Author Archives: China Briefing

Why Your 2015 China Business Strategy Must Include Asia

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AB mag 2014 07_manufacturing hubs across emerging asiaThe China Price is Dead. It is the Asia Price that Counts.

Op-Ed Commentary: Chris Devonshire-Ellis

As we move into the tail end of 2014, many businesses are now starting to plan their China strategies for the forthcoming year. 2015 will be a significant year in Asia, with numerous trade development and incentive deadlines coming to fruition. These will have an immediate impact upon foreign investors in China, and in many cases will necessitate a change in business model.

While much media attention has concentrated upon the U.S.-led Trans-Pacific Partnership, this has yet to be finalized and potentially may never be so. Meanwhile, other agreements, which do not include the United States as a signatory, will ultimately shape the way that American and other foreign investors plan their 2015 strategies for China and beyond. Chief among these is the ASEAN Economic Community (AEC) compliance deadline that kicks in at the end of next year. Far too many China-focused executives, especially within SMEs, are blissfully ignorant of what this means and the impact it will have. Yet ignoring it could prove fatal.

Briefly stated, the AEC agreement reduces tariffs on products manufactured in ASEAN nations – and subsequently exported to China – to zero. This is due to affect some 90 percent of all products. Although countries like Indonesia, Malaysia, Philippines, Singapore and Thailand – the so-called “ASEAN 5″ – are already in compliance, others are not. Of these, Cambodia, Laos and Myanmar can effectively be written out of the manufacturing/sourcing equation, as for the most part their infrastructure problems continue to threaten the sustainability of production. Their day will come in a decade or so. Continue reading…

The Shake Up: Changing the Shareholder Structure of a Company in China

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By Zhou Qian and Rainy Yao

SHANGHAI – In China, the shareholders in a wholly foreign-owned enterprise (WFOE) are those who make capital contributions and represent the highest authority in the company. According to the Company Law, the functions and powers of shareholders are defined as follows:

  • Deciding on the operational policy and investment plan of the company;
  • Electing or replacing directors and supervisors who are not representatives of the staff and workers, and deciding on matters concerning the remuneration of directors and supervisors;
  • Examining and approving reports from the board of directors, reports from the board of supervisors or the supervisors, as well as the annual financial budget and accounts plan of the company;
  • Examining and approving the company’s plans for profit distribution and making up losses;
  • Adopting resolutions on the increase or reduction of the company’s registered capital, the issuance of corporate bonds, and the merger, division, dissolution, liquidation or transformation of the company;
  • Amending the company’s Articles of Association; and
  • Other functions and powers provided for in the company’s Articles of Association.

Continue reading…

Hong Kong-Chile FTA to Enter Into Force

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SHANGHAI – The free trade agreement (FTA) signed between Hong Kong and Chile will come into effect on October 9, according to an official announcement. The agreement, initially signed in September 2012, is Hong Kong’s first to be signed with a country outside of Asia or Europe. Its far-reaching provisions cover bilateral trade in goods and services, as well as investment, and entail commitments beyond those required by both parties’ membership in the World Trade Organization.

Chile will remove import tariffs on roughly 88 percent of scheduled items, and eventually remove tariffs on an additional 10 percent of items through 2017. The remaining 2 percent of tariff lines to be left untouched represent national priority industries such as cereals, sugars, and iron/steel components.

RELATED: Industry Focus: Importing Wine into China Continue reading…

Case Study: Using the Shanghai FTZ to Access the Outbound Tourism Industry

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By Maria Kotova and Kate Wang

A client in the tourism industry recently contacted Dezan Shira & Associates to advise them on how to best expand their scope of operations in the tourism industry. With the rise in income levels in China, outbound tourism has become one of the most profitable operations for travel agencies in China. The client, who had already engaged in domestic and inbound tourism in China for several years, requested that we investigate the options for foreign investment in the outbound tourism industry.

Pursuant to Article 21 of the Regulation on Travel Agencies (the “Regulation”) issued by the State Council on May 1, 2009, foreign investment in travel agencies is permitted for Sino-foreign equity joint venture (EJV) travel agencies, Sino-foreign cooperative travel agencies and wholly foreign-owned travel agencies, restricted to domestic tourism and inbound tourism only.

