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How to Do I Due Diligence on Chinese Companies to Avoid Scams? - CTD 101 Series

Mon, 20 Dec 2021
Contributors: Meng Yu 余萌
Editor: C. J. Observer


If you are required to pay a deposit or make a prepayment before you can get the goods delivered by a Chinese supplier, then you’d better do due diligence on the Chinese supplier beforehand.

This post was first published in CJO GLOBAL, which is committed to providing consulting services in China-related cross-border trade risk management and debt collection.

As mentioned in our previous post “How to Avoid Fraud by Chinese Company: Find Trustworthy Company & Write Good Contracts”:

Once you made the payment before getting the goods under the circumstance of no third-party guarantee, you are likely to face moral hazard from the supplier: the supplier may refuse to deliver the goods, delay the delivery, increase the price, or deliver the goods of lower quality.

One way to prevent this moral hazard is to find a supplier who keeps its promises driven by interests,

Due diligence can help you verify whether it is as it claims to be.

There are two types of such due diligence:

(1) Due diligence requiring no cooperation from the Chinese company, that is, you can obtain relevant information from public sources.

(2) Due diligence requiring cooperation from the Chinese company, that is, you need the Chinese company to provide you with certain information. Given such information involves the company’s trade secrets, it is likely that it will not provide you with such information.

Of course, even in the case of the former one, the Chinese name of the supplier is still needed. With its legal Chinese name, you can get all kinds of information from legal and public channels.

I. Due diligence not requiring cooperation from the Chinese company

1. Chinese name

As mentioned in “Find China Supplier’s Legal Name in Chinese to Avoid Scams”: All Chinese individuals and enterprises have their legal names in Chinese, and they have no legal or standard names in foreign languages. In other words, their English names or names in other languages are named by themselves randomly.

If you find a China supplier’s legal name in Chinese, you can initiate an action before a court or file a complaint against it. If not, you cannot do anything.

How could you obtain a China supplier’s legal name in Chinese?

You can ask a China supplier to provide its business license. There are a legal name in Chinese and a unified credit code in its business license.

Besides, you can ask a Chinese supplier to seal the contract with you. To make a contract valid in China, Chinese companies must seal it. The official seal contains a legal name in Chinese and a unified credit code of the company.

2. Legitimacy

With its company name, we can verify whether the company actually exists through an official website of the Chinese government. For how to search a Chinese company on the website, please read our post “How Do I Know if a Chinese Company Is Legitimate and Verify It?“.

In addition, we can also find the current status of the company in the system.

Generally, the system will display the following statuses of a company: existence, in business, moving-in, moving-out, closure, cancellation, suspension, and liquidation. The first four states indicate that the company is in normal operation. For the meaning of these statuses, please read our post “Which Status of a Chinese Company Is Legit?“.

You can only do business with an “existing” company. Companies in other statuses cannot perform the contract normally.

3. Company address

We can figure out its registered address.

Larger Chinese companies generally operate at their registered address, whereas many small companies would not. It means that there is a possibility to find out where the company is.

We can also find its actual business address in addition to its registered address through the public marketing materials and sales records. If necessary, we can arrange for investigators to conduct on-site investigations at these locations to understand its production scale, number of employees, inventory, and assets.

4. Registered capital of the company

Shareholders of Chinese companies need to disclose their subscribed registered capital. It’s worth noting that subscribed registered capital is only a commitment, rather than paid-in contributions.

We can find out the registered capital subscribed and paid-in by shareholders.

The paid-in registered capital reflects the size of the company’s assets. For most companies, the paid-in contribution accounts for only part of the subscribed contribution. However, in the case of factories, the proportion of paid-in contribution will be comparatively higher, because it needs such capital to buy many necessary fixed assets such as equipment and plants.

If a factory doesn’t have so much paid-in capital, you have good reason to doubt it as a shell company.

5. Business scope of the company

Chinese companies are required to register their business scope. For example, if it sells medical devices to you, it needs to register such matter in its business scope.

Although Chinese law does not prohibit a company from engaging in other businesses outside the registered business scope, the tax declaration limits its ability to do so. Because when declaring any of its revenue to the tax bureau, it needs to choose one of the items from its business scope for the purpose of tax declaration.

