Due Diligence
17
October 2017

What are China Abnormal Business Operations?

China Abnormal Business Operations is a status given to Chinese companies by the Administration of Industry and Commerce.

As the name indicates it is issued when the company's operations are irregular and they are not meeting their reporting duties.

The presence of abnormal business operations status may indicate that a Chinese company is experiencing financial difficulties or is poorly managed.

What are China Abnormal Business Operations?

In China "abnormal business operations" (企业经营异常) is a status applied to a company's registration record when they are deemed to have irregular business activities by China's company registration bureau, the Administration of Industry and Commerce (AIC).

The phrase came into being in 2014 following the AIC publication of Order 68, the "Interim Procedures of Business Abnormal Operation Directory Management" (企业经营异常名录管理暂行办法).

This order was issued with the aim of encouraging Chinese companies to perform their reporting obligations such as submitting an annual return and keeping their registration details up-to-date.

4 Types of China Abnormal Business Operations

As defined in Article 4 of Order 68, there are 4 circumstances in which a company is given the status of abnormal business operations:

1. Failure to Submit Annual Return on Time

As is common business practice in other parts of the world, Chinese companies are required to report their business performance on an annual basis.

In China the financial year operates from 1 January to 31 December and companies have until the following June 30 to submit their annual return.

From our experience, this is the most common type of China abnormal business operations, occurring in approximately 3% of companies we verify.

2. Failure to Disclose Other Information on Time

In addition to submitting annual returns, Chinese companies also have to report significant changes such as registered capital contributions and shareholder transfers.

If this is not done within 20 working days the AIC can apply abnormal business operations status.

Despite verifying thousands of companies we have yet to come across a company with this type of abnormal business operations status.

3. Concealing Facts or Falsification

Another sure fire way for a Chinese company to get abnormal business operations status is not being honest with the AIC.

Get caught and "concealing facts or falsification" is the term that can be applied in many situations, such as submitting false financial information.

We have also yet to observe a company with this abnormal business operations status.

4. Unable to be Contacted

If the AIC has tried many time to get in touch with a company, but they can't be tracked down, this will also raise abnormal business operations status.

This might happen if a company has changed office without notifying the AIC.

This status appears in approximately 2% of the companies we verify.

What are the Implications of Abnormal Business Operations Status?

The most obvious outcome of a company having abnormal business operations status is that it could negatively effect their reputation. 

If a company is unable to meet their basic reporting requirements, it suggests that they might have poor management systems in place and/or be running into some financial difficulties. 

Certainly, if a Chinese company can't meet their reporting requirements, you should be having second thoughts about whether or not they are able to handle the production and delivery of your order on time.

Although they might have just run into some unfortunate circumstances, the odds are that abnormal business operations status indicates larger problems at the business.

There may be some bigger implications for companies listed as having China abnormal business operations status. 

It has been suggested that it could even result in restrictions on the company's legal representative travelling, the company registering on Alibaba platforms and lead to difficulties acquiring bank loans.

Can China Abnormal Business Operations Status be Removed?

When actions have been taken to address the AIC's concerns, Chinese companies can apply for abnormal business operations status to be removed.

The AIC commits to review such cases within 5 working days of receiving evidence.

Even when an abnormal business operations status has been removed, a historical record of the case is still kept on their file and is generally publicly available.

Does my Supplier have China Abnormal Business Operations Status?

Finding out is easy with our verification reports. A check for Abnormal Business Operations is included in our China Pro Verification and Full Scope Verification services.

Take a look at our verification reports now.

Further reading