Further, according to Article 23 of the Regulation, “foreign-invested travel agencies shall not engage in overseas travel for Chinese mainland residents or business travel for Chinese mainland residents to the Hong Kong Special Administrative Region, Macao Special Administrative Region and Taiwan.” Therefore, our client’s goal of expanding operations by adding outbound tourism to their business scope was determined to be impossible under the normal regulatory environment in China. Continue reading…

China Regulatory Brief: Coal Reform, RMB-Euro Trading, Import Measures

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Shanghai FTZ Further Revises FIE Regulations 

The State Council recently released the “Decision on Temporarily Adjusting and Implementing the Special Administrative Access Measures in the China (Shanghai) Free Trade Zone (Guo Fa [2014] No.38),” which took immediate effect. According to the Decision, wholly foreign-owned enterprises (WFOE) have been newly approved in certain industries such as:

  • Research and application of new technologies for petroleum exploration and development;
  • Research, development, design and manufacture of passenger service facilities and equipment to support high-speed rail, dedicated railway passenger lines and urban railways; and
  • Design of luxury cruisers and yachts.

A total of 27 liberalization measures were introduced for business scope items and foreign equity ratios.

China to Launch Coal Tax Reform

The Chinese government recently announced plans to launch a coal reform program, including a coal resource tax to be levied on an ad valorem basis – meaning that the rate will be set based on the resource price rather than quantity. In order to reduce the burden on the coal industry, other coal-related fees shall be cancelled, including the coal price regulation fund, ecological compensation fund for primary mineral products and local economic development charge. The reforms, which will begin on December 1, 2014, are aimed at promoting energy savings and emissions reductions.

RELATED: The East is Green: The Future of China’s Environmental Regime (Part 1 and 2)

RMB-Euro Direct Trading Opens

On September 29, the People’s Bank of China (PBOC) announced that China would allow direct trading between the yuan and the euro from September 30, 2014. Direct trading is expected to promote the internationalization of the renminbi, according to Ryan Song, Head of Global Markets at HSBC China. According to official data, bilateral trade between China and Europe reached US$291 billion in the first half of this year alone, growing at 12 percent year on year. The euro is now the sixth foreign currency to allow direct trading with the yuan – the others being the Japanese yen, Australian dollar, New Zealand dollar, Malaysian ringgit and Russian ruble.

China Implements Measures to Strengthen Imports

An executive meeting of the State Council, held by Premier Li Keqiang, has released a package of policies to strengthen imports and promote further liberalization of the industry. The meeting clarified that the import of advanced technical equipment and key components shall be highly encouraged. As a result of the meeting, China will adjust the “Catalog of Encouraged Imported Technology and Products”; further support enterprises engaged in import equipment financing and leasing services; and improve import tax policies for products connected with scientific and technological development. These measures come as a response to China’s declining imports volume and the likelihood of missing trade targets for a third consecutive year. In the first five months of this year, the country’s import volume was decreased by 1.6 percent (RMB 4.9 trillion).

Related Reading

Revisiting the Shanghai Free Trade Zone: A Year of Reforms
In this issue of China Briefing, we revisit the Shanghai FTZ and its preferential environment for foreign investment. In the first three articles, we highlight the many changes that have been introduced in the Zone’s first year of operations, including the 2014 Revised Negative List, as well as new measures relating to alternative dispute resolution, cash pooling, and logistics. Lastly, we include a case study of a foreign company successfully utilizing the Shanghai FTZ to access the Outbound Tourism Industry.

Adapting Your China WFOE to Service China’s Consumers
In this issue of China Briefing Magazine, we look at the challenges posed to manufacturers amidst China’s rising labor costs and stricter environmental regulations. Manufacturing WFOEs in China should adapt by expanding their business scope to include distribution and determine suitable supply chain solutions. In this regard, we will take a look at the opportunities in China’s domestic consumer market and forecast the sectors that are set to boom in the coming years.

Industry Specific Licenses and Certifications in China
In this issue of China Briefing, we provide an overview of the licensing schemes for industrial products; food production, distribution and catering services; and advertising. We also introduce two important types of certification in China: the CCC and the China Energy Label (CEL). This issue will provide you with an understanding of the requirements for selling your products or services in China.

