The image of China as a favorite investment haven for international capital is once again shined. According to the Ministry of Foreign Trade and Economic Cooperation (MOFTEC), during the first half of this year, 15,155 foreign-invested enterprises (FIE) have been newly set up around the country, bringing in actual foreign direct investment of US.579 billion. The figures respectively post a year-on-year increase of 26.39 and 18.69 percent. For the whole year, FDI is expected to surpass for the first time the US billion mark.
It will indeed be a feat to marvel on, considering the worldwide lethargy of investment. A strong economy, political stability and a vast market comprising 1.25 billion people with fast rising income are among the factors shaping Chinasintosan investment magnet. Encouragingly, there are already projections by esteemed researchers that China's economy will continue its high-growth trajectory over the coming 30 years.
China's membership in the WTO, and its concurrent necessity to thrust wider its door, add to its charm. With its positive effects proven over the past 20 years, FDI is fervently courted by virtually every part of the country. By the end of June 2002, there are altogether 405,180 FIEs throughout the country, with actual investment of US.802 billion. And they account for around 25 percent of the country's overall industrial added value, 50 percent of foreign trade, and 20 percent of tax revenues.
New Investment Guideline
In line with its commitments to the WTO, China has taken unprecedented moves to reduce or demolish barriers to international investors. A new guideline for FDI has been putsintoseffect starting April 1st this year, replacing an outmoded one enacted in 1997. Industries are groupedsintosthree categories in which FDI is encouraged, restricted, or forbidden to enter. A check-up of that list is recommended to every international investor.
Compared to its predecessor, the new guideline increases the number of industries in the FDI encouraged category by 76 to 262 items, while slashing the FDI restricted category by 37 to 75 items. Besides, the limitations concerning the stake a foreign investor can hold in an enterprise are further loosened. Moreover, some industries that used to be off limits to FDI, including telecommunications and urban networks for gas, heating and water, are for the first time opened to international investors.
According to the new guideline, China encourages FDIsintosthe following domains: First, restructuring of traditional agriculture, development of modern agriculture, and promotion of the industrialization of agriculture. Second, infrastructure and basic industries like transportation, energy and raw materials. Third, hi-tech industries like electronic information, biotech, new materials, and aerospace. Foreign investors are also encouraged to set up research and development centers in China. Fourth, using modern technologies to restructure traditional industries like machinery, light industry and textile, and upgrading the equipment. Fifth, comprehensive usage and recycling of resources, environmental protection projects and urban projects. Sixth, advantageous industries in western China. Seventh, projects whose products are all for export.
Mu Hong, a director with the State Development Planning Commission (SDPC), pointed out that the newly open service trade offers huge opportunities to investors. In the highly coveted telecom industry, foreign investors will be allowed to hold up to 35 percent stake in mobile voice and data services as from December 11, 2002, and 49 percent two years later; they will also be allowed to hold have 25 percent stake in domestic and international call services as from December 11th, 2004, and 49 percent 3 years later. In banking and insurance services, not only will geographical restrictions be gradually lifted, but also their business scope will be extended to conduct RMB deals and life insurance.
Infrastructure offers another goldmine on tap. According to estimated by the World Bank, China needs US billion in the coming ten years for infrastructure construction. Mu Hong said, "We welcome FDI in this area."
The WTO requires its members to give national treatment to foreign investors. Admittedly, China is on its way to fully follow the rules. However, over 20 years of strenuous transitionsintosa market economy gives birth to the fact that different regions have different degrees of preferential policies for foreign investors. Therefore, there's always the practical question to ask concerning which part of China gives the best offer.
The five economic zones (Shenzhen, Zhuhai, Shantou, Xiamen, Hainan) naturally come to the mind first. Established in the early 1980s, they are indeed "Arial paddies"for the country's reform and open-up policy. They are endowed by the central government with unprecedented preferential treatments to attract FDI. Their relative success has since spawned an array of open coastal cities, national hi-tech zones and national economic and technical development zones, which offer more or less the same preferential policies as the special economic zones.
In late 1990s, an initiative was rolled out by the central government to develop the country's vast west. Comprising ten provinces (Shaanxi, Gansu, Qinghai, Ningxia, Xinjiang, Sichuan, Chongqing, Yunnan, Guizhou, and Tibet) and home to 23 percent of the country's population, the underdeveloped western regions are endowed with more leeway in attracting FDI than special economic zones.
According to information released by the MOFTEC, the government collects income tax from foreign invested enterprises (FIE) at the rate of 33 percent, but only 15 percent from enterprises in special economic zones, the national hi-tech industrial zones and national economic and technical development zones; 24 percent from enterprises in open coastal cities and capital cities of local provinces.
