China: Country and Culture

ASIA/PACIFIC HOME PAGE | VIEW A DIFFERENT TAX JURISDICTION

On this Page:

- China: Country Overview
- China: Characteristics of the Economy
- China: Business Culture, 'Guangxi'
- China: Employing People
- China: Living there as a Foreigner

China: Country Overview

Although China is of course the most populous nation in the world, with a population estimated at 1.33 bn in mid-2010, it is surprisingly only the fourth largest country, being slightly smaller than the USA.

Unlike the USA, and the other two countries which are larger, Canada and Russia, China has a long history of advanced civilization; it was not until the Industrial Revolution in Western Europe in the eighteenth century that China was overtaken in terms of technology and culture. Indeed, partly because of intrusion by 'the West', and contamination by foreign ideas, China spent the years from 1750 to 1945 suffering from a series of civil wars, occupations and famines. The communists under Mao Zedong then took control, with appalling consequences for ordinary people, although in China, as in Russia, the period after the second world war saw the establishment of a technology-based 'modern' country with adequate infrastructure. The People's Republic of China was established in 1949, replacing the Republic of China, which is preserved only on the island of Taiwan (capital, Taipei), although China has never accepted the validity of that entity.

Deng Xiaoping, who took over from Mao in 1978, supervized a gradual thaw equivalent to perestroika in the USSR, although unlike Russia, China has yet to convert its highly restrictive political system to a Western, democratic model. Within the confines of a one-party state, individuals have a reasonable degree of economic freedom, and China's acceptance of market mechanisms has underpinned its startling economic and technological advances in the last twenty years. The current President of China is Hu Jintao.

Although China is three times more densely populated than the USA, except in certain regions it could not yet be said to be over-populated. Due to the 'one child only' system, however, the population is only growing by 0.5% a year, a comparatively low figure. India may overtake it in the foreseeable future, with Brazil and Indonesia also likely to grow to a significant fraction of China's size during the next twenty years, not to mention the USA itself. In economic terms, however, China is likely to become and remain for some years the world's largest economic power. In 2009 China's GDP was USD8.9 trillion at purchasing power parity, ranking fourth in the world, and about two-thirds of the US figure (if nominal GDP figures are used, China is much further behind). But China is growing at 10% a year, while moribund Western nations are stuck in the 1-3% range, and China is expected to overtake the US, at least in PPP terms, within ten years and perhaps sooner. Of course, in GDP per capita terms, the picture is much less rosy for China, with a 2009 level of USD6,600, between five and ten times lower than in the US. On the other hand, the low wage rates (and other costs) implied by this figure are a positive advantage for China, which has an enormous competitive advantage over most developed countries.

China's competitive advantage over the West is accentuated by what US and other politicians and economists say is a secular undervaluation of China's currency, the yuan or renminbi. It is this that accounts for the difference between 'nominal' and 'PPP' GDP figures. China disagrees, but is very gradually allowing the renminbi to trade up. The currency remains non-convertible in most respects, although a number of capital market instruments, particularly in Hong Kong, are chipping away at the lock-down. It can be expected that the renminbi will become convertible within five years, and the difference between nominal and PPP valuations will probably unwind over the same period.

Source: The CIA World Facbook

Back to top

China: Characteristics of the Economy

China is such a large country, with such enormous regional variations, that any kind of generalization about the economy is dangerous and can be misleading. In particular, the provinces and larger cities retain much independence of action, and economic regimes vary considerably, particularly as regards foreign investment.

China's railway, highway, civil aviation and telecommunications sectors have been growing rapidly, and its urban and rural transport conditions have become convenient. Coastal areas have built or expanded large numbers of ports, wharves and berths, and enjoy excellent conditions for ocean-going transportation. Advanced modern telecommunications technology and equipment have found extensive use in China's telecommunications and telephone networks. Electricity supply to foreign-funded enterprises can be guaranteed. In many cities, facilities for foreigners' living, cultural entertainment and commercial services are complete.

