Author Archives: China Briefing

With Reboot of Import Tariffs, A Sooty Future Awaits for Foreign Coal in China

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By Rainy Yao

SHANGHAI – China, the world’s biggest coal producer and consumer, is facing a poignant dilemma: whether to turn up its effort to tackle air pollution and curb carbon emissions or boost its flagging coal industry to prevent a sharp economic slowdown.

In 2013, China produced roughly 3.7 billion tons of coal and consumed 3.61 billion tons at a declining growth rate of 2.6 percent. Meanwhile, the country’s growth in coal imports hit a record of 13.4 percent with 327.1 million tons imported last year – more than twice the amount of coal imported in 2010, according to CapitalVue.

As a result, more than 70 percent of Chinese local miners are losing money and struggling to survive. Further, due to declining coal prices and rising costs of production, the economies of some coal-dependent provinces such as Inner Mongolia, Shanxi and Shaanxi have substantially slowed.

In order to sooth the country’s jittery coal market, the Chinese government has released a slew of policies to ban or limit coal imports in recent years. In the latest of these, on October 15, China rebooted its levy of import tariffs on coal after nearly a decade of suspension, and announced plans to ban the import of coal with high ash and sulfur content from 2015. Continue reading…

Investing in China’s Education Industry

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By Roy K. McCall

China has the longest education tradition of any country. Beginning in the Han Dynasty, education formed the basis of China’s meritocracy for climbing the social ladder into the emperor’s presence. Educational rigor has fundamentally shaped China’s ambitious spirit and tenfold economic growth in the past two decades. This may never have happened without China’s respect for competitive pressure fostered by its long veneration of education.

One of the fastest growing education market segments in the country is K-12 (after school tutoring for kindergarten through 12th grade). Spending on K-12 has been growing faster than the Chinese economy and in 2014 may amount to around US$66 billion. Chinese households now spend 30 percent of their income on education, higher than both Korea (22 percent) and Japan (10 percent).

Yet, the proportion of households with children enrolled in additional K-12 education is only 30-35 percent, compared to 70-90 percent in Korea. In China, no one company dominates the market, with none controlling more than 1 percent of the total share and the top five sharing just 3 percent. China’s K-12 education market is large, growing and fragmented. Continue reading…

End of the Line: Terminating an Employee in China (Part 1)

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By Zhou Qian

Heightened pressure in China’s labor market means that employers are commonly required to terminate employees to optimize their business operations. Legally speaking, this is by no means an easy thing to do, especially under the comparatively stringent regulations on terminating employment contracts since 2008.

To avoid the onerous and costly labor disputes that can arise from improper termination, foreign-invested enterprises in China must understand the governing framework and key issues behind employee termination and consider taking preventative measures from the start of the employment arrangement.

In Part 1 of this two-part article, we introduce the different types of employee termination in China; in Part 2, we detail the methods of calculating severance payments and provide practical guidance for FIEs. Continue reading…

Is Your China Manufacturing Business Ready for Next Year’s Flood of Cheaper Vietnamese Products?

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CDE Op-Ed Commentary

Has your business factored in the implications of the China-ASEAN Free Trade and China-Vietnam Double Tax Agreements?

Next year will be an important one for manufacturing businesses in China. Fast approaching is something called the “ASEAN Economic Community” (AEC) 2015 deadline, which entails Cambodia, Laos, Myanmar and Vietnam all coming into line with the ASEAN community on tariff reductions. Of these, Vietnam is the big player, with a well-developed border with China, ports up and down its east coast and very close proximity to South China. Vietnam’s AEC compliance means that, under the ASEAN Free Trade Agreement with China, 90 percent of all Vietnamese manufactured products will be permitted to enter the China market duty-free.

With even Xinhua on the ball with what is about to happen, your business had better be as well. Vietnam’s lower operating costs – in terms of both land-use rights and worker salaries – mean that inevitably, production of low and medium tech products will leech away from China into ASEAN, and Vietnam in particular. In fact the shift is already taking place – while China’s trade with the rest of the world has grown by 1.6 percent this year, bilateral trade with ASEAN grew by 6 percent.

