The Dragon Beckons
In late 1978, China initiated an open-door policy to modernise its economy by encouraging foreign investment and trade. Since then, China has been an attractive INVESTMENT destination

China’s economy has been one of the fastest growing in the world since the initiation of economic reforms in the late 1970s. The national gross domestic product (GDP) increased at an average rate of 9.8 per cent per year from 1977 to 2007. Although down from its 2007 peak of 13 per cent, the GDP growth rate for 2008 was still a robust nine per cent in spite of the global economic downturn, which started to intensify in the second half of 2008.

While state-owned enterprises (SOEs) dominated the economy 30 years ago, private domestic enterprises and foreign-invested enterprises (FIEs) now play important roles in the economic development of the country. The three industries with the highest concentration of direct foreign investment are manufacturing (57 per cent), real estate (12 per cent) and financial services (10 per cent).

Investment climate
In late 1978, China initiated an open-door policy to modernise its economy by encouraging foreign investment and trade. Since then, China has been an attractive destination for foreign investors. The main reasons that foreign investors favour China are:

Low labour cost
A huge market with 1.3 billion people
WTO accession

Investment incentives
China welcomes foreign investment and is committed to improving the investment environment in multiple ways, such as establishing a sound legal system, protecting intellectual properties and further opening up its industries to foreign investors. To guide foreign investment, the Chinese government announced a list of projects that encourage foreign investments and entrepreneurs, which primarily includes:

• Projects related to new agricultural technology, construction and operation of energy sources and transportation

• Projects using new or advanced technology

• Projects that meet international market demand

• Projects that involve the integrated use of China’s resources and involve new technology for preventing environmental degradation

• Projects that develop the economies of central and western regions

The above listed projects are eligible for preferential treatment. In general, apart from the duty-free import of capital equipment for the importer’s own use, companies engaged in the encouraged projects mentioned above may apply for certain tax incentives. This includes a reduced tax rate of 15 per cent for qualified high and new technology companies; a 50 per cent super-deduction for qualified research and development expenses; and tax holidays for specified infrastructure, resource-saving and environmentally friendly projects.
Forms of business enterprises

Domestic enterprises
Business may exist in different forms. Among these, state-owned enterprises, privately owned enterprises, limited liability enterprises and companies limited by shares are the most common in China.

State-owned enterprises (SOEs)

SOEs primarily occupy areas of the economy that the government deems critical, including post and communications, transportation, pharmaceuticals and energy industries.

Foreign-invested enterprises (FIEs)
FIEs may take one of the following four forms: equity joint ventures, cooperative joint ventures, wholly foreign-owned enterprises and foreign-invested joint stock companies. Non-legal entities such as representative offices (ROs), branches and partnerships are possible depending on the industry and mode of operations.

Wholly foreign-owned enterprises (WFOEs)
A WFOE is a limited liability company (LLC) in which one or more foreign investors hold the entire equity interest of the enterprise. The minimum capital requirement for an LLC is CNY 30,000. A WFOE is the preferred vehicle for foreign investors if there is no compelling business reason for having a Chinese partner.

Equity joint ventures (EJVs)
An EJV must be formed as a limited liability company with one or more Chinese investors. The parties to an EJV share profits in proportion to their respective equity contributions. By law, the foreign party or parties must contribute at least 25 per cent of the total registered capital.

Foreign-invested joint stock companies (JSCs)
Un­like an EJV, a CJV or a WFOE cannot issue shares but rather determines shareholders’ ownership by their respective equity interest, the capital of a JSC is divided into shares. Therefore, the JSC is the only type of foreign-invested enterprise that is potentially eligible for public listing. The minimum amount of registered capital is CNY5mn.
Tax implications

Corporate income tax
The New PRC Enterprise Income Tax (EIT) Law, effective January 1, 2008, unified the income tax treatment of domestic and foreign enterprises. The new statutory income tax rate of 25 per cent applies to all corporations and branches regardless of their ownership. The new EIT law also provides incentives targeted at enterprises in certain industries. The tax incentives range from reductions in taxable income, bonuses and accelerated tax deductions, to tax exemptions for designated industries such as energy, resource saving, farming, infrastructure and venture capital. Qualified high and new technology enterprises (HNTEs) are eligible for a preferential tax rate of 15 per cent.

Foreign tax relief
Generally, a PRC resident company, which is organised under the laws of the PRC or one that has its effective management located in China, is subject to PRC tax on its worldwide income. However, a foreign tax credit is allowed up to an amount of PRC income tax payable on such income. A country-by-country limitation applies. Excess foreign tax credits may be carried forward for five years. China has concluded double taxation agreements (DTAs) with most countries in Europe and Asia-Pacific as well as Canada and the United States. China and Oman concluded a DTA in 2002.

Labour availability
The Chinese labour market has undergone a transformation as the country’s economy moves away from labour-intensive toward technology-intensive operations. As the market matures, higher standards are being used in recruiting, and skilled and well-educated people are preferred to unskilled ones. The urban unemployment rate is 4.2 per cent at this point in the economic downturn. There is an abundant supply of skilled labour in major cities such as Beijing, Shanghai and Guangzhou, but additional incentives might be required to attract skilled labour to relocate to less developed cities and regions.

Major trading partners
China is a significant exporter of high-tech products, electrical equipment and electronics as well as textiles, fabrics and related products. After becoming a member of the WTO, China agreed to eliminate non-tariff trade bar­riers, reduce duty rates to levels similar to those in other Most Favoured Na­tions (MFN) and gradually open the Chinese market to foreign competition.

Conclusion
With a population of more than 1.3 billion people, China provides a vast market for consumer goods and services. Low labour costs and a
constantly improving investment environment have made China a very promising and attractive market to foreign investors.

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