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China: Country and Foreign Investment

Economy and Currency

This page was last updated on 1 July 2019.

China's railway, highway, civil aviation, telecommunications and transport sectors have been completely transformed in recent decades. Ports have been built or expanded, electricity supply guaranteed and, in many cities, facilities for foreigners are complete.

Smaller cities 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, Nanjing and Suzhou would feature on the first list.

The Chinese authorities have developed projects involving high-tech and export-orientated investment, though since joining the World Trade Organization in 2005 and unifying the taxation system between foreign and domestic companies, incentives have been cut back. Priority sectors include transport, communications, energy, metallurgy, construction materials, machinery, chemicals, pharmaceuticals, medical equipment, environmental protection and electronics.

Hong Kong is the largest ‘foreign’ investor in Mainland China. However, China’s entry into the WTO made working in the mainland more transparent and predictable and firms are increasingly 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.

The government attempts to guide new foreign investment towards ‘encouraged’ industries and regions. Over the past seven years, China has implemented new incentives for investments in high-tech industries and in the less advanced central and western parts of the country to stimulate development. A catalogue of foreign investment took effect on 30 January 2012, designating sectors in which foreign investment are encouraged, restricted or prohibited.

According to a regulation accompanying 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 defence, firearms manufacturing, most media content sectors, and biotechnology seed production.

Although there are now fewer national-level incentive programmes, 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 packages of tax incentives. The Pudong area in Shanghai is particularly noteworthy as a location for Chinese experiments in economic liberalisation, 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 investors and enterprises established in special economic zones (SEZs), namely 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. 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, namely Beihai, Dalian, Fuzhou, Guangzhou, Lianyungang, Nantong, Ningbo, Qingdao, Qinhuangdao, Shanghai, Tianjin, Wenzhou, Yantai and Zhanjiang.

A reduced tax rate of 24% applies to foreign investment companies engaged in production and manufacturing activities within the coastal open economic regions, namely Liaodong peninsula, Shandong peninsula, the Changjiang (Yangtze) and Pearl River deltas; southern Fujian, including Zhangzhou and Quanzhou delta areas and within the 14 open cities, provincial capitals and Changjiang (Yangtze) cities.

 

 

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