Doing Business in China

Why Foreign Companies Relocate to China?

Since the outbreak of the COVID-19 pandemic, a public health crisis of unprecedented proportions, China emerged as a more resilient and reliable investment destination than ever before. As businesses and factories reopened and internal movement relaxed following the successful implementation of COVID-19 control measures, China offers the world a way to move forward.

The parallel experiences of China versus much of the rest of the world has put the country at a uniquely advantageous position. Foreign investors who had moved their supply chain out of the country due to the US-China trade tension and China’s rising labor cost are now seriously considering moving back to China.

On top of why foreign investors choose China as an investment destination at the first place, i.e.:

  • Strong economic performance: China was the only major economy that experienced positive growth in 2020 and entered 2021 with a relatively optimistic outlook.
  • Tremendous domestic market: China is the world’s second largest retail market and tout to be the first in the near future with China’s rising purchasing power, expanding middle class, and a population over 1.4 billion.
  • Strong supply chain: China is the only country that possesses all the industrial categories in the United Nations industrial classification, which allows firms to source goods easily.
  • Sophisticated infrastructure: China boasts of the largest network of high-speed rail and expressways in terms of mileage, which allows products to be transported efficiently.
  • Improving business environment: China moved from ranking 78th to 31st on the World Bank’s Ease of Doing Business rankings in the years between 2017 to 2019, as a result a series of business reforms.
  • Continuous market opening to foreign investment: China rolled out two 2020 negative lists for foreign investment, reducing the number of items from 40 to 33 on the national negative list and 37 to 30 on the free trade zone negative list.
  • Workforce and labor: China has the world’s largest labor market, while at the same time holding advantages in expertise and efficiency compared to lower cost emerging markets.
  • Increasing trade and investment agreement framework: China has signed 19 free trade agreements (FTAs) with 26 countries on a bilateral or multilateral basis, with another 10 FTAs under negotiation; China has 107 bilateral investment agreements (BITs) in place, with another 17 under negotiation; China has signed 110 double tax avoidance agreements (DTAs) with countries and regions.

Foreign companies may relocate to China based on the below reasons:

China’s quick recovery from COVID-19

The most straightforward reason behind this is China’s relatively quick recovery from the COVID-19 outbreak. China’s COVID-19 spread was overwhelmingly brought into control in February 2020, around two months after the virus was first recognized. In April 2020, Wuhan – the epicenter of the pandemic – lifted its 2.5 months-long lockdown.

Despite new clusters emerging in cities from east to west, China has shown its capability in the rapid containment and control of the infectious outbreaks.

Most remarkably, it has been able to implement massive test and trace operations wherever the clusters emerged, to expose any asymptomatic cases and expel chances of a wider spread of the virus. In the Qingdao outbreak in 2020, for example, local health authorities tested 10 million inhabitants, discovered the origin of the cluster, and confirmed that there were no community spread risks within five days. Such effectiveness in controlling the spread of the virus provides security and confidence to the people living in China, as well as businesses and foreign investors.

By April 2020, 99 percent of large-scale industrial enterprises and 84 percent of small- and medium- sized enterprises had restored their production nationwide. The rate of personnel returning to work was 94 percent by this time. The general public also gradually returned to their pre-epidemic lifestyle, with 637 million people hitting the road for domestic trips during the National Day Golden Week in early October 2020, 79 percent of the traffic recorded in 2019.

Consequently, China has taken the lead, globally, in achieving an economic rebound, having benefited from the restart of production activity, and reopening of logistic links. In the second quarter of 2020, China’s economy bottomed out and rose by 3.2 percent, making it the only G20 country showing positive growth indicators. In the third quarter, China achieved a 4.9 percent year-on-year growth, in line with market projections. And in Q4 2020, China’s GDP rose by 6.5 percent year-on-year from October to December 2020, returning the economy to its pre-pandemic levels.

