China Business Environment
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PoliticalEnvironment Outlook c hc ahpatpetre 5r 1 Business
SWOT Analysis Strengths China is continuing to open up various sectors of its economy to foreign investment. With its vast supply of cheap labour, the country remains the top destination for foreign direct investment (FDI) in the developing world.
Weaknesses Foreign companies continue to complain about the poor protection of intellectual property in China. Chinese corporate governance is weak and non-transparent by Western standards. There is a considerable risk for foreign companies in choosing the right local partner.
Opportunities China’s ongoing urbanisation and infrastructure drive will provide major opportunities for foreign investment in the landlocked provinces, and the transfer of skills and know-how. The Chinese government is giving more protection and encouragement to the private sector, which is now the most dynamic in the economy and accounts for most of the country’s job growth.
Threats China’s government will block attempts by foreign firms to takeover assets of national importance. China is experiencing rising labour costs, prompting some investors to turn to cheaper destinations such as Vietnam.
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BMI Business Environment Risk Ratings Wu Xiaoling, a former deputy governor of the People’s Bank of China (PBoC) has confirmed that the central bank has decided to ‘strip out’ lending to small firms, farmers and areas hit by the May 12 2008 earthquake from the total loan quota apportioned to domestic lenders. She also confirmed that the PBoC had raised lending quotas – originally implemented to try to cool credit expansion – by 5% for big banks and 10% for small banks. Furthermore, Wu suggested that ‘next year there will be no quota checks and each bank will be able to make their own lending plan’.
Singapore Hong Kong New Zealand South Korea Japan Australia Taiwan Malaysia Thailand China Philippines Vietnam Sri Lanka Indonesia India Pakistan Cambodia Bangladesh Laos Myanmar North Korea Regional average: 51.9
44
Business Environment 83.8 82.2 79.0 73.4 72.6 71.8 65.2 61.5 59.5 52.5 44.9 42.0 40.6 40.2 39.8 37.7 36.7 36.2 35.2 16.0 11.5 Emerging markets average: 46.2
Rank Trend 1 = 3 = 6 = 10 = 12 = 15 = 24 = 33 = 38 = 55 = 79 = 86 = 89 = 90 = 92 = 100 = 106 = 109 = 113 = 133 = 134 = Global average: 49.7
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Business Environment Outlook Introduction With its vast supply of cheap labour, and rapid economic growth, China remains the top destination for foreign direct investment (FDI) in the developing world. Positively, the Chinese government is increasingly giving more protection and encouragement to the burgeoning private sector, which is now the most dynamic part of the economy and accounts for most of the country’s job growth. However, the commanding nature of China’s economy means that bureaucracy remains a key obstacle to doing business within the country, and the legal framework is still weak despite two decades of reform.
Latest Developments •
China is considering a plan to invest CNY5trn (US$731bn) in transport infrastructure over the next five years, as it looks to public works projects to help stimulate the economy amidst a slowdown in the global economy. The investment would overlap with a previous plan that earmarked CNY2trn (US$292.3bn) for infrastructure between 2006 and 2020. The focus for the new plan will be on roads, waterways and ports.
•
Beijing has endorsed a long-awaited restructuring of Agricultural Bank of China (ABC), drawing to a close a decade-long reform drive to reorganise the domestic banking sector which has so far drained state coffers of US$500bn. As part of the restructuring deal, ABC – China’s third largest lender in terms of assets (CNY6trn, US$878bn) – will receive US$19bn, and have US$120bn worth of bad loans removed from its books, according to a company official. This will pave the way for the bank to follow the path taken by the other three state-owned lenders, Industrial and Commercial Bank of China, China Construction Bank and Bank of China, and launch a public listing.
•
The Yangkou Port, a new deep-water port on the Yellow Sea, has just opened to transporters. The port, in Jiangsu Province, has been built on an artificial island connected to the mainland by a 13km bridge. The port is in the early stages of development, and is scheduled for completion in 2013. Just one berth is currently operational, which can handle smaller ships carrying up to 10,000 tonnes of cargo. By 2013 the port will be open to ships weighing up to 300,000 tonnes. These include very large crude carriers (VLCCs), which are between 150,000 and 320,00 deadweight tonnes (dwt) in size, and ultra-large crude carriers (ULCCs), which are large enough to handle 300,000 dwt and above.
•
The eleventh National People’s Congress (NPC) standing committee has passed a law aimed at curbing embezzlement. The law in question prevents managers of state companies from exploiting their positions to secure large stakes of these enterprises for themselves. Improved procedures for the restructuring of state assets are also required. Specifically, accurate audits will be required before any mergers or divestment to enable better valuation of such assets. The law, which comes into effect in May 2009, also stipulates stiff punishment for officials who flout the rules. Nonetheless, despite increased efforts to tackle graft, China was still ranked only 72nd (out of 180
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countries) by Berlin-based corruption watchdog Transparency International in its latest corruption perceptions index. This means that China’s ranking was unmoved from the previous year’s index, despite its score improving marginally from 3.5 (out of 10) to 3.6, where a higher rating represents lower corruption. •
On November 4 2008, in the highest level meeting between China and Taiwan in over 60 years, top officials signed a series of agreements. The number of direct charter flights across the Taiwan Strait will be tripled to 108 per week, with new flights being permitted on all seven days of the week instead of just four previously. The flying routes will also be shortened by allowing aircraft to transit directly between China and Taiwan (they had previously been routed through Hong Kong), and increasing the number of Chinese airports accepting flights from Taiwan from 5 to 21. Meanwhile, 60 direct cargo flights per month will be allowed to operate between Taiwan and the mainland, putting paid to the current practice of diverting them through third countries.
TABLE: BMI BUSINESS AND OPERATIONAL RISK RATINGS Infrastructure
Institutions Market Orientation
Overall
Afghanistan
20.73
29.85
40.59
30.39
Bangladesh
35.05
25.89
47.74
36.23
Bhutan
20.29
58.26
35.63
38.06
Cambodia
19.69
26.83
63.69
36.74
China
68.01
42.73
46.75
52.50
East Timor
32.47
30.62
59.50
40.86
Hong Kong
75.06
80.76
90.72
82.18
India
50.37
40.21
28.77
39.79
Indonesia
32.65
22.48
65.53
40.22
Japan
88.03
81.02
48.74
72.59
Laos
23.90
31.49
50.17
35.18
Malaysia
65.71
59.42
59.29
61.47
Maldives
40.42
54.31
67.17
53.97
Myanmar
21.44
3.06
23.43
15.98
Nepal
42.67
36.69
54.09
44.49
North Korea
23.63
8.98
1.97
11.53
Pakistan
36.08
29.57
47.50
37.72
Philippines
40.12
37.12
57.64
44.96
Singapore
83.09
88.18
80.16
83.81
South Korea
82.92
67.88
69.35
73.39
Sri Lanka
35.57
48.85
37.49
40.64
Taiwan
69.49
61.38
64.61
65.16
Thailand
59.54
60.06
59.00
59.53
Vietnam
37.23
39.11
49.71
42.01
Australia
86.43
81.44
47.57
71.81
New Zealand
83.41
90.25
63.21
78.96
Global ave.
47.39
47.46
48.65
47.73
Region ave.
49.00
47.56
52.31
49.62
Source: BMI. Scores out of 100, with 100 representing the best score available for each indicator.
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In addition, direct cargo routes between 63 Chinese and 11 Taiwanese ports will be established, while a similar agreement will reduce postage times, with direct links being established between five stations in Taiwan and eight in China.
