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How to conduct primary due diligence in China?

Due diligence is an essential requirement when doing business with Chinese partners. The only way to be safe is to spend time to scrutinise every aspect of your potential partner’s business. This consists of ensuring that the company is legitimate and properly established, has a solid financial foundation, and is operationally capable of fulfilling your needs. Searching the company on web engines is not enough, although some potential red flags may already be triggered if the company is not easy to find, or if there is no Chinese version of the website (indicating the legal Chinese name of the company). Other key steps include:

  • Ask a copy of the company’s business license;
  • Verify the validity of the information included in it, especially the company’s social security number and whether the name showed on the business license perfectly matches that used in the business contracts;
  • Verify whether your contact person is allowed to negotiate on behalf of his/her company;
  • Verify the company stamp (chop): Chinese legal chops have a standardized shape, i.e. circled, red, with a star in the middle; other shapes of chops are not valid;
  • Avoid paying in advance, and instead use safer payment methods such as letters of credit or documentary collections which are commonly used in China;
  • Hire professional agencies to conduct on-site inspection of the goods before they actually leave the Chinese port.

The EU SME Centre receives, on a weekly basis, emails from EU SMEs that have been scammed when purchasing goods from China. In the majority of cases, such scams could have been avoided with the above steps. The EU SME Centre can assist in conducting free-of-charge preliminary due diligence on potential partners (through our Ask-the-expert function). However, for major transactions and complex deals we always recommend you seek professional legal advice from licensed law firms, as they can obtain access to the company’s registration documents filed with local authorities.