Major cities such as Beijing, Shanghai, and Shenzhen have created modern infrastructure in the shape of roads, airports and railways, but have also established investor-friendly facilities such as schools, hospitals and commercial real-estate. Smaller cities, sometimes termed 2nd-tier, present an inconsistent picture, and for an incoming investor it's important distinguish between those which have risen to the challenge and those which are more backward, or at least less foreigner-friendly. Chongqing, Dalian, Hangzhou, Nanking and Suzhou would feature on the first list.

The Chinese authorities have also established special preferences for projects involving high-tech and export-oriented investments, although since joining the World Trade Organization in 2005 and unifying the taxation system between foreign and domestic companies, incentives have been throttled back. Priority sectors include transportation, communications, energy, metallurgy, construction materials, machinery, chemicals, pharmaceuticals, medical equipment, environmental protection and electronics.

Hong Kong is the largest “foreign” investor in Mainland China, but with China’s WTO entry making the operating environment more transparent and predictable, firms increasingly are investing directly in the Mainland. As part of this trend, Shanghai is emerging as a major alternative to Hong Kong as a regional headquarters for foreign investors in China, although China’s limitations on currency convertibility continue to present problems for many investors, regardless of investment form, destination within China or origin.

China attempts to guide new foreign investment towards "encouraged" industries and regions. Over the past seven years, China has implemented new policies introducing incentives for investments in high-tech industries and in the central and western parts of the country in order to stimulate development in those less developed areas. A Catalogue of Foreign Investment took effect January 5, 2005, replacing the April 2002 Catalogue. The catalogue designates sectors in which foreign investment are encouraged, restricted or prohibited. Unlisted sectors are permitted.

According to an accompanying regulation to the catalogue, projects in “encouraged” sectors benefit from duty-free import of capital equipment and value-added tax rebates on inputs. The same regulation states that approval authority for “restricted” investments rests with the relevant central government ministry and may not be delegated to the local level. For a number of restricted industries, a Chinese controlling or majority stake is required. Industries in which foreign investment is prohibited include national defense, firearms manufacturing, most media content sectors, and biotechnology seed production.

The Special Economic Zones of Shenzhen, Shantou, Zhuhai, Xiamen and Hainan, 14 coastal cities, dozens of development zones and designated inland cities all promote investment with unique packages of tax incentives. The Pudong area in Shanghai is particularly noteworthy as a location for Chinese experiments in liberalization, which are then extended nationwide. In recent years, Chinese authorities have also established a number of free ports and bonded zones.

Various types of tax abatement have been available to foreign investment enterprises and foreign enterprises with establishments in China located in Special Economic Zones (SEZs), which are Shenzhen (including Shekou), Zhuhai, Shantou in Guangdong Province, Xiamen in Fujian Province and Hainan Province. Newly-established entities in such zones are usually free of tax for the first few years; and a reduced rate of 15% applies to foreign investment enterprises engaged in production or manufacturing activities located within the Pudong Development Zone in Shanghai and within the Economic and Technology Development Zones of the 14 Open Cities, which are Beihai, Dalian, Fuzhou, Guangzhou, Lianyungang, Nantong, Ningbo, Qingdao, Qinhuangdao, Shanghai, Tianjin, Wenzhou, Yantai and Zhanjiang.

Foreign investment enterprises engaged in production and manufacturing activities located within the Coastal Open Economic Regions (Liaodong Peninsula, Shandong Peninsula, Changjiang and Pearl River Deltas, and Southern Fujian, including Zhangzhou and Quanzhou Delta Areas) and within the 14 Open Cities, Provincial Capitals and Changjiang Cities are taxed at a reduced rate of 24%.

Back to top

China: Business Culture, 'Guangxi'

As is the case in many non-Western cultures, the rule of law, which forms the bedrock of Western, and particularly Anglo-Saxon business relationships, is less than well-rooted in China, and this has been exacerbated, or even perhaps caused, by the authoritarian role of the State, which holds itself as being above the law, whatever the Constitution says, and certainly behaves that way.

