Opportunities of Investing in China
In 2013, President Xi rolled out an ambitious agenda to liberalize the Chinese economy. Over the last two years, the Xi administration has begun to implement policy changes to increase Chinese consumption, stimulate innovation and develop a world-class services sector. President Xi’s recent visit to the White House is part of his ongoing agenda to open China to western capitalist markets.
The size of China’s economy makes it an attractive market for U.S. business opportunities. With a gross domestic product (GDP) of approximately $10.4 trillion in 2014, China’s economy is second only to the United States. (Our annual GDP was about $17.4 trillion in 2014, according to the International Monetary Fund.)
China is now our second largest goods trading partner. Sino-American trade amounted to $562 billion in goods during 2013, according to the Office of the U.S. Trade Representative. We exported $122 billion in goods to China and imported $440 billion from China, resulting in a goods trade deficit with China of $318 billion in 2013. In 1992, two-way trade of goods between China and the United States was only $33 billion.
The Chinese outbound tourism market is another key component of President Obama’s National Export Initiative. The U.S. Commercial Service estimates that 1.8 million Chinese tourists visited the United States in 2014, spending an average of $5,444 each. According to the National Travel and Tourism Office, Chinese tourism in the United States will increase by 239% by 2018.
Outbound tourism is part of the $30 billion in private services that the United States exported to China. We imported only $13 billion in private services from China, resulting in a $17 billion U.S. services trade surplus with China.
U.S. foreign direct investment in China was $61 billion in 2013, up from $54 billion in 2012. This investment in China occurred primarily in the manufacturing, wholesale trade and banking sectors. Chinese direct investment in the U.S. stocks was $5.2 billion in 2012 (latest data available). Chinese investment was up 38.2% from 2011 and led by the banking and wholesale trade sectors.
Growth in the Chinese economy since joining the World Trade Organization in 2001 has significantly improved the average buying power of millions of Chinese workers. The middle class continues to grow as increasing numbers of Chinese workers migrate from rural farms to pursue job opportunities in urban centers.
Risk of doing business in China
1. Government control
An increasing number of strict regulations exist over the way business can be done in China. While all competitors are subject to the same laws and regulations, the enforcement of those compliance regulations may be different for many local competitors. In certain designated industries, for example, multinational companies are required to co-operate with local joint venture partners, which are generally selected by the Chinese government, and governmental orders may be redirected towards local competitors in the future.
2. Inconsistent interpretation of rules and regulations
The Chinese government has issued a number of laws and regulations relating to taxes, such as corporate income tax law and transfer pricing. However, certain detailed implementation guidelines for these laws and regulations are still not pronounced, even though the respective laws and regulations may have taken effect. In addition, local authorities retain the right to interpret existing laws and regulations, resulting in a lack of consistency between individual provinces and jurisdictions.
3. Increased local competition
The Chinese government strongly promotes the evolution of strong local competitors in its key industries. The quality of products delivered by local competitors is rapidly increasing, requiring reaction in terms of innovation at the higher end of the market, as well as cost savings at the lower end of the market.
4. Lack of controls
Historically, businesses in China are not familiar with key concepts of internal control over financial reporting, since the finance function has not been seen as a key function in an organization. Risks tend to be addressed on a reactive, not proactive, basis. If risks are being managed, a silo approach is often used.
5. Recruitment issues
There is a lack of skilled and well-trained employees, particularly in the areas of engineering and finance. Retention rates are low and some salaries (eg, engineering, finance) have witnessed double-digit growth and in certain areas are at the same levels as in mature markets. Due to governments trying to control housing prices via ‘hu-kou’ (residence registration), talent management will be more challenging in coming years. (For more on this issue, read Grant Thornton’s article: What’s your employment strategy for hiring in China?)
6. Getting money out of China
Moving cash out of China can also be a slow process – it typically takes around three to four months to move funds. If not done correctly, cash can get trapped. Three sets of approvals are required to remit funds from China, although the process is simplifying as it will soon no longer be necessary to obtain an advance tax clearance certificate for certain cross-border payments.
Contact Us
If you have further enquire, please do not hesitate to contact Tannet at anytime, anywhere by simply visiting Tannet’s website www.tannet-group.net, or calling Hong Kong hotline at 852-27826888 or China hotline at 86-755-82143422, or emailing to tannet-solution@hotmail.com.
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