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How to conduct China due diligence. Just ask.

by Dan Harris

Buying a Chinese company? Looking to do a China Joint Venture? Looking to use a Chinese company to distribute your product in China? Licensing your technology? Just want some good widgets from a reliable China supplier? Everyone will tell you that before agreeing to anything you should do your due diligence to make sure that your Chinese co-party measures up.

But how do you do that, especially now when it has become clearer than ever that much private investigatory due diligence in China is illegal?

The first thing we do, because it is so easy and so cheap, is to conduct an internet search of the company in English and, more especially, in Chinese. Doing this sort of search will virtually never be enough to feel good about going forward with a $10 million deal, but it is sometimes enough to persuade you not to do so.

Then do your due diligence the old fashioned way. Ask your potential Chinese counter-party for relevant documents showing its various registrations and financial condition. In particular, get its tax returns.

And if your potential counter-party will not turn over what you reasonably seek? Seriously consider walking away. In our experience, legitimate Chinese companies do not balk at providing documents that reinforce that they are who they say they are.

And if your potential counter-party does turn over the documents you reasonably seek? Then get someone who truly knows what he or she is doing to thoroughly review those documents.

It is that simple.

What do you think?

UPDATE: I should have mentioned that it is even more important than ever that you hire the right firms to conduct your due diligence in China. This means hiring a company with experience in China and, most especially, a company that knows China’s investigatory laws and follows them.

Dan Harris is founder of the Harris & Moure law firm, a boutique international law firm focusing on small and medium sized businesses that operate internationally. China is the fastest growing area for the firm. Dan writes as a source of China legal and business information.

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