Investing in China

We assist to outsource your manufacturing to quality cost competitive Chinese companies. Globalization is here and Chinese manufacturing is a growing part. A successful option used by many Multinationals is to set up manufacturing in one of the many Special Economic Zones around China. The Suzhou Industrial Park is a good example. The Suzhou Industrial Park is a cooperative project between the Chinese and Singapore government where Toshiba, L'Oreal, Kraft Food has its factory set up 8 kms east of Suzhou City.

How to Invest

      The first step of investing in China is to decide the form of investment. This would depend on the kind of business you want to set up or acquire, the amount of money you want to invest and whether you want to have a Chinese partner or not.
Some main options included as follow:

1) Representative Office

The main reason to set up representative offices is to test the market before establishing full operations in China. It may not be a wise choice to commit significant amounts of capital to a new venture before being confident about the decision. A representative office can conduct business liaison, market surveys and research, product introduction, and technological exchange within the business scope of the enterprise it is representing. Besides that, it can also operate as the liaison and marketing office of a foreign company for imported products. Nevertheless, a representative office is not a PRC legal person and it is not allowed to involve in direct business activities.

It is comparatively easy to gain approval and investment costs are low. It is also easier to terminate a representative office than to back out of a Joint Venture(JV) or fully established Wholly Foreign Owned Enterprise (WFOE).

2) Assembly and Processing Contract between a Foreign Company and a Chinese Enterprise

If you want to establish a manufacturing base in China, this form of enterprise is a popular option. It permits foreign investors to take advantage of manufacturing in China without setting up a company themselves. 
It has low establishment costs and fast set up. Mostly, the supplier for raw materials, parts and components will be the foreign investor, and the Chinese party provides the factory, plant and labor. The Chinese party receives a processing fee and usually plays a limited role in the enterprise. The foreign party tend to run the whole operation.

3) Foreign Invested Enterprises (FIEs)

It is possible to set up a FIE, acquire a FIE, or acquire a domestic company and convert it into a FIE. Foreign investor can buy an existing enterprise by acquiring an interest in either a FIE, a domestic private enterprise or a domestic Chinese State-Owned Enterprise (SOE).
First of all, it is crucial to check if your proposal meets the Government's criteria for investment in China. The Government has introduces foreign investment guidelines which set out the kinds of investment that they want in China and the areas of economy that they are still not willing to open up. 

Even though the investment guidelines are fairly strict, it is possible for investors to negotiate changes depending on the industry involved, location of the proposed project and the relationship you have with Government officials.
After meeting the guidelines, it is time to decide on the type of enterprise you would like to set up or acquire. The following are the types of enterprise:

Joint Ventures (JV)

      This is an idea of team up with a local partner who knows the PRC market, and sometimes can handle all regulatory requirements which apply to the formation of the venture and its operations. They are also perceived as having the right connections (guanxi), to get things organized. Many operational requirements can be difficult for foreigners to organize, for instance, power, water, water etc. 

Wholly Foreign Owned Enterprises (WFOEs)

      This option is getting more popular since last few years as foreign investors have decided to "go it alone" without a PRC partner. Like JVs , approval is needed for establishing a WFOE and the Government requires the application to demonstrate that the enterprise will be of benefit to the development of China's economy. It should either:
      i. Export at least half of the total value of all the products it make each year 
      ii. Use advanced technology and equipment, develop new products, save energy and raw materials, and upgrade and replace existing products that can be substituted for imports

 

 

advantages

disadvantages

joint venture

 - incorporation of a preexisting sales network

- no official export threshold requirement

- benefit from local connections of Chinese party less Government scrutiny than a WFOE

- can be set up in many different sectors, including some "restricted" sectors

- Chinese party can have power of veto over certain major structural decisions including assignment of interest and termination

- may need to take on former liabilities of the Chinese party including excess workers

- tendency for interests of parties to diverge after period of time

§                         greater chance of leakage of trade secrets

wfoe

- complete control over management and product quality

- complete control on use and distribution of profits provided that the statutory limitations are complied with