This latter figure has grown by leaps and bounds in recent years, in line with the development of the China-ASEAN Free Trade Agreement. In 2002, when the FTA was signed, trade between the two jurisdictions was just US$55 billion. This year it is expected to reach US$420 billion, and AEC compliance is expected to push it further, up to US$500 billion in 2015.

RELATED: The Competitive Advantages of Manufacturing in Vietnam

Here is a checklist of the issues your China manufacturing base will face as a result of this:

1)     Are the products you are manufacturing in China also included under the China-ASEAN FTA?

2)     Have you examined the implications for your China business of the China-Vietnam Double Tax Agreement?

If not, then it would be wise to seek professional advice to examine its implications for your China manufacturing operations. This should include:

3)     A briefing on the implications for your company of the China-ASEAN FTA and Vietnam-China DTA;

4)     Cost analysis of manufacturing overheads as a comparison between China and Vietnam

5)     Infrastructure analysis on production capabilities between China and Vietnam

Based on these, you will need to make a corporate decision on what to do next. Typically, we have found that China-based manufacturers relocate part – not usually all, although it does happen – of their production to Vietnam. Less complicated component parts can be imported from Vietnam, with total assembly using more complex China-made parts being conducted in China, then resold onto the domestic market.

The harsh reality is that the supply chain is shifting – fast – and your China manufacturing base may start to become uncompetitive as early as next year. Now is the time to be examining the possibility of this, and looking hard at the Vietnam option. Your future as a profitable business depends on it. 


Chris Devonshire-Ellis
 is the Founding Partner of Dezan Shira & Associates – a specialist foreign direct investment practice providing corporate establishment, business advisory, tax advisory and compliance, accounting, payroll, due diligence and financial review services to multinationals investing in emerging Asia. Since its establishment in 1992, the firm has grown into one of Asia’s most versatile full-service consultancies with operational offices across China, Hong Kong, India, Singapore and Vietnam, in addition to alliances in Indonesia, Malaysia, Philippines and Thailand, as well as liaison offices in Italy, Germany and the United States. For further information, please email china@dezshira.com or visit www.dezshira.com.

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Related Reading

Manufacturing in Vietnam to Sell to ASEAN and China In this issue of Vietnam Briefing Magazine, we introduce our readers to manufacturing in Vietnam as a key part of their business strategy within the ASEAN region and beyond. Specifically, we explain the new ASEAN Free Trade Area, outline what foreign investors can look forward to when creating their manufacturing presence in the country, and introduce the country’s key tax points.
 

ASEAN’s Investment Horizons: Key Industries for AEC 2015 In this issue of Asia Briefing, we forecast the effects of ASEAN Economic Community on foreign investment into the region in the lead up to 2015. Following this, we highlight what is happening in some of ASEAN’s hottest industries for investment, including electronics, information and communications technology, textiles and medical devices. Lastly, we examine the growing potential of bilateral trade between ASEAN and India in light of recent historic developments in the latter.

Double Taxation Avoidance in China: A Business Intelligence Primer In our twenty-two years of experience in facilitating foreign investment into Asia, Dezan Shira & Associates has witnessed first-hand the development of China’s double taxation avoidance mechanism and established an extensive library of resources for helping foreign investors obtain DTA benefits. In this issue of China Briefing Magazine, we are proud to present the distillation of this knowledge in the form of a business intelligence primer to DTAs in China.

Manufacturing Hubs Across Emerging Asia In this issue of Asia Briefing Magazine, we explore several of the region’s most competitive and promising manufacturing locales including India, Indonesia, Malaysia, Singapore, Thailand and Vietnam. Exploring a wide variety of factors such as key industries, investment regulations, and labor, shipping, and operational costs, we delineate the cost competitiveness and ease of investment in each while highlighting Indonesia, Vietnam and India’s exceptional potential as the manufacturing leaders of the future.

China Regulatory Brief: Guangzhou R&D Subsidies, China-Russia Agreements and Revised Dongguan Annual Inspections

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Guangzhou Raises Subsidy for R&D Investment

The Guangzhou municipal government recently held an executive meeting in which it was determined to raise the fiscal subsidies for enterprises investing in R&D. The meeting stipulated that any enterprise registered in Guangzhou that invests in R&D shall be granted a fiscal subsidy based on their actual R&D investment. Specifically, enterprises investing less than RMB 100 million shall obtain a subsidy of five percent of the total investment, while those investing more than RMB 100 million will be granted a one-off subsidy of at least RMB 25 million. 

