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China Market Economic Overview

China Market Entry Solutions - China Market Economic Overview

China Market Entry Solutions - China Market FDI Inflows

  • China is the leading recipient of FDI inflows in Asia and the 2nd largest, globally after the US
  • The country was the world’s leading merchandise trader and leading exporter of commercial services in 2018
  • China’s total import and export value reached 12.1 trillion yuan ($1.75 trillion) between January-May 2019, registering a Y-o-Y increase of 4.1%
  • China’s GDP growth rate (%) is expected to slow down over the next 6 years to reach 5.5% in 2024 as compared to 6.1% in 2020
  • The number of sectors prohibited from the foreign investment has been reduced from 48 to 40, which provides more opportunities to invest
  • 16,460 foreign-invested companies were established during January-May 2019 and the use of foreign capital reached 369.06 billion yuan, with a Y-o-Y increase of 6.8%

Establishing an entity in China

The launch of a new business in China is now easier due to the elimination of minimum capital requirements. However, the overall regulatory framework remains complex and uneven

LLC

  • The registration process for an LLC is easier as compared to a Joint Stock Limited Company
  • It is the most common form used by foreign investors
  • The IP is protected by Chinese law

Wholly Foreign-Owned Enterprise

  • The establishment requirements for a Wholly Foreign-Owned Enterprise are higher and the process typically takes 2-4 months
  • This form is prohibited in certain industries such as broadcasting and public utilities
  • This form allows for greater freedom in business activities as compared to RO

Representative Office

  • An RO can be established only if the parent company has been in existence for at least 2 years
  • This form requires approval for establishment in banking, securities and insurance sectors

Joint Venture

  • JVs are of two types: Equity or Contractual/Co-operative Joint Venture
  • It is an LLC formed between a foreign investor and a Chinese company
  • 25% share of such a business entity is owned by a foreign company

Partnership

  • This form can be of three types: General partnership, limited partnership and special general partnership

Government Regulations and Compliance in China

Overview

China Market Government Regulations and Compliance

Forex Regulations in China

  • China’s foreign exchange system has two main accounts: current account and capital account
  • Companies, banks and individuals must comply with closed capital accounts
  • Foreign-invested enterprises (FIEs) are subject to a general debt to equity ratio requirement
  • Investors need to register foreign exchange transactions directly with SAFE by September 30 of each year.
  • People’s Bank of China and State Administration of Foreign Exchange (SAFE) are the regulatory bodies for monitoring the system
  • Effective July 2017, banks and financial institutions in China must report both domestic and overseas cash transactions of US$7,600 or above. Overseas transfers of US$10,000 or above by an individual also needs to be reported

Accounting Standards in China

  • China has its own unique accounting standards that differ from the IFRS
  • Chinese Accounting Standards (CAS) is based on: Accounting Standards for Business Enterprises (ASBEs) and Accounting Standards for Small Business Enterprises (ASSBEs)
  • There are some differences between the CAS and the IFRS such as valuation methods for fixed assets, detailed rules and delay in the implementation of new IFRS updates
  • China is committed to adopt the IFRS soon

Immigration, Secondment, Secretarial Compliance in China

  • Business visa is valid for 90 days which can be extended many times however, cumulative time is limited to 1 year
  • Employment can not be obtained without residence
  • The participation of foreign workers in Chinese social security system is compulsory

China market operational Challenges

Taxation System in China

  • China’s taxation system is more complex as compared with that of the US and the UK. It’s ranking in terms of ease in paying taxes is 105 while the US is ranked at 25 and the UK at 27
  • Transfer pricing is conducted on an arm’s length basis
  • There is no separate tax on capital gains. Capital gains are combined with other operating income and taxed at the corporate income tax rate

China Market basic taxes

China Corporate Tax:

  • Standard rate – 25%
  • Qualified new/high tech enterprises – 15%
  • Key software production & IC design enterprises – 10%
  • Qualified technology-advanced service enterprises – 15%

China VAT:

  • Manufacturing sector – 13% (reduced from 16%)
  • Construction and transport – 9%
  • Services – 9%

Other Taxes:

  • Real estate
  • Deed
  • Consumption
  • Custom duties

PESTEL Analysis of China Market

Overview of the Macro-Economic Environment

1) Political

  • New Foreign Investment Law has been passed to protect the investors’ IP, effective January 1, 2020
  • The Chinese government has a strong focus at state-owned enterprises to influence economic outcomes and monopolize strategic areas such as petroleum, power, and railway
  • Continuous anti-corruption campaign has been introduced since 2013 to strengthen the functioning of the Chinese authorities
  • The Government has also elevated the employment-first policy to the status of a macro policy in 2019