Another consequence of the recent history of the Chinese is the dominance of 'the collective' in business situations. Collectives still exist as such, particularly in rural areas, but the mind-set imbued by the Chinese educational system runs deep, even when an apparently 'modern', hi-technology business is being run. Of course, if you are dealing with a western-educated Chinese, things may, but only may, be different.

A successful negotiation, and a successful business relationship, is therefore dependent on recognizing that a contract, while necessary and important, is only one aspect of the cultural nexus in which a foreign investor is operating. It may be difficult, also, to locate responsibility and decision-making power among the group of Chinese with whom you are negotiating or dealing.

Central to Chinese inter-personal culture is the concept of 'face'. In the collective, position is dependent on reputation, and nothing is more deadly to the self-esteem of a member than loss of face. A foreigner who is seen as the agent of such loss of face has committed a serious and possibly fatal error of negotiation.

While it may be difficult at first to understand the relative positions of individuals in the group with which you are negotiating or dealing, there are some pointers. It is highly probable that the members of a team will enter a room in the order of their relative importance, especially in the presence of a foreigner; and junior members of the team will constantly defer to their seniors in conversation and in bodily behaviour.

Due to the importance attached to 'face', business cards have much greater importance in China than in the West, where they have rather taken a back seat, and relative position among a group of Chinese will be reflected in the order in which they present their business cards, as well as on the cards themselves, if you can understand them! When presenting your business card, you should offer it with both hands; likewise, you should take a business card with both hands, study it carefully, and place it respectfully in a pocket or on the table in front of you.

Chinese names consist of a family name followed by 'first' or personal names. Thus Hu Jintao is Mr Hu. First names are only used by family members or close friends. In business, when a person has a title or position, it is customary to adress them with it, thus Chairman Hu. Married women normally retain their maiden names except in very formal situations.

It is normal to shake hands when meeting someone, but a nod or slight bow is also often appropriate, particularly for someone you already know. A handshake should not be very forceful; and it may last quite a number of seconds. It is rude to look straight into the eyes of a Chinese person; more proper would be a quick glance, and then lower the eyes as a sign of respect.

Guangxi

Apart from being a scenic region of southern China, the word means 'relationship', but it has deep resonance when it comes to getting things done. In China, more than most places, it's not what you know, but who you know. And how you know them. In order to succeed, a foreign investor or business partner will need to have close and appropriate relationships, not just with the government body and officials involved in the company formation and licensing process, but also with Chinese staff, suppliers, the tax office and other municipal authorities. Whereas in the West, business relationships can be conducted (if necessary) on a purely contractual basis ('you do your job and I'll do mine'), this will quite possibly be a counter-productive strategy in China. Mutual respect based on familiarity established over a long period is going to be the most successful basis for a harmonious business relationship.

Back to top

China: Employing People

China has a huge population, abundant labour resources and a relatively low level of wages. The Chinese work force is of a relatively high quality. Generally speaking, overseas-funded enterprises set up in China are satisfied with the quality of Chinese workers and technicians.

Representative Offices can employ foreign staff, who will require employment visas and residence permits. They will be subject to tax on China-source income (unless they are in the country for less than 90 days a year, or 183 days if a tax treaty applies), and after five years will be taxed on their world-wide income.

Local staff can also be employed, but not directly. They have to be provided by a 'labour service organization' licensed by the Ministry of Labour and Social Security. The RO is responsible however for paying taxes due in respect of Chinese employees.

'Wholly Foreign Owned Enterprises' (WFOE) and 'Foreign Invested Commercial Enterprises' (FICE) on the other hand can employ Chinese staff directly if they choose to. Individual labour contracts are required and must be submitted for approval to the local labour bureau.