Deregistering a Representative Office in China

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By Rainy Yao

For foreign companies looking to expand into the Chinese market, a representative office (RO) is the easiest type of entity to set up, as it entails no requirements in terms of registered capital. However, investors should be warned that in China, deregistering a representative office can be even more time-consuming and complex than setting up a new one. In this article, we detail the full process of deregistering an RO and provide strategic guidance for doing so.

According to the “Administrative Regulations on the Registration of Permanent Representative Offices of Foreign Enterprises” revised in 2013 by the State Council, a foreign enterprise shall apply to the relevant registration authorities for liquidation within 60 days from the date of any of the following:

  • The foreign enterprise terminates its RO;
  • The RO no longer engages in business activities upon the expiry of its licensed duration;
  • The foreign enterprise terminates its business; or
  • The RO is required to shut down in accordance with the law.

The main deregistration procedure is as follows:

Step 1 — Prior to applying to deregister the RO, the company must apply to the tax bureau for a tax audit and deregistration. The company should submit to the tax bureau a board resolution affixed with the signature and seal of the chairman of the board of directors, as well as a cancellation application signed by the chief representative of the RO. This requires the following:

  • An application form
  • Business license
  • Proof supporting the change of registration
  • The original tax registration certificates issued by the taxation authorities (e.g., original copy and duplicate of the tax registration certificate and tax registration form)
  • Other relevant documents

Step 2  The company must deregister with other departments and authorities including the State Administration of Foreign Exchange (SAFE), Customs, the State Administration of Industry and Commerce (AIC), the Quality and Technical Supervision Bureau and the Statistics Bureau. This step requires the following:

  • A written application for the cancellation of the RO’s registration
  • The cancellation certificate from the tax bureau, as obtained in Step 1
  • A certificate issued by Customs and SAFE proving that all the relevant matters have been completed
  • Other relevant materials required by the AIC

According to the AIC, the cancellation application will be processed within 10 workdays of receipt. If successful, the company will be issued a “Notice of Deregistration” and all the registration certificates will be cancelled.

Step 3 — The company should close its bank account.

The total time required for deregistration varies from six months to two years (or more) by region.

For a consultation on deregistering your representative office (or changing over to a wholly foreign-owned enterprise), please contact the legal professionals of Dezan Shira & Associates at china@dezshira.com.

Asia Briefing Ltd. is a subsidiary of Dezan Shira & Associates. Dezan Shira is 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 China, Hong Kong, India, Vietnam, Singapore and the rest of ASEAN. For further information, please email china@dezshira.com or visit www.dezshira.com.

Stay up to date with the latest business and investment trends in Asia by subscribing to our complimentary update service featuring news, commentary and regulatory insight.

Related Reading

Setting Up Representative Offices in China (Fourth Edition)
This guide is a practical overview for the international businessman to understand the rules, regulations and management issues regarding establishing Representative Offices in China, including detailed description of 2010 regulatory updates.

 

 

Adapting Your China WFOE to Service China’s Consumers
In this issue of China Briefing Magazine, we look at the challenges posed to manufacturers amidst China’s rising labor costs and stricter environmental regulations. Manufacturing WFOEs in China should adapt by expanding their business scope to include distribution and determine suitable supply chain solutions. In this regard, we will take a look at the opportunities in China’s domestic consumer market and forecast the sectors that are set to boom in the coming years.

Using China WFOEs in the Service and Manufacturing Industries
In this issue of China Briefing Magazine, we provide a detailed overview of the WFOE establishment procedures as well as outline the typical costs associated with running these entities in China. We hope that this information will give foreign investors contemplating entry into the Chinese market a better understanding of the time and costs involved.

Competition with Chinese Firms Tops Challenges for American Companies in China

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When nearly one year ago a US business executive received word that his company was flatly denied membership to one of China’s biggest industry specifications and standards associations, he was left with many troubling questions. Were other companies turned down also? Was his company being singled out? But what troubled him most was the reported reason his industry-leading company was rejected: foreign companies were not permitted to join.

Since then, the executive says his company—a US-China Business Council (USCBC) member—has lobbied many times for reconsideration, but its application continues to be denied.

