Registered capital is the amount of money that represents the first investment in a new company. It is used to cover operational start-up costs such as salaries, rental fees and purchase of stock or equipment.
While the registered capital is an important piece of information that can indicate a rough state of financial health and operational stability of a company, it should be taken as only one piece of information and should never be used as a stand-alone component to conclude something about a Chinese company.
When shareholders register a company in China, they must declare the amount of registered capital (注册资本) to the State Administration of Industry and Commerce (SAIC) which is the approval authority for this registration. The capital amount is the first investment in a new company. The registered capital needs to be sufficient to cover operational start-up costs such as salaries, rental fees and purchase of stock or equipment. The registered capital is shown on the all-important business license.
Should this information change at any point, the company and its shareholders must report the change to the government, indicate that there is a change in the company’s registration, and declare it on their annual return.
What the amount of registered capital communicates about the Chinese company
The amount of registered capital can be a used as a rough – stress rough – indicator of a company’s size, grown since inception, and credibility, as well as its type (is it a trading company or a factory that actually produces the products and goods you’re procuring). While this singular piece of datum can indicate levels of financial size and operational quality, you should never use registered capital as a stand-alone component to conclude something about a Chinese company. Here’s why.
Chinese companies can pay fees to have more registered capital listed on their official documentation to bolster the picture of health that they want to project. Companies arrange these deals through business consulting companies that use their own actual capital for the process. Once the registration process is complete and the inflated amount of registered capital is recorded, the consulting company or service provider reclaims the capital it invested and uses it for the next transaction. These fees are relatively low compared to the amount of “registered capital” that can be recorded:
- To register 1m RMB (~160k USD), the client company pays a total of 6.5k RMB (~1k USD). That’s a 153x boost.
- To register 2m RMB (~321k USD), the client company pays a total of 11k RMB (~1.8k USD). That’s a 181x boost.
- To register 5m RMB (~800k USD), the client company pays a total of 24k RMB (~3.8k USD). That’s a 208x boost.
Note that this process is currently entirely legal, though it does fall into a somewhat grey area of ethical business practices. While companies have every right to receive investments and support from other companies and outside entities, simply using that capital investment as a short-term “front” for registration purposes should cause some pause.
As with all Chinese documents, you should take steps to ensure that information about the registered capital on a Chinese business license or annual return is valid. We’ve outlined the steps you can take to verify the validity of a Chinese document in our companion article “Certifying Chinese documents’ authenticity.”
With all official Chinese business documents, it’s important to verify their legitimacy. While many businesses or individuals seeking to do business in China can utilize the CNCA’s English-language database, the process is complex and challenging.
We can help.
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