Why Invest in China

Why choose China for your business?

China has accumulated advantages to back up its outstanding position in the global market and maintain investor confidence, including a huge market growth potential, a skilled labor pool, unparalleled infrastructure, and investment in its capabilities as a manufacturing base for industries of the future.

Contributing Advisor

Kyle Freeman

Partner

In this guide, we discuss why China is proving to be a hotbed for companies looking to leverage market advantages such as:

• World’s largest domestic market;
• Leading global manufacturing capacity;
• Multiple special economic zones and business incentives;
• Developed infrastructure and supply chain;
• Network of Free trade and tax agreements; and,
• Market reform and improving business environment;

Tremendous domestic market

China’s rising purchasing power, expanding middle class, and a population over 1.4 billion, touts it to become the largest retail market in the near future. In 2022, for example, total retail sales of consumer goods hit RMB 43,973.3 billion (US$7,383.7 billion).

Increasing local demand and disposable income, rising by 5% in 2022 to reach RMB 36,883 (US$5745.12), allows many foreign companies to produce goods specifically for local consumption, rather than use the country as a production base for export-led manufacturing - making China their largest market for growth.

The strong domestic market performance will also benefit from the dual circulation strategy, which intends to spur China’s domestic demand and simultaneously create conditions to increase foreign investment and boost production for exports.

The focus on tapping into internal consumption patterns and domestic markets can buffer the impact of global economic headwinds on the country’s economic and financial stability. This is why the Chinese government has sped up market opening reforms to make it easier for businesses to scale up, innovate, and boost economic activity, thereby fuelling consumption growth.

Global manufacturing capacity

China’s manufacturing dominance remains significant despite the changes brought about by the pandemic - China makes up 28.7% of the total global output for manufacturing.

China remains an attractive destination for manufacturing overall and holds many advantages over its competitors:

• Skilled workforce and labor pool
• Developed shipping and logistics infrastructure; and,
• Government incentives promoting the sector, among others.

While wages have risen, so has worker productivity as the workforce becomes more skilled with higher quality resources. China also has a developed shipping and logistics infrastructure and is increasingly a market for manufactured goods rather than just a producer, letting businesses take advantage of the proximity for reduced shipping costs.

While a diminishing workforce and stronger government enforcement of regulations are increasing the costs of labor, China aims to remain competitive by boosting productivity and producing higher value goods. As certain labor-intensive industries such as apparel shift to lower cost locations like Vietnam and India, Beijing is responding by encouraging manufacturers to move up the value chain and produce more innovative products.

The “Made in China 2025” campaign promotes this effort, hoping to spur the country into a global power in manufacturing advanced technology in place of cheap and often imitated merchandise.

Although the country has not yet fully transitioned from low cost to high value manufacturing, capitalizing on government incentives promoting the sector can pay dividends. Investors can also take solace in the fact that the factories they contract are gradually providing their employees with better conditions and benefits, thus providing often marginalized groups with improved living standards. China’s vast financial resources and significant domestic market present lucrative opportunities during the industry’s transition phase.

Incentives for doing business

The Chinese government offers numerous investment-related business incentives and is continually making further improvements through reforms and by further upgrading its incentives to maintain the country’s high appeal to foreign investors. Among all investment incentives, tax incentives tend to be one of the most important to foreign investors and one of the most attractive features of the business landscape.

From the investor’s perspective, tax incentives are legitimate tools for reasonable tax planning and cost savings. It is also a useful indicator of market trends and government priorities.

China has implemented a series of preferential tax policies, in turn attracting a large number of foreign capital and foreign-invested enterprises and effectively promoted the adjustment and optimization of various industrial structures.

There are multiple forms of tax incentives available to businesses and can be primarily categorized as tax incentives based on:

• Type of tax – particularly Corporate income tax (CIT), value added tax (VAT), and individual income tax (IIT).
• Size of businesses – such as small and low profit enterprises, small- and medium- sized enterprises and small-scale VAT taxpayers.
• Sector wise - to guide industrial upgrade, to support the development of the sector, or to respond to the special characteristics of the sector.
• Region-based – to encourage investments in certain less attractive areas or to give comparative advantages to more economic zones.

Several other types of incentives are offered by the Chinese government in qualifying special circumstances. These are explained in our incentives guide, and summarize below:

• Tariff exemptions on imported equipment – for encouraged foreign-invested projects, the import of self-use equipment within the total amount of investment can be exempted from customs duties;
• Access to preferential land prices and looser regulation of land uses – 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, which yet shall be no less than that of the local land; and
• Other bonuses for foreign investment engaged in the encouraged sectors, such as more flexibility in hiring talents, shorter turnaround in dealing with government administration, lower threshold in financing, etc.

Workforce and labor

The breadth of China’s labor pool means that the country’s human resources are highly adaptable to business needs, as companies will be able to find workers and technical specialists experienced in a wide variety of fields.

