Scholz’s German Business Delegation Looking To Understand China Opportunities

November 4, 2022 Posted by China Briefing Reading Time: 9 minutes

China-Germany

Significant industrial and service sectors have just become open for German investment in China.

By Riccardo Benussi, German Desk, Dezan Shira & Associates Munich

A rare event occurred on Friday (November 4) when Germany’s Chancellor, Olaf Scholz, met with Chinese President Xi Jinping in Beijing. Due to strict Covid restrictions, it has been the first visit by a major Western leader in the past three years. Scholz’s delegation included numerous German business senior executives, indicating the visit included significant discussions about Germany-China trade and investment opportunities.

This itself is significant as China has just completed its CPC Congress during which new development policies were created that intend to expand China’s trade, both in maintaining China’s export growth and its consumer base. Of particular interest to German exporters will be the fact that Beijing intends to raise the numbers of the Chinese middle-class consumer base by another 400 million by 2035.

While Scholz will also be wanting to discuss the geopolitical situation and especially Russia, the Germans have long been pragmatic in terms of engaging with China as a customer. Current 2022 bilateral trade levels are running at growth rates of about 1% – Scholz and Xi will want to push that higher. China was once again Germany’s largest trading partner for goods in 2021, with a volume of trade of over €245 billion. To put that into the EU context, French bilateral trade with China was about €80 billion. The meeting also comes just two days after global bankers attending the Global Financial Investors Summit in Hong Kong said the international banking community was ‘very pro-China’.

Germany and China maintain regular, high-level coordination of policy conducted through a large number of dialogue mechanisms, as well as trade relations, investment, environmental cooperation, and cooperation in the cultural and scientific sectors. Germany advocates substantive and reciprocal relations between the EU and China, as well as increased EU unity towards China – meaning that in political terms it does not always follow the negative image of China that has emerged from some of the smaller EU nations in recent years.

There are several key trade and investment areas likely to be of interest to German manufacturers when it comes to China. Helpfully, Beijing released the ‘Catalogue of Encouraged Industries for Foreign Investment (2022 Version)’ (2022 FI Encouraged Catalogue) last week, which takes effect from 1^st January 2023, and has further expanded the market sectors that China is looking for foreign investors to fulfill. The new Catalogue contains a total of 1,474 items and has increased by 19% the market sectors are now fully open to foreign investors.

The new Encouraged Catalogue is designed to serve three main purposes:

Boost foreign investment in manufacturing to upgrade China’s industrial and supply chains.
Promote the integrated development of the service and manufacturing sectors.
Encourage foreign investment in China’s central, western, and northeastern regions.

We can examine these as follows:

Manufacturing – New German FDI Into China

The Catalogue has added or expanded items on the manufacturing of components and parts and equipment. This includes:

End Products Manufacturing: items such as aviation ground equipment, glow discharge mass spectrometer, transmission electron microscope, and industrial water-saving equipment have been added or modified.
Components and Parts Manufacturing: items include shield machine bearings, key parts related to autonomous driving, high-performance light metals, etc.
Raw Materials Manufacturing: high-purity electronic chemicals, high-performance coatings, and organic polymer materials.

China Service Industries: New Opportunities For German Investors

In the service industries, foreign companies are encouraged to invest in production-oriented services, with items such as professional design, technical services, and development, newly added to the national catalog. As follows:

Technical Services: advanced system integration technology and service of low carbon, environmental protection, green energy saving, and water saving, development and application of environmentally friendly technology, design and research and development of offshore wind power equipment and marine new energy equipment.
Business Services: Retired wind turbine blades and waste photovoltaic modules recycling and processing, clean operation of traditional energy, engineering construction, and technical services, language services.

New China Regional Investment Opportunities

China is always looking to attract foreign investment into Central and Western China. There are advantages here as these regions tend to have lower production costs, and especially in terms of labor. However, that needs to be paired up with sometimes less effective infrastructure, and skills.

