Russia-China Business Cooperation: Legal Aspects

 

September 28, 2024

BRACE Law Firm ©

 

In 2024, the People's Republic of China (the "China" or the "PRC") demonstrated its status as one of the world's largest economies through high rates of economic growth. By the end of 2023, China's GDP grew by 5.2% year-on-year, reaching 126 trillion yuan (USD 17.41 trillion).

Through radical decisions and strategic measures, the PRC Government successfully modernized Chinese industry. In many manufacturing sectors, China has become a leader in applying modern innovative technologies and robotic equipment.[1]

For the Russian economy, Chinese markets are key partners in international trade. Given that Russian companies faced large-scale international sanctions in 2022–2023, finding new foreign trade partners — including Chinese manufacturers, suppliers, and consumers — is highly relevant.

Meanwhile, Russian-Chinese relations face several issues that inevitably affect interactions between Russian and Chinese companies.

Problems in Russian-Chinese Relations within the Context of Working with Chinese Companies

Experts point to the following current challenges in developing bilateral trade between Russia and China:

• Lack of clearly established, trust-based relationships between partners from the two countries;
• Significant Russian dependence on China and a decline in the strategic position of the domestic economy within established trade and economic relations;
• Lack of effective logistics communication channels. Additionally, there is a lack of projects to develop road and transport infrastructure between the countries;
• Current export and import structures characterized by homogeneity and lacking long-term prospects for Russia. According to foreign trade data, China is Russia’s primary partner, while Russia is China’s eleventh partner by trade volume (accounting for only 2% of the PRC's foreign trade);[2]
• Weak competitiveness of domestic manufacturers compared to Chinese counterparts due to technological deficiencies. Issues regarding intellectual property rights protection remain unresolved, and there is a shortage of Russian specialists capable of effectively promoting high-tech products in the market;
• Lack of adequate information and telecommunications infrastructure to support mutually beneficial scientific and technical cooperation between Russia and China.[3]

Given these issues, developing bilateral trade between Russia and China requires creating a primary legal framework to establish specific strategic measures for foreign trade activity. Although China and Russia have adopted general concepts for economic interaction and mutual development (such as the "One Belt, One Road" initiative), there is currently no extensive practice of preparing roadmaps that include specific measures, target indicators, and planned effects (considering long-term strategic interests rather than just immediate gains). A singular example is the Roadmap for the High-Quality Development of Russian-Chinese Trade in Goods and Services, aimed at increasing export and import volumes.[4]

The creation of such legal documents is a prerequisite for mutually increasing competitiveness. Primary focus should be placed on customs cooperation, which can be structured based on existing economic interests and economic security indicators for both Russia and China. This cooperation must account for the challenges domestic producers face when competing with Chinese ones, include multilateral mechanisms to stimulate free interaction among investors, and define joint projects within each country’s territory.

To ensure more successful trade and economic relations, a more balanced Russian export structure is required to eliminate the trade imbalance. Russian exporters should increase the share of manufacturing products and services, as well as high-tech products. The development of economic ties between Russia and China depends on the effectiveness of measures to diversify the Russian economy.

There is also a need for effective customs and tariff regulation to prevent border violations and eradicate corruption in bilateral trade mechanisms. Furthermore, shifting the settlement currency structure to move away from the US dollar is necessary to maintain national currency stability and establish a mechanism for using national currencies in settlements.[5]

In the corporate sector, business cooperation faces challenges due to Chinese companies' fears of secondary sanctions from the US. These may be imposed on companies violating sanction regimes by conducting financial transactions with entities on sanctions lists. For instance, under the 13th EU sanctions package, export restrictions were imposed on several Chinese organizations involved in circumventing trade restrictions: Guangzhou Ausay Technology Co Limited (China); Shenzhen Biguang Trading Co. Ltd (China); and Yilufa Electronics Ltd (China).[6]

The danger of violating sanctions regimes when conducting transactions without sufficient due diligence imposes additional restrictions on cooperation. Chinese companies are forced to verify whether a counterparty shows signs of being included — or potentially included — in sanctions lists.

