Choosing the Right City in China for an FIE: Cost Savings vs. Hidden Risks

Posted by Written by Samantha Zhang Reading Time: 5 minutes
Choosing a city in China for a foreign-invested company can dramatically affect your cost structure and operational efficiency. While second- and third-tier cities offer appealing savings, they also come with hidden risks related to banking, approvals, and administrative capacity. This article provides clear guidance and real cases to help investors make an informed, risk‑balanced decision.

For many foreign investors planning their first steps into China, one question arises almost immediately:

Besides Beijing, Shanghai, Guangzhou, and Shenzhen, can we register our company in a lower-cost city?

 

 

The short and practical answer is yes. Operating in second‑ and third‑tier cities can significantly reduce rent, payroll, and general administrative expenses. But cost savings come with trade-offs. And some of these hidden risks are not obvious until you’ve already committed.

This article explains when you should consider lower-tier cities, what risks to anticipate, and how to avoid common pitfalls, based on real cases from foreign investors.

China City Tier Classification
City tier Number of cities Cities included
Tier 1 4 Beijing, Shanghai, Guangzhou, Shenzhen
Tier 2 31 Tianjin, Shijiazhuang, Taiyuan, Hohhot, Shenyang, Dalian, Changchun, Harbin, Nanjing, Hangzhou, Ningbo, Hefei, Fuzhou, Xiamen, Nanchang, Jinan, Qingdao, Zhengzhou, Wuhan, Changsha, Nanning, Haikou, Chongqing, Chengdu, Guiyang, Kunming, Xi’an, Lanzhou, Xining, Yinchuan, Urumqi
Tier 3 35 Tangshan, Qinhuangdao, Baotou, Dandong, Jinzhou, Jilin, Mudanjiang, Wuxi, Xuzhou, Yangzhou, Wenzhou, Jinhua, Bengbu, Anqing, Quanzhou, Jiujiang, Ganzhou, Yantai, Jining, Luoyang, Pingdingshan, Yichang, Xiangyang, Yueyang, Changde, Shaoguan, Zhanjiang, Huizhou, Guilin, Beihai, Sanya, Luzhou, Nanchong, Zunyi, Dali
Non-tiered – All remaining cities not meeting the tier criteria

* Note: This table follows the National Bureau of Statistics’ official 2024 classification.

First-tier vs. second- / third-tier cities: How to choose

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China’s first-tier cities – Beijing, Shanghai, Guangzhou, Shenzhen – remain the most popular locations for foreign-invested companies. Their advantages come from experience, predictability, and well-developed infrastructure.

But that doesn’t mean lower-tier cities are unsuitable. It depends entirely on your business model.

 

Choose a first-tier city if:

  • Your China entity provides consulting, design, online services, or other activities that can be managed remotely by an overseas team.
  • You do not plan to hire a large local workforce and prefer to outsource payroll, social insurance, and admin support to reputable service providers.
    (First-tier cities have a wide ecosystem of reliable providers for foreign companies.)
  • You will not frequently travel to China and prefer centralized decision-making from HQ.

Choose a second- or third-tier city (e.g., Suzhou, Dongguan, Foshan, Wuhan, Chengdu) if:

  • You need large factory space, warehouses, or retail property—where rental and labor cost differences are substantial.
  • Your local team prefers or needs to be based in a specific city and must join the social insurance system there.

At first glance, lower-tier cities seem to promise attractive savings.
But before finalizing your decision, you must understand the risks that arise not from law, but from local capability and experience.

The three hidden risks in second-/third-tier cities

Foreign investors often assume that national laws ensure uniform treatment across China. In reality, the biggest differences between city tiers come from:

  • government experience;
  • supporting infrastructure; and
  • consistency in applying regulations.

In first-tier cities, officials may have handled tens of thousands of foreign-invested entities. In smaller cities, officials may have handled only a handful – or none at all. This gap has real operational consequences.

Risk 1: Banking limitations—especially if you rely on international banks

Efficient financial control is often a top priority for headquarters. To maintain oversight, most foreign investors prefer international banks, such as HSBC, Standard Chartered, Citi, because their systems integrate with global treasury controls.

However, in smaller cities:

  • Foreign bank branches may not exist;
  • They may operate with limited capacity; or
  • They may close unexpectedly.

See also: Opening a Bank Account in China

Real case: Foreign bank branch closure disrupted operations

A US investor set up a trading business in a third-tier city in Guangdong for cost reasons. They planned for HQ to maintain financial oversight via Citibank, but Citibank had no local presence. They then chose HSBC, which did have a branch.

Right after the company was established, the investor received a notice:

“Due to low business volume, this HSBC branch will be closed.
Please switch to our Guangzhou branch.”

