incentives. In particular, enterprises that reinvest their profits to increase their own capital or to establish or invest in another foreign invested enterprise in China are eligible for a refund of 40% of the corporate taxes already paid on those reinvested profits. The refund rate rises to 100% if the enterprise in which profits are reinvested is classified as a Technologically Advanced Enterprise or Export Oriented Enterprise. This refund must be returned, however, if the reinvested finds are withdrawn within five years.

The foregoing description is not exhaustive - China offers various other investment incentives. That was the good news; the better news is that incentives are offered not only by the national government but also by provincial and local governments that compete fiercely with each other for a slice of China's lucrative foreign investment pie. But that's another article.

David A. Carnes is a California attorney currently working as a legal advisor for California Industrial City (Zhengzhou) Development Co., Ltd. in Zhengzhou, China. His website is Start a Company in China.

Investing In China: Incentives Offered By Local Governments

China's national government offers a tempting variety of financial incentives designed to lure inbound foreign investment, some of which were introduced by this author in the article "Investing in China: Tax Incentives". However, additional incentives offered by provincial and local governments significantly sweeten the investor's overall incentive package. These incentives tend to become more generous as one moves westward from the investment-saturated coastal provinces to China's heavily populated interior, allowing the investor to cash in on China's fierce domestic competition.

Central China's Henan province, for example, offers manufacturing-oriented Foreign Invested Enterprises (FIEs) 100% waivers of business tax and a variety of local administrative fees. Furthermore, FIEs engaged in technology transfer, development work, and related consulting may apply for a full refund of business tax already paid.

Municipal governments, however, are often even more generous than provincial governments. Although various incentives are offered by Chinese municipal governments, the city of Zhengzhou (a metropolis of about 4.4 million people in central China) makes a good case study, if for no reason other than that the author is more familiar with its policies.

Zhengzhou rewards local FIEs in various ways:

Tax Breaks for Local Reinvestment of Profits Local FIEs that reinvest their profits within Zhengzhou will receive a 30% refund of the locally retained portion of corporate income tax actually paid on these reinvested profits (the national government offers an even bigger tax refund applicable to the nationally retained portion).

Investment in "Pillar" Industries and State-owned Enterprises Zhengzhou offers a three-year, 50% refund of the locally retained portion of corporate income tax paid on FIE funds invested in certain designated "pillar industries". It also offers a financial incentive for investing in and reorganizing provincially administrated state-owned enterprises, and this incentive is magnified if the FIE retains a certain percentage of the enterprise's original employees after reorganization.

Inward Remittance of Export Earnings Zhengzhou offers export incentives in the form of cash payouts of approximately 0.2% to 0.5% of every dollar of hard currency export earnings remitted inward (the highest payouts are reserved for the export of technologically advanced products).

Matching Funds The Zhengzhou municipal finance administration will provide one-to-one matching funds for the international market development funds of small and medium-sized export enterprises that are supervised at the provincial level (whether an enterprise is supervised at the provincial level or the national level depends on how much money has been invested in the enterprise, i.e., its "Registered Capital").

Anti-Dumping Insurance Zhengzhou will assist FIEs in responding to anti-dumping initiatives, and will also subsidize expenses arising from participation by exporting enterprises in anti-dumping responses, as long as these initiatives are not otherwise subsidized by national and provincial authorities (which they often are). It may seem strange for an American company to establish a subsidiary in China, be sued for dumping by the United States, and then receive subsidies from the Chinese government for the expenses necessary to defend against the suit, but it's possible.

Interest Subsidies for Loans Secured by Tax Refund Accounts. Zhengzhou will subsidize an amount equal to 70% of the interest due on loans secured by a tax refund account. If the FIE has no such loans, Zhengzhou will grant a subsidy equal to 50% of the interest that would have been paid on such a loan had it been taken out - the Zhengzhou municipal government will even provide the fund from which the interest is subsidized. Enterprises with an export volume of five million US dollars or more in the previous year that are verified by the National Tax Bureau to have increased tax refunds due for the current year will enjoy a 100% interest subsidy.

Export Incentives An export enterprise with either (i) a yearly export volume of at least ten million US dollars or more and actual export growth of more than 25% over the previous year, or (ii) a yearly export volume of at least five million US dollars, actual export growth of more than 40% over the previous year, and inward remittances from exports of at least 80%, will be designated a "Zhengzhou City Advanced Foreign Exchange Generating Export Enterprise" and awarded 30,000 RMB (roughly $3,500 US dollars) as long as it has not committed any serious regulatory violations during the same year.

Although a few of the foregoing incentives represent relatively small payouts, they are numerous and can make a significant difference when combined with the broad range of incentives offered by the national government.

David A. Carnes is a California attorney currently working as a legal advisor for California Industrial City (Zhengzhou) Development Co., Ltd. in Zhengzhou, China. His website is Start a Company in China.

The Latest Investment Stocks Online Articles

Mutual Funds

A mutual fund is perhaps one of the most popular means of long term investing and is the vehicle of choice in IRAs and 401k accounts. A mutual fund is basically a way of investing in a pool of different companies in order to minimize risk.

More articles coming soon!

Investing Stock Online Resources

Yahoo Finance

CNN Money

Online Business Courses

Internet TV