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China: Country and Foreign Investment

Economy and Currency

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 30, 2012, replacing the 2007 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.

Although there are now fewer national-level incentive programs, foreign investors can often negotiate incentives and benefits directly with the relevant provincial authorities, who are in any case deeply involved in the company formation and licensing process. The incentives available still include significant reductions in national and local income taxes, land fees, import and export duties, and priority treatment in obtaining basic infrastructure services.

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%.



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