Institutions Legal Framework The People’s Republic of China (PRC) operates a civil law system that includes some common law elements, although relatively less emphasis is placed on legal precedent. Two decades of reform have resulted in a number of changes in institutions, laws and practices. A formal legal system has resulted in a nationwide court system comprising 3,000 basic courts and some 200,000 judges. The Chinese courts are divided into Courts of General Jurisdiction, and the Courts of Special Jurisdiction. In 1979 economic courts were established as part of China’s Supreme People’s Court and TABLE: BMI LEGAL FRAMEWORK RATINGS Investor Protection
Rule of Law
Contract Enforceability
Corruption
Afghanistan
34.8
0.6
17.4
23.3
Bangladesh
61.1
25.1
8.0
3.3
Bhutan
25.6
75.4
57.0
82.0
Cambodia
51.2
13.8
38.9
6.0
China
7.8
50.3
54.7
54.7
East Timor
11.8
12.6
36.3
na
Hong Kong
62.5
89.8
87.5
92.7
India
38.0
62.9
8.9
54.7
Indonesia
22.3
25.7
26.5
18.0
Japan
58.3
89.2
90.5
91.3
Laos
44.8
19.8
28.7
28.7
Malaysia
53.8
72.5
47.8
75.3
Maldives
91.8
64.1
46.5
23.7
Myanmar
na
4.8
na
1.3
44.3
31.7
43.0
23.3
Nepal North Korea
na
9.0
na
na
Pakistan
56.2
26.9
17.5
8.7
Philippines
56.4
46.1
54.4
23.3
Singapore
64.5
94.6
75.9
98.7
South Korea
31.7
79.0
81.8
76.0
Sri Lanka
57.6
59.9
47.7
48.0
Taiwan
19.7
81.4
53.1
80.7
Thailand
19.5
60.5
60.1
62.0
Vietnam
22.8
49.7
45.6
28.7
Australia
27.9
94.0
89.2
95.3
New Zealand
66.9
97.0
82.4
100.0
Global ave.
36.8
48.8
49.9
40.2
Region ave.
43.0
51.4
50.0
50.0
Source: BMI. Scores out of 100, with 100 representing the best score available for each indicator.
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three levels of provincial courts. The economic courts enjoy jurisdiction over: •
Contract and commercial disputes between Chinese parties.
•
Trade, maritime, intellectual property and insurance.
•
Other business disputes involving foreign parties.
•
Various economic crimes including theft, bribery, and tax evasion.
There is also an administrative legal system, which adjudicates more minor criminal cases. Judges are often vulnerable to corruption, political control and the pressures of guanxi (connections based on family or local ties). Their appointment, promotion and removal are all at the discretion of local government and Communist Party leaders rather than the Supreme People’s Court or provincial High Court. Both the judges and the litigants who appear before them are subject to the influence of local protectionism. Legislation is frequently inadequate, with numerous conflicts between national and local norms, and a proliferation of regulations, interpretations and other edicts often producing incoherence and inconsistency. Laws and regulations in China tend to be far more general than in most Organisation for Economic Co-operation and Development (OECD) countries, and therefore need more specific implementing rules and measures. Even government arbitration, to which many foreign businesses and Chinese turn in an effort to avoid the vagaries of the courts, sometimes suffers from the same types of pressures that distort judicial justice. Prosecutors, who are supposed to guard against such illegal conduct, are usually too weak politically and China’s current legal and regulatory system can be opaque, inconsistent and often arbitrary. Implementation of the law is inconsistent. Although China is a member of the International Centre for the Settlement of Investment Disputes (ICSID) and has ratified the UN Convention on the Recognition and Enforcement of Foreign Arbitral Award, it places strong emphasis on resolving disputes through informal conciliation and mediation.
Property Rights Chinese law states that all land is owned by ‘the public’. Individuals are not permitted to own land. However, both Chinese nationals and foreigners can hold long-term leases for land use. They can also own buildings, apartments, and other structures on land, as well as own personal property.
Intellectual Property Rights China lacks effective protection for intellectual property rights (IPR). In spite of some reforms under its WTO commitments – China has committed to full compliance with the WTO Agreement on Trade-Related Aspects of Intellectual Property (TRIPS) – enforcement
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is poor and penalties, in the rare cases they are applied, are insufficient to act as proper deterrents. Trademark and copyright violations are widespread. Lack of co-ordination among public bodies undermines attempts at enforcement. There is also wide variation in the application of IPR protection.
Corruption Corruption is prevalent and anti-corruption efforts are obstructed by weak or non-existent monitoring mechanisms. Embezzlement and financial mismanagement have been identified by numerous audit reports. The use of guanxi is widespread in the upper echelons of business. Many of those who come under investigation are able to deploy their connections so as to avoid prosecution. However, anti-graft efforts have improved significantly under President Hu Jintao, who has made tackling rampant corruption one of his top priorities. January 2008 saw sports magnate Yu Zhifei jailed for embezzlement and the launch of an investigation against the former head of oil giant Sinopec, Chen Tonghai, while 2007 witnessed two of China’s most high profile anti-graft cases – the sacking and arrest of Shanghai’s former Communist Party boss, Chen Liangyu and the execution of Zheng Xiaoyu, the former head of the country’s food and drug watchdog. Yet, during a month-long leniency offer that began on May 30, almost 1,800 officials confessed to corruption according to the Chinese Communist Party watchdog, the Central Commission for Discipline Inspection (CCDI). Red tape is a major issue for investors. Given that many laws are defined in very general terms, it is often left to the bureaucracy to make decisions. With a lack of accountability, this process provides opportunities for corruption, and numerous bureaucratic obstacles stymie the easy acquisition of licenses. According to World Bank data, 20 separate procedures are required to enforce a contract, which takes an average of 180 days.
Infrastructure Physical Infrastructure As one of the fastest-developing economies in the world, China has an insatiable appetite for infrastructural development. BMI valued the country’s construction industry at US$146.40bn in 2006, registering a growth rate of about 13% y-o-y. We are expecting the construction industry in China to be worth about US$315.32bn by 2012, contributing about 7.17% to the nation’s gross domestic product (GDP). Much of the ongoing construction work in the country is at the higher-value end of the industry (power plants, hydroelectric schemes, high-speed rail links). Most of this will be funded through private-sector involvement. However, public-infrastructure spending will also need to increase substantially to meet the government’s targets. A boom in residential construction is expected to continue, as increasing numbers of workers migrate to urban centres for employment opportunities. The government intends to increase the number of new homes built by 15% over the next five years, and we expect Business Monitor International Ltd
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new housing to reach 1.5bn m2 of completed dwellings in 2006. However, site safety is a concern. The Ministry of Construction put the industry death toll at 2,288 people in 2005, and while this represented an 11.4% y-o-y drop, the industry was still responsible for the highest number deaths of any Chinese industrial sector, including mining. As well as having to deal with these social and structural problems, the industry is trying to reform in other ways, such as improving environmental performance and introducing a regulatory framework for building materials. The major test for the Chinese government will be to eliminate the physical and financial dangers from the industry. The action it takes over the coming years to curb corruption and improve working conditions will be crucial to the success of its ambitious infrastructure building plans and, ultimately, the country’s economic development. The quality of roads in China is poor. In 2005 China had a total road network of more than 3.3mn km, although approximately 1.47mn km of this network – almost 45% – is classified as ‘village roads’. Paved roads totalled 770,265km in 2004; the remainder were gravel, improved earth standard, or merely earth tracks. Rail is the major mode of transportation in China. The national rail system – the third largest in the world at approximately 76,000km – is modernising and expanding rapidly, but still possess a number of weaknesses, as highlighted by the recent snow storms which brought the country’s railways to a virtual standstill. Eight Chinese cities (Beijing, Tianjin, Shanghai, Guangzhou, Wuhan, Shenzhen, Nanjing and Chongqing) currently have metro systems, and at least seven more are planning them. Currently proposed extensions and new networks amount to more than 2,000km, with a cost of at least CNY500bn (US$65bn). In Beijing alone, which currently has around 114km of metro routes, there are plans to expand the network to a total of 561km by 2020. Some of this expansion has been driven by the 2008 Olympic Games, but most of it is aimed at relieving congestion and expanding the city. Indeed, the World Bank in June 2006 urged China to do more to improve public transport to ease traffic jams rather than building more highways to accommodate cars. Overall, with China projected to have 125 cities with more than one million people each by 2010, there is still huge scope for urban railway expansion. As a result of the country’s rapidly expanding civil aviation industry, by 2007 China had around 500 airports of all types and sizes in operation, about 400 of which had paved runways. China plans to build another 97 airports by 2020. China has more than 2,000 ports, 130 of which are open to foreign ships, and 16 ‘major’ ports with a capacity of over 50mn tonnes per year. China’s total shipping capacity is in excess of 2,890mn tonnes. By 2010, 35% of the world’s shipping is expected to originate from China. China also has more than 140,000km of navigable rivers, streams, lakes and canals, and in 2003 these inland waterways carried nearly 1.6trn tonnes of freight and 6.3tr passenger/km to more than 5,100 inland ports.