Therefore, if the company is tax compliant, it can’t obtain revenue beyond its business scope.

6. Officers and shareholders of the company

Directors, supervisors, managers, and shareholders of Chinese companies need to be registered with relevant authorities. In addition, the company will have one registered legal representative who will conduct transactions with relevant parties on behalf of the company and bear personal responsibility for the illegal acts of the company.

First, we may get to know the credibility of the officers and shareholders. If they are involved in too many lawsuits or subject to administrative penalties, or are listed as dishonest judgment debtors, the Chinese company they work for or hold shares of will generally not be in the good business condition.

Secondly, we can investigate other companies, i.e., affiliates, in which officers and shareholders hold positions or shares. If a company’s affiliate is a powerful one with a good reputation, then the strength and reputation of such company are usually not too bad. After all, why would officers and shareholders of a good company be willing to correlate with a bad one?

7. Intellectual property

We can find out the intellectual property rights of a company, such as trademark rights, patent rights and copyright filed. If a Chinese company owns lots of intellectual property rights, it at least means that it has invested many resources for these intellectual property rights, and hopes to operate steadily and continuously to recover its investment.

This means that they will not easily breach the contract and commit fraud. Or, even if they do breach the contract, these intellectual property rights can be used to repay the money they owe you.

8. Administrative penalties

We can find out the administrative penalties record of a company. If there are so many penalties, it means that the company has compliance problems.

In addition, we can further see what penalties are imposed. In the case of environmental protection, tax, and customs penalties, it means that the production and delivery for you may be blocked by law enforcement activities, which is clearly not a good sign.

9. Lawsuits

We can find out the lawsuits of a Chinese company.

First thing first, it is clear that even if a company is involved in many lawsuits, it does not necessarily mean that there are problems in its business operation. For many companies, such as those living on intellectual property licensing, suing others to obtain compensation is a business strategy itself.

Therefore, we also need to check in detail what kind of litigation it is involved in.

If a company is a defendant in most lawsuits, such as subject to a breach of contract in contract disputes or infringement in product quality disputes, then the company’s reputation is definitely questionable.

If a company is involved in many labor disputes, it also means that its human resources are unstable, which will undermine its ability to perform the contract.

10. Customs records

You can check the customs records of a company on China Electronic Port (available at: This is a website under the General Administration of Customs of China.

You can know whether the company has been registered with the Chinese customs, whether it has the import and export qualification, and whether there is any violation of customs regulations.

If the company is exporting goods to you, its customs records will be important information.

II. Due diligence requiring cooperation from the Chinese company

1. Enterprise Credit Report

You can ask a Chinese company to print its Enterprise Credit Report at the Credit Reference Center of the People’s Bank of China and then provide you with the Report.

From the report, you can see the credit status of the company in Chinese financial institutions, such as financing, guarantee, credit extension, debt, interest arrears, tax arrears, etc.

2. Number of employees

You can ask a Chinese company to provide its payment of social security for employees at the Human Resources and Social Security Bureau, so that you can know its real number of employees.

To some extent, the number of employees reflects the human resources available for contract performance.

3. Past performance

You can also ask a Chinese company to provide you with its export records of similar products. For example, the contracts signed between the Chinese company and other purchasers (with necessary confidentiality measures). Another example is its customs record of exporting such products.

We recommend that you conduct “due diligence not requiring cooperation from the Chinese company” on the supplier you want to do business with, given these cost fewer communication efforts and time as well.

In terms of this kind of due diligence, if no on-site investigation is required, we only charge USD 998 for each company. If an on-site investigation at the company’s business premises is required, we will charge an additional fee by the hour, and we will inform you of the estimated working hours in advance. For our services, please click HERE.




The Cross-border Trade Dispute 101 Series (‘CTD 101 Series’) provides an introduction to China-related cross-border trade dispute, and covers the knowledge essential to cross-border trade dispute resolution and debt collection.



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Photo by 大爷 您 on Unsplash

Contributors: Meng Yu 余萌

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