China and Russia Sign 40 New Agreements

On October 13, China and Russia signed approximately 40 new agreements on financing, taxation, science and technology, energy and other fields during Chinese Premier Li Keqiang’s visit to Russia. Among the 40 deals, an intergovernmental agreement was signed on the delivery of gas from Russia to China via an eastern pipeline. The Eximbank of China committed to provide US$2 billion in financing to Vnesheconombank and VTB, two Russian banks hit by Western sanctions. Furthermore, the two countries signed a new double taxation avoidance agreement (DTA), which is expected to reduce the tax burden of cross-border investors and is aimed at boosting bilateral trade and investment.

Notably, the two sides signed a currency swap deal worth RMB 150 billion in a bid to diminish their mutual dependence on the US dollar. China has replaced Germany to be the biggest trade partner of Russia in 2011. Continue reading…

Case Study: Tax Withholding for Non-Resident Foreign Enterprises in China

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As part of our mission to provide business intelligence on the legal, tax and operational issues of doing business in China, China Briefing presents here the first in a series of case studies, based on the practical experience of Dezan Shira & Associates professionals.

Scenario

A non-resident foreign company without an office in China provides design services for a Chinese resident enterprise and dispatches employees to China for the handover of design work. According to Chinese law, enterprise income tax (EIT) shall be levied on income earned from commercial operations conducted within Chinese territory, by both resident and non-resident taxpayers. Therefore, the company is required to pay both EIT and value-added tax (VAT) for non-resident enterprises on the service income derived from China.

Companies unfamiliar with China’s tax declaration procedures face the risk of incurring considerable penalties. For example, failure to provide proof of the division of a project inside and outside China (such as workload, work hours, cost and expenses) can result in excessive taxation, whereby the local tax authorities deem all income to have been derived from China. To remedy this, we outline the procedure for tax declaration below. Continue reading…

Second Cup? China’s Coffee Industry Revisited

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By Rainy Yao and Benedict Lynn

Coffee reportedly made its initial appearance in China when a French missionary planted beans throughout Yunnan Province in the 1890s. Over the next hundred years, the drink would go largely unnoticed, but as with many things in China, the market has undergone rapid change over the last 20 years.

This week China Briefing revisits our three-part series from 2013 detailing various facets of China’s coffee industry. Part one, introducing China’s coffee industry, can be found here; part two, dealing with the coffee trade in China, here; and part three, dealing with domestic production, here. Continue reading…

Hong Kong’s Absorption into Mainland China

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“One country, two systems” is fast running out of special treatment favors

Apartment Block in Tai Po, Hong Kong, in cheaper area of the territory, near to border with Shenzhen. Cost of 750 sq. ft. apartment: HKD6.2 million. Mortgage payments per month (20 years) HKD22,000. Average salary of Hong Kong Office Administrator per month: HKD21,000.

 Op-Ed Commentary: Chris Devonshire-Ellis

On the afternoon of June 30th, 1997, I walked across the Shenzhen border at Louwu and into Hong Kong, taking the MTR straight into Central. There was nothing remarkable about the trip per se; I had completed it hundreds of times previously, with Dezan Shira & Associates offices already well established in both cities. Yet the date was of significance – it was the last day of Hong Kong being under British administration. At midnight, it would all return to China.

At that time there was doom and gloom. To many, China was still very much an unknown quantity. Fortune magazine had run a cover story, “The Death of Hong Kong” and two years previously, Jardines, the old British trading hong, and then the most powerful company in the territory, had redomiciled from Hong Kong to Bermuda, and thousands of Hong Kongers were acquiring secondary passports.

Today, the pressure is not so much directly about democracy, but the impact of decades of poor governance and neglecting the needs of Hong Kong’s population. This is manifesting itself in a desire to have a greater say, or at least be governed by leaders who can provide Hong Kong’s residents with a future and the ability to sustain themselves in their own city. The problem is that even this most basic of rights is being eroded. Continue reading…

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