When in China, do as the Chinese do. If you want to really get off the ground there you'll need to partner with a local that knows the ways things are done, which is not always intuitive from a 'westerner' point of view.
A friend of mine is currently going this route and there are a few other HN'ers that are doing this, maybe you guys should get together somehow and compare notes. That might save everybody both hardship and time.
I would certainly love to meet other HNers that are going this route, perhaps you could set me up. I've got two close and old friends of mine that are locals and are collaborating with me, so that's good.
I'm an American running a company in Beijing. I may email you some time.
You have some things right and are too optimistic about some things. There are certainly freedoms here that you do not enjoy in the West - at the same time, relationship maintenance is an extremely time-consuming and expensive, never-ending process.
Whenever you brush up with a bureaucratic organization, the experience can be hellish. I own, for example, a ~600 USD receipt-printing machine (fapiao machine) because the gov't forced me to buy it for my business. I also need to buy a new one every 5 years.
Trust is a huge issue. You need a Chinese partner, or you're going to get your ass kicked. You need a Chinese partner you really trust (I recommend you consider finding a Chinese wife), or you're going to get your ass kicked. I know very few successful entrepreneurs who built their businesses here who do not have a Chinese spouse.
I hope you're not building a business where IP is an important competitive advantage. Your code is not safe - safety lies in creating smaller products that are approximately as easy to copy from scratch as to steal. Alternatively, a good business model is one that uses very simple tech but makes heavy use of sales and relationships (for example, a Groupon clone).
Good luck, and remember that people eat people here.
I live in HK and have lived, studied and now spend time working in China. If you are ever in HK and fancy a beer, drop me an email... first round is on me.
I'm moving to Kunming in Jan 2010-- will be contracting for my former employer but also working on startup projects, and hoping to employ some local university grads to do some grunt work...
A friend of mine is currently going this route and there are a few other HN'ers that are doing this, maybe you guys should get together somehow and compare notes. That might save everybody both hardship and time.