China can be an overwhelming location to consider establishing a business. For one, it’s vast. Nations don’t get much vaster than 1.3 billion people. It is a lazy truism to point out that China isn’t just a different country, but different world. From a distance, China’s corporate aesthetic could appear like a horizon of big firms and formidable business-types. But nothing could be further from the truth.
Common misconceptions about China run as long as the Great Wall, and the philosophy of an agrarian market with no private sector might as well be as old. It is all a very antiquated way of thinking. China is the greatest economic success story of the past quarter-century – period. Countless companies of all sizes from the UK and elsewhere are currently thriving and there is no reason for you not to join them.
China is accommodating, with more markets, industries and niches than you can shake an investment at. Local authorities are famous for competing over foreign business, throwing incentives and exemptions at entrepreneurs to secure investment in underdeveloped provinces and cities.
China is the most successful communist country on the planet and consistently ranks as the sixth largest economy. With attributes like these you can’t really criticize its history of isolation and insulation. Instead of regarding China as intimidating, alien and overwhelming, see it as an opportunity. China is, indeed, a vast nation, but it has no room for defeatism. Adopt the optimism of its people, culture and animal almanac. China may not be for the fainthearted, but then neither are steely entrepreneurial ethics and ambition.
An Economic Overview
China, during the last few decades, has transposed to a more market-friendly economy that has a fast growing private sector. It is a big force in the global economy. The reform began in the late 1970s, and grew to include the gradual liberalization of prices, decentralization, more independence for state ventures, the establishment of an eclectic banking system, the development of stock markets, and the welcoming of overseas trade and investment.
China has instigated reforms in a step-by-step fashion. Its currency was tightly linked to the US dollar for years. Judged on purchasing power parity (PPP), China was the second-biggest economy in the world after the United States. Although, in per capita terms, the country is still lower middle-income.
However, the government does face a handful of economic development challenges :
- To abide sufficient job growth for millions of redundant workers from state-owned enterprises. This also includes migrants and upstarts
- To reduce corruption and other exploitation
- To harness environmental damage and social strife
Economic progress has been more expeditious in coastal provinces, and roughly 200 million rural labourers have re-established in urban areas to seek employment. A major consequence of China’s one child law is that it’s now one of the most superannuated countries in the world. Environmental atrophy is another long-term problem it faces.
China’s Predominant Industries are :
- Mining and Ore Processing
- Iron, Steel, Aluminum and other Metals
- Machine Building
- Textiles and Apparel
- Consumer Products, including Footwear, Toys and Electronics
- Food Processing
- Transportation Equipment
- Telecommunications Equipment
- Commercial Space Launch Vehicles
China’s Main Export Commodities are :
- Electrical Products
- Data Processing Equipment
- Mobile Phones
Their Primary Import Commodities are :
- Machinery and Equipment
- Oil and Mineral Fuels
- LED Screens
- Data Processing Equipment
- Optical and Medical Equipment
- Organic Chemicals
Basics To Know When Setting Up In China
It is easy to misinterpret the role that the government plays in the corporate sphere. Regardless of the expeditious growth of the private sector, many big Chinese businesses in strategic sectors are still under state control. Additionally – and allegedly – private firms are also often found to have some sort of state control.
This supposed tentacle of control can have a big influence on the way a business operates. Therefore, you need to be aware of the vaster political environment that your partners and customers operate in.
Additionally, mayors and other regional officials often brandish and exercise more power than their counterparts in the West. Strong relationships are vital to success in Chinese business, and familiarizing yourself with influential officials is likely to make your business operations more facile and lucid.
Be warned; a change in regional government official might affect the incentives or agreements reached with any predecessors. It is not unusual for officials to be arrested for corruption.
Investment Zones (IZ) and Their Incentives
The main incentive of an Investment Zone is the tax break. Tax breaks vary according to the industrial sector :
- The most common tax break that an alien business investing in an Investment Zone may receive is a 50% discount on the corporation income tax, a reduction from 30% to 15%.
- Invariably, a complete exemption of the tax can be warranted for a two-year period with a further reduction by half for the next three years. For example, two years at 0% and then a further three years at 7.5%.
- If your business introduces technology that is deemed as ‘advanced’ by the authorities, then a further three years’ reduction (by half) can be negotiated.
- If an overseas investment has an export value of more than 70% for a certain year, then they may receive a preferential Corporate Income Tax rate of 10% for that year.
Another advantage of investing in a special zone is a possible tax refund. There are two types of tax refund that could be available :
- By reinvesting profits back into your company, or other enterprises in the Investment Zone, you could receive a 40% refund of the Corporate Income Tax on your investment amount.
- By reinvesting profits into an export-orientated or high-technology company, then you could receive a refund for the entire amount of Corporate Tax paid on the amount of the reinvestment.
Different Types of Investment Zones
There are various Investment Zones, which were established alongside the economic liberalization of China. These include :
- Special Economic Zones (SEZ)
- Open Cities (OC)
- Economic and Technological Development Zones (ETDZ)
- Hi-tech Development Zones (HTDZ)
- Free-Trade Zones (FTZ)
- Export Processing Zones (EPZ)
Each of these zones has different prerequisites for setting up, and likewise they also offer varying advantages. Therefore, foreign investors seeking to establish in one of these zones should check the local regulations and policies to see which is best suited to their needs, product or service.
Special Economic Zones
Shenzhen, Xiamen, Zhuhai, Shantou and Hainan were formed in the ’80s and were China’s inaugural attempts at creating Investment Zones. Authorities in each area were given further independence to devise and develop their respective areas.
The incentives offered have unfortunately been greatly reduced since China’s joining of World Trade Organisation. It is therefore no secret that Shenzhen is the only zone that maintains national importance because of its locality. Other zones, however, attract investment through their far superior infrastructure, etc.
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