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China Business » Business Tips » Aspects of Investing in China

Aspects of Investing in China

China's market economy is centrally-planned and is stringently overseen by the government of the country. All foreign business enterprises must be approved by the government, and decisions are made based on the Catalogue for the Guidance of Foreign Direct Investment. This catalogue is used to categorize foreign investments into four different categories. These are (1) encouraged, (2) restricted, (3) prohibited and (4) permitted.

Those businesses which are placed in the encouraged category are the quickest approved, get better tax benefits and receive benefits in how the government treats them. Businesses which find themselves in the restricted category tend to discover strong pressures to become joint ventures with Chinese companies. Nowadays, most of the companies in the restricted category are banks, telecommunications companies or companies whose business can be seen as a possible threat to Chinese national interest.

The first logical step in preparing to begin business in China is to become familiar with the Catalogue for the Guidance of Foreign Direct Investment. There are several business-establishment options that most businesses can select unless it is in the prohibited category.

As the world's third largest country and with fifty-six ethnic groups living there, China should be treated as many markets rather than one large market for one's products or services. Each section of the country has its own features which affect business conditions. Some sections also have special zones established by the government to encourage foreign investment. A prospective investor should study the sections and any zones in the sections in order to make a wise choice of location for his business.

TYPES OF ENTERPRISES AVAILABLE IN CHINA

There are five options for establishing a business in China. They are (1) a representative office, (2) a joint venture, (3) a wholly-owned foreign enterprise, (4) a joint stock company, and (5) a holding company.

(1) a representative office

A representative office is usually the quickest way to get one's presence in China. There are restrictions on this type of enterprise while allowing the office to do its company's business in the country.

The office is allowed to negotiate contracts, give advice concerning the company, do market research and collect general information in behalf of the foreign home office.

On the negative side, the office cannot invoice or accept payments, enter into any contract for the home office or arrange for the importation of goods into China.

Most of the business done through the representative office must be done by the home office, not by the representatives in China.

This office is rather easy to get established and can then hire foreign employees to work in its Chinese office and hire Chinese workers through a labour services company. The term of this office option is three years.

(2) a joint venture

A second option for beginning business activity in China by a foreign company is the joint venture. There are two divisions in a joint venture business, the equity joint venture and the contractual joint venture.

This option is becoming less popular recently with foreign investors choosing instead to go on their own rather than join with a Chinese partner. The law requires that the Chinese partner hold a particular degree of ownership in the company. Although the popularity of joint ventures is not high, there are benefits including that fact that the Chinese partners know the local culture better than a foreign partner and can offer beneficial advice. The local partner, too, can offer his employees to handle with local aspects of running the business on a day to day basis.

A local partner probably already has facilities for the new business partnership, one which is established and accepted by the local people. This helps to avoid having to find and set up a new store or office.

Some negative issues in a joint business relationship include possible clash of the two cultures involved, fear of theft of the foreign company's secrets by employees of the Chinese partner and fear of the Chinese partner's overvaluation of its contributions to the partnership.

(3) a wholly-owned foreign enterprise

A third option is a wholly foreign-owned enterprise. As the name implies, this does away with a Chinese partner. If approved, the company will obtain an enterprise identity code to be used with several Chinese governmental offices. Annual audits are a part of the requirements for the wholly foreign-owned business.

This business type takes longer to get much return on investment as it is starting from scratch. Much more research is needed in finding a location and hiring Chinese staff. Overseeing Chinese workers could be more difficult than overseeing one's own country's personnel.

(4) a joint stock company

The joint stock company is another option for a foreign business in China. This limited liability company is a pre-requisite for listing on a Mainland stock exchange. As in western countries, the business involves selling shares of stock without having to get government approval.

This type of business is still in its infant stages in China and is rather difficult to begin, requiring large capital availability and much red tape concerning the Chinese government.

(5) a holding company

A holding company is the fifth of the enterprises open to foreign investors in China. Extensive capital outlay is required, making opening a holding company, or Investment Company as it is called in China, a very challenging option.

There are around two hundred fifty such companies in China presently, and the outlook for adding to that number is very unlikely.



Considering the five options, one must also be aware of other issues in Chinese investments. Taxes are usually collected on a monthly basis. Corporate taxes run around thirty-three percent. A Value Added Tax (VAT) is also collected and is based somewhat on the product or service sold. The percentage varies but is often around seventeen percent of the value of the product or service.

Patent protection and trademark or logo protection laws do exist in China, but they are not as carefully monitored as in many developed countries. There is also some hacking done by Chinese workers and professional hackers. There are 'non compete' rules in contracts. However, they are not always honoured explicitly.

China offers opportunities for foreign investors, opportunities to make good profits. There are also significant challenges in doing business in the country.

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