Additionally, Russian companies face difficulties in verifying counterparties before entering deals due to a lack of knowledge regarding where and how to conduct such checks.

How to Check a Chinese Legal Entity Before Starting Cooperation?

In China, there are three types of partners Russian entrepreneurs typically cooperate with: manufacturers, trading companies, and retailers. They differ in their capabilities and operating methods.[7]

Manufacturers can create unique products specifically for your needs or offer mass-produced items. Working with them allows for direct oversight and the establishment of specific quality standards. However, a manufacturer may lack an export license. In such cases, the manufacturer cannot process documents, ship goods, or receive payment directly. Therefore, a trading company is involved in the transaction.

Trading companies (or traders) purchase goods from manufacturers and supply them to other countries. A trading company usually works with various manufacturers and can therefore supply several types of goods in a single order.[8]

Retailers usually set higher prices than manufacturers and only ship standard goods. Typically, entrepreneurs just starting out who have not yet secured many clients work with retailers. As sales volumes grow, it is advisable to transition to large-batch orders.[9]

Many problems can arise when working with Chinese companies; therefore, the primary rule is total control.

First, you must request a company’s incorporation documents:

• Business License (the primary document);
• Articles of Association;
• Export License (if the factory focuses on the domestic market, the intermediary — an export-import company — must hold this license);
• Customs Registration Certificate.

Once you receive scanned documents, verify them through image searches on various search engines (especially the Chinese site Baidu.com), as unscrupulous participants and fraudsters may download them from the internet.

Information on Chinese counterparties is stored in registries. There are websites containing data on companies in mainland China, such as the National Enterprise Credit Information Publicity System on the website of the State Administration for Market Regulation (gsxt.saic.gov.cn) and the corporate information service Qichacha (qichacha.com). Hong Kong companies can be checked via the Integrated Companies Registry Information System (icris.cr.gov.hk). Searches can be conducted using the company’s Chinese name in characters or its registration number. Some databases, such as qichacha.com, allow searching by English names, but results may be inaccurate. Multiple companies with different Chinese names may share a single English name.

Registry information can be requested in writing directly from a trade and industrial organization or through the Trade Representation of Russia in China. Inquiries to Chinese government authorities must be submitted in Chinese.

A company's website can provide valuable information. Reliable companies typically have Chinese (primary) and English (secondary) versions. Fraudulent sites are often written only in English. Whois services allow you to determine domain registration dates and ownership. Counterparties can also be checked on major business platforms that conduct independent company audits: Alibaba, GlobalSources, and Made-in-China.

Verifying a Chinese company’s contact information indirectly confirms its reliability. A legally operating firm must have a landline and fax number, which should be called. Its location can be viewed on electronic maps (maps.baidu.com).[10]

Bank details must be verified through multiple communication channels — email, phone, Skype, WeChat, etc. At least three channels are recommended. This helps prevent the substitution of bank details via email, where a fraudster’s bot intercepts emails. The bot redirects messages containing keywords (payment, prepayment, money) to attackers, who then send their own details. Other messages are forwarded to the real recipient, who can then respond.

Supply contracts and invoices must specify bank accounts opened in banks located in mainland China. If the Chinese side suggests transferring funds to an account in, for example, a Hong Kong bank, the supply contract will not be official for China’s relevant control and regulatory authorities.[11]

Recently, Chinese fraudsters have begun creating offshore or Hong Kong companies with English names identical to those of Chinese companies and opening offshore accounts in Chinese banks in the names of these offshore or Hong Kong entities. A list of Chinese banks licensed to open offshore accounts includes: CHINA MERCHANTS BANK, SHENZHEN DEVELOPMENT BANK, BANK OF EAST ASIA, SHANGHAI PUDONG BANK, and CITIC BANK. Some of these offshore account numbers start with "OSA," standing for "Offshore account."[12]

Therefore, it is also necessary to request information regarding the opening of the bank account from the Chinese counterparty.

