Over the past couple decades there have been many companies of all sizes from many different countries endeavoring to do business with The Peoples Republic of China. Reasons for this include to take advantage of the low labor costs inherent in the Chinese economy, one of the largest labor pools in the world, and of course the tax incentives of special economic zones in certain areas of China which give them a competitive advantage over their competitors and increasing the profit margin on their balance sheets.
China has become one of the largest economies in the world since it opened up its economy to the world in 1978 culminating in its entry into the World Trade Organization (WTO) in 2002. China has a populaton of 1.3 billion which amounts to approximately one fifth of the population of the entire world. China is made up of twenty-three provinces, five autonomous regions and 4 municipalities which are directly governed by the central government in Beijing. China also has special administrative regions in Hong Kong and in Macao.
Since it opened its economy in 1978, the Gross Domestic Product (GDP) of China has been growing at a rate of ten percent per year. However this rate is an estimate and some experts place this number much higher. By the year 2003, the total volume of Chinese imports and exports was ranked as fourth in the world at $840 billion U.S. dollars. Also during 2003 foreign investment in the Peoples Republic of China topped 50 billion U.S. dollars. Despite this economic boom, China is still in the early stages of developing a free market economy. There are 15 Free Trade Zones and 38 Export Processing Zones, mostly concentrated between the northeastern to southeastern part of the country.
Various Investment Structures
Chinese Business Center Investment structures include Representative Office ( RO), Equity Joint Venture (EJV) or Cooperative Joint Venture (CJV), Wholly Owned Foreign Enterprise (WOFE), Company Limited by Shares (CLS), and Foreign Investment Holding Company (FIHC). To invest in China a foreign investor need to first register with the government and obtain its approval. China has divided its market into three categories of business opportunities. These categories are Encouraged, Restricted, and Prohibited. Approval to invest in Encouraged business types is relatively easy and quick to receive however industries that are in the restricted category require domestic control through an approved Chinese citizen or a joint venture structure.
Foreign Investment Enterprise (FIE) must be approved by the Chinese Ministry of Commerce and some industries may additionally need approval of a specific ministry of the state council dedicated to that particular industry.
A Representative Office (RO) will coordinate functions for U.S. offices and additionally provide liaison services however it is not to engage in any business activities on its own. An RO is used only to conduct market research, customer service, and to advertise and promote products for its parent company. Equity Joint Venture (EJV) or Cooperative Joint Venture (CJV), with a Chinese company is probably the most viable option to enter into a business arrangement and to provide a medium term commitment to take advantage of existing resources in China. Any EJV must be incorporated as a Limited Liability Company (LLC). Each Investment will be evaluated and assigned a monetary value. Distribution of profits is in proportion to each shareholder’s capital contribution to the JV, and a board is required as is the case in most countries. A CJV can be either an LLC or non-legal person enterprise; its investment contributions do not need to be evaluated. Cooperative parties in a CJV are free to decide how to distribute their profits among the CJV partners. This may or may not be related to the proportion of capital contributed by each partner. A CJV is free to either have a board or a joint management committee to decide the major issues of the Joint Venture.
Doing Business in China A Wholly Owned Foreign Enterprise (WOFE) ensures full control over investments and operations and assures maximum risks and maximum rewards. A Foreign Investment Enterprise (FIE), depending on the amount of the investment and business plan may consider using a Company Limited by Shares (CLS) as its vehicle of investment. But The Peoples Republic of China has strict laws concerning the set up of a CLS. For example more than 10 million RMB (1.2 million U.S. dollars) must be registered and there must be at least five shareholders. Additionally, the shares in the foreign invested CLS can not be transferred or sold for a period of three years from the date of corporate registration of the CLS.
A foreign investor may want to consider using a Foreign Investment Holding Company (FIHC) in order to consolidate operations and to coordinate investment in China. This refers to both Wholly Owned Foreign Enterprises and to Enterprise Joint Ventures, which are to be set up mainly for the purpose of the investment of capital in other business enterprises in China.
Perhaps the major difference between the Foreign Investment Enterprise (FIE) and the Foreign Investment Holding Company (FIHC) is the FIHC mainly invests in business and is not subject to the same regulations that apply to the FIE.
How to Choose an Investment Vehicle
When considering which investment vehicle to choose, qualification of Chinese counterparts, land use grants and allocations, land ownership or collective ownership, whether any assets are owned by the state, registration and valuation of equity, preferential treatment, local labor force employment, protection of the environment (recently becoming more important), protection of intellectual property patents and copyrights, foreign monetary exchange, profit distribution and reinvestment, and other external investments.
