2017 was the year in which Xi Jinping, President of the People’s Republic of China, further consolidated his already considerable power at the top of the Communist Party of China (CCP). The Xi-led anti-corruption drive, launched in 2012, has snared more than 100,000 officials and weeded out numerous potential rivals.
Xi did not name an official successor at the CCP national congress in October, prompting speculation that he might plan to stay on as supreme leader beyond the usual two five-year terms, which would end in 2023. This question has just been answered with the CCP announcing that it intends to scrap the clause in the constitution that limits presidents to 10 years in office.
The dynamic between President Xi and US President Donald Trump is another ongoing and interesting topic. Talk of tariffs and increased barriers to trade continue to spook investors worldwide. Most would agree that the last thing the world economy needs is a trade war between the world’s two largest economies.
The question of market access continues to rankle many foreign firms and the issue of restrictions on certain activities remains worrisome. Nevertheless, some positive noises emanating from Beijing may ease some of these concerns.
“China’s door will not close to the world but open wider,” Xi told a recent gathering in Guangzhou. Similarly, Vice Premier Wang Yang, spoke of the country’s commitment to a “non-discriminatory environment for foreign companies.”
Such positive comments, however, may be somewhat undermined by China’s determination to be a world leader in certain industries such as robotics and drones. There are still accusations that foreign firms in such industries are being held back in terms of market access. According to Kenneth Jarrett, President of the American Chamber of Commerce in Shanghai: “Chinese government statements reaffirming China’s commitment to providing a non-discriminatory environment for foreign companies are always welcome, but need to be accompanied by real progress,”
Though considerable uncertainty exists, there are still numerous and lucrative opportunities for foreign players in the China Market. Beijing is still very keen to attract foreign investment and has made some positive moves in this regard. For example, a new circular issued on 21 December sets out formal guidance on a withholding tax deferral incentive for foreign investors.
Circular 88 grants a temporary non-imposition of the 10% withholding tax in respect of dividends foreign investors receive from their Chinese subsidiaries if they reinvest such dividends in China in projects that fall within the Encouraged Category of China’s Catalogue for the Guidance of Foreign Investment Industries and its equivalent for China’ Midwestern Regions.
Typical ‘Encouraged’ industries include solar and wind technology, water conservation, environmental protection, scientific research and technological services, lightweight and eco-friendly metals for aviation and auto industries, and batteries for electric cars. These are all areas in which China is keenly aware of the need to attract Western capital and know-how.
Despite the seemingly ever changing regulations and procedures, there certainly exists great opportunity for foreign players in certain sectors. Sectors that are expected to face loosened restrictions include financial and insurance markets. Overseas education providers may also enjoy expanded access through partnerships with local players.
The demand for overseas education for Chinese students has also opened up opportunities for companies working in this area. In terms of offering certifications or degrees locally, however, restrictions will still apply. Healthcare, elderly care and green technology companies are also increasingly encouraged to explore the market here. We have seen much evidence in this regard over the last year, with foreign ‘lifestyle’ products and services increasingly sought after by wealthy Chinese. The e-commerce market continues to explode here, as evidenced by new record sales on T-MALL for China’s ‘Singles Day’ shopping festival on 11 November.
Of course, things can change rapidly in China and it is essential to keep a keen eye on new developments. Surprising new changes can spring up at any time. For example, opening a bank account for a China entity has in some cases become more difficult. Previously, there was no need for the legal representative (LRI) of a Wholly Foreign-Owned Enterprise (WFOE) to come to China to open a bank account. This suddenly seemed to change last October, with some banks insisting that the LRI must physically visit China. This does not, however, seem to have been uniformly applied, with certain banks showing some degree of flexibility.
A further change occurred relating to the financial running of the company. The Administration of Industry and Commerce (AIC) informed us late last year that the legal representative (executive director), supervisor and general manager of a WFOE were no longer permitted to also act as the chief financial officer. Previously, only the supervisor of the WFOE was prohibited from serving in this role.
We cannot yet be sure what 2018 will hold in store but, as always, be prepared for last minute changes at any time. Despite some uncertainty and negativity, opportunities still abound in China. You just need to make sure that you keep up-to-date with such changes and that your company remains compliant and does not fall foul of any of the regulatory bodies. Feel free to contact us at Sovereign China if you are in doubt about any changes to doing business here.
If you are interested in increasing your understanding of the China market and the potential opportunities for your brand, online or offline, please contact Mark Ray at Sovereign’s Shanghai office.