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Labour Force The Chinese labour force is expanding rapidly. Estimated in 2007 at 798mn, this represents a participation rate of around two-thirds. The urban unemployment rate averages 4.2%. However, the government admits that the statistics ignore many unemployed workers, including those laid off from state-owned companies. Though China has a reputation for having a bottomless well of cheap labour, the Chinese economy has actually experienced labour shortages in recent years. Minimum wages are rising as the economy responds to the labour shortage, setting a new salary floor for employers. For example, textile factories in Bangladesh and India are undercutting China on price. The affluent Pearl River cities are also drawing labour away from traditional industrial sectors, with workers able to command larger wages. Shortages of rural workers are spreading from the nation’s coastal areas inland. Out of 2,794 villages investigated in a 2007 nationwide survey, 74.3% of them no longer have a surplus of young labourers as all had left for the cities for work. It projected that the total rural labour force would not be able to satisfy the demand from non-agricultural sectors by 2010. According to China’s Ministry for Labour, 12mn big city residents will be out of work in 2007. An additional 24mn people were expected to join the ranks of the labour force during the year. News agency Xinhua estimates that a total of 200mn Chinese have travelled to cities to find jobs. Education levels vary by region. English-speaking graduates are most commonly found in Beijing or Shanghai. However, companies warn that technical skills or training in accounting and finance are scarce. Skilled managers are also in short supply. The labour market is heavily regulated. New labour rules state that non-Chinese may be hired only where there is a demonstrable need, and approval is required from local labour authorities. The law provides for collective and individual contracts specifying wage levels, working hours, conditions, insurance and welfare. Since local Communist Party committees select union leaders, collective agreements are usually not part of negotiations. The Labour Law makes it more difficult to fire staff than previous regulations, which allowed foreign enterprises to dismiss staff as a result of technical and production changes. Now, only imminent bankruptcy and major production problems justify redundancy. There is a minimum wage – each province or municipality must set a minimum wage that must not be less than half the local average wage. Furthermore, every month, foreign companies have to contribute 2% of total wages (including those payable to expatriate employees) to the trade union fund. This contribution comes out of after-tax profits. Foreign companies only rarely report strikes affecting their Chinese operations. Workers have the right to organise and participate in trade unions, but the law does not allow for the creation of unions, which must be organised ‘in accordance with law’. The only permitted unions are state affiliates of the All-China Federation of Trade Unions (ACFTU). The ACFTU is more interested in maintaining relations between the government and foreign Business Monitor International Ltd
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companies than in seeking to promote industrial strife. Although China does not allow independent trade unions, it does tolerate some forms of activism.
Market Orientation Foreign Investment Policy As repeated surveys and actual foreign direct investment (FDI) flows bear out, China remains the top emerging market destination for foreign investors. Low labour costs, and better competitive and productivity rates give China a leading edge in the manufacturing and assembly sectors – the dominant areas for FDI inflows. Since the early 1990s, China has substantially reformed its investment regime and foreign investors are now able to manufacture and sell a wide variety of goods on the domestic market. In the mid-1990s, China authorised the setting up of 100% foreign-owned enterprises – the preferred vehicle for FDI. This precipitated the rampant FDI performances of recent years. However, there is concern that the government’s concentration on luring investment to the manufacturing sector has led to saturation and overcapacity. UN Conference on Trade and Development (UNCTAD) figures show that China pulled in US$74.8bn in FDI in 2007, setting yet another record. The government wants to make the service sector a key area to attract foreign investment. China is to channel FDI into research and development (R&D) centres, new high-tech industries, advanced manufacturing and the energy conservation sectors. Wholly owned foreign enterprises are now the most popular entry route for investors. Since the late 1990s, the authorities have attempted to direct FDI towards ‘encouraged’ industries and regions, bringing in new incentive schemes for investments in high-tech industries and in the central and western parts of the country. A revised list came into effect in April 2002, outlining areas and sectors where foreign investment would be encouraged, restricted or prohibited. The raft of investment incentives developed over the past two decades mainly centre on the special economic zones. The list is partly intended to abide by the promised sectoral openings that were part of Beijing’s WTO accession agreements: opening up banking, insurance, petroleum extraction and distribution. For example, the upper limit is 20% for a single foreign investor in one Chinese bank and combined foreign shareholding in banks is not allowed to exceed 25%. Regulations issued in November 2002 have eased foreign investment intended for the acquisition of stakes in Chinese companies. Non-Chinese investors can now purchase traded and non-traded (state-held) shares of Chinese companies. However, foreign investors have been put off by the requirement to undergo an extensive approvals process with trade unions. China allows for full profit repatriation and since the mid-1990s, foreign investors have broadly had free access to foreign exchange. Since WTO accession, an overhaul of regulations has been implemented to improve intellectual property rights. It has committed to full compliance with the WTO Agreement on Trade-Related Aspects of Intellectual Property (TRIPS), as well as other TRIPS-related commitments. But enforcement remains negligible
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with penalties frequently failing to be imposed. Most FDI remains focused on the export-oriented manufacturing and assembly sectors. But services – mainly tourism, telecoms and finance – form a growing proportion of the FDI stock in China. The top sectors in terms of attracting FDI are chemicals, machinery and industrial goods, and IT including software. The main sources of investment are Japan, the US and Germany.
Foreign Trade Regime In line with its WTO accession requirements, China has lowered its import tariffs. In 2006, the general tariff level on imports was 9.9%, a decline of more than 40% on the early 1990s level. The commitment to lower tariffs has been borne out by thriving import levels, which have surged faster than China’s exports in recent years. China is now the world’s third-biggest importer. The government has pursued multilateral agreements as a priority, with a series of regional and bilateral free trade negotiations underway as part of its wider commitments under the Doha Development Round. China’s formal accession to the WTO in December 2001 cemented its integration into the global economy. The two key bilateral deals were the EU-China agreement signed in May 2000, and the US-China agreement signed in November 1999. Beijing is actively pursuing regional trade deals, with recent progress towards a free trade agreement (FTA) between China and the 10-member Association of South East Asian Nations (ASEAN). It has also initiated FTA talks with the Southern African Customs Union (SACU) and the Gulf Co-operation Council (GCC). The possibilities of FTAs with Australia, New Zealand and Chile are also under study.