China market analysis

2) Economic

  • China’s annual GDP growth (%) was 6.2 in 2019 and is forecasted to be 6.1% in 2020 and 6% in 2021
  • The country’s share in the global GDP adjusted for purchasing-power-parity is 19.3% (highest in the world)
  • Inflation reached at 2.2% in 2018 and is expected to remain stable at 2.4% and 2.7% in 2019 and 2020, respectively
  • FDIs reached to US$100.78 billion, with an increase of 2.9% Y-o-Y between January-September 2019
  • Public debt is a challenge and it is expected to rise in the coming years

3) Social

  • More than 150 million students enrolled in China’s compulsory education system
  • 3.24 million urban jobs were added in Q1 2019 and achieved the target of reaching 29% for 2019
  • The country has 802 million active users of internet
  • A large gap remains between the living standard across country and rising inequalities are a concern for investors

4) Technological

  • Spends on the domestic R&D reached to US$293 billion in 2018
  • “Made in China 2025” initiative was launched to advance technology and boost the idea-driven innovation
  • The Government is focused at enhancing industries in 5G, AI, biotechnology and quantum computing
  • China announced 6 scientific and technological projects and 9 projects under the “Scientific Innovation 2030” in 2016

5) Environment  

  • The country registered renewable energy investments worth US$127 billion (45% of global value) in 2018
  • The environment policies are regulated by the Ministry of Ecology and Environment of the People’s Republic of China
  • China is the world’s largest source of carbon emissions and accounts for 28% of annual global emissions

6) Legal

  • Land is owned by the state and protection of foreign IP is inadequate
  • The judicial system is heavily influenced by the government agencies and the Chinese Communist Party
  • The Government prohibits the employment of children under the age of 16
  • New immigration policy (effective August 2019) has made it easier for foreign nationals to apply for PR

Industry Overview

Non-profit Organization 

China Non Profit Organizations overview

  • Overseas NGO law (ONGO 2017) allows foreign NGOs to formally establish and conduct activities in China
  • Foreign NGOs can conduct business using their registered name and within operational and geographical scope
  • 510 foreign NGOs are operating in China, as of November 2019

China market legal forms

China market regulations

  • Overseas NGO law (ONGO 2017) allows foreign NGOs to formally establish and conduct activities in China
  • Foreign NGOs can conduct business using their registered name and within operational and geographical scope
  • 510 foreign NGOs are operating in China, as of November 2019

Manufacturing

As a result of the US-China trade war, industrial production has slowed down and companies have started shifting to cheaper Southeast Asian countries.

Manufacturing in China - An Overview

  • Manufacturing contributed 29% to the GDP in 2018
  • The sector witnessed a decrease of 4.9% in profits from January-October 2019
  • Foreign capital utilization in high-tech manufacturing reached US$16 billion between January-May 2019
  • The number of companies established by foreign investments stood at 4,986 in 2017

Foreign Investments in China - An Overview

China Tax Regulations Overview

  • VAT has been reduced to 13% from 16%
  • Registration of manufacturing WFOE is done in four phases and generally takes 40 days
  •  Use of land can be approved for 50 – 70 years

China Market Entry major challenges

Education

China market Foreign Investment regulations

  • China’s education market is worth US$ 288 billion (2018)
  • Public listed companies are prevented from investing in private kindergartens
  • Online education witnessed significant growth with 200 million users by the end of 2018

China market mode of entry

China Market foreign investment Overview

  • Foreign enterprises are prohibited from investment in compulsory education for Chinese students (ages 05 – 16) for both public and private schools
  • Education market is open to joint ventures (FDI<50%) and wholly foreign-owned enterprises
  • The president or principal must be a Chinese national
  • In 2015 ‘non-academic vocational skills training’ was removed from list of restricted sectors

Consulting Services

Slower economic growth and trade disruption is creating opportunities for management consulting firms in China. The demand for non-regulated professional services is growing in China and Asia, in line with global trends.

An overview on China consulting services

  • Consulting market is forecasted to reach US$5.9 billion by 2019
  • Operational improvement is one of the strongest consulting services, particularly in the manufacturing sector.
  • Other key consulting service segments include technology, strategy, and marketing
  • The market is dominated by the Big 4 firms
  • Tech consulting firms are expected to grow at the fastest pace in China

Management consulting market in China

Retail

Consumers in tier-3 and -4 cities are playing a significant role in driving growth of e-commerce due to limited access to physical outlets.

China retail market overview

  • Despite the trade war and slow economy growth, China is expected to become largest retail market in 2019
  • Retail sales of consumer goods reached to 19.52 trillion yuan in the first half of 2019, with Y-o-Y increase of 8.4%
  • Online sales reached 4.82 trillion yuan, registering the Y-o-Y increase of 17.8% in the first half 2019
  • M&A transactions witnessed a growth of 31% (Y-o-Y) during the Q1 2019

China Preferred business structure & Major export commodities

China Market business regulations

  • Certain types of products such as medical products and food are subject to special licensing
  • Foreign companies must have a Chinese business license to start a business on an e-commerce platform
  • Tax rebate has been increased from 15% to 37% for e-commerce businesses
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