Despite the ongoing COVID-19 pandemic and the geopolitical tensions, China proved itself to be an attractive and reliable investment destination. According to official data released by China’s National Statistic Bureau, foreign direct investment (FDI) into China rose by 14.9 percent year-on-year to RMB 1.149 trillion (US$173.48billion) in 2021, with 47,643 foreign-invested enterprises (FIE) having newly established. To understand China’s appeal, beyond the swift measures taken to contain the economic fallout of COVID-19, China has other accumulated advantages to back up its outstanding position in the global market and maintain investor confidence, including its huge market growth potential, its skilled labor pool, its unparalleled infrastructure, and its ever-improving capabilities as a manufacturing base for industries of the future. Investing in China is not always easy, but there is no other country that can replace it.
Why choose China for your business?
China’s growth potential
Although China’s economic growth rate is slowing after years of breakneck expansion, the size of its economy dwarfs almost all others, be they developed or developing. Simply put, foreign companies cannot afford to ignore the world’s second largest economy.
In 2021, China’s GDP grew by 8.1 percent to reach RMB 114.4 trillion (US$17.7 trillion). With this growth, China’s economy surpassed that of the entire 27-country European Union, which stood at US$15.73 trillion.
Already the world’s second largest national economy, China’s economy is not done growing either. With a population of 1.4 billion, China’s GDP per capita was US$12,551 in 2021, about six times lower than that of the US. While China is not guaranteed to eventually achieve GDP per capita on par with the US, the gap shows that there is still significant room for economic activity and household wealth to continue to grow before leveling off at a saturation point.
The British Consultancy Centre for Economics and Business Research (CEBR) projects China’s economy to continue growing at 5.7 percent per year through 2025 and then 4.7 percent to 2030, at which point it will surpass the US to become the world’s largest economy. Although these growth rates are slower than in the past, they come from a higher base and reflect China’s transition towards becoming a high-income country.
China’s tremendous domestic market
Being the world’s second largest economy, China’s rising purchasing power, expanding middle class, and a population over 1.4 billion, touts it to become the largest retail market in the near future. In 2019, for example, total retail sales of consumer goods hit RMB 41.17 trillion (US$5.97 trillion), according to the National Bureau of Statistics. This trend has remained in the wake of COVID-19.
Due to vigorous employment support measures, the per capital disposable income rose by 9.1 percent in 2021, reaching RMB 35,128 (US$5,445). Combined with other consumption promotion measures launched by the government, the total retail sales of consumer goods remain stable, reaching RMB 44.82 trillion (US$6.95 trillion) in 2021.
The strong domestic market performance will benefit from China’s dual circulation strategy, which intends to spur China’s domestic demand, on one hand, and simultaneously create conditions to increase foreign investment and boost production for exports, on the other. The focus on tapping into China’s internal consumption patterns and domestic markets will also buffer the impact of global economic headwinds on the country’s economic and financial stability. This is why China’s government – at the central and provincial levels – have sped up market opening reforms to make it easier for businesses to scale up, innovate, and boost economic activity, and as a result, fuel consumption growth.
Bearing this in mind, it is not hard to understand why foreign investors are once again betting big on China.
Many foreign companies have started to produce goods specifically for local consumption in China, rather than use the country as a production base for export-led manufacturing as in the past. For many companies, China is now their largest market for growth.
China’s infrastructure and supply chain
China’s sophisticated manufacturing and logistics infrastructure ensures it will not get replaced in the global supply chain easily. According to Xinhua, the state-run press agency, 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.
China Supply Chain
The importance of these transport advantages has become fully clear right from the start of the pandemic 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.
China’s workforce and labor
China has the world’s largest labor market even though its working age population is shrinking. The labor force of China, which refers to the population aged 16 and over and capable of working, stood at around 811 million in 2019. And the number of employed people in China amounted to around 774.7 million people.
Despite the increasing concerns that China’s labor cost keeps rising, China’s labor force still earns considerably less than their counterparts in developed countries, while at the same holding advantages in experience and efficiency compared to lower cost emerging markets.
For example, in 2020, the average hourly cost for labor in the manufacturing sector was US$6.50 in China, compared to US$4.82 in Mexico and US$2.99 in Vietnam, two popular alternatives for manufacturing. However, while Vietnam’s labor costs in manufacturing are less than half of China’s, Vietnam’s productivity per worker is about one-third of productivity levels in China.
Workers in China’s manufacturing sector tend to be more experienced, more educated, and better resourced than in competing countries, often making China a more cost-efficient option despite slightly higher wages.
The breadth of China’s labor pool means that the country’s human resources are highly adaptable to business needs, as companies will be able to find workers and technical specialists experienced in a wide variety of fields.
Further, China’s labor market is becoming an asset not just for its size and cost efficiency, but for the quality of education. For instance, the Times Higher Education World University Rankings had 10 Chinese universities in its 2022 top 200 list – the most ever – including two in the top 20.
Overall, China was the fourth most represented country in the complete rankings, with 97 universities, behind only the US, Japan, and the UK. The improving quality of China’s universities is reflective of the next generation of Chinese workers that is more educated and competitive than previous ones.
China's investment environment
China’s improving business environment
China’s efforts in business reform have yielded success. In the years between 2017 and 2019, China moved from ranking 78th to 31st on the World Bank’s Ease of Doing Business rankings. China featured among the top 10 economies with the biggest improvement in business environment for two years in a row during the period.
