The People’s Republic of China (PRC) is situated in eastern Asia and is bounded by the Pacific to the east. It is the third largest country in the world and has a population of 1.37 billion, which means one out of every five individuals in the world is Chinese.
The legal system is a complex amalgam of custom and statute, with a largely criminal law. A rudimentary civil code has been in effect since 1 January 1987 and new legal codes in effect since 1 January 1980. Continuing efforts are being made to improve civil, administrative, criminal and commercial law.
The Chinese economy has sustained high-speed growth since its opening-up and reform, and China has become the third largest trading nation and the fourth largest economic entity in the world.
The national economy kept stable and comparatively fast growth in 2015. The gross domestic product (GDP) of the year was 10,425.81 billion USD, up by 6.9 percent over the previous year (according to statistics released by China’s National Bureau of Statistics in February 2016) the lowest rate since 1999.
China has pledged to transform its economic growth model to be less driven by exports and investment and more by domestic consumption and moving up the supply chain.
A slowdown is to be expected during the process. The slower economic growth is generally welcomed as it will ensure steadier growth of the Chinese economy in the future.
Government stimulus measures introduced since early 2012 have helped reverse the slowdown and stabilise growth. In May 2012, the government shifted its top priority from taming inflation to stabilising growth. It has moderately eased its grip over lending, approved massive construction projects and stepped up tax reductions to buoy theeconomy. As a result, Chinese gross domestic product (GDP) reached CNY 67,670.8 billion in 2015, compared to 6.9% in 2014), ensuring China remained one of the major countries contributing to world economy growth.
In 2015, the world financial crisis entered its eighth year. The basis of the world economic recovery is still fragile with persistent downward pressure on domestic economies. In such a complex international environment, China adheres to scientific development and accelerating the transformation of economic development, while maintaining stability and the strengthening and improving of macro-control to ensure firm growth and to stabilise the operation of the national economy.
SETTING UP A BUSINESS
China has set up various special zones to serve as ‘windows and bases’ in the fields of opening-up, capital attraction, export enlargement, hi-tech development and regionaleconomy promotion.
These zones have been highly successful and become attractive places for foreign investment and the main centres for export.
There are seven special economic zones (SEZs), 145 High-Tech Industrial Development zones and 43 bonded areas and 16 Border Economic Cooperation zones most of which are located in economic and technological development zones.
TOP INVESTMENT REGIONS
Beijing, the capital of China, is the centre of the nation’s politics, culture and international exchanges and a modern metropolis full of vitality. The beauty of the city has for hundreds of years attracted visitors to this ancient capital. Beijing has a fully integrated industrial structure. High-tech and modern manufacturing industries have become the leading forces of its industrial growth.
By 2015, the city of Beijing expanded and approved 1,068, an increase of 10.2%, foreignenterprises in six major investment areas, with 9.55 billion USD, an increase 62.5%, the actual utilization of foreign capital, which accounted for 73.5% of the city’s total foreign investment.
The Zhongguancun Science Park attracts domestic and foreign investors setting up hightech enterprises and research and development (R&D) centres, as well as ‘incubator’ and intermediary institutions.
The Beijing Economic-Technological Development Area has created an industrial structure characterised by pharmaceutical, IT, optical, mechanical and electronic integration and new-type materials industries. The Beijing Tianzhu Export Processing Area is home to many electronic communication, warehousing and free trade activities, as well as aviation- related industries.
The Central Business District (CBD) functions mainly as a site for the headquarters of domestic and foreign-invested companies, financial institutions and intermediary institutions.
The Financial Street in the Xicheng District has become the most influential area of China’s financial sector, controlling 90% of the country’s credit funds.
Lying in the middle of China’s north-south coastline, on the western bank of the Pacific Ocean, Shanghai is a fabled city with glorious historical and cultural heritages. It is the largest city in China and is now becoming an international centre of economy, finance, trade and shipping. So far, 103 countries and regions have invested in Shanghai.
Businesses in Shanghai mainly focus on IT, finance, trade and commerce, motors, real estate and equipment activities. The city has also cultivated new industries such as biopharmaceuticals, modern logistics, new materials and environmental protection, while simultaneously developing fine steels, petrochemicals and fine petrochemicals.
Different development zones in Shanghai boast different features and preferential policies.
The Pudong New Area is the biggest development zone in Shanghai. Financial and trade development zones include Lujiazui Financial and Trade Zone and Hongqiao
Economic and Technological Development Zone. Export processing zones include Songjiang and Jinqiao Export Processing Zones. The main industrial zones in the suburban areas have attracted numerous global investments.
Shanghai Pilot Free Trade Zone (PFTZ) is the country’s biggest free trade zone. It incorporates various functions including free trade, export processing, logistics warehousing and the displaying of bonded commodities. The PFTZ covers Shanghai Waigaoqiao Free Trade Zone, Waigaoqiao Bonded Logistics Park, Yangshan Bonded Port and Shanghai Pudong Airport Comprehensive Free Trade Zone, Jinqiao Export Processing Zone, Zhangjiang Hi-Tech Park, and Lujiazui Finance and Trade Zone sevenregions.