- greater protection of intellectual property

- simpler establishment procedures

- easier to terminate

- flexibility of location

- total control over labor management and no redundant labor to deal with as in the case of JVs

- no access to the cheaper forms of land acquisition that are available to JVs

- lack of Chinese partner and local contacts - a Chinese party may have the necessary influence ("guanxi") to secure approval of certain projects or expertise to deal with cumbersome bureaucracy. The Chinese party may further secure land-use rights for a particular site or may have particular know-how, technology, assets or resources which would not otherwise be available (for example established distribution, wholesale or retail network)

- time and effort required to attract trained local personnel and to establish an extensive sales and procurement network

- inability to obtain stock market listing in current form - JVs may convert to joint-stock companies and issue shares on the Shenzhen and Shanghai Stock exchanges. WFOEs may not unless they invite a Chinese company to be one of the promoters


Setting up

It is essential to comply with Government requirements and follow a set procedure. There are some stages that foreign investor have to go through before being able to operate in China.

Locating
      The projected scope of business may be the main factor to determine the district or zone in which the investment is located. For instance, some forms of consulting companies may only be established in Pudong New Area, Shanghai. There are other commercial issues, like infrastructure, access to distribution channels, ease of procurement of supplies etc. which may influence the choice of location. Besides that, the general legal environment in the relevant locality is an important consideration too. 

Incentives
      The special economic zones (SEZs) were established in Shenzhen, Xiamen, Shantou, Hainan and Zhuhai by the Government to keep control over the foreign investors' activities. In order to promote investors to set up in these areas, a number of incentives were offered. 
      i. Two years tax break from their first year of profitability
      ii. Reduced corporate income tax of 15 %
      iii. Three year reduction of business tax, followed by continued reductions.
      The Government opened coastal cities for investment in 1984 setting up economic technological development zones (ETDZs) and then high-tech development zones (HTDZs) which also offer the tax and other concessions enjoyed by foreign investors in the SEZs. There are various incentives offered by different regions and cities, mainly involving tax reductions but also incorporating the option of managing a SOE under a management contract with payment being a share of company profits.

Property
      PRC do not permit private ownership of land. The central Government retains title to all urban land and some rural land, with the remainder of rural land belonging to townships or village collectives. Therefore, foreign companies can only lease office space or acquire the right to use land for a fixed term in various ways ("land use rights").

Leasing
      Residential premises and offices space may be leased on a contractual basis, by the developer or owner of a building. Representative offices sometimes set up an office and residence for their chief representative in one apartment. The following are important things to take note of when leasing.
     * Local regulations in case there are restrictions regarding the areas or buildings which are open to foreign companies
     * Local regulations regarding the drafting of lease documents ( e.g in Shanghai, leases must usually be drafted in the Shanghai Municipality standard form.
     * The ownership and approval documentation of the building
     * That the landlord registers the lease with the local authorities, or else the lease will not be enforceable against third parties.

Taxation
      The Government is recognizing the importance of a unified tax regime to the growing number of foreign invested companies entering China. There are a number of standard taxes that foreign investors will be subject to, and some more specific taxes according to location and business scope. However, it is recommended that proper tax advice is sought in the early stage of planning because there are incentives under different circumstances to foreign companies. 

Customs Duty
      It is usually 13% or 17% depending on the nature of the imported goods. Many FIEs are entitled to exemptions and/ or rebates of customs duty, VAT and consumption tax on imports, up to a total import value not exceeding the total investment of each FIE. Certain FIEs on the export of products will be subject to import duty and VAT refund. Tariffs and licenses will be applied to certain import/ export goods. 

Finance
Foreign Debt
      China has a extremely regulated system of foreign exchange control and strictly monitors foreign debt levels. FIEs are free to borrow foreign currency loans from foreign banks, subject to complying with certain conditions. Nevertheless, all foreign currency loans or transactions that involve foreign currency payments to foreign creditors and which are deemed to be foreign debts have to be registered with SAFE. 
     