FIEs may also be exempted from income tax during the first two years after they become profitable, pay only 50 percent of the income tax during the ensuing three more years. On top of this, FIEs encouraged by the state in the middle and western regions can apply for a prolongation of paying only half of the income tax for three more years. For advanced technology enterprises funded by international capital, their income tax may be exempted for two years and slashed by half for the following six years.
Besides, there are various preferential policies in regard to turnover tax and import tax. The government particularly puts its weight behind those FIEs investing in technical upgrade and innovation.
The western regions are allowed to further reduce entry barriers to foreign investment. FIEs in eastern China are encouraged to go west, and every project they have a 25 percent stake there will be regarded as an FIE with access to due treatments. Those FIEs in the FDI encouraged category in central and western China have to pay only 15 percent of the income tax during the 3 years after the expiration of current preferential tax policies. Moreover, FIEs in eastern China are allowed to go west to contract and operate both FIEs and domestic-funded enterprises.
Long maligned for its poor accessibility and backwardness, the western regions nonetheless hold the bulk of the country's natural resources and boasts better-than-national-average talent pool. With more investment by the statesintosthe infrastructure, the regions are appearing up and coming in terms of attracting FDI. In a landmark deal, three major foreign oil companies, Royal Dutch/Shell Group, Exxon Mobil, and Russia's OAO Gazprom in early July signed a contract to each own 15 percent of a company that will build a 4,000-kilometer pipeline stretching from China's far west to its eastern coast. Two Chinese domestic corporations hold the remaining 55 percent. The project requires as much as US billion in investment.
Preferential policies aside, investors nowadays are looking more and more at the overall environment of a city or region when decidingswheresto put money. Legal framework, access to market, labor costs, talent pool and transportation are among the most important index for gauging.
Guangdong Province, Shanghai and Beijing take the lead in attracting FDI. Guangdong still benefits from its status as the very first frontline of the country's open-up campaign. By the end of 2001, it had lured in actual FDI of US billion, around two fifths of the nation's total. Half of the world's 500 largest corporations have a foot in the Province, and among the world's 500 largest FIEs in China, 158 are based in Guangdong. In the meantime, Shanghai is regaining its status as the financial center of Far East with the arrival of international banks, while Beijing as the capital boasts unparalleled resources and is thus the premier choice to base the regional headquarter for many multinationals.
A research ranking the competitiveness of China's cities offers a useful reference for investors. Released early this year, the ranking picks the Top Ten amid a list of 24 candidates. Shanghai tops the ranking, followed insgroupsby Shenzhen, Guangzhou, Beijing, Xiamen, Wuxi, Tianjin, Dalian, Hangzhou, and Nanjing.
Shanghai champions in many categories like capital, sci-tech, geographic location, order, and management. Shenzhen excels in open-up competitiveness and infrastructure planning. Guangzhou is best in corporate management. Beijing is the fastest in improving its competitiveness, more so with the arrival of Olympics. Xiamen boasts the highest average growth rate, while Wuxi is No.1 in light industry and textile. Tianjin has the most admirable potential in sci-tech and manufacturing. Dalian lives up to the name of the best managed city. Hangzhou and Nanjing derive their competitiveness from natural environment and talent pool respectively.
Meanwhile, another research was conducted to gauge the competitiveness of 12 key cities in west China. Chongqing was ranked No.1 in overall competitiveness, followed by Chengdu, Xi'an, Kunming, Urumqi, Lanzhou, Nanning, Guiyang, Hohhot, Yinchuan, Lahsa and Xining.
Box: Once you have made the decision to invest in China, you will need to decide what form your investment should take. This will largely depend on the kind of business you want to set up or acquire, the amount of money you want to invest and whether or not you want to have a Chinese partner.
Forms of Foreign Investment
1. Sino-Foreign Joint Ventures. Sino-foreign joint ventures also refer to Chinese-foreign equity joint-venture enterprises. They are the enterprises established in China with joint investment from foreign companies, enterprises and other economic organizations or individuals as well as from Chinese companies, enterprises or other economic organizations. All the parties participating in the joint venture jointly offer investment in it, jointly operate it, share the risks of it in accordance with their different proportions of investment, and are jointly held responsible for the profits and losses of it.
2. Sino-Foreign Co-operative Ventures. Sino-foreign co-operative ventures also refer to Chinese-foreign contractual joint ventures. They are the enterprises established in China with investment or conditions for co-operation jointly offered by foreign companies, enterprises, other economic organizations or individuals as well as by Chinese companies, enterprises or other economic organizations. Normally, in establishing a Sino-foreign co-operative enterprise the foreign party will generally provide all or most of the funds while the Chinese party will offer land, workshops, usable equipment, facilities, and sometimes a certain proportion of funds.