Table: Asia, FDI Annual Inflows 2006 Australia
2007
US$bn
Per capita
US$bn
Per capita
25.74
1,255.4
22.27
1,075.7
Bangladesh
0.79
5.7
0.67
4.7
Cambodia
0.48
34.2
0.87
60.3
China
72.72
55.3
83.52
62.5
Hong Kong
45.05
6,520.6
59.90
8,602.3
India
19.66
17.3
22.95
19.9
Indonesia
4.91
21.5
6.93
29.9
Malaysia
6.05
231.6
8.40
316.2
Pakistan
4.27
27.5
5.33
34.0
Philippines
2.92
33.9
2.93
33.3
Singapore
24.74
5,646.5
24.14
5,441.2
South Korea
4.88
101.6
2.63
54.6
Sri Lanka
0.48
24.0
0.53
26.0
Taiwan
7.42
324.0
8.16
354.8
Thailand
9.01
142.0
9.58
149.9
Vietnam
2.36
27.5
6.74
77.5
Source: UNCTAD, BMI.
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In January 2002, China implemented tariff cuts required as part of its WTO accession agreement and beefed up access to trading rights. This was followed one year later by a further lowering of tariffs, again dictated by the WTO. China has substantially reduced the number of goods subject to import quotas and is committed to phasing out remaining quotas. Licensing procedures have been streamlined to comply with transparency requirements. Some WTO commitments have been met ahead of schedule, and there are ongoing plans to further liberalise trading rights. China may apply tariff rates significantly lower than the published most-favoured nation (MFN) rate in the case of the goods industry. Import tariff rates are divided into three categories: general rates, MFN rates and Bangkok Agreement rates, applying to ASEAN members. Non-tariff barriers remain in force. China has agreed to drop all agriculture export subsidies as part of the WTO agreement. But there has been criticism over its lack of adherence to trade agreements, particularly when discretionary elements are involved – specifically the absence of implementation on IPR protection.
TABLE: BMI TRADE RATINGS Protectionism
Bureaucracy
Afghanistan
na
21.6
Bangladesh
0.7
22.9
Bhutan
4.2
18.3
Cambodia
7.5
25.4
China
51.7
52.9
East Timor
na
40.5
Hong Kong
100.0
98.6
India
12.9
23.0
Indonesia
54.4
44.3
Japan
76.9
81.5
Laos
19.7
6.7
Malaysia
64.6
50.9
Maldives
na
55.3
Myanmar
1.4
na
13.6
34.1
Nepal North Korea
4.2
2.3
Pakistan
16.3
42.9
Philippines
76.2
66.9
Singapore
100.0
88.9
South Korea
42.2
69.1
Sri Lanka
48.3
35.6
Taiwan
95.9
64.1
Thailand
55.8
37.6
Vietnam
11.6
44.0
Australia
70.7
80.3
New Zealand
72.1
76.3
Global ave.
47.1
45.2
Region ave.
43.5
47.4
Source: BMI. Scores out of 100, with 100 representing the best score available for each indicator.
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US officials have also accused Beijing of intervening to keep the renminbi artificially low, thereby boosting its exports to the US and creating a debilitating trade surplus. But the Chinese government appears likely to resist pressure to adjust its currency regime solely to suit US whims. Concerns also remain over inconsistencies in the legal system, as well as over government attempts to control trade flows through the deployment of import and export licenses. The government retains regulatory controls through commodity inspections and a plethora of registration requirements.
Tax Regime China is pushing ahead with reform, with the emphasis on reducing taxes and unifying income tax rates for domestic and foreign companies. China’s dual-tier tax system offers separate rates for domestic and foreign enterprises. A new tax reform will unify the income tax treatment of domestic and foreign enterprises. As of January 1 2008, both domestic and foreign-funded enterprises will be subject to a 25% statutory rate. The reform also includes rules relating to controlled foreign corporations, thin capitalisation (when a company has excessive debt in relation to its arm’s length borrowing capacity, leading to the possibility of excessive interest deductions) and foreign tax credits. Corporate tax: The standard rate is 33%, comprising a 30% national tax and a 3% local tax. Foreign investment enterprises (FIEs) generally pay tax at concessional rates depending on the location and type of business. The state tax rate of 30% may be reduced to 15% or 24% if the FIE is located in one of the specially designated zones. Qualified FIEs are entitled to a tax exemption or reduction during a tax holiday period. The local tax of 3% may be waived or reduced by the local government. A unified tax for Chinese and foreign enterprises, involving the removal of concessional rates and exemptions, is anticipated. Income tax: Income tax is levied on Chinese and foreign individuals at progressive rates ranging up to a 45% limit. Non-residents who are resident for less than a year are subject to personal tax only on income sourced in China. Individuals resident for one to five years are subject to personal tax on income sourced in China, plus foreign income actually remitted to China. Those resident for more than five years are taxed on their worldwide income. Indirect tax: China is obliged by WTO rules to offer identical tax treatment for domestic and imported products. VAT is levied at two rates, a standard 17% rate and a lower 13% rate. A 6% VAT rate applies to small enterprises. VAT is applied to most products, the
Table: TOP EXPORT DESTINATIONS 2000
2001
2002
2003
2004
2005
2006
2007
United States
52,162
54,395
70,064
92,633
125,155
163,348
203,898
233,181
China,P.R.:Hong Kong
44,520
46,503
58,483
76,289
100,878
124,505
155,435
184,289
Japan
41,654
45,078
48,483
59,423
73,514.3
84,097
91,773
102,116
Korea
11,293
12,544
15,508
20,096
27,818.4
35,117
44,558
56,129
9,278
9,759
11,382
17,536
23,755.9
32,537
40,302
48,729
249,208
266,709
325,744
438,364
593,358
762,337
969,284
1,218,130
63.8
63.1
62.6
60.7
59.2
57.7
55.3
51.3
Germany Total exports Top 5, % of total
Source: IMF, Direction of Trade Statistics.
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lower 13% rate pertaining to grain and edible oil, books, water and agricultural times. Exports are zero-rated and exporters can obtain VAT refunds. The business tax rates are 3-5% for most services, but a 20% rate applies to entertainment. Withholding tax: There is no withholding tax on dividends, but a 10% rate is applied to interest and 10% on royalties.
Operational Risk Security Risk Overall, China is a relatively safe country with a low – albeit growing – crime rate. While violence against foreigners is fairly rare, it does occur and severe injuries have occasionally been the result. The threat of political violence against foreigners in China is low. However, the potential for violent outbreaks exists and foreigners operating businesses on Chinese soil should keep aware of the political situation. It should also be noted that incidents of violence have taken place between members of various ethnic groups in China. Indeed, the risk of political violence was heightened in 2008, as due to Beijing hosting the Olympic Games. There was a growing concern among China’s elite that pro-democracy, pro-Tibet, and Falun Gong activists, who have been quiet in recent years, could use the Olympics to highlight their various causes to those outside China. In turn, China’s preemptive crackdown on dissidents is fostering an increasingly vocal human rights movement, which could yet escalate into non-peaceful protests. Having said that, however, the Chinese authorities have successfully ensured that there have been no large gatherings of people advocating violence against US facilities or interests in recent years. There is a low threat from terrorism in China. However, the British Foreign and Commonwealth Office advocates that people should remain aware of the global risk of indiscriminate terrorist attacks. Within the past year there have been no reported instances of terrorism committed against foreign interests in China.