The Regional Catalogue has added and expanded items catering to the specific advantages of China’s central, western, and northeastern regions, such as labor force availability, distinctive resources, and need for investment. These include tax incentives and other motivational devices to encourage FDI in these specific regions. Professional advice needs to be undertaken to examine this in detail, however, in broad terms, this includes the following:

Human Resource Development: Labor-intensive processing trade industries are encouraged in Jiangxi, Anhui, Henan, Guizhou, Gansu, Ningxia, and Guangxi.
Equipment Manufacturing: Chongqing, Sichuan, Hubei, Hunan, and Shaanxi.
Agricultural and Livestock Product Processing: Heilongjiang, Jilin, and Liaoning.
Export-Oriented Economic Development: Commercial logistics and tourism and leisure businesses have been added to the regional catalogue in Tibet, Xinjiang, and Yunnan. (Note Yunnan Province borders ASEAN, which China has a free trade agreement with and includes major markets such as Indonesia, Malaysia, Thailand, and Vietnam).
Green Transformation: Shanxi, and Inner Mongolia.

Drilling Down For New German Opportunities In China

Taking a closer look, the revision to the encouraged catalogue is also in line with China’s priorities on further improving the country’s healthcare system, sports industry, elder care, rural revitalization, vocational education, and the transition to a green, low-carbon, and circular economy.

We highlight some of the investment opportunities for Germany in the promoted industries below. Businesses should seek professional support to understand the full extent of the opportunities available and potential access to incentives that may streamline costs and offer market benefits.

Healthcare

The 2022 FI Encouraged Catalogue adds multiple new items for the healthcare sector. Some areas where foreign investment is encouraged are:

Production and research and development of therapeutic medical and health textiles, artificial skin, absorbable sutures, hernia repair materials, new dialysis membrane materials, catheters for interventional therapy, and high-end functional biomedical dressings.
Development and production of drugs for rare diseases and special drugs for children.
Consumables related to the pharmaceutical manufacturing industry: separation and purification media, solid phase synthesis media, chiral resolution media, consumables for drug impurities control and detection, etc.
Manufacturing of dental implant system for implant repair in patients with bone loss.
Manufacturing of closed negative pressure drainage and protection wound materials, bacterial cellulose film, polyurethane foam dressing, and other polymer material dressing manufacturing.
Hearing aid and cochlear implant manufacturing.
Postpartum maternal and child services in maternity centers.
Rehabilitation institute for autistic children.

Elderly Care

To facilitate the development of the elder care sector, the 2022 FI Encouraged Catalogue encourages foreign investment in “research, development, and manufacturing of smart healthcare products for the elderly”, which include geriatric products and auxiliary products manufacturing, geriatric medical equipment and rehabilitation AIDS manufacturing, elderly intelligent and wearable equipment manufacturing.

Foreign investment is also encouraged for elder care-related services, including services for renovation and barrier-free transformation of homes, liveable environments, and public facilities for the elderly, eldercare-related professional education, training services designed for elder care, and education provided to the elderly.

Sports

Inspired by the success of the Beijing Winter Olympic Games, the 2022 FI Encouraged Catalogue encourages foreign investment into China’s snow and ice industry, with “research and development and production of snow and ice heavy equipment and light equipment for a ski resort, passenger ropeway, snow machine, snow press, and other special equipment” being added to the encouraged catalogue.

The 2022 FI Encouraged Catalogue also added “construction, operation, and management of fitness facilities such as outdoor sports camps” and “development, popularization, and promotion of intelligent sports products and services” as encouraged items for foreign investment. The esports market in China is also growing.

Rural Revitalization

The 2022 FI Encouraged Catalogue adds multiple items that are designed to improve the agriculture, living environment, logistic, commerce, and industrial structure of the rural area. Among others, the below items are introduced in the encouraged catalogue:

Efficient water-saving irrigation, farmland soil improvement and ecological management, comprehensive utilization of farmland reserve resources – such as saline-alkali land, and green farmland construction, technology development, and application.
Rural environmental remediation, rural sewage and garbage treatment, water ecological environment treatment, and restoration-related engineering construction, technology development, and application.
Construction of cold chain logistics facilities for storage and preservation of agricultural products.
Smart agriculture (integrated application of software technology and equipment, digital transformation of agricultural production, operation, and management).
Rural e-commerce and new types of rural services, including productive agricultural services adapted to large-scale, standardized, and mechanized agricultural production, as well as rural life services.
Rural tourism, leisure sightseeing, agricultural experience, outdoor expansion, ecological health, and labor education and practice base construction.