Located in the southernmost part of China’s mainland, Guangdong is adjacent to Hong Kong and Macao with the South China Sea lying to the south. Guangdong Province is one of fastest-growing economic development regions in China. It has the most advanced foreign economic cooperation and trade, the most dynamic markets and it attracts the most investment.
It has made substantial progress with HK-mainland trade under the Closer Economic Partnership Arrangement (CEPA). As China’s leading province for foreign trade, Guangdong has made important contributions to the economy. According to statistics, in 2015 the city’s GDP 278.87 billion USD, an increase of 8.4% last year.
Guangdong Pilot Free Trade Zone (GFTA) officially opened on April 21, 2015. In 2015, newly established foreign-invested enterprises in Guangdong increased 15.7%. The actual utilization of foreign capital grew 42.7%, more than 21.7 billion in US dollars.
Guangdong has established trade relations with more than 200 countries and regions. More than 100 countries and regions have made their investment in the province. The top 500 multinationals have set up 236 enterprises in Guangdong. More than 20,000 foreignowned enterprises have been approved to settle in Guangdong.
Nineteen countries have set up their consulates-general in Guangzhou. And in spring and autumn every year, the Chinese Export Commodities Fair is held in Guangzhou; likewise, the China Hi-Tech Fair is held in Shenzhen every year.
Guangdong Province has three unique economic zones (SEZ) – the Shenzhen SEZ, Zhuhai SEZ and Shantou SEZ. It also has 6 development zones of national status. There are Zhanjiang Economic and Technological Development Zone, Guangzhou Economic and Technological Development Zone, Nansha Economic and Technological Development Zone, Huizhou Daya Bay Economic and Technological Development Zone, Zengcheng Economic and Technological Development Zone and Zhuhai Special Economic and Technological Development Zone.
The possible legal business structures in China are:
- Wholly foreign-owned enterprises (WFOE)
- Sino-overseas equity joint ventures (EJV)
- Sino-overseas cooperative/contractual joint ventures (CJV)
- Foreign-invested companies limited by shares (FICLS)
- Overseas invested financial institutions
- Representative offices (RO).
Other structural forms are:
- Build-operate-transfer (BOT)
- Compensatory trade enterprises
- Contracted projects
- Domestic investment by foreign investment enterprise(s)
- Financial leasing
- Free trade zone trading companies
- Mergers and acquisitions
- Offshore holding companies
- Portfolio investments
- Processing and assembling enterprises (also called contract manufacturing)
- Sales and purchase of goods
- Technology licensing.
In practice, the above business entities are divided into two groups – Foreign Investment Enterprises (FIE) and Foreign Enterprises. An FIE is a People’s Republic of China legal entity or unincorporated joint venture in which one or more foreign investors owns an interest of 25% or more. FIEs include Wholly Foreign-Owned Enterprises (WFOE), Sino- Overseas Equity Joint Ventures (EJV), cooperative/contractual joint ventures (CJV), and Foreign Invested Companies Limited by Shares (FICLS).
A foreign enterprise (FE) is a company or other business organisation formed under the law of a country other than China. For example, a Hong Kong company with a
representative office in China is an FE, as is a US company which has no People’s Republic of China (PRC) presence but derives PRC-sourced income from licences granted to Chinese licensees.
The procedures to establish an FIE are as follows:
1) Early-stage preparation (preliminary project proposal) – to select investment projects,investigate marketing, etc.
− For EJVs and CJVs, co-operative partners will also need to be selected and a nonbinding memorandum of understanding or letter of intent signed. Chinese partners will submit a project proposal to the relevant department along with a preliminary feasibility study report
2) Application for approval Certificate – all project proposals, feasibility study reports and articles of association have to be approved by state authorities or local authorities (e.g. the Foreign Economic Trade and Relation Commission, Ministry of Commerce) according to the project’s nature, industry and investment volume. Usually the authorities should reply (issue an approval letter and a formal approval certificate) to foreign investors or local partners within 30–90 days of receiving all necessary documentation
3) Obtaining a licence – an FIE must bring the articles of association, contract and approvaldocuments to the State Administration for Industry and Commerce, or local AIC, for business registration purposes and to obtain a business licence
4) Other procedures – these include tax registration, foreign exchange control registration, opening a bank account, registration with the statistics bureau, custom registration, fiscal registration, land use approval and capital verification, etc.
Beginning in the early 1980s, China made extensive reforms to its tax system to accommodate and reflect its needs during the transition from a central planning economy to a market-based economy.
China uses its tax system to achieve multiple goals. In addition to generating revenue, the tax system helps to regulate economic activity by a set of preferences and incentives on the types and location of business investments and activities, such as tax holidays for manufacturing companies with foreign investors and the encouragement of export trade by allowing refunds of value added tax (VAT) when goods are exported outside China.
The tax system will continue to evolve while China is on its path to becoming one of the world’s largest economies. Possible tax reform on the horizon may include equalising the treatment of domestic and foreign enterprises. Another reform may be changing the VAT system from a production-based to a consumption-based system.