Play by the rules

The recent tightening of visa restrictions is a source of frustration to many. Tourists, legitimate business visitors and even entertainers are walking away empty-handed from Chinese embassies and consulates, their travel plans in tatters.

Although this phenomenon has not been officially tied to the Olympics, the situation is expected to return to “normal” in October, once Beijing 2008 fever has subsided.

For one group, however, the difficulties won’t end when the quadrennial party leaves town. This group comprises foreigners who take up what amounts to permanent residency in China on tourist or business travel visas that are intended for temporary visits only. They are subject to another set of restrictions that reflect a different and more important trend unrelated to the Olympics.

These people deal with their visa status by continuously renewing their temporary visas, either through extension in China or by a quick visit to the China visa office in Hong Kong. Some businesspersons have worked on this basis in China for over a decade, creating large but unregistered (i.e. illegal) business operations.

End of the line
In recent months, the door has been closed. Requests made by these unofficial residents for visa extensions in China have been denied. The authorities have also warned that no extensions or renewals will be permitted in Hong Kong. Many of those who have followed official advice and returned to their own countries to apply for new visas are still unable to obtain new certification for tourist or business travel.

Most of these foreign entrepreneurs attribute this process to the tightening before the Olympics. They are wrong.

China has a clear set of laws on how foreign-owned business must be conducted in China. There was a period, however, when foreign investors were treated as a special category. As long as the investor was bringing investment or sales opportunities to China, the authorities were not particularly careful about the investor’s visa status.

It was therefore relatively easy to stay in China for extended periods on a temporary visa and it was relatively easy to operate an unregistered business outside the strict requirements of the law.

All of this has now dramatically changed. Foreign investors are expected to follow the requirements of investment law and visa requirements. This is part of the more comprehensive trend to apply all laws equally to both foreign and domestic business enterprises in China.

The letter of the law
With respect to foreign businesses in China, this means the following:

– It will no longer be possible to operate an unregistered business in China by means of perpetual renewal of temporary tourist or business travel visas. Where there is a business operation in China, the foreign investor will be required to register such business as required by law.

– Representative offices are now carefully monitored. Such offices are the appropriate vehicle for providing both visa status and housing to foreign investors in China. However, representative offices are limited to performing liaison activities in China. They cannot be involved in production activities and, where improper activity is discovered, visas are revoked and the offices are shut down.

– In order to carry out production or sales in China, a wholly foreign-owned entity (WFOE) is required, although such entities are restricted to acting within their stated scope of business. Once established, the WFOE can be used to obtain a proper work visa for the investor and foreign staff employed in China. However, in relation to the visa issue, many WFOEs dispatch their foreign staff from the parent country. The WFOE does not obtain a proper work visa and simply allows the foreign employee to live in China on a temporary tourist or business travel visa. As with the owner of unregistered businesses, this type of visa is now uniformly denied.

The message is that all foreign investors in China must plan to comply with Chinese law. Failure to do this – whether a company isn’t properly registered, is acting outside the scope of its stated business or is violating employment and visa regulations – will no longer be tolerated.  

This is the new world of Chinese law and will not change after the Olympics. Investors waiting for the return to the good old days will be waiting for a long time.