China has the world’s largest labor market even though its working age population is shrinking. The labor force (age 16+, and capable of working) stood at around 880 million in 2020. By the end of 2021, the number of employed people was around 746.5 million.

Despite the increasing concerns regarding increasing costs, China’s labor force still earns considerably less than their counterparts in developed countries, while at the same holding advantages in experience and efficiency compared to lower cost emerging markets.

For example, in 2020, the average hourly cost for labor in the manufacturing sector was US$6.50, compared to US$4.82 in Mexico and US$2.99 in Vietnam, two popular alternatives for manufacturing. However, while Vietnam’s labor costs in manufacturing are less than half of China’s, Vietnam’s productivity per worker is about one-third of productivity levels in China.

Workers in the manufacturing sector tend to be more experienced, more educated, and better resourced than in competing countries, often making China a more cost-efficient option despite slightly higher wages.

The labor market is becoming an asset not just for its size and cost efficiency, but for the quality of education. For instance, the Times Higher Education World University Rankings had 10 Chinese universities in its 2022 top 200 list – the most ever – including two in the top 20. The improving quality of these universities is reflective of the next generation of Chinese workers that are more educated and competitive.

Infrastructure and supply chain

China infrastructure investment is a key driver of economic growth. The country boasts of the largest network of high-speed rail and expressways in terms of mileage, which allows products to be transported efficiently. The advantages of a sophisticated manufacturing and logistics infrastructure ensures China will not be replaced in the global supply chain easily.

The development of new infrastructure is also a core component of the 14th Five Year Plan (FYP), the country’s primary economic roadmap for the period between 2021 and 2025. The plan urges China to accelerate the building of new infrastructure in the years leading up to 2025, covering a wide range of industries, from gigabit fiber optics to space-based infrastructure, and expanding smart and green energy transport.

There are extensive plans to expand railway networks, including intercity rail and high-speed rail, highways, and passenger airports. By 2025 the country aims to:

• Expand the railway operating mileage by 19,000 kilometers, of which 12,000 kilometers will be high-speed rail; 
• Expand mileage of public roads by 302,000 kilometers, of which 29,000 kilometers will be expressways;
• Building at least 29 new passenger airports; and 
• Expanding urbian transit rail operating mileage by 3,400 kilometers. 

Economic Development Zones and super city clusters

EDZs provide a broad range of FDI incentives, which vary depending on the specific EDZ. Businesses operating in EDZs can expect, among other incentives, a higher level of autonomy over their operations, a variety of tax exemptions, land and building subsidies, and preferential employment policies.

China has created a range of EDZs to attract foreign direct investment (FDI) and boost domestic growth. Economic development zones (EDZs) are areas with preferential business policies that differ from those governing the country as a whole.

There are over 2,000 EDZs, each with unique investment incentives and accreditation at different levels of government. Even within zones of the same type, the level of infrastructure, amount of autonomy, and breadth of incentives vary widely, creating an extremely diverse investment environment. Further, EDZs can have accreditation at the national, provincial, municipal, and district levels. Accreditation at a higher level generally means larger tax exemptions and better infrastructure.

We outline the classification, purpose and major policies in EDZs below:

Super city clusters

The scale of China’s urbanization over the past four decades is a staggering feat in human history. City clusters, as the main form of China’s new urbanization, are important pillars to support economic growth, promote coordinated development among regions, and enhance international competitiveness.

Among the 19 super city clusters, which cover most of the provinces throughout the country, four of these clusters - the Yangtze River Delta, the Pearl River Delta (or the Guangdong-Hong Kong-Macao Greater Bay Area), the Beijing-Tianjin-Hebei (or Jing-Jin-Ji), and the Chengdu- Chongqing Economic Circle - are among the most important, and areas which China is working particularly hard to optimize and improve.

The Yangtze River Delta alone accounted for 24.1 percent China’s total GDP and 48.9 percent of China’s foreign direct investment in 2021, while the Guangdong-Hong Kong-Macao Greater Bay Area accounted for 11 percent of China’s total GDP and 15.7 percent of China’s FDI the same year. Businesses that have operations in China or that are planning to expand to this enormous market are advised to seriously consider and fully understand the potential of these city clusters.

Trade and investment agreement framework

China has been extremely active in putting into place a variety of trade agreements. This includes bilateral investment treaties (BITs), free trade agreements (FTAs), and double taxation agreements (DTAs), among others. These have had a significant impact on the Asian geographical region and proved highly influential in encouraging the direction of trade flows and the development of supply chains.

Free trade and bilateral trade agreements

China has signed off on 23 FTAs, which involve a total of 26 countries and regional blocs (including ASEAN, comprising 10 nations), offering direct trade advantages with these countries and regions, including:

• RCEP (The Regional Comprehensive Economic Partnership);
• China-ASEAN FTA (including upgrade); and
• Mainland and Hong Kong Closer Economic and Partnership Arrangement.