Limited Convertibility
      The difference between current account items and capital account items is important to keep in mind since Renminbi (RMB- China's currency), is at present convertible only on the current account. 
Current account items are ordinary transaction items in connection with international receipts and payments. These include payments and receipts in respect of trade, labor services and unilateral remittances. 
Capital account items are items which there are an increase or decrease in debt or equity due to the inflow or outflow of capital in connection with international receipts and payments. These include direct investment and all types of loans and investments in securities. Specific approval from SAFE is needed before conversion can be done.

Remitting Abroad
       If a company plans to remit abroad the profits, dividends and bonuses for previous years, it must, in addition to the documents already mentioned, present to the designated foreign-exchange bank the audit report of an accounting firm in respect of the company's financial situation for the year in which such profits, dividends and bonuses arise. Only enterprises with registered capital that is completely paid up in accordance with the terms of the contract will be allowed to make such remittances. Therefore, the ability to remit profit abroad is directly connected to the track record of the investors in making their capital contributions. 

Intellectual property
       The following rights can be protected in China. However, it is essential to register them and to ensure that you have adequate internal safeguards.
      1. registered trade marks and service marks
      2. patents, know-how and trade secrets
      3. copyright and related rights
      4. designs

Trademarks and Service Marks
      China operates on a "first -to-file" system for protection of intellectual property rights. Under the trademark law, goods and services can be registered by applying to the Trade Mark Office of the SAIC. It is effective for 10 years and can be renewed at the end of each term. China is a member country of the Paris Convention for the Protection of Industrial Property which gives nationals of the member countries the right to claim priority in the filing of applications, within six months of the first filing. Besides that, China also has the Madrid Agreement Concerning the International Registration of Marks relating to international registration and registration of well-known trademarks.

Patents
      If a service invention is made by the staff of a foreign enterprise or a JV, the right to apply for the patent goes to the enterprise. For any non-service invention, the right goes to the inventor. Invention patents are effective for 20 years, and the utility model and design patents are only effective for 10 years. If a patent is used without the authority of the patentee, legal proceedings can be started within two years from the date the patentee knew the infringement. Passing off the patent of another person will be sanctioned from fines to criminal prosecution. 
 

Copyrights and Related Matters
      Copyright protection against distortion, mutilation, and plagiarism for literary and oral works, entertainment works, television and video production, design drawings, maps and sketches and other graphic work is provided by the Chinese Copyright Law. Performers and the producer of audio recordings, broadcasting programs, computer software, are also protected. 

Immigration and Visas
Visas
      It is necessary to have a visa for any foreign investor who wishes to come to China on business. One option for application is to contact its Chinese trading partner directly, stating the purpose and date of the visit to China. If the Chinese trading partner agrees, it may, on behalf of the foreign investor, apply to its local foreign affairs department for a visa notice fax. Once the fax is received, it has to be taken to the Chinese Embassy in its country to apply for a visiting visa to enter China.
The second option is to stop off in Hong Kong on the way to the mainland destination and apply for a business visa there through China Travel Service, or directly with the China Visa Office. It will just take about a day.

types of visa 

Visa D

Issued to aliens who are to reside permanently in China

Visa F

Issued to foreigners who are invited to China to visit, study, lecture, on business, scientific, technological and cultural exchanges, short term refresher courses or job training, for a period of not more than 6 months

Visa Z

Issued to foreigners who come to China to take up posts or employment and their accompanying family members

Visa L

Issued to foreigners who come to China for tourism, visiting relatives or other private purposes

Visa X

Issued to foreigners who come to China for study or job training for a period of six months or more

Visa G

Issued to foreigners passing through China

 

  • 889 takes title/ownership of products to remove risk from our clients.
  • Our multi-lingual team provides on-the-ground inspection and quality control in China.
  • We provide logistics management, including import/export documentation, customs brokerage and transportation from Asia to clients’ locations.
  • Clients are assigned a multi-lingual project manager, based in the U.S., who ensures goods are manufactured to their exact specifications and are delivered on time.
  • 889’s extensive contacts throughout China provide our clients with the unique ability to manage risk by working with trusted, quality manufacturers.