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SWOT Analysis Strengths China is continuing to open up various sectors of its economy to foreign investment. With its vast supply of cheap labour, the country remains the top destination for foreign direct investment (FDI) in the developing world.
Weaknesses Foreign companies continue to complain about the poor protection of intellectual property in China. Chinese corporate governance is weak and non-transparent by Western standards. There is a considerable risk for foreign companies in choosing the right local partner.
Opportunities China’s ongoing urbanisation and infrastructure drive will provide major opportunities for foreign investment in the landlocked provinces, and the transfer of skills and know-how. The Chinese government is giving more protection and encouragement to the private sector, which is now the most dynamic in the economy and accounts for most of the country’s job growth.
Threats China’s government will block attempts by foreign firms to takeover assets of national importance. China is experiencing rising labour costs, prompting some investors to turn to cheaper destinations such as Vietnam.
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BMI Business Environment Risk Ratings Wu Xiaoling, a former deputy governor of the People’s Bank of China (PBoC) has confirmed that the central bank has decided to ‘strip out’ lending to small firms, farmers and areas hit by the May 12 2008 earthquake from the total loan quota apportioned to domestic lenders. She also confirmed that the PBoC had raised lending quotas – originally implemented to try to cool credit expansion – by 5% for big banks and 10% for small banks. Furthermore, Wu suggested that ‘next year there will be no quota checks and each bank will be able to make their own lending plan’.
Singapore Hong Kong New Zealand South Korea Japan Australia Taiwan Malaysia Thailand China Philippines Vietnam Sri Lanka Indonesia India Pakistan Cambodia Bangladesh Laos Myanmar North Korea Regional average: 51.9
44
Business Environment 83.8 82.2 79.0 73.4 72.6 71.8 65.2 61.5 59.5 52.5 44.9 42.0 40.6 40.2 39.8 37.7 36.7 36.2 35.2 16.0 11.5 Emerging markets average: 46.2
Rank Trend 1 = 3 = 6 = 10 = 12 = 15 = 24 = 33 = 38 = 55 = 79 = 86 = 89 = 90 = 92 = 100 = 106 = 109 = 113 = 133 = 134 = Global average: 49.7
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Business Environment Outlook Introduction With its vast supply of cheap labour, and rapid economic growth, China remains the top destination for foreign direct investment (FDI) in the developing world. Positively, the Chinese government is increasingly giving more protection and encouragement to the burgeoning private sector, which is now the most dynamic part of the economy and accounts for most of the country’s job growth. However, the commanding nature of China’s economy means that bureaucracy remains a key obstacle to doing business within the country, and the legal framework is still weak despite two decades of reform.
Latest Developments •
China is considering a plan to invest CNY5trn (US$731bn) in transport infrastructure over the next five years, as it looks to public works projects to help stimulate the economy amidst a slowdown in the global economy. The investment would overlap with a previous plan that earmarked CNY2trn (US$292.3bn) for infrastructure between 2006 and 2020. The focus for the new plan will be on roads, waterways and ports.
•
Beijing has endorsed a long-awaited restructuring of Agricultural Bank of China (ABC), drawing to a close a decade-long reform drive to reorganise the domestic banking sector which has so far drained state coffers of US$500bn. As part of the restructuring deal, ABC – China’s third largest lender in terms of assets (CNY6trn, US$878bn) – will receive US$19bn, and have US$120bn worth of bad loans removed from its books, according to a company official. This will pave the way for the bank to follow the path taken by the other three state-owned lenders, Industrial and Commercial Bank of China, China Construction Bank and Bank of China, and launch a public listing.
•
The Yangkou Port, a new deep-water port on the Yellow Sea, has just opened to transporters. The port, in Jiangsu Province, has been built on an artificial island connected to the mainland by a 13km bridge. The port is in the early stages of development, and is scheduled for completion in 2013. Just one berth is currently operational, which can handle smaller ships carrying up to 10,000 tonnes of cargo. By 2013 the port will be open to ships weighing up to 300,000 tonnes. These include very large crude carriers (VLCCs), which are between 150,000 and 320,00 deadweight tonnes (dwt) in size, and ultra-large crude carriers (ULCCs), which are large enough to handle 300,000 dwt and above.
•
The eleventh National People’s Congress (NPC) standing committee has passed a law aimed at curbing embezzlement. The law in question prevents managers of state companies from exploiting their positions to secure large stakes of these enterprises for themselves. Improved procedures for the restructuring of state assets are also required. Specifically, accurate audits will be required before any mergers or divestment to enable better valuation of such assets. The law, which comes into effect in May 2009, also stipulates stiff punishment for officials who flout the rules. Nonetheless, despite increased efforts to tackle graft, China was still ranked only 72nd (out of 180
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countries) by Berlin-based corruption watchdog Transparency International in its latest corruption perceptions index. This means that China’s ranking was unmoved from the previous year’s index, despite its score improving marginally from 3.5 (out of 10) to 3.6, where a higher rating represents lower corruption. •
On November 4 2008, in the highest level meeting between China and Taiwan in over 60 years, top officials signed a series of agreements. The number of direct charter flights across the Taiwan Strait will be tripled to 108 per week, with new flights being permitted on all seven days of the week instead of just four previously. The flying routes will also be shortened by allowing aircraft to transit directly between China and Taiwan (they had previously been routed through Hong Kong), and increasing the number of Chinese airports accepting flights from Taiwan from 5 to 21. Meanwhile, 60 direct cargo flights per month will be allowed to operate between Taiwan and the mainland, putting paid to the current practice of diverting them through third countries.
TABLE: BMI BUSINESS AND OPERATIONAL RISK RATINGS Infrastructure
Institutions Market Orientation
Overall
Afghanistan
20.73
29.85
40.59
30.39
Bangladesh
35.05
25.89
47.74
36.23
Bhutan
20.29
58.26
35.63
38.06
Cambodia
19.69
26.83
63.69
36.74
China
68.01
42.73
46.75
52.50
East Timor
32.47
30.62
59.50
40.86
Hong Kong
75.06
80.76
90.72
82.18
India
50.37
40.21
28.77
39.79
Indonesia
32.65
22.48
65.53
40.22
Japan
88.03
81.02
48.74
72.59
Laos
23.90
31.49
50.17
35.18
Malaysia
65.71
59.42
59.29
61.47
Maldives
40.42
54.31
67.17
53.97
Myanmar
21.44
3.06
23.43
15.98
Nepal
42.67
36.69
54.09
44.49
North Korea
23.63
8.98
1.97
11.53
Pakistan
36.08
29.57
47.50
37.72
Philippines
40.12
37.12
57.64
44.96
Singapore
83.09
88.18
80.16
83.81
South Korea
82.92
67.88
69.35
73.39
Sri Lanka
35.57
48.85
37.49
40.64
Taiwan
69.49
61.38
64.61
65.16
Thailand
59.54
60.06
59.00
59.53
Vietnam
37.23
39.11
49.71
42.01
Australia
86.43
81.44
47.57
71.81
New Zealand
83.41
90.25
63.21
78.96
Global ave.
47.39
47.46
48.65
47.73
Region ave.
49.00
47.56
52.31
49.62
Source: BMI. Scores out of 100, with 100 representing the best score available for each indicator.
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In addition, direct cargo routes between 63 Chinese and 11 Taiwanese ports will be established, while a similar agreement will reduce postage times, with direct links being established between five stations in Taiwan and eight in China.