If you have doubts about a Chinese partner requesting prepayment, you may use a letter of credit from a Russian bank or a corresponding bank guarantee.

It is not recommended to place orders without seeing the production facility, especially for wholesale supplies. However, a personal inspection does not provide a 100% guarantee. A popular type of fraud is the "fake laoban" (from the Chinese for "boss" or "director"): some factories allow third parties to conduct tours of their production and pose as the owner. Fraudsters may rent a factory with equipment and workers for the day or show a beautiful office and warehouse without showing equipment or employees. Thus, it is vital to verify everything personally. During a visit, you must check the level of technical equipment, testing methods for finished products, the number of workers, stock levels, and current factory orders. You should speak with rank-and-file employees, observe their work, and see the finished products.[13]

If a Chinese counterparty asks to cooperate through its Hong Kong company, you should know that the standard share capital for such a company is HKD 10,000 (approximately USD 1,500). This share capital is often unpaid; consequently, the Hong Kong company lacks sufficient assets to meet its obligations. In such circumstances, you should insist on signing the contract with the entity registered in mainland China or request an additional guarantee agreement from the Chinese parent company to ensure the Hong Kong company's performance. Such a guarantee agreement takes legal effect upon approval by China's relevant currency control authorities.[14]

Negotiations with Partners from China

It should be noted that the primary difference between Chinese and Western negotiation styles is the orientation toward the process itself. While Western representatives are generally result-oriented and focused on specific tasks and conditions, the Chinese side focuses on avoiding a situation described by the Chinese proverb "sharing a bed, but seeing different dreams." In other words, pursuing different interests in a common cause. This is why Chinese companies do not rush to establish contractual relations. Signing a desired contract requires a long journey. Any haste will be perceived as a focus on short-term results.[15]

When representatives of different cultures interact, understanding the cultural aspect is essential. Showing respect, understanding the mindset, and knowing local traditions are the foundations of successful business relationships. Many small steps must be taken before a decisive one. Observing business ethics during negotiations is crucial: for Chinese companies, this indicates the opponent’s experience and serious intentions. You should demonstrate tact, patience, and professionalism. Intercultural and linguistic barriers complicate negotiations. While non-verbal communication is largely absent in Chinese business communication, significant attention is paid to body language. Relaxed postures, interrupting the speaker, or walking around the room during a conversation are viewed as bad manners, and pointing a single finger at a person or object is unacceptable. During negotiations, carefully observe the communication between members of the Chinese delegation. The person who speaks the least may hold the highest position. It is critical to avoid direct "no" answers to allow the opponent room for "retreat," respect their viewpoint, avoid rushing to conclusions, and speak clearly, briefly, and politely. Reputation is not a hollow concept for Chinese negotiators.

In Chinese business culture, it is not customary to use the polite form of "you." Most often, the term "Guì gōngsī" (贵公司) is used, meaning "Honorable Company."

The most common negotiation tactic used by Chinese partners involves discussing constantly emerging problems. Two scenarios are possible. First: as designated problems are resolved, the Chinese side puts forward new requirements or finds new issues for discussion, dragging out the process. The second scenario involves making unreasonable demands on the foreign partner. This "wearing down" tactic exhausts the opponent, who, tired of answering new requests, eventually agrees with the Chinese side. Consequently, provisions favorable to only one side may be included in the contract. The human factor directly influences this method's success. Generally, Chinese companies assign a person with a narrow specialization to negotiations, whereas Western organizations may use a specialist who performs multiple functions.[16]

The "artificial deadline" tactic involves two parties agreeing to sign a contract by a set date, allowing sufficient time to coordinate key provisions. Subsequently, the Chinese side may claim it is impossible to sign the contract, citing various reasons. The foreign company is left with no choice but to yield on some points. Alternatively, Chinese negotiators may act more subtly: first yielding on major provisions, then — a few days before signing — announcing the need for a review based on a "government regulator's" (bank or insurance company) requirement. It is highly likely that the opponent, facing deadlines, will make adjustments in favor of the Chinese company.[17]