A further 10 FTAs are currently under negotiation, while 8 more are under consideration. China also has in total 107 BITs in force, with another 17 under negotiation.

Double taxation avoidance agreements

Double Tax Avoidance Agreements treaties effectively eliminate double taxation by identifying exemptions or reducing the amount of taxes payable in China.

DTAs not only provide certainty to investors regarding their potential tax liabilities but also act as a tool to create tax-efficient international investments.

So far, China has signed DTAs with 110 countries or regions.

Market reforms 

China has endeavored to attract greater foreign investment by relaxing market access restrictions and continuously introducing improvements to the business and regulatory environment. The country has repeatedly and publicly stated its intentions to accelerate market opening reforms.

Key among its reform actions are changes to the negative lists. These lists indicate which industries are subject to special administrative measures for foreign investors, or supervised by authorities when determining market entry, scope of operation, and access to local market.

The 2021 National Negative List has removed two restricted items from its 2020 counterpart, cutting it 33 to 31, while the new 2021 FTZ Negative List removed three items, cutting it down to 27 from 30.

With the Foreign Investment Law and supporting regulations coming into effect in 2020, together with other reforms in the areas of company establishment, tax, finance, reporting and compliance management – foreign investors in China are playing on a more even ground with domestic competitors.

Ease of doing business

In the years between 2017 and 2019, China moved from ranking 78^th to 31^st on the World Bank’s Ease of Doing Business rankings - featuring among the top 10 economies with the biggest improvement in business environment for two years in a row during the period.

Among the 10 indicators – starting a business, dealing with construction permits, getting electricity, registering property, getting credit, protecting minority investors, paying taxes, trading across borders, enforcing contracts, and resolving insolvency – China’s far-reaching reforms have placed it close to or at the forefront of the global best practice in several areas.

China has piloted several reforms, such as e-fapiao, and launched online company registration and simplified social security registration in Beijing and Shanghai, as well as implemented a simplified company deregistration procedure nationwide.

The completion of the five-in-one business license reform and the introduction of policies like “One Window, One Form” created a simplified digital channel to register a business, and as a result, dramatically cutting the days needed for starting a company from 22.9 days to 8.5 days.

Innovation and emerging industries

Once known as an economy rife with copycats and counterfeits, China-based businesses are advancing to the leading edge of innovation and experimental business models.

This spending has contributed to the growth of dynamic and innovative business models in areas like e-commerce, fintech, and artificial intelligence that are competitive with – or even lead – advanced economies like the US.

One unique advantage for data-fueled innovation in is the size of its internet-using population - with close to a billion internet users, which is more than the US and EU combined. About 800 million people use mobile payments on a daily basis – over eight times more than the US – leading to a world-leading fintech industry.

Beyond opening an enormous market, investing in China positions international companies to gain experience with innovative products that can make them more innovative and competitive in their home countries.

China’s thriving services industry

As China navigates its transition from manufacturing to services and consumption, foreign investors that are agile and can adapt to satisfy shifting trends will be best placed to capitalize on the country’s new economic landscape.

China’s services sector is the main driver of economic growth and the basis for the next stage in its development. With labor and land costs growing and its workforce becoming increasingly well-educated, China is transitioning to a more sustainable post-industrial services and consumption-driven economy.

The government is also increasingly focused on improving the business landscape for the services industry.  The State Council, China’s Cabinet approved comprehensive pilot programs on opening the service sector in Tianjin, Shanghai, Chongqing municipalities, and Hainan province. This document expands the pilot program on China’s service sector opening – six years since Beijing became the first and only pilot city in China implementing service sector opening-up trials in 2015. The affected industries include areas that were previously off-limits, such as education, telecommunications, construction, performing arts, and more.

Why foreign companies relocate to China?

To size up China, or any country, as a potential destination for relocation, it is vital that foreign investors diligently research their options across many factors that are relevant to their situation. Such factors may include infrastructure, locations, talent availability, access to raw materials, incentives, supply chain partners and logistics, and others.

Here are some top reasons why companies choose to relocate to China:

• All of the stated Top Reasons to Invest in China;
• Preferential policies, especially tax incentives, for investment in certain sectors and areas;
• A resilient supply chain and export capacity: China boasts of the largest network of high-speed rail and expressways in terms of mileage, which allows products to be transported efficiently;
• Access to a large domestic market as well as proximity to the growing south and south east- Asian countries to implement the China+1 strategy; and
• Numerous EDZ’s, FTZ’s and super city clusters, workforce and labor availability, lower labor costs and a relatively open environment for foreign direct investments.

Summary: Top 10 Reasons to Invest in China