As compared to the estimated 3.5 percent contraction of global economy, China’s GDP grow by 2.3 percent in 2020, reaching RMB 10159.86 trillion (US$1571.73 trillion). In January 2021, the IMF forecast that China’s GDP would grow 8.1 percent in 2021.

China’s resilient supply chain and export capacity

China is the only country that possesses all the industrial categories in the United Nations industrial classification, which allows firms to source goods easily. China also boasts of the largest network of high-speed rail and expressways in terms of mileage, which allows products to be transported efficiently.

The supply chain and infrastructure advantage has become one of the most important drivers for foreign companies relocate to China, when global supply chains were seriously disrupted due to the aggressive implementation of infection control measures.

From the production and supply of masks, protective suits, and medical equipment in the early stage of the outbreak, to consumer electronics, household goods, and festival products during later months, China’s exports have made up for overseas shortages in all kinds of goods segments.

Accordingly, global businesses may consider applying a dual-track supply chain strategy to alleviate supply chain risks even in the future after-pandemic scenarios. That is to say, beyond the global supply chain the business relies in normal times, they may relocate some core operations to China to avoid being caught in the future supply chain shocks.

China’s incentives provided to certain sectors

China has been providing incentives to foreign investment in certain sectors, in a bid to upgrade the country’s industrial structure. Foreign investors may relocate to China to take advantage of the opportunities and stimulus policies provided in such sectors.

For example, as China transitions from being a low-tech producer to a high-tech manufacturing hub, value-added manufacturing segments are set to be among those that benefit the most from the government’s preferential policies. Consequently, China is doubling down on its efforts to boost domestic high-tech manufacturing industries, among which the integrated circuit (IC) and software industries are especially emphasized. Beijing views the technology sector as a strategic one and government support is expected to increase in the years to come.

In 2020, China further upgraded its supporting policies for the IC and software sector, which cover tax breaks, favorable financing, IP protection, and support for R&D, import and export, and talent development etc. In terms of tax concessions, IC producing enterprises will enjoy the most substantial corporate tax preferential policies, while IC design, equipment, materials, packaging, testing enterprises and well as software enterprises will also benefit from tax exemptions and cuts.

Considering the ambitious goal set by Chinese leaders – to produce 70 percent of all semiconductors used by China by 2025 (the percentage is only about 15 percent currently) – the IC and software sector remains appealing for foreign investors with China as the world’s largest market for semiconductor equipment. What is also noteworthy is that Chinese companies are encouraged to cooperate with overseas research institutes and foreign companies are welcome to build R&D centers in China.

Other encouraged sectors for foreign investment could be found in the Catalogue of Industries for Encouraging Foreign Investment, the most recent was released by the National Development and Reform Commission (NDRC) and the Ministry of Commerce (MOFCOM) on December 28, 2020.

The catalogue includes two sub-catalogues – one covers the entire country (“national catalogue”) and a second document covers the central, western, and northeastern regions (“regional catalogue”). Together, the 2020 FI encouraged catalogue identifies industries where foreign direct investment (FDI) will be welcome and treated with favorable policies in China. (You can check out the full catalogue in Chinese here, the full national catalogue in English here, and the full regional catalogue in English here).

So far, the following favorable treatment is in place for foreign invested enterprises (FIEs) engaged in doing business in the listed industries published in the encouraged catalogue:

  • Tariff exemptions on imported equipment – for encouraged foreign-invested projects, the import of self-use equipment within the total amount of investment can be exempted from customs duties;
  • Access to preferential land prices and looser regulation of land uses – land can be preferentially supplied for encouraged foreign-funded projects with intensive land use. The land transfer reserve price can be determined at 70 percent of the national minimum price for the transfer of industrial land, which yet shall be no less than that of the local land; and
  • Lowered corporate income tax (CIT) – for FIEs in encouraged industries in the central, western, and northeastern regions that meet the requirements, the CIT rate can be reduced to 15 percent.

There could be other bonuses for foreign investment engaged in the encouraged sectors, such as more flexibility in hiring talents, shorter turnaround in dealing with government administration, lower threshold in financing, etc.

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