Returning to key issues is another tactic. This involves signing a contract based on achieved agreements. As soon as the foreign company begins implementing the project and investing money, the Chinese side declares the need for amendments due to bank or insurance company requirements. To avoid losses, foreign companies often agree, recalling the difficult negotiations that led to the existing contract.[18]

Contracts with Chinese Companies

Entering into contracts with Chinese companies always involves risks and requires attention to detail regarding product quality requirements, delivery terms, and dispute resolution procedures.

Some authors recommend drafting the contract, all additions, amendments, and appendices in the Chinese language. In the event of a dispute in a PRC People’s Court or an arbitration commission within the PRC, the judge or arbitrator may appoint an independent translator for documents not in Chinese.[19] However, following this recommendation involves additional costs for a translator and a Chinese lawyer, which may not always be justified. Most often, contracts with Chinese companies are concluded in Russian and English. This does not cause problems in potential arbitration, as the appointed arbitrators can work with the English version.

When signing a contract, you must verify the authority of the person signing on behalf of the Chinese company. The Legal Representative of a Chinese company is the person entitled to sign, represent the company without a power of attorney, and perform specific actions on its behalf. Under the PRC Company Law, only the Chairman of the Board (if a board exists), the Executive Director (if no board exists), or the Manager (General Manager or Director) can be the Legal Representative. Only one individual may serve as the Legal Representative. Their details are entered into the Business License. If the Legal Representative changes, the company must first apply to the PRC registration authority to update records and re-issue the Business License before updating all other documents. If a legal entity removes a Legal Representative from office but fails to update the documents, this action is invalid against third parties. When signing, you should also request the signer’s identification document and a power of attorney if the signer is not the Legal Representative.[20]

Payment terms and deadlines must be clearly defined in the contract. You may provide that final settlement occurs after an initial quality assessment once the products reach the buyer's warehouse. Linking the contract to a specific currency and setting short payment deadlines can create issues due to settlement difficulties in Chinese banks. This creates risks of contract violations for the Russian buyer, particularly regarding late payment penalties. Consequently, some authors recommend providing the possibility of settlements in different currencies and through various methods.[21] Under anti-Russian sanctions and payment blocking by Chinese banks due to secondary sanctions threats, this allows for alternative settlement types.

Additionally, payments to a Chinese company must comply with currency control requirements. In imports, contracts exceeding 3 million rubles must be registered with the bank; in exports, the threshold is 10 million rubles. If the contract price is not specified, it must be registered once the supply volume exceeds these amounts. If the contract price is below 600,000 rubles, currency control is conducted without submitting documents; providing the bank with the transaction code specified in Bank of Russia Instruction No. 181-I dated August 16, 2017, is sufficient. For example, for an advance payment for foreign goods, the code 11100 is used, meaning settlements by a resident in favor of a nonresident for goods purchased abroad via prepayment and imported into the RF. Failure to comply with currency control requirements leads to administrative—and in some cases, criminal—liability.

Product quality must be checked both before shipping and after receipt. Many disputes arise because the parties failed to define and include quality requirements in the contract. Therefore, the contract must precisely define the standards the goods must meet. Without these, a Chinese supplier may "optimize" the product and reduce costs by using cheaper materials. Furthermore, the contract should define preliminary inspection and acceptance procedures. Preliminary inspections can be conducted before shipping in the PRC, allowing for the rejection of defective goods on-site. When accepting received goods, a reasonable timeframe should be established to detect defects in time.[22] Claims for product returns are easier to assert if all quality control points are specified in the agreement.

Goods from China are delivered via any available means: road, rail, sea, or air. Delivery costs depend on speed. Air delivery is considered the most expensive and fastest, while sea transport is the least expensive but takes the longest.