Institutions Legal Framework The People’s Republic of China (PRC) operates a civil law system that includes some common law elements, although relatively less emphasis is placed on legal precedent. Two decades of reform have resulted in a number of changes in institutions, laws and practices. A formal legal system has resulted in a nationwide court system comprising 3,000 basic courts and some 200,000 judges. The Chinese courts are divided into Courts of General Jurisdiction, and the Courts of Special Jurisdiction. In 1979 economic courts were established as part of China’s Supreme People’s Court and TABLE: BMI LEGAL FRAMEWORK RATINGS Investor Protection
Rule of Law
Contract Enforceability
Corruption
Afghanistan
34.8
0.6
17.4
23.3
Bangladesh
61.1
25.1
8.0
3.3
Bhutan
25.6
75.4
57.0
82.0
Cambodia
51.2
13.8
38.9
6.0
China
7.8
50.3
54.7
54.7
East Timor
11.8
12.6
36.3
na
Hong Kong
62.5
89.8
87.5
92.7
India
38.0
62.9
8.9
54.7
Indonesia
22.3
25.7
26.5
18.0
Japan
58.3
89.2
90.5
91.3
Laos
44.8
19.8
28.7
28.7
Malaysia
53.8
72.5
47.8
75.3
Maldives
91.8
64.1
46.5
23.7
Myanmar
na
4.8
na
1.3
44.3
31.7
43.0
23.3
Nepal North Korea
na
9.0
na
na
Pakistan
56.2
26.9
17.5
8.7
Philippines
56.4
46.1
54.4
23.3
Singapore
64.5
94.6
75.9
98.7
South Korea
31.7
79.0
81.8
76.0
Sri Lanka
57.6
59.9
47.7
48.0
Taiwan
19.7
81.4
53.1
80.7
Thailand
19.5
60.5
60.1
62.0
Vietnam
22.8
49.7
45.6
28.7
Australia
27.9
94.0
89.2
95.3
New Zealand
66.9
97.0
82.4
100.0
Global ave.
36.8
48.8
49.9
40.2
Region ave.
43.0
51.4
50.0
50.0
Source: BMI. Scores out of 100, with 100 representing the best score available for each indicator.
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three levels of provincial courts. The economic courts enjoy jurisdiction over: •
Contract and commercial disputes between Chinese parties.
•
Trade, maritime, intellectual property and insurance.
•
Other business disputes involving foreign parties.
•
Various economic crimes including theft, bribery, and tax evasion.
There is also an administrative legal system, which adjudicates more minor criminal cases. Judges are often vulnerable to corruption, political control and the pressures of guanxi (connections based on family or local ties). Their appointment, promotion and removal are all at the discretion of local government and Communist Party leaders rather than the Supreme People’s Court or provincial High Court. Both the judges and the litigants who appear before them are subject to the influence of local protectionism. Legislation is frequently inadequate, with numerous conflicts between national and local norms, and a proliferation of regulations, interpretations and other edicts often producing incoherence and inconsistency. Laws and regulations in China tend to be far more general than in most Organisation for Economic Co-operation and Development (OECD) countries, and therefore need more specific implementing rules and measures. Even government arbitration, to which many foreign businesses and Chinese turn in an effort to avoid the vagaries of the courts, sometimes suffers from the same types of pressures that distort judicial justice. Prosecutors, who are supposed to guard against such illegal conduct, are usually too weak politically and China’s current legal and regulatory system can be opaque, inconsistent and often arbitrary. Implementation of the law is inconsistent. Although China is a member of the International Centre for the Settlement of Investment Disputes (ICSID) and has ratified the UN Convention on the Recognition and Enforcement of Foreign Arbitral Award, it places strong emphasis on resolving disputes through informal conciliation and mediation.
Property Rights Chinese law states that all land is owned by ‘the public’. Individuals are not permitted to own land. However, both Chinese nationals and foreigners can hold long-term leases for land use. They can also own buildings, apartments, and other structures on land, as well as own personal property.
Intellectual Property Rights China lacks effective protection for intellectual property rights (IPR). In spite of some reforms under its WTO commitments – China has committed to full compliance with the WTO Agreement on Trade-Related Aspects of Intellectual Property (TRIPS) – enforcement
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is poor and penalties, in the rare cases they are applied, are insufficient to act as proper deterrents. Trademark and copyright violations are widespread. Lack of co-ordination among public bodies undermines attempts at enforcement. There is also wide variation in the application of IPR protection.
Corruption Corruption is prevalent and anti-corruption efforts are obstructed by weak or non-existent monitoring mechanisms. Embezzlement and financial mismanagement have been identified by numerous audit reports. The use of guanxi is widespread in the upper echelons of business. Many of those who come under investigation are able to deploy their connections so as to avoid prosecution. However, anti-graft efforts have improved significantly under President Hu Jintao, who has made tackling rampant corruption one of his top priorities. January 2008 saw sports magnate Yu Zhifei jailed for embezzlement and the launch of an investigation against the former head of oil giant Sinopec, Chen Tonghai, while 2007 witnessed two of China’s most high profile anti-graft cases – the sacking and arrest of Shanghai’s former Communist Party boss, Chen Liangyu and the execution of Zheng Xiaoyu, the former head of the country’s food and drug watchdog. Yet, during a month-long leniency offer that began on May 30, almost 1,800 officials confessed to corruption according to the Chinese Communist Party watchdog, the Central Commission for Discipline Inspection (CCDI). Red tape is a major issue for investors. Given that many laws are defined in very general terms, it is often left to the bureaucracy to make decisions. With a lack of accountability, this process provides opportunities for corruption, and numerous bureaucratic obstacles stymie the easy acquisition of licenses. According to World Bank data, 20 separate procedures are required to enforce a contract, which takes an average of 180 days.
Infrastructure Physical Infrastructure As one of the fastest-developing economies in the world, China has an insatiable appetite for infrastructural development. BMI valued the country’s construction industry at US$146.40bn in 2006, registering a growth rate of about 13% y-o-y. We are expecting the construction industry in China to be worth about US$315.32bn by 2012, contributing about 7.17% to the nation’s gross domestic product (GDP). Much of the ongoing construction work in the country is at the higher-value end of the industry (power plants, hydroelectric schemes, high-speed rail links). Most of this will be funded through private-sector involvement. However, public-infrastructure spending will also need to increase substantially to meet the government’s targets. A boom in residential construction is expected to continue, as increasing numbers of workers migrate to urban centres for employment opportunities. The government intends to increase the number of new homes built by 15% over the next five years, and we expect Business Monitor International Ltd
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new housing to reach 1.5bn m2 of completed dwellings in 2006. However, site safety is a concern. The Ministry of Construction put the industry death toll at 2,288 people in 2005, and while this represented an 11.4% y-o-y drop, the industry was still responsible for the highest number deaths of any Chinese industrial sector, including mining. As well as having to deal with these social and structural problems, the industry is trying to reform in other ways, such as improving environmental performance and introducing a regulatory framework for building materials. The major test for the Chinese government will be to eliminate the physical and financial dangers from the industry. The action it takes over the coming years to curb corruption and improve working conditions will be crucial to the success of its ambitious infrastructure building plans and, ultimately, the country’s economic development. The quality of roads in China is poor. In 2005 China had a total road network of more than 3.3mn km, although approximately 1.47mn km of this network – almost 45% – is classified as ‘village roads’. Paved roads totalled 770,265km in 2004; the remainder were gravel, improved earth standard, or merely earth tracks. Rail is the major mode of transportation in China. The national rail system – the third largest in the world at approximately 76,000km – is modernising and expanding rapidly, but still possess a number of weaknesses, as highlighted by the recent snow storms which brought the country’s railways to a virtual standstill. Eight Chinese cities (Beijing, Tianjin, Shanghai, Guangzhou, Wuhan, Shenzhen, Nanjing and Chongqing) currently have metro systems, and at least seven more are planning them. Currently proposed extensions and new networks amount to more than 2,000km, with a cost of at least CNY500bn (US$65bn). In Beijing alone, which currently has around 114km of metro routes, there are plans to expand the network to a total of 561km by 2020. Some of this expansion has been driven by the 2008 Olympic Games, but most of it is aimed at relieving congestion and expanding the city. Indeed, the World Bank in June 2006 urged China to do more to improve public transport to ease traffic jams rather than building more highways to accommodate cars. Overall, with China projected to have 125 cities with more than one million people each by 2010, there is still huge scope for urban railway expansion. As a result of the country’s rapidly expanding civil aviation industry, by 2007 China had around 500 airports of all types and sizes in operation, about 400 of which had paved runways. China plans to build another 97 airports by 2020. China has more than 2,000 ports, 130 of which are open to foreign ships, and 16 ‘major’ ports with a capacity of over 50mn tonnes per year. China’s total shipping capacity is in excess of 2,890mn tonnes. By 2010, 35% of the world’s shipping is expected to originate from China. China also has more than 140,000km of navigable rivers, streams, lakes and canals, and in 2003 these inland waterways carried nearly 1.6trn tonnes of freight and 6.3tr passenger/km to more than 5,100 inland ports.
