Conducting due diligence in China: a guide for Canadian businesses

For Canadian companies exploring opportunities in China, conducting thorough due diligence is critical to reducing risks. A comprehensive due diligence process can help assess prospective Chinese partners legitimacy and financial stability to protect against regulatory and compliance risks.

• Business registration and financial transparency standards may differ from those in Canada
• Legal enforcement in China may vary by region and case
• China’s export control and corporate social credit systems impose additional layers of compliance that foreign companies must account for
• Preventative due diligence can help identify potential risks early, such as:
  • legal disputes
  • counterfeit IP
  • sanctions exposure

Operational due diligence is used to verify the identity, legitimacy, and authority of Chinese business partners. Key checks include:

• Verify company registration through the National Enterprise Credit Information Publicity System, managed by the State Administration for Market Regulation (SAMR) and its local branches. Information to confirm includes:
  • registered legal person
  • registered capital
  • business scope
  • company address
  • registration date
  • validity of business license
• Authority of representatives: Ensure the individual you are negotiating with has the authority to bind the company. A registered legal person may only serve as a representative, and not the final decision-maker.

Financial due diligence involves assessing the financial accountability and stability of the Chinese partner, especially before entering into contracts or joint ventures.

For listed companies, consider:

• equity structure
• capital availability ratio
• forms of investment
• major shareholders
• percentage of shares held

Private companies might have limited access to complete financial statements, but balance sheets are often available. These offer insights into current assets and liabilities, long-term obligations and cash flow health.

Due diligence should also address compliance risks, especially in cross-border trade and sensitive sectors. Important checks include:

• Export control and sanctions lists: Confirm that your potential Chinese partner is not listed on Canadian, U.S., EU, or other international control or sanctions lists.
• Intellectual property (IP) verification: Confirm that the partner owns or legally controls any IP they claim to hold in China. Check trademark registrations and patents for authenticity and ownership.
• Corporate social credit system: Determine whether the company is blacklisted or under scrutiny by Chinese regulators.
• Litigation records: Search Chinese court databases to see whether the company is involved in serious legal disputes, including contract violations or fraud claims.

Canadian companies have several practical options for initiating due diligence:

The Canadian Trade Commissioner Servicei (TCS) in China can conduct preliminary research on local companies using public sources. To initiate a search, please provide the Chinese name of the company and phone number of the local office. Using this information, the TCS can help identify:

• whether the company is registered with the local SAMR
• the amount of registered capital
• the chief representative of the company
• how long the company has been registered

Several public and commercial databases can support independent verification:

• National Enterprise Credit Information Publicity System
• Qichacha – corporate data aggregator and risk assessment tool
• Tianyancha – business registration and legal case tracking platform
• Credit China – information on credit records and blacklists
• Shanghai Clearing House – useful for verifying financial exposure and records

Before engaging with a Chinese partner, companies should:

• confirm business registration and license validity
• verify the authority and identity of representatives
• assess financial health and liabilities
• review exposure to export control and sanctions risks
• validate IP ownership and legitimacy
• check for litigation history and regulatory blacklisting