Goods must be declared when crossing the border. You must provide all shipping documents confirming the composition, origin, and value of the goods. Each item crossing the border is assigned a code according to the Commodity Nomenclature of Foreign Economic Activity. Mandatory payments — customs fees, customs duties, VAT, and in some cases, excise tax — must also be made.

The claims section is usually the most difficult to coordinate. Therefore, it should be drafted as clearly and in as much detail as possible. You must specify the conditions for filing a claim, the deadlines, and who bears the cost of returning or replacing goods or refunding money.

After defining all obligations, the parties must establish liability for non-performance. If the contract does not provide for liability for violations, recovering damages will be complicated — and in some cases, impossible. When concluding a contract, it is advisable to identify the supplier’s core obligations and include specific liquidated damages, penalty amounts, or calculation rules. This makes it easier for the buyer to recover losses if the supplier violates the contract.[23]

The absence of a specific governing law provision in the contract is not the worst-case scenario. It is far worse when parties choose the laws of several countries simultaneously as a compromise — for example, the laws of both Russia and China, or even the "general principles" of Russian and Chinese law. Additionally, problems may arise in dispute resolution if the parties chose English law or the law of another jurisdiction that has imposed sanctions on the RF. The law of one of the parties (Russia or the PRC) may be chosen as the governing law. Alternatively, parties may agree on Hong Kong law (as a replacement for English law), international trade law, or a combination of a national law with international trade law principles.[24]

If negotiations or compensation fail to resolve a dispute, you will have to go to a Chinese court. If China is chosen as the venue for dispute resolution, it is more effective to choose mainland China (excluding Hong Kong and Macau). If a dispute is heard outside mainland China, the decision must first be recognized within mainland China before enforcement, which is a complex and expensive process.

In mainland China, unlike in the Russian Federation, there are no state arbitration courts (the functions of commercial courts are performed by People's Courts); there are only People's Courts.

Although China signed the New York Convention and Chinese courts are required to enforce foreign arbitral awards, such awards are often ignored for the following reasons:

• According to some authors, there is a strong cultural aversion in China to enforcing foreign arbitral awards, and Chinese courts will find any reason to avoid doing so. This is particularly true at the local court level. While there is some chance of winning an appeal, it is uncertain, and delays can be significant. Often, rather than ruling against enforcement, a Chinese court will simply issue no ruling at all, leaving the case pending for years;[25]
• In many cases, the Chinese side will not participate in foreign arbitration, resulting in a default award. Chinese courts (like courts worldwide) are disinclined to enforce default awards, and the likelihood of enforcing a foreign arbitral default award is low. Knowing this, Chinese lawyers may advise their clients not to participate in foreign arbitrations;
• Chinese courts usually do not comply with the orders of foreign arbitrators. Many arbitrations concern intellectual property or company management disputes requiring injunctions. Chinese courts believe such orders from a foreign arbitrator may infringe upon Chinese sovereignty and, consequently, ignore the arbitrator's orders.[26]

In 2018, the Supreme People's Court of the PRC established the China International Commercial Court as a permanent judicial body to hear international commercial disputes.

Arbitration commissions are the equivalent of "private arbitration courts." The most well-known and experienced commission for disputes involving foreign entities in China is the China International Economic and Trade Arbitration Commission. It is respected by foreign companies for its objectivity for the following reasons:

• Extensive experience in resolving disputes involving foreign persons;
• The ability to choose and appoint foreign arbitrators;
• Disputes are heard in a single instance with a final decision (People’s Courts have two instances);
• The ability to shift arbitration representation costs to the losing party;
• Generally, legalized documents are not required for participation in the process.

For a contract to become legally binding on a Chinese company, each page must bear a red circular seal with a star in the center or a red circular contract seal specifying the Chinese company’s name. The seals must show the Chinese side’s full registered Chinese name, as English seals are considered invalid in China. Signatures may accompany the seal, but contracts bearing only signatures are considered invalid in China.

