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.:
- Great growth potential: 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. China’s GDP per capita was US$12,551 in 2021, about six times lower than that of 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.
- 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 2021 negative lists for foreign investment, reducing the number of items from 33 to 31 on the national negative list and 30 to 27 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 23 free trade agreements (FTAs) with 26 countries or regions 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 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.
[tips title="Did You Know"]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.[/tips]
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.
[video file='https://cdn.jwplayer.com/videos/Qd4BkZxF-sZcHHUE7.mp4' image='https://resource.dezshira.com/resize/900x506/Misc/banners/web_1.jpg' title='The RCEP Advantage Part 4 – The Future of Trade in China']
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 north-eastern 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 north-eastern 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.
China's strong Free Trade and Double Tax agreements
China has developed a strategic position when it comes to entering into free trade agreements – the policy of allowing dutiable and tax reduction on certain products and services being one of the main cornerstones that has projected the nation to be the world’s manufacturing hub over more recent years.
Without doubt, the signing of the China-ASEAN FTA, followed by the recent RCEP agreement in particular, will continue to have a huge impact on China and Asia’s development in global sourcing and the foreign investment related to this.
[tips title="Did You Know"]China also has a Free Trade Agreement with Switzerland, which as a result has become one of the few European nations not to have a China trade surplus.[/tips]
In total, China has signed off 23 FTAs impacting 26 countries or regions countries (including the 10 ASEAN nations), has another 10 under negotiation, and a further eight under consideration.
Further, from an investor’s perspective, confusion about international taxation can arise when investors are subject to two different and potentially conflicting tax systems. For example, Hong Kong and Singapore adopt a “territorial source” principle of taxation, which means that only profits sourced locally are taxable. Meanwhile, other countries, such as China and the United States, are on the worldwide tax system, and resident enterprises can be required to pay tax on income sourced both inside and outside of the country.
DTAs not only provide certainty to investors regarding their potential tax liabilities but also act as a tool to create tax-efficient international investments.
So far, China has signed DTAs with 110 countries or regions.