Capital Requirements
When setting up a business in China, depending on your business or industry, expect a fairly moderate investment of one hundred and fifty thousand to one million dollars U.S.. The minimum capital outlay requirements by Chinese law include:
* Technology development, consulting and services, RMB 100,000 about US $ 12,000,
* Production operation, RMB 500,000 about US $61,000,
* Wholesale, RMB 500,000 about US $61,000, and
* Retail sales, RMB 300,000 ~ $37,000 US.
There are different laws, and regulations and tax rules governing each form of investment in any business or industry to consider. Also of consideration are the different advantages and disadvantages of operating a business in the Peoples Republic of China.
The Business Culture of China
The Peoples Republic of China has a very personalize business culture. In China it is extremely important to maintain good, networking, people contacts, and relationships. Trust is of paramount importance as is proper respect for all your business contacts and customers. Relationships you develop with people represents the face of your company. China people have natural respect for authority figures, superiors, and family. They use courtesy and sincerity at all times with their contacts. With increased age comes increased respect and the tone that you use with someone older than you will differ than with someone your age or younger. Saving Face and Maintaining Face are of extreme importance in everything that the Chinese do so it is important to never publicly criticize or insult a person. Acceptance and observance of Chinese customs of hospitality and mutual respect is always appreciated. The a light handshake when greeting a person and a proper Chinese greeting is Ni Hao. With an older person a slight lowering of the eyes is preferred as a sign of respect. The presenting of small gifts to potential business contacts is also important. Friendships should also be cultivated with the local officials as these can only work to your advantage.
The Chinese Labor Force
Most Chinese factory employees are between the ages of eighteen to thirty. Most employees are female with the men doing heavier work. However most factory managers are male and senior management tend to aged from forty to sixty.
In The Peoples Republic of China the average factory worker earns about one U. S. dollar per hour. Factory managers earn around ten thousand per year. Chinese law provides for overtime pay of time and a half for hour worked greater than forty-five. Overtime pay for working on Sundays in double time and triple time is the standard on holidays. Any benefits such as employee housing, healthcare, or uniforms are negotiated with the local government.
Chinese workers usually live on the premises or in apartments close to the factories, especially in the south of China. A salaried worker’s pay includes base pay plus benefits such as a bonus paid at Chinese New Years. (A seven day holiday which is the most important holiday in China. Most like the period between Christmas and New Years Day in the United States. Usually occurring around the end of January to the beginning of March and calculated by the phase of the moon.)
When choosing your location consider transportation, taxes, fees, and the cost and reliability of electrical and water utilities. (These can vary depending on the area of China.) Monetary revaluation, local customs, local laws are also things to consider. As far as taxes are concerned, foreigners are usually charged value-add tax, consumption tax, customs duty, business taxes, income tax for both individuals and corporate, land appreciation, real estate tax, stamp duty, tax on vehicles and vessel usage taxes. These taxes usually add up to about a 15% rate within a special economic zone and double that in other areas.
Some Challenges That Foreign Investors Face
One of the main challenges that people doing business in China face is the fact that time zones in China can be up to or more than twelve hours ahead of parts of the United States. This can have an effect on communications, logistics and also on lead times for shipping. Of other concerns can be quotas on imports and exports and varying performance of suppliers and material availability. Transportation convenience and the reliability of local electrical and water utilities can vary throughout China with infrequent to frequent outages of both, depending on the area. Also of consideration are travel time and costs to and from the United States especially considering that the International Dateline is crossed on the trip across the Pacific Ocean both ways.
The business landscape is in a state of constant flux so other things to consider should be site geographic location, inventory considerations for both yourself and your suppliers, location of your suppliers and local labor pool.
Top Growing Industries
Some top growing industries in China are: Automobile Manufacture, Auto Parts Manufacture, Mining, Chemical, Steel, Textile, Agriculture, Merchandise, Machine Manufacture, Building Materials, Medicines, Paper Manufacture, light industry and Electronics.
In Conclusion
China is an immense country with an enormous growing economy. Right now there are many opportunities available to the savvy businessman and investor. As stated before the economy and business landscape are in a state of constant flux but these changes are manageable. If you are considering foreign business investment you should certainly doing business in China. Right now is a great time to explore trade opportunities for the U.S. importer. However with proper planning and research doing business with and investing in China can be hugely profitable.
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