The contract, which needless to say must be in Chinese, must include at least a minimum seven clauses as prescribed by Article 19 of the Labour Act, and must follow a format prescribed by the local labour administration. The contract must be signed within one month of the commencement of employment; an employer who does not sign such a contract within one month is liable to pay double wages to the employee concerned. Legal employment begins on the day that work begins, not on the day a contract is signed.

PRC labour law permits the termination of a direct employment on 30 days' notice, but if there is no demonstrable cause, there is a definite possibility of legal action. For this reason it may be better in some circumstances to recruit Chinese workers through an official 'labour service' office since there is no direct legal relationship with the employees.

Management of a Chinese work-force needs to take account of conflicts that may exist between the ethos and culture of Western companies and the collective, communist-inspired mind-set of staff members. This is not to say that Western managers must adopt communist principles, but just to show that a long, careful process of education and training will be required during which staff can come to learn the principles of free markets and the rule of law, while some acceptance of collective principles and some dilution of the highly individualistic attitudes of Western managers may be advisable if staff morale is not to be damaged.

Back to top

China: Living there as a Foreigner

Visas

Almost invariably, visas must be obtained before arriving in the country; they can be for single entry or multiple entry. The most common types of visa are as follows:

• F Visa: for short-term business visits (but in practice this type of visa has been used by many longer-stay residents due to the ease of issue and relatively laid-back attitude of the authorities, at least until the Beijing Olympics led to some tightening-up);
• L Visa: for short-term personal visits;
• X Visa: for students with courses longer then six months;
• Z Visa: for people taking up employment, and their family members;
• D Visa: for long-term foreign residents.

Culture Shock

Although there are concentrations of foreigners in some major cities, notably of course Beijing and Shanghai, which has 300,000 expats, where you can expect to find a parallel 'Western' life-style and facilities, in most parts of China that is not the case. Few people will speak English, you will have no choice but to adopt Chinese eating and cooking habits, and you won't get very far without at least an elementary knowledge of Chinese. Of course, if you are employed at a facility operated by a Western company, even in a remote region, you may well find a nucleus of other foreigners and Westernized facilities which may dull the shock of a transition to China. Some people, however, may prefer to take on the change in a full frontal way!

'Face' was mentioned above, and it is the key to understanding how to behave socially in China. In countless ways, it is necessary to be sensitive to the nuances of social and family position, in terms of conducting a conversation, your bodily behaviour, and in such matters as paying for things. Chinese people are not rich, with rare exceptions (more and more of these, of course), and Chinese salaries are still so low by Westerrn standards that it may seem impossible for people to live on them. But they manage, and by some miracle will turn themselves out impeccably for social occasions. Don't be fooled: unless you are sure of the financial position of the people you are with, you should assume that you are the richest person present, and therefore expected to pay the bill, although other members of the party may make a show of offering to pay. Females, by the way, never, ever pay in China, unless they are in a hen party.

Accommodation

It is likely that your employer will assist you to find an apartment, something that you will find extremely difficult if you are on your own, except perhaps in Beijing, Shanghai, and Guangzhou, where there are agencies serving the expat market. Of course, expat salaries are such that in most parts of China you can expect to be able to afford upper-level accommodation.

In Beijing many expats choose to live in one of a number of newly-built high-rise apartment blocks, some with pools and exercise facilities. There is no formal separation between the Chinese and foreign communities, but naturally they tend to cluster. The most popular district is Chaoyang, which has a metro and is home to many of the larger international firms.

Villas in gated communities in Shunyi, near the airport, are a popular choice for families with children, partly because there are two prominent international schools there, although the commute is a up to an hour at peak times.

Education

There are international schools in many parts of China, and they often teach the International Baccalaureate.

Cities with international schools include:

Beijing, Cashan Dongguan, Chaoyang District, Chengdu, Guangzhou, Utahloy, Nanjing, Ningbo, Quingdao, Shanghai, Suzhou, Tianjin and Xian. The cost of attendance at such schools can however be as high as USD25,000 a year.

Back to top