As a result, he says that competition with Chinese firms is proving to be the greatest challenge his firm is facing in the China. And he isn’t alone: After a steady ascent in the rankings, competition with Chinese firms is now the top challenge for American companies doing business in China. According to the USCBC 2014 member survey, US businesses say that they are facing increasing numbers of Chinese competitors who often enjoy preferential treatment over foreign firms.

CBR_survey_1

This is echoed by the US executive. He says that it is unequal treatment in government regulations, not competitive Chinese goods and services, that makes this challenge so difficult to tackle. He says that Chinese companies striving for international recognition—and the central government—are driving these kinds of policies. “In my opinion, China wants nothing more than to have a brand similar to Lexus or Nikon,” he said. “And it’s going to be difficult with that sort of approach.”

 

The top challenge

As China’s economy has grown in size and strength, so have its domestic companies—both private and state-owned enterprises (SOEs). The competition American businesses face from their advantaged Chinese counterparts has grown stronger—and more pressing due to the recent slowing of economic growth in China.

CBR_survey_2

Robust competition in itself is not a concern for foreign companies doing business in China, according to the 2014 survey. American companies are accustomed to strong competitors, which they face in markets all over the world. However, competition in which one group of companies is favored over othersis a significant concern, say respondents. While many have focused on preferential treatment that Chinese state-owned enterprises (SOEs) receive, survey data show that the issue is not ownership structure, but simply nationality. Chinese companies, regardless of ownership, receive benefits that foreign companies cannot.

In addition to membership access to industry associations, the USCBC member company executive also points to the Chinese government procurement law as a stumbling block for foreign companies. He says that the law’s regulations heavily encourage the purchase of Chinese goods and services on both business-to-consumer and business-to-business levels. What hurts his company the most is a regulation that forces state-owned enterprises to purchase exclusively from Chinese companies—even if a superior option is available from a foreign firm—unless they can convince the government that they can’t purchase what they need otherwise.
CBR_survey_3

One last challenge is the threat of investigation under China’s antimonopoly law. Although both foreign and domestic companies are being investigated, foreign companies appear to be facing increasing scrutiny. Eighty-six percent of survey respondents are concerned about the lack of transparency, due process, and other issues surrounding competition-related investigations.

Preferential treatment of domestic enterprise is not in the long-term interest of China or its companies, according to the survey. Access to preferential benefits does little to create the type of efficient and innovative companies that China hopes will lead its economy to the next stage of development. As senior leaders such as China’s Premier Li Keqiang have noted inpublic statements, Chinese companies will become internationally competitive only through increasing fair and robust competition in China’s market.

CBR_survey_4

The list continues

This year’s top 10 challenges include many issues that have made the list in previous years, though the order changes from year to year. As with previous survey results, issues that move down in rank are not necessarily doing so because the situation has improved. Rather, those issues are most likely eclipsed by more pressing concerns. Overall, companies report that little progress has been made in addressing many of these persistent challenges.

CBR_survey_5

For instance, cost increases dropped from the top slot to the fifth, despite separate survey data that indicates costs have not moderated in China. In fact, most respondents note that the challenges associated with cost increases have gotten worse over the past year. This same trend holds true of other policy related challenges.

To genuinely confront the regulatory issues that foreign companies continue to face in China, USCBC says that regulators must focus on major policy changes, such as the conclusion and implementation of a US-China bilateral investment treaty (BIT). Addressing this issue and others will help make real progress on challenges like competition, investment restrictions, uneven enforcement of laws and regulations, licensing, and national treatment. Without such bold leadership, says USCBC, the top 10 challenges are unlikely to see substantive change in the future.

Business outlook

American companies continue to view China as a top-five market, but the number of companies increasing their resource commitment in China continues to drop, according to the survey. Fifty percent of companies report plans to boost resources in China over the next 12 months, down from almost 75 percent just three years ago. Virtually no companies are cutting back on their operations in China, however. Those that are not expanding their operations in China are maintaining current levels and few are redirecting investments from China to other countries.

Almost three-quarters of companies saw an increase in revenue last year, with another 12 percent reporting flat sales. Only 15 percent of companies reported a decrease in revenue in 2013. Most companies anticipate that their revenue will increase again in 2014.

