Most global companies operating in China eventually face similar operational risks, either with HR management or with their accounting management. The turmoil of the last five years has only made these surface even more, with HQs detaching their operational work from the Chinese arms. If you have experienced a similar scenario, know that you are not alone. If you are only now starting the journey for market entry to China, then this is a great checklist to keep to avoid future pitfalls. Learn from those who’ve already been there; there is no need for you to make the same mistakes.
Understand Contracts in China
When it comes to contracts in China, one should understand that the topic is not as straightforward as it might be outside China. For example, a contract between two companies might not have the same enforcement capabilities as a labor contract. Why? Because doing business in China is a fluid thing, and as such, is usually kept flexible. We have seen time and time again (in 2000 as in 2025), agreements that were not fully respected after they were signed, because government regulations changed, or because the specific person who signed with you in the company moved to another position, and their replacement didn’t care for the agreement anymore.
Labor contracts, on the other hand, are highly rigid and taken very seriously by the courts. This is because China is a socialist country, and the care for the employee is a top priority. Just check the percentage of cases won at the labor court in favor of the company – nearly 0%.
And this is why internal Rules and regulations matter!
Making sure your labor contracts comply with labor law, and that your Employee Handbook is detailed, updated, and signed by all employees.
Understand Cultural Differences
As with contracts, other areas of operations are affected by cultural habits, just like in every other country. This is why you should always make sure your China manager is aware of those differences and capable of working with them.
For example, the common practice of not losing face can mean not appearing as disrespectful but could also mean not appearing incompetent. For example, an employee in the role of an assistant might be exposed to all sorts of information about the sales of the company, including some not-so-good practices of the sales team. But because of their position, they will never say anything or even answer directly when asked. They will not want to put their managers in a negative light, and therefore disrespect them.
Another example could be of an employee who was asked to complete a task but doesn’t know how. Instead of asking for help, they may stall, make excuses or divert the conversation, instead of admitting they don’t know, just so as not to appear incapable. For someone who is not used to the concept of losing face, this behavior might be confusing.
In some cases, it might create a real problem. One of our clients faces an interesting situation with their local GM in China. That GM had some personal relationships with the local investors and therefore had to put up a “face” of a great manager who brings profits and results. Unfortunately, the company didn’t do so well during COVID times, but the manager still wanted to share dividends. He ended up taking a bank loan to cover those dividends and keeping the company in debt. All of this, simply to avoid losing face.
Managing expectations in accounting
Many think that accounting in China is a black box. But in fact, the rules of accounting in China are the same as in other places, except for one thing – here, the ruling entity is the Tax authorities. And that means you can run your accounting books according to GAAP or IFRS, but what ultimately matters is the number of Fapiaos you register and issue.
You can look at it a little bit like cash accounting, only in Fapiao accounting, if you issued a Fapiao but still didn’t receive the full payment, you are still obligated to pay the tax. This often confuses global companies doing business in China, as it disrupts their cash flow, and budgeting.
Another thing to note is that most local accounting firms are not familiar with project accounting. When choosing an agency, make sure they can work with your CFO and controller at HQ.
Adding to that, creating and maintaining good relationships with your local bank and tax officer can be crucial too. For that, you need to make sure your accountants are aware of the additional role they must play.
And one extra tip from us, if you are only starting your China Market Entry now, we wouldn’t rush to count on promises for incentives, tax reductions and other benefits. Local officers and bank clerks also have their KPIs in bringing new agreements, but until you actually prove your business is stable and capable of making a good-sized income, you won’t see any significant incentives.
The Operational Audit
China continues to change rapidly, and its business environment is highly dynamic. If you continue to operate as you did last year or the year before, you might find yourself lacking. This is where an operational audit comes in handy.
An operational audit examines if the company’s workflows and practices are updated and aligned with rules and regulations. It is important to check your accounting books for sure, but an operational audit also checks if the accounting method applied is relevant to your global company’s standards.
HR-related topics are also reviewed, such as labor contracts and the employee handbook. This includes reviewing termination processes and ensuring proper contributions to social benefits. Your team can get some advice and guidance on what to adapt and how.
In supply chain management, reviewing pricing, BOM, and other workflows can help identify more efficient options.
An operational audit is a health check of the company that can revive it and bring a fresh perspective to its operations. The end of the year is an ideal time to conduct one, so don’t wait!