Among the 10 indicators – starting a business, dealing with construction permits, getting electricity, registering property, getting credit, protecting minority investors, paying taxes, trading across borders, enforcing contracts, and resolving insolvency – China’s far-reaching reforms have placed it close to or at the forefront of the global best practice in several areas.
In getting electricity, China is now positioned 12th worldwide, with only two steps to get a commercial electricity connection. It now only costs 32 days to obtain a power connection in China, compared to half the East Asia and Pacific average of 63 days. China made it easier to get electricity connections in Beijing and Shanghai by expanding their network capacity, simplifying power connection applications, introducing mobile apps to simplify administration, and making electricity tariffs more transparent.
In addition, China maintains its leading position in enforcing contracts, ranked 5th worldwide, and achieved great improvement in dealing with construction permits (from 172nd to 33rd), protecting minority investors (from 119th to 28th), and starting a business (from 93rd to 27th).
In 2017, China launched online company registration and simplified social security registration in Beijing and Shanghai, as well as implemented a simplified company deregistration procedure nationwide.
The completion of the five-in-one business license reform and the introduction of policies like “One Window, One Form” created a simplified digital channel to register a business, and as a result, dramatically cutting the days needed for starting a company from 22.9 days to 8.5 days.
In the years between 2017 to 2019, China also made dealing with construction permits easier by simplifying the approval for low-risk projects, quickening service for obtaining water and drainage connections, and increasing safety by imposing stricter qualification requirements for specific professionals. This has reduced the total time to obtain building permits in Shanghai from 169.5 days to 125.5 days and Beijing from 136.5 days to 93 days.
China’s market reforms and opening
China has endeavored to attract greater foreign investment by relaxing more market access restrictions and continuously introducing improvements to the business and regulatory environment.
Key among its reform actions, are changes to the negative lists. These lists indicate which industries are subject to special administrative measures for foreign investors, or in other words, supervised by authorities when determining market entry, scope of operation, and access to local market. The negative lists were shortened again this year.
The 2021 National Negative List has removed two restricted items from its 2020 counterpart, cutting it 33 to 31, while the new 2021 FTZ Negative List removed three items, cutting it down to 27 from 30. Taking auto manufacturing as an example, the restrictions on the share ratio of foreign investment in passenger vehicle manufacturing has been liberalized. Before, the Chinese party shareholding percentage in passenger automobile manufacturing was to be no less than 50 percent.
Besides, with the Foreign Investment Law and supporting regulations coming into effect in 2020, together with other reforms in the areas of company establishment, tax, finance, reporting and compliance management – foreign investors in China are playing on a more even ground with domestic competitors.
China has also publicly stated its intentions to accelerate market opening reforms.
More free trade zones (FTZs) were announced to diversify scope and access to preferential incentives as well as pilot sector- and region-based relaxation of entry norms.
Most recently, on September 21, 2020, China announced it would establish pilot FTZs in Beijing, Tianjin, and Anhui, raising the country’s FTZ tally to 21. This also constitutes part of China’s efforts to transform into a more innovative, service, and consumption-driven economy and the creation of sustainable and high-end manufacturing capacity to attract international businesses.
Such policy orientation towards high-tech innovation and market opening – that was initially an outcome of US-China trade tensions – will pave the ground for future and sustainable patterns of growth and investment in China.
Innovation and emerging industries
Once known as an economy rife with copycats and counterfeits, China-based businesses are advancing to the leading edge of innovation and experimental business models.
Companies that do not pay attention to China will not just miss out on the market, but also the country’s increasingly dynamic innovation that is beginning to influence trends worldwide.
China’s spending on research and development is equivalent to about 2.5 percent of GDP, which is far higher than other countries at similar levels of development. This spending has contributed to the growth of dynamic and innovative business models in areas like e-commerce, fintech, and artificial intelligence that are competitive with – or even lead – advanced economies like the US.
One unique advantage for data-fueled innovation in China is the size of its internet-using population. China has close to a billion internet users, which is more than the US and EU combined. About 800 million people in China use mobile payments on a daily basis – over eight times more than the US – leading to a world-leading fintech industry.
China’s tech ambitions are no longer limited to the domestic market either. For example, TikTok, which is owned by the Chinese company Bytedance, now has one billion monthly users, even though the platform is not available in China itself. This makes it the world’s sixth most used social media platform, far ahead of more established platforms like Snapchat (557 million), Pinterest (444 million), and Twitter (436 million).
As the case of TikTok shows, trends that began in China are beginning to influence trends worldwide. Consequently, it is becoming more important to learn from the Chinese market to inform business models and strategies for global audiences.
Beyond opening an enormous market, investing in China positions international companies to gain experience with innovative products that can make them more innovative and competitive in their home countries.
Where to invest in China
China’s economic development zones (EDZs) are areas with preferential business policies that differ from those governing the country as a whole. First experimented with in the 1970s, China has created a range of EDZs to attract foreign direct investment (FDI) and boost domestic growth.
EDZs provide a broad range of FDI incentives, which vary depending on the specific EDZ. Businesses operating in EDZs can expect, among other incentives, a higher level of autonomy over their operations, a variety of tax exemptions, land and building subsidies, and preferential employment policies.
China’s trade and investment agreement framework
China has been extremely active in putting into place a variety of trade agreements. This includes bilateral investment treaties (BITs), free trade agreements (FTAs), and double taxation agreements (DTAs), among others. These have had a significant impact on the Asian geographical region, and proved highly influential in encouraging the direction of trade flows and the development of supply chains.
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.