By Sun Jin, Marlow, China attorney at law

When doing business with Chinese vendors, it’s very important to know the operation situation of the vendor, and we may say that it’s vital to do so especially when the vendor is a new one, to avoid the situation of meeting scammers or dishonest vendors.

In China, we have two databases from which we can do the verification job on the company’s nature and its operation situations, one database called “All Chinese Enterprises Database” (“ACED”) which contains registration information of nearly all Chinese companies and other type of enterprises like partnership enterprise in all China; another database is “Chinese Court Judgements Database” (“CCJD”), which contains all court judgements of recent 15 years.

So called a “company’s nature”, means the company is a trading company or a manufacturing company. In China, in normal situations, a trading company cannot carry on manufacturing actions, otherwise it will be a manufacturing company, but a manufacturing company can always do trading business, as trading business does not require much, just money will be fine, no machine, workshop real estate and workers needed. Most foreign importers would prefer to do business with manufacturers, who can offer better prices than trading companies. And it’s less risky to do business with a manufacturer who can have some assets of machines, real estate, while a trading company may not have these assets at all, but just an office site and office furniture.

From ACED, we will be able to know the company’s registration information, including their address, capital sum, name list of high management team, and the company will need to make one online-report and publish it on ACED, which contains some operation information of the company’s operation in the very passed year, including how many persons’ social insurance they had paid for their employees including high managements.

As per information from ACED, and experienced lawyer can easily tell that the company is a trading company or a manufacturing one. For example, the company’s registration address (in which only one company is allowed to be registered) is in one commercial building in downtown of a city, and they are paying social insurance for only a few persons like less than 5 persons, and their registered capital is high like millions of CNY but actually-remitted-into-company’s capital is zero, then it’s by 99% possibility a trading company. On other hand, if the company is in one industry zone, and the company is paying insurance for many persons like 30 or even 50 persons, and it’s actually-remitted-into-company’s capital is a high sum, then very likely this is a middle-size or big-size manufacturing company.

So-called “operation situation” of the vendor, shall include below important information from two database:

I. How much is the company’s registered capital, and how much capital the company had remitted into the company.

In 2014, the PRC Company Law was revised to change the registration capital system from “registered capital actually paid in system” to “registration capital subscription system”. Registering a company no longer requires actual capital contributions, and only requires a commitment to fully pay within a deadline, which can reach a maximum of 50 years. So far (2023), the registration capital subscription system has been implemented for nearly 10 years.

Meanwhile, the new draft of the PRC Company Law has been approved by the National People's Congress and may be revised again next year, changing back to the “registered capital actually paid in system” (fully paid within 5 years).

So a company could have a high sum registered capital but actually-remitted-into-company’s capital is small, then you need to be careful that this might be a trading company or just a shell company, doing business with this company may bring you some additional risks.

II. The quantity of employees of the company including high management.

This information will come from the annual report of the company online in ACED. Of course this contains a lot of information, a company who is pay social insurance for many persons, like 50 persons or even more, could be a large company; even it’s a trading company, then it must be large trading company. But for a company who is paying social insurance for very few people, then it could be trading company, if it is paying social insurance for zero people, then it might be a shell company, or a company who is operating company in a illegal way (not paying social insurance for employees is illegal in China).

III. From CCJD, we can tell how many litigation cases the company had involved, including in how many cases the company acted as the defendant, and in how many cases the company acted as the plaintiff.

Of course, acting as the plaintiff, in normal situations, means the company is innocent, and its legal rights had been infringed by somebody else. But if the company acted as the defendant, then you need to be careful, this means the company brough troubles to other parties, infringed their rights, or breached the contract with other parties, and you need to think over whether choose this company as your vendor, while in future you may have the risk of facing them on court too.

Bad news, the two databases are in Chinese only, and no other language version, so you will need to find a Chinese guy to help you, and better a lawyer who would know it very well how to get the information that you really need, and interpret it correctly for you with lawyer’s working experiences, when you may need a Chinese counselor (standing legal advisor).