Vocational Education

To echo China’s plan to strengthen the country’s vocational education system, in addition to the Vocational Education Law that came into force recently on May 1, 2022, the 2022 FI Encouraged Catalogue adds “non-academic language training institutions” and “non-academic art training institutions”.

To be noted, this does not include language and art training services for primary and secondary school students and preschool children between the ages of 3 and 6, which are still subject to stringent supervision amid China’s effort to reduce the burden for students and parents.

Green and Low-Carbon

On top of the nearly 100 items that are relevant to China’s green transition in the 2020 FI Encouraged Catalogue, the 2022 FI Encouraged Catalogue introduces more, such as:

Development and production of new technology and products for wood structure and wood building materials, as well as recycling of used wood.
Production of ultra-high folding optical resin material, co-extrusion backplane for environmentally recyclable solar modules and plastic materials for backplane, auto start and stop lead battery diaphragm, energy storage lead battery diaphragm.
Green hydrogen fuel preparation technology (chemical by-product hydrogen production, biological hydrogen production, water electrolysis hydrogen production from renewable energy, etc.)
Industrial water-saving technology, technology development, and application and related equipment manufacturing.
Development and production of environment-friendly surface treatment technology products.
Deep processing of high-performance light metal and copper alloy materials used in energy-saving and environmental protection areas.
Low-carbon upgrade of petrochemical chemical raw materials.
Clean production technology development and service, traditional energy clean operation, engineering construction, and technical service, and clean production evaluation, certification, and audit.
Advanced system integration technologies and services of low carbon, environmental protection, green, energy saving, and water saving.
Development and application of environmentally friendly technologies.
Recycling and processing of retired wind turbine blades and discarded photovoltaic modules.
Comprehensive utilization of Yellow River sediment.
Construction and operation of clean coal power generation projects using circulating fluidized bed, pressurized fluidized bed, integrated coal gasification combined cycle power generation, and low calorific value coal power generation projects using coal gangue, medium coal, slime, and other coal.

Market-Specific Sectors Of Note By German Manufacturers / Exporters

Other Favorable Policies to Facilitate German FDI into China

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: For encouraged foreign-invested projects, the import of self-use equipment within the total amount of investment can be exempted from customs duties, except for those listed in the Catalogue of Major Technical Equipment and Products Not Exempt from Import Duty and Catalogue of Imported Commodities Not Exempt from Import Duty for Foreign Investment.
Preferential Land Prices: Looser regulation of land use – 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.
Lower Corporate Income Tax: For FIEs in encouraged industries in the western regions and Hainan province that meet the requirements, the CIT rate can be reduced to 15 percent.

Other Relevant China Policy Measures To Attract German Investment

On October 25, 2022, three days before the release of the 2022 FI Encouraged Catalogue, the NDRC released the Several Policy Measures to Stabilize Foreign Investment Stocks and Spur Foreign Investment Quality and Quantity with a Focus on the Manufacturing Sector, which details 15 measures to stabilize and attract foreign investment. In addition to tax breaks, financial support, land facilitation, and measures to improve fairness and business environment, it also pledges to relax travel restrictions for inbound travelers including executives, foreign talents, and their families, smooth COVID-19 related logistics bottlenecks that have seriously disrupted the operation of foreign businesses, and to support FIEs to list on domestic share trading market.

German investors looking at China opportunities may contact the Dezan Shira & Associates German desk in Munich for further discussions concerning China investment. Our practice has 13 offices across China, including Hong Kong, and has been assisting German and other foreign investors in the China market since 1992. Email: china@dezshira.com