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Labour Force The Chinese labour force is expanding rapidly. Estimated in 2007 at 798mn, this represents a participation rate of around two-thirds. The urban unemployment rate averages 4.2%. However, the government admits that the statistics ignore many unemployed workers, including those laid off from state-owned companies. Though China has a reputation for having a bottomless well of cheap labour, the Chinese economy has actually experienced labour shortages in recent years. Minimum wages are rising as the economy responds to the labour shortage, setting a new salary floor for employers. For example, textile factories in Bangladesh and India are undercutting China on price. The affluent Pearl River cities are also drawing labour away from traditional industrial sectors, with workers able to command larger wages. Shortages of rural workers are spreading from the nation’s coastal areas inland. Out of 2,794 villages investigated in a 2007 nationwide survey, 74.3% of them no longer have a surplus of young labourers as all had left for the cities for work. It projected that the total rural labour force would not be able to satisfy the demand from non-agricultural sectors by 2010. According to China’s Ministry for Labour, 12mn big city residents will be out of work in 2007. An additional 24mn people were expected to join the ranks of the labour force during the year. News agency Xinhua estimates that a total of 200mn Chinese have travelled to cities to find jobs. Education levels vary by region. English-speaking graduates are most commonly found in Beijing or Shanghai. However, companies warn that technical skills or training in accounting and finance are scarce. Skilled managers are also in short supply. The labour market is heavily regulated. New labour rules state that non-Chinese may be hired only where there is a demonstrable need, and approval is required from local labour authorities. The law provides for collective and individual contracts specifying wage levels, working hours, conditions, insurance and welfare. Since local Communist Party committees select union leaders, collective agreements are usually not part of negotiations. The Labour Law makes it more difficult to fire staff than previous regulations, which allowed foreign enterprises to dismiss staff as a result of technical and production changes. Now, only imminent bankruptcy and major production problems justify redundancy. There is a minimum wage – each province or municipality must set a minimum wage that must not be less than half the local average wage. Furthermore, every month, foreign companies have to contribute 2% of total wages (including those payable to expatriate employees) to the trade union fund. This contribution comes out of after-tax profits. Foreign companies only rarely report strikes affecting their Chinese operations. Workers have the right to organise and participate in trade unions, but the law does not allow for the creation of unions, which must be organised ‘in accordance with law’. The only permitted unions are state affiliates of the All-China Federation of Trade Unions (ACFTU). The ACFTU is more interested in maintaining relations between the government and foreign Business Monitor International Ltd
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companies than in seeking to promote industrial strife. Although China does not allow independent trade unions, it does tolerate some forms of activism.
Market Orientation Foreign Investment Policy As repeated surveys and actual foreign direct investment (FDI) flows bear out, China remains the top emerging market destination for foreign investors. Low labour costs, and better competitive and productivity rates give China a leading edge in the manufacturing and assembly sectors – the dominant areas for FDI inflows. Since the early 1990s, China has substantially reformed its investment regime and foreign investors are now able to manufacture and sell a wide variety of goods on the domestic market. In the mid-1990s, China authorised the setting up of 100% foreign-owned enterprises – the preferred vehicle for FDI. This precipitated the rampant FDI performances of recent years. However, there is concern that the government’s concentration on luring investment to the manufacturing sector has led to saturation and overcapacity. UN Conference on Trade and Development (UNCTAD) figures show that China pulled in US$74.8bn in FDI in 2007, setting yet another record. The government wants to make the service sector a key area to attract foreign investment. China is to channel FDI into research and development (R&D) centres, new high-tech industries, advanced manufacturing and the energy conservation sectors. Wholly owned foreign enterprises are now the most popular entry route for investors. Since the late 1990s, the authorities have attempted to direct FDI towards ‘encouraged’ industries and regions, bringing in new incentive schemes for investments in high-tech industries and in the central and western parts of the country. A revised list came into effect in April 2002, outlining areas and sectors where foreign investment would be encouraged, restricted or prohibited. The raft of investment incentives developed over the past two decades mainly centre on the special economic zones. The list is partly intended to abide by the promised sectoral openings that were part of Beijing’s WTO accession agreements: opening up banking, insurance, petroleum extraction and distribution. For example, the upper limit is 20% for a single foreign investor in one Chinese bank and combined foreign shareholding in banks is not allowed to exceed 25%. Regulations issued in November 2002 have eased foreign investment intended for the acquisition of stakes in Chinese companies. Non-Chinese investors can now purchase traded and non-traded (state-held) shares of Chinese companies. However, foreign investors have been put off by the requirement to undergo an extensive approvals process with trade unions. China allows for full profit repatriation and since the mid-1990s, foreign investors have broadly had free access to foreign exchange. Since WTO accession, an overhaul of regulations has been implemented to improve intellectual property rights. It has committed to full compliance with the WTO Agreement on Trade-Related Aspects of Intellectual Property (TRIPS), as well as other TRIPS-related commitments. But enforcement remains negligible
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with penalties frequently failing to be imposed. Most FDI remains focused on the export-oriented manufacturing and assembly sectors. But services – mainly tourism, telecoms and finance – form a growing proportion of the FDI stock in China. The top sectors in terms of attracting FDI are chemicals, machinery and industrial goods, and IT including software. The main sources of investment are Japan, the US and Germany.
Foreign Trade Regime In line with its WTO accession requirements, China has lowered its import tariffs. In 2006, the general tariff level on imports was 9.9%, a decline of more than 40% on the early 1990s level. The commitment to lower tariffs has been borne out by thriving import levels, which have surged faster than China’s exports in recent years. China is now the world’s third-biggest importer. The government has pursued multilateral agreements as a priority, with a series of regional and bilateral free trade negotiations underway as part of its wider commitments under the Doha Development Round. China’s formal accession to the WTO in December 2001 cemented its integration into the global economy. The two key bilateral deals were the EU-China agreement signed in May 2000, and the US-China agreement signed in November 1999. Beijing is actively pursuing regional trade deals, with recent progress towards a free trade agreement (FTA) between China and the 10-member Association of South East Asian Nations (ASEAN). It has also initiated FTA talks with the Southern African Customs Union (SACU) and the Gulf Co-operation Council (GCC). The possibilities of FTAs with Australia, New Zealand and Chile are also under study.
