Why pick China for your business?
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 6.2 percent year-on-year to RMB 999.98 billion (US$154.58 billion) in 2020, with 38,570 foreign-invested enterprises (FIE) having newly established. China has overtaken the US to become the world’s largest FDI destination. Leading multinational companies, such as ExxoMobil, BMW, Toyota, and Invista, increased their investment into China.
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, as summarized below:
- 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.
To be more specific, China’s advantages are detailed as below.
China’s strong economic outlook
China – despite being the pandemic’s epicenter – was the first major economy to recover and enter 2021 with a relatively optimistic outlook. Beijing’s stable and time-sensitive policy responses, epidemic control strategy, and reprioritization of macroeconomic objectives ensured that it was the one of the two G20 economies that experienced positive growth in 2020—the other being Turkey.
China’s GDP growth shrank by 6.8 percent year-on-year in Q1 2020. However, it bounced back to a growth rate of 3.2 percent in Q2 and 4.9 percent in Q3. And in Q4, China’s GDP rose by 6.5 percent year-on-year from October to December 2020, returning the economy to its pre-pandemic levels.
China’s economic rebound was driven by a combination of factors, including massive investment in infrastructure and real estate, export booms boosted by the strong global demand for medical supplies, medical equipment, and electronics, and the steady pick-up in domestic consumption after a long period of sluggish growth.
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 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 4.7 percent in 2020, reaching RMB 32,189 (US$4,979). Combined with other consumption promotion measures launched by the government, the total retail sales of consumer goods remain stable, reaching RMB 39.20 trillion (US$6.06 trillion) in 2020.
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.
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 improving business environment
China’s recent acceleration in business reform has yielded success – over the past two years, moving from ranking 78th to 31st on the World Bank’s Ease of Doing Business rankings.
China now features among the top 10 economies with the biggest improvement in business environment for two years in a row.
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 2020 National Negative List cut the number of restrictive measures by 17.5 percent, from 40 to 33, and the 2020 FTZ Negative List cut the restrictive measures by 18.9 percent, from 37 to 30. Taking auto manufacturing as an example, the restrictions on the share ratio of foreign investment in commercial vehicle manufacturing has been liberalized. Before, the Chinese party shareholding percentage in commercial 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.
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 Guangdong, one of China’s most important manufacturing bases with top GDP, the average wage was recorded at RMB 6,756 (US$1,045) per month in 2019, which only accounts for 25 percent of Germany’s 2019 average wage.
Besides, to alleviate the rising labor cost pressures on employers, authorities in Beijing are making various moves to lower social welfare costs, especially for SMEs.
In December 2018, the State Council announced 50 percent unemployment insurance refunds for companies that did not lay off staff or kept redundancies to a minimum. The refunds were higher for firms facing temporary operational difficulties.
In 2019, regional governments have been directed to lower social insurance obligations for businesses to the extent possible – depending on the local government’s funding needs and the support required for the economy.
In addition, China has cut employers’ share of basic pension premiums for urban workers from 20 to 16 percent and has extended the policy of reducing unemployment and work-related injury insurance premiums.