The first possibility of how a foreign company can establish itself in China is through the establishment of a Representative Office (RO). A RO is not a separate legal entity but is considered to be part of its parent company. It is the most basic form of foreign investment and can be very useful, and in some cases even necessary, for most administrative decisions concerning the establishment of a business. Examples hereof include the renting of an office space, the employment of Chinese personnel, the opening of bank accounts in name of the company, etc.
The advantage of establishing a RO can be found in its inexpensiveness (There is no obligation to bring in any type of capital), the simplicity of the procedure as well as in its short timeframe.
A RO will act as a business liaison between the parent company and local companies. It often conducts market research, takes care of product promotion, establishes contacts with prospective customers or partners, makes travel arrangements for parent company representatives coming to China and conducts other non-profit making business activities.
It will, however, not be able to engage in any direct business activities (Except if there exists a bilateral agreement between China and the home country of the foreign company establishing the RO, which explicitly states that ROs established by companies of both countries do have the authority to engage in direct operational activities.
In that case the provisions of the bilateral agreement will prevail above the respective national laws), like for example entering into contracts, receiving fees for services provided, buying property, issue invoices (This problem, however, can be solved by letting your overseas parent company invoice directly in foreign currency to your China based customer), etc. Violations hereof might lead to the imposition of fines and, in the worst case, to the closure of the office.