Overall, American companies remain profitable, but at lower margins, with 83 percent of companies indicating that their China operations are profitable. But companies have seen an important shift in China’s performance compared to overall company operations. Although improved from last year, the profit margin of China-based operations continues to be well below the highs that companies experienced prior to 2012.

So what’s squeezing profit margins? Along with rising costs, this year’s top challenge is the answer. Not only is this competition with Chinese companies under preferential policy unfair, says the survey, but it’s also hitting China’s foreign investors in their wallets.

How do we move forward?

The full survey report provides a detailed account of the challenges that American companies face in their China operations. USCBC says it is important to keep in mind the contrast that China presents for companies: an extremely difficult business environment along with a vital, growing market for foreign businesses.

By USCBC calculations, China is at least a $300 billion market for American companies—but it should be bigger. Depending on which source is used, US firms have invested around $70 billion dollars in China over the past 30 years. Chinese companies are only now beginning to ramp up their investments in the United States, which will create additional jobs and opportunities for the American economy as well as tax revenue for local, state, and federal governments.

It is vitally important that the United States and China get their commercial relationship right, rather than allowing these issues derail what is and will remain the most important bilateral relationship in the world, USCBC says. That will require policymakers on both sides to work toward solutions to mutual problems: those that US companies face in China and those that Chinese companies experience when doing business in the United States.

The bottom line

All of the challenges US companies face in China warrant attention and remedies, but none is more pressing than leveling the playing field with Chinese competitors, USCBC says. The business executive whose company was denied association membership agrees. He says he worries that denying companies based on nationality and not qualifications could lead to lowered standards that may hurt the industry overall and present future challenges to his business in China.

China Business Review is the official magazine of the US-China Business Council, a non-profit and non-partisan trade association that represents roughly 230 American companies doing business in China.

Asia Briefing Ltd. is a subsidiary of Dezan Shira & Associates. Dezan Shira is 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 China, Hong Kong, India, Vietnam, Singapore and the rest of ASEAN. For further information, please email china@dezshira.com or visit www.dezshira.com.

Stay up to date with the latest business and investment trends in Asia by subscribing to our complimentary update service featuring news, commentary and regulatory insight.

Related Reading

Revisiting the Shanghai Free Trade Zone: A Year of Reforms
In this issue of China Briefing, we revisit the Shanghai FTZ and its preferential environment for foreign investment. In the first three articles, we highlight the many changes that have been introduced in the Zone’s first year of operations, including the 2014 Revised Negative List, as well as new measures relating to alternative dispute resolution, cash pooling, and logistics. Lastly, we include a case study of a foreign company successfully utilizing the Shanghai FTZ to access the Outbound Tourism Industry.

Adapting Your China WFOE to Service China’s Consumers
In this issue of China Briefing Magazine, we look at the challenges posed to manufacturers amidst China’s rising labor costs and stricter environmental regulations. Manufacturing WFOEs in China should adapt by expanding their business scope to include distribution and determine suitable supply chain solutions. In this regard, we will take a look at the opportunities in China’s domestic consumer market and forecast the sectors that are set to boom in the coming years.

China Retail Industry Report 2014
In this special edition of China Briefing, we provide an overview of the retail industry in China and the procedures for setting up a retail shop, focusing specifically on brick-and-mortar physical retail stores. Further, we have invited our partner Direct HR to offer some insights on the talent landscape in the retail industry, as well as tips for recruiting retail personnel in China.

China Outbound: From New York to Shanghai, All Eyes Are on India

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Our Latest Round-Up of Business News Affecting China-Based Businesses Investing in Asia

In this edition of China Outbound, we highlight the growing importance of India in global investment trends, as supported by the launch of Prime Minister Narendra Modi’s “Make in India” campaign for promoting high-tech enterprises to invest in the country. At the other end of the spectrum, we outline why India is poised to inherit low value-added manufacturing to serve China’s domestic consumer market, and review the results of President Xi Jinping’s recent South Asian tour in terms of infrastructure investment in India and Sri Lanka. These projects, together with streamlined customs initiatives in China such as those in the Shanghai Free Trade Zone, will facilitate the smooth flow of both goods and investment between these two Asian powerhouses. Continue reading…

Asia Briefing Bookstore Catalogue 2013