3. Foreign Enterprises. Foreign enterprises in China also refer to wholly foreign-owned enterprises. They are the enterprises established in China by foreign companies, enterprises, other economic organizations or individuals in accordance with Chinese law with all the investment solely offered by foreign investors. The corporate form of foreign enterprises in China is generally the limited liability Company.
Establishing foreign-funded enterprises in China generally consists of the following regular steps:
1. Choose projects and co-operation partners as well as relevant official approval. Choosing investment projects, foreign investors can have two options:
(1) to choose investment projects proposed by enterprises or institutions across China and
(2) to propose investment projects by themselves. Under the first option, it is advisable for foreign investors to choose those which have been officially approved, insgroupsthat they may easily get the approval of authorities in applying for the establishment of foreign-funded enterprises in the country. Under the second option, the first step foreign investor will need to check whether the proposal meets the Government's criteria for investment in China. The Government has introduced foreign investment guidelines, which set out the kinds of investment that they want in China. The guidelines clarify which areas are restricted or encouraged. What the foreign investors should pay attention is that if they applying for the establishment of Sino-foreign joint ventures and co-operative ventures, it is the responsibility of the Chinese Cupertino partner to submit the application for the establishment of investment projects to relevant authorities of the Chinese Government for approval. And if applying for the establishment of wholly foreign-owned ventures, foreign investors should get assistance from government authorities at the location they have chosen to establish the project.
2. Submission of Feasibility Study Reports and Relevant Official Approval. Only when the application for the establishment of a Sino-foreign joint ventures and co-operative ventures has been approved can the investors concerned proceed to conduct the study on the feasibility of establishing it. A feasibility study report is generally required to include these 10 items of content: the outline of implementation, the background and history of the project, the capacities of marketing and production, materials and inputs, the location to build the project and the site chosen, the designing of the project, the costs of organization and management of the project, the arrangement for progress of construction, financial and economic assessments, and the foreign exchange equalization and the analysis of risks.
3.The signing of contracts and relevant official approval. After the feasibility study report is officially approved, the foreign investors and their Chinese co-operation partners can proceed to discuss the signing of contracts, charters of association and other legal documents concerning the establishment of the projects. When the contracts and charters of association concerned are approved, competent, authorities of the Chinese Government will issue certificates of approval for the establishment of foreign-funded enterprises. For foreign investors applying for the establishment of wholly foreign-owned ventures, when their initial applications for the establishment of the ventures are approved by competent authorities in written replies, they can proceed to submit formal applications, charters of association and other documents concerned to the authorities for approval. After these formal documents are approved, the authorities will issue certificates of approval for the establishment of foreign-funded enterprises. In an effort to simplify the procedures, the Chinese Government has adopted a stipulation that, for foreign investors and their Chinese co-operation partners applying for the establishment of small-size projects, they can simultaneously submit the applications, the feasibility study reports and the contracts and charters of association together to competent authorities for overall approval.
4.Registration. After the contract and charter of association are officially approved, foreign investors and their Chinese co-operation partners, with the certificate of approval and other document concerned with the establishment of the foreign-funded enterprise, should proceed to apply for the registration to administrative authorities for industry and commerce within a period of 30 days. During the stage of making applications, foreign investors and their Chinese co-operation partners should take two steps for registration:
(1) get the name of the foreign-funded enterprise registered after the application for its establishment is officially approved;
(2) get the establishment of the foreign-funded enterprise registered after the contract and charter of association are officially approved. When the registration is made and checked by competent authorities, the foreign investors and their Chinese co-operation partners concerned will be issued a business license. The date of issuing the business license means the date of the establishment of the foreign-funded enterprise concerned.
For foreign investors reference:
For foreign investors who have no immediate plans to open business ventures in China but wish to open representative offices in the country, they may contact local commissions (in cities or provinces) of MOFTEC (Ministry of Foreign Trade & Economic Co-operation) and go through necessary procedures for opening representative offices locally. For foreign investors wishing to open representative offices in the capital city of Beijing, they may contact the MOFTEC directly. Usually, representative offices are set up by companies who wish to test the market prior to establishing full operations in China. A representative office can conduct business liaison, product introduction, market surveys and research, and technological exchange within the business scope of the enterprise it is representing. It can also act as the liaison and marketing office of a foreign company for imported products. However, a representative office is not a PRC legal person and it is not allowed to engage in direct business activities.