The corporate seal, often called a "chop," represents an unlimited power of attorney granted to its holder. Once a document is sealed, the company becomes legally bound, whereas signatures are not enforceable under Chinese law. Every company must have a set of corporate seals, which are submitted to the public security bureau for approval. Once approved, the seals are paid for and registered. If a company changes its seal, it must repeat the approval and registration procedures with the public security bureau.[27]

All transaction documents with a Chinese counterparty must be executed in the original, as in the event of a dispute in a PRC People’s Court or arbitration, if the Chinese side does not recognize the documents, it will be necessary to prove they were actually executed.

Thus, careful attention to detail when concluding contracts and a proper assessment of consequences will help reduce risks when supplying goods from China.

As a general forecast for Russian-Chinese trade and economic cooperation in the foreseeable future, it is assumed that China will not limit it under current conditions. At the same time, China will attempt to minimize the risks of its companies and banks falling under Western primary and secondary sanctions. To circumvent sanctions, specially created structures, intermediary companies, barter mechanisms, clearing, semi-legal international payment centers, digital currencies, and other tools will likely be actively used.

Overall, by skillfully using anti-Russian sanctions and Russia's consequent limited access to Western products, China will highly likely be able to gradually displace EU and US competitors from the Russian market, becoming an alternative-free supplier for certain product categories. Thus, the role of the Chinese factor in the Russian trade, economic, and investment agenda will steadily increase.

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References

[1] A.S. Khakimova, A.N. Kuskov. State Regulation Measures for Implementing the Economic Interests of the Russian Federation in Foreign Trade Cooperation with the People's Republic of China. Economics and Business: Theory and Practice journal, No. 4-3, 2024.

[2] M.A. Polovchenko, Yu.S. Kleshcheva. Conditions for the Growth of Trade Turnover Between the Russian Federation and the People's Republic of China. Industrial Economics journal, No. 3, 2023.

[3] A.A. Kvitkina. Customs Cooperation Between Russia and China in the Context of Bilateral Trade Development. KANT journal, No. 1, 2023.

[4] Ibid.

[5] M.A. Polovchenko, Yu.S. Kleshcheva. Conditions for the Growth of Trade Turnover Between the Russian Federation and the People's Republic of China. Industrial Economics journal, No. 3, 2023.

[6] Ivan Tkachev, February 23, 2024, European Union Introduced 13th Package of Sanctions Against Russia. RBC website.

[7] P. Khramkin, A. Zakharchenko. Business Advice: How to Work with Suppliers from China. April 23, 2023, T-Zh website.

[8] Ibid.

[9] Ibid.

[10] Business with China: How to Find a Counterparty and Conclude a Contract. Pravo.Ru website.

[11] Some Advice When Concluding Contracts with Chinese Counterparties. ChinaWindow website.

[12] Business with China: How to Find a Counterparty and Conclude a Contract. Pravo.Ru website.

[13] Ibid.

[14] Some Advice When Concluding Contracts with Chinese Counterparties. ChinaWindow website.

[15] N.O. Lebedeva. Negotiations: Chinese Style. Bulletin of Udmurt University journal, Vol. 2, Issue 4, 2018.

[16] V.A. Pavlova. Features of Conducting Trade Negotiations with Representatives of China's Business Circles. Political Marketing journal, No. 7, 2023.

[17] Ibid.

[18] Ibid.

[19] Some Advice When Concluding Contracts with Chinese Counterparties. ChinaWindow website.

[20] Ibid.

[21] Five "Dangerous" Contract Terms with Chinese Suppliers. CN Legal Blog on PRC Legislation.

[22] Ibid.

[23] Ibid.

[24] Ibid.

[25] Yu.A. Savinov, E.A. Taranovskaya, V.N. Volodina, A.V. Skurova. Features of Contractual Work When Concluding Foreign Trade Transactions with Chinese Firms. Russian Foreign Economic Bulletin journal, No. 12, 2020.

[26] Ibid.

[27] China Business: Corporate Seals Explained. Thesquare website.