Table: Asia, FDI Annual Inflows 2006 Australia
2007
US$bn
Per capita
US$bn
Per capita
25.74
1,255.4
22.27
1,075.7
Bangladesh
0.79
5.7
0.67
4.7
Cambodia
0.48
34.2
0.87
60.3
China
72.72
55.3
83.52
62.5
Hong Kong
45.05
6,520.6
59.90
8,602.3
India
19.66
17.3
22.95
19.9
Indonesia
4.91
21.5
6.93
29.9
Malaysia
6.05
231.6
8.40
316.2
Pakistan
4.27
27.5
5.33
34.0
Philippines
2.92
33.9
2.93
33.3
Singapore
24.74
5,646.5
24.14
5,441.2
South Korea
4.88
101.6
2.63
54.6
Sri Lanka
0.48
24.0
0.53
26.0
Taiwan
7.42
324.0
8.16
354.8
Thailand
9.01
142.0
9.58
149.9
Vietnam
2.36
27.5
6.74
77.5
Source: UNCTAD, BMI.
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In January 2002, China implemented tariff cuts required as part of its WTO accession agreement and beefed up access to trading rights. This was followed one year later by a further lowering of tariffs, again dictated by the WTO. China has substantially reduced the number of goods subject to import quotas and is committed to phasing out remaining quotas. Licensing procedures have been streamlined to comply with transparency requirements. Some WTO commitments have been met ahead of schedule, and there are ongoing plans to further liberalise trading rights. China may apply tariff rates significantly lower than the published most-favoured nation (MFN) rate in the case of the goods industry. Import tariff rates are divided into three categories: general rates, MFN rates and Bangkok Agreement rates, applying to ASEAN members. Non-tariff barriers remain in force. China has agreed to drop all agriculture export subsidies as part of the WTO agreement. But there has been criticism over its lack of adherence to trade agreements, particularly when discretionary elements are involved – specifically the absence of implementation on IPR protection.
TABLE: BMI TRADE RATINGS Protectionism
Bureaucracy
Afghanistan
na
21.6
Bangladesh
0.7
22.9
Bhutan
4.2
18.3
Cambodia
7.5
25.4
China
51.7
52.9
East Timor
na
40.5
Hong Kong
100.0
98.6
India
12.9
23.0
Indonesia
54.4
44.3
Japan
76.9
81.5
Laos
19.7
6.7
Malaysia
64.6
50.9
Maldives
na
55.3
Myanmar
1.4
na
13.6
34.1
Nepal North Korea
4.2
2.3
Pakistan
16.3
42.9
Philippines
76.2
66.9
Singapore
100.0
88.9
South Korea
42.2
69.1
Sri Lanka
48.3
35.6
Taiwan
95.9
64.1
Thailand
55.8
37.6
Vietnam
11.6
44.0
Australia
70.7
80.3
New Zealand
72.1
76.3
Global ave.
47.1
45.2
Region ave.
43.5
47.4
Source: BMI. Scores out of 100, with 100 representing the best score available for each indicator.
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business environment
US officials have also accused Beijing of intervening to keep the renminbi artificially low, thereby boosting its exports to the US and creating a debilitating trade surplus. But the Chinese government appears likely to resist pressure to adjust its currency regime solely to suit US whims. Concerns also remain over inconsistencies in the legal system, as well as over government attempts to control trade flows through the deployment of import and export licenses. The government retains regulatory controls through commodity inspections and a plethora of registration requirements.
Tax Regime China is pushing ahead with reform, with the emphasis on reducing taxes and unifying income tax rates for domestic and foreign companies. China’s dual-tier tax system offers separate rates for domestic and foreign enterprises. A new tax reform will unify the income tax treatment of domestic and foreign enterprises. As of January 1 2008, both domestic and foreign-funded enterprises will be subject to a 25% statutory rate. The reform also includes rules relating to controlled foreign corporations, thin capitalisation (when a company has excessive debt in relation to its arm’s length borrowing capacity, leading to the possibility of excessive interest deductions) and foreign tax credits. Corporate tax: The standard rate is 33%, comprising a 30% national tax and a 3% local tax. Foreign investment enterprises (FIEs) generally pay tax at concessional rates depending on the location and type of business. The state tax rate of 30% may be reduced to 15% or 24% if the FIE is located in one of the specially designated zones. Qualified FIEs are entitled to a tax exemption or reduction during a tax holiday period. The local tax of 3% may be waived or reduced by the local government. A unified tax for Chinese and foreign enterprises, involving the removal of concessional rates and exemptions, is anticipated. Income tax: Income tax is levied on Chinese and foreign individuals at progressive rates ranging up to a 45% limit. Non-residents who are resident for less than a year are subject to personal tax only on income sourced in China. Individuals resident for one to five years are subject to personal tax on income sourced in China, plus foreign income actually remitted to China. Those resident for more than five years are taxed on their worldwide income. Indirect tax: China is obliged by WTO rules to offer identical tax treatment for domestic and imported products. VAT is levied at two rates, a standard 17% rate and a lower 13% rate. A 6% VAT rate applies to small enterprises. VAT is applied to most products, the
Table: TOP EXPORT DESTINATIONS 2000
2001
2002
2003
2004
2005
2006
2007
United States
52,162
54,395
70,064
92,633
125,155
163,348
203,898
233,181
China,P.R.:Hong Kong
44,520
46,503
58,483
76,289
100,878
124,505
155,435
184,289
Japan
41,654
45,078
48,483
59,423
73,514.3
84,097
91,773
102,116
Korea
11,293
12,544
15,508
20,096
27,818.4
35,117
44,558
56,129
9,278
9,759
11,382
17,536
23,755.9
32,537
40,302
48,729
249,208
266,709
325,744
438,364
593,358
762,337
969,284
1,218,130
63.8
63.1
62.6
60.7
59.2
57.7
55.3
51.3
Germany Total exports Top 5, % of total
Source: IMF, Direction of Trade Statistics.
Business Monitor International Ltd
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china Q1 2009
lower 13% rate pertaining to grain and edible oil, books, water and agricultural times. Exports are zero-rated and exporters can obtain VAT refunds. The business tax rates are 3-5% for most services, but a 20% rate applies to entertainment. Withholding tax: There is no withholding tax on dividends, but a 10% rate is applied to interest and 10% on royalties.
Operational Risk Security Risk Overall, China is a relatively safe country with a low – albeit growing – crime rate. While violence against foreigners is fairly rare, it does occur and severe injuries have occasionally been the result. The threat of political violence against foreigners in China is low. However, the potential for violent outbreaks exists and foreigners operating businesses on Chinese soil should keep aware of the political situation. It should also be noted that incidents of violence have taken place between members of various ethnic groups in China. Indeed, the risk of political violence was heightened in 2008, as due to Beijing hosting the Olympic Games. There was a growing concern among China’s elite that pro-democracy, pro-Tibet, and Falun Gong activists, who have been quiet in recent years, could use the Olympics to highlight their various causes to those outside China. In turn, China’s preemptive crackdown on dissidents is fostering an increasingly vocal human rights movement, which could yet escalate into non-peaceful protests. Having said that, however, the Chinese authorities have successfully ensured that there have been no large gatherings of people advocating violence against US facilities or interests in recent years. There is a low threat from terrorism in China. However, the British Foreign and Commonwealth Office advocates that people should remain aware of the global risk of indiscriminate terrorist attacks. Within the past year there have been no reported instances of terrorism committed against foreign interests in China.
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