China Business Continuity Issues That Need to Be Addressed Now

March 27, 2020 Posted by China Briefing Reading Time: 5 minutes

China’s closing of its borders causes legal, financial, and administrative problems for foreign investors that need to be dealt with immediately.

Foreign companies in China have had to factor in sudden travel restrictions introduced Thursday, which will effectively prevent any foreign-based executives from entering the country from midnight, March 28, 2020. The restrictions may be in place for the foreseeable future. This move in of itself should not come as a surprise to serious China watchers as coronavirus infections from travelers abroad have dominated new cases. Given that the country is just come out of a lockdown disrupting business for weeks now, this control on foreign entry – though controversial – may be a desperate measure to prevent a second wave of the outbreak.

This move on China’s part to temporarily ban foreign entry adds to the impact from other global headwinds – a pandemic, currency, and oil crises – which may pose acute challenges for several companies, even those with business continuity plans in place. However, it is during these moments of crises that businesses are alerted to the solutions available that may limit, if not mitigate, their exposure to the negative effects on their business even in times of border closings.

Some immediate steps that can be taken include the issuing of powers of attorney, addressing gaps in company interim management, adapting established business continuity plans to reflect new factors, conducting scenario analysis by assessing preparation required for all possible outcomes, or pursuing risk management strategies like hedging.

Here we run through some of the immediate business continuity issues that need to be addressed on priority by foreign-invested companies affected by China’s border closing.

Opting for a second general manager, outsourcing legal/administrative services

A lot of administrative approval can be done online nowadays without physical presence in China, so the absence of the general manager or other key management personnel at the workplace may not be as challenging as before. Nevertheless, it will have an impact on employees and the smooth running of the business.

For example, one major concern could be that contracts are not signed or approvals required for payments to suppliers or authorities are held up. In these situations, having more than one general manager would seem appropriate and alleviate the risk of business loss due to the physical absence of senior management. It is possible to authorize and temporarily appoint more than one general manager via a power of attorney and the practice is very positive.

Alternately, this responsibility may be transferred to a professional services provider that can assist with chop and licensing custodial to take control of cash payment/authorization as well as HR and payroll management. This is basically an outsourced model to ensure good internal control in this special period of time. In such cases, Dezan Shira & Associates can step in quickly and perform these important functions. Please contact us at china@dezshira.com for legal administrative assistance in China if your own executives are unable to be in China at this time.

Foreign exchange and other cash flow concerns

In addition to the border closure, the Chinese economy is also coming under pressure due to geopolitical oil disputes and the devaluation of linked currencies. The Chinese RMB Yuan has strengthened against the US Dollar and Euro within the past few days. In order to be able to determine any existing risk and increasing costs, we suggest evaluating the checklist below:

Are any exchange rate differences due to the RMB/USD/Euro position realized immediately or only at the end of the business year?
If losses must be realized immediately, what does the cash outflow situation look like?
Are the conditions in contracts with fixed exchange rates, if the company has signed any, negotiable?
Will the company potentially come under bankruptcy due to under capitalization, and if so, what instruments are available to increase its equity?
How will these factors affect the 2020 budget?
What is the company’s position on its tax obligations, including tax advance payments?

By working through the list, you can quickly determine whether your company has a problem, how extensive it is, and whether it will impact now or can be left to consolidation at the financial year end.

State of remote infrastructure

The now global spread of the coronavirus has triggered the world’s biggest ever work from home experiments as businesses consider how to effectively utilize their employees while also minimizing physical contact. Under these circumstances, most options for the standard operation of businesses using traditional methodologies are temporarily closed. Managers at foreign-invested entities (FIEs) in China have had to move very quickly to pick up the slack. Company IT systems are often not designed for a large number of telephone or video conferences as it is not assumed that all office employees would work from home.

The unprecedented need of foreign companies based in China to suddenly implement and shift to scaled and adaptable virtual work or telecommuting regimes for nearly all their company processes, means daily exposure to a challenging internet ecosystem, and the need to do so immediately and cost effectively. Dezan Shira & Associates IT team is able to help your company with its virtual infrastructure needs, such as informing and providing you with the best IT solutions (deployed through SaaS platforms) available in China to enable smooth workforce collaboration, as well as conducting IT audits to find out if company devices are secured and prepared for remote access and/or need to be configured and what that will entail. We can also help you to implement electronic document exchange between clients and suppliers, which can be very useful in the current situation. We have written about this in the article COVID-19: How Companies Can Leverage IT Solutions. Alternatively, please contact our IT Solutions Team.

HR management concerns

When shifting the workforce to a telecommuting regime (working via virtual platforms), there are multiple factors that will need to be considered for crisis management. Companies should ask themselves the following questions:

How, if at all, does the employee’s employment contract address ‘work from home’?
Is there a way to manage labor costs?
What is the legal position of the employer if the employee is no longer willing or able to travel on business?
How to measure and monitor working hours if the employee if working from home and what is the effect on salaries, if any?
Can the employer terminate an employment agreement in the current situation and what are the legal risks?

Making changes to the workforce may be inevitable based on the company’s economic situation. However, due to China’s protective labor laws, employees cannot be terminated on certain grounds and it is important that the company is aware of its legal liabilities when making such decisions. Labor policies also differ according to the local jurisdiction and industry. Ultimately, any breach of employee’ rights will be treated harshly by regulatory authorities. We have answered some frequently asked questions that have arisen at this time in the article – HR Compliance in China During the Coronavirus.

We can guide you as per your particular requirements. Please contact our China HR specialists at HR@dezshira.com for assistance.

Our firm has twelve offices currently operating in mainland China, and one in Hong Kong. Elsewhere, we have offices in Singapore, India, and most of the ASEAN nations, including Vietnam, Indonesia, Thailand, Philippines, and Malaysia. We have 27 years of experience in the region and several hundred qualified legal, tax, financial, and accounting staff on the ground.

If you require hands on, professional, and experienced assistance in China or elsewhere in Asia to assist you with handling your business managerial, administrative, and financial issues, please contact us in full confidence at china@dezshira.com.