But social insurance and housing fund payments must be processed through a bank located in the company’s registered city. HSBC Guangzhou could not support this.

The investor ultimately had to use a local Chinese bank, which could not integrate with US treasury systems. Fortunately, HQ had engaged a professional service provider to manage payments and approvals. Otherwise, internal control would have been compromised.

Practical checklist

  • Confirm whether your preferred bank has a stable branch in the target city.
  • Evaluate whether HQ can accept losing direct control if forced to use a local Chinese bank.

Risk 2: Approval authorities may interpret rules incorrectly

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Local authorities, such as the local administration for market regulation (AMR), banks, the local branch of the State Administration of Foreign Exchange (SAFE), and Customs, play critical roles in company formation.

While the laws are national, the interpretation and execution vary by city. In smaller cities, officials may be unfamiliar with more complex or international structures. This can lead to unusual requirements or even procedures that contradict national rules.

Real case: AMR required an unnecessary passport legalization

A European investor selected a third-tier city in Hebei. The local AMR insisted the investor’s overseas authorized signatory must complete real-name verification by either:

  • mailing their original passport to China, or
  • submitting a notarized & apostilled passport copy.

This requirement was incorrect. Under Chinese regulations:

  • Only individuals holding positions within the China entity are required to complete real-name verification.
  • External investor signatories are not required to do this.

Despite explanations, the local AMR refused to adjust its position, stating it was a “local policy.” Even the supervising authority declined to override the local office.

The investor had no choice but to proceed with notarization and legalization abroad, which created unnecessary costs and delays.

Practical checklist

  • Consult experienced agents before selecting a city.
  • Ask directly about unusual or inconsistent local practices.

Risk 3: Government procedures may be slower or more conservative

Lower-tier cities often lack experience with:

  • complex shareholding structures;
  • foreign-currency procedures;
  • new incentive policies; and
  • capital-related filings.

Even straightforward processes may take longer.

Real case: Two months’ delay in opening the foreign-currency capital account

A foreign-invested company opened its RMB basic account quickly. But the local bank and the local SAFE had no experience handling foreign-currency capital accounts or FDI registrations.

As a result:

  • The RMB basic account opened in 1 week; and
  • But the foreign-currency capital account took over 2 months.

During those two months:

  • The investor could not inject capital;
  • The new entity had no operating funds; and
  • Hiring, rent payments, and supplier contracts were all delayed.

Practical checklist

  • Build buffer time into your project timeline.
  • Prepare for limited flexibility from local officials.
  • Confirm whether the bank and the local SAFE have experience with similar cases.

The ultimate step-by-step checklist

If you choose a second- or third-tier city, follow this sequence to reduce risk:

  • Step 1: Engage a competent service provider – Discuss your business model, industry, and hiring plans. Let the advisor assess whether the local environment fits your needs.
  • Step 2: Select your office/factory/warehouse – Ensure the location meets the regulatory requirements for your business type (import/export, manufacturing, retail).
  • Step 3: Confirm your banking plan early – Contact preferred banks immediately.
    If only Chinese banks are available, prepare a financial-control workflow in advance.

Conclusion

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Choosing a second- or third-tier city in China can deliver substantial cost savings. But the trade-offs are real: delays, inflexible procedures, and bank-related complications.

The risks are rarely “deal-breakers,” but they can cause significant inefficiencies if not anticipated. By investigating the local environment early and verifying bank, AMR, and SAFE capabilities, you can make a choice that is both cost-effective and operationally safe.

If you encounter specific issues during your assessment, feel free to reach out for guidance.

Our Business Advisory service helps companies navigate Asia’s complex business landscape from initial market entry to ongoing expansion. We advise on corporate structuring, company setup, due diligence, legal contracts, intellectual property, and M&A transactions. Clients benefit from both standalone projects and integrated support from our in-house tax, audit, HR, and technology teams. To arrange a consultation, please contact China@dezshira.com.

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China Briefing is one of five regional Asia Briefing publications. It is supported by Dezan Shira & Associates, a pan-Asia, multi-disciplinary professional services firm that assists foreign investors throughout Asia, including through offices in Beijing, Tianjin, Dalian, Qingdao, Shanghai, Hangzhou, Ningbo, Suzhou, Guangzhou, Haikou, Zhongshan, Shenzhen, and Hong Kong in China. Dezan Shira & Associates also maintains offices or has alliance partners assisting foreign investors in Vietnam, Indonesia, Singapore, India, Malaysia, Mongolia, Dubai (UAE), Japan, South Korea, Nepal, The Philippines, Sri Lanka, Thailand, Italy, Germany, Bangladesh, Australia, United States, and United Kingdom and Ireland.

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