By Dezan Shira & Associates

June 19 - One of the issues that many foreign investors face in China, when deciding on a location for their business, is evaluating the various incentives offered by the local government.

The problem with this is that many local governments, or even officials, do not follow state law when it comes to offering incentives to foreign investors. At worst, they can sell you something that can be immensely damaging, sacrificing your investment to local business interests, or more commonly, provide incentives that may not be actually backed up in written format and cannot be replied over the long term. These can also prove to have a longer-term impact on your business. It is important to check off investment incentives that are offered to you as part of a package to attract your business with an experienced firm familiar with the issues and able to offer an opinion on the credibility of the deal.

Soft incentives
These typically involve a manipulation of the local government’s tax collection, and can include rebates on business taxes, VAT or similar taxes. Because Chinese tax collection is a two-tiered structure, part collected by the state level tax bureau’s local office and part by the Regional level tax bureau, the local part can be used by the local government to offer this back as an investment to foreign investors. However, in doing so they are out of compliance with their own State directives that specify that such collected revenues go towards local urban development; roads repair, hospitals, schooling, civic amenities and so on. Such revenues are not supposed to be used to attract foreign investment. Accordingly, this is why in practice a local government will never provide a written guarantee of such incentives; they can’t as the money is not supposed to be used in this manner. There are three ways to assess these types of incentives. (more…)

By Dezan Shira & Associates

June 18 - With the unification of China’s tax base at the beginning of 2008 to 25 percent (as predicted by China Briefing in April 2006, see page ten of the issue) much of China’s previous tax incentives for attracting foreign investment into the country dried up. Gone were the wholesale 15 percent uniform tax rates for manufacturing enterprises, gone too were the attractive five year tax breaks of two years zero and three years 50 percent of the applicable rate. Yet, as we noted yesterday, foreign investment hasn’t slowed down at all, the country remains an attractive destination for foreign investment. There are three main reasons for this.

WTO admission
China has, in accordance with the WTO requirements, opened up its markets to foreign investment and participation. Although there are still areas of resistance in some of the inland regions to foreign participation in long-protected local industries, in time this will change. Strategic industries, as is common elsewhere, will remain restricted in line with the Communist Party’s areas of concern, but generally speaking, the WTO aspect has been good for China and good for foreign investors. (more…)

By Dezan Shira & Associates

June 17 - With the adjustment of China’s corporate tax base six months ago to a universal rate of 25 percent for all businesses, barring a few exceptions for encouraged industries, and the abolition of the profits tax breaks of manufacturing industries, many now mourn the passing of the “good old days” in China when foreign investors were largely financially encouraged to invest. At the time, local governments nationally went on a spree to attract them.

Not all of that investment was particularly good for China, and neither were some of the so-called incentives quite what they were cracked up to be either. China attracted a lot of investment that was bad for the country. It attracted inefficiency, outmoded industrial processes that were 30 years out of date in the West let alone China, industrial polluters, poorly treated work forces…the list went on and on. Foreign investors were largely free to bring to China, especially in manufacturing, old processes long discredited elsewhere. Cue an entire who’s who of exploiting businesses wanting to eke as much as they could both from an underpaid workforce and poor technology already long written off the books. China’s adjustment of the tax base and its insistence of higher standards of employment ethics concerning labor were specifically designed to curb the worst of these practices, and force them to either comply, or leave. The true cost of conducting business in China would now be levied.

The result has not been a dramatic slow down of FDI. In fact, quite the reverse – China’s FDI increased 50 percent as we noted here a few days ago, and international businesses are pouring in to invest as China’s middle class is now starting to buy global brands.

But what of the true cost of business, what of any new tax incentives? (more…)

June 13 - China utilized US$42.78 billion in foreign direct investment in the first five months this year, an increase of 54.97 percent from the same period last year, the Ministry of Commerce said yesterday.

The growth was lower than a year-on-year growth rate of 59.32 percent used in the January-April period this year Xihhua reported. The number of newly-approved foreign-funded enterprises shrank 20.95 percent to 11,915 in the first five months of the year.

Utilized FDI in May jumped 37.94 percent from a year earlier to RMB7.76 billion while the number of newly-approved foreign-funded enterprises dropped 10.94 percent to 2,425. (more…)

By Chris Devonshire-Ellis

June 10 - How badly is China’s runaway success affecting its environment? Jonathan Franzen, author of the New Yorker article, “The Way of the Puffin,” travels between Phoenix Arizona and Ningbo on China’s eastern seafront to discover the economic and environmental costs of producing a Puffin golf club cover.

Along the way, he coincidentally comes across a handful of situations that fly in the face of conventional American wisdom over Chinese business practices. Visiting the American company churning out the Puffin – a soft toy producer in Phoenix – he establishes that the supplying company in Ningbo pays their China staff double the going rate. “We want karma in China,” the U.S. managing director says. “And we wanted to pay for perfection.” (more…)

CHICAGO, June 9 - The Chicago Tribune reports that executives of Alfred L. Wolff Inc., a prominent honey importer based in Germany, have been arrested and held by U.S. Immigration and Customs enforcement agents for illegally conspiring to import honey from China.

The honey laundering case is note worthy as it involves apparent criminal activities by American-based, rather than Chinese businessmen in trying to ensure that cheap product reaches the States, in what is regarded as a rising trend of American commercial disobedience towards government imposed anti-dumping measures. In the Wolff case, honey was said to have been purchased from China, shipped to Russia, mixed with Russian honey, and then shipped to Chicago labeled as pure Russian honey - which does not carry anti-dumping penalties. Other countries Wolff have been alleged to have used as secondary destinations to get around the U.S. Department of Commerce’s anti-dumping fees on Chinese honey include Australia, the Ukraine, Poland and Singapore. The origin of honey can be detected by a signature chemical analysis that identifies soil residues within the honey itself, and once nine containers of Russian honey were actually identified as being of Chinese origin, the executives concerned were apprehended and are now being held at Chicago’s Metropolitan Correction Center, though they have yet to be formally charged. (more…)

May 27 - AmCham South China released their annual report business conditions in the Greater Pearl River Delta region last month, stating that business in South China remains excellent (click on picture to download report).

The reports, conducted by AmCham South China in partnership with Hewitt Associates and Dezan Shira & Associates, collected the experiences and insights of 419 international and local companies in Guangdong, Guangxi, Fujian and Hainan according to the chamber’s press release.

“I believe that the most important thing about this report,” said AmCham South China President Harley Seyedin, “is that it is only the broadcast medium for a message coming directly from the international business community.”

Nine out of ten participating companies indicated that they were already profitable, or would be within two years or less, and vast amounts of these profits are reported as being reinvested in China, with approximately 23 percent of companies indicating that they plan to invest in excess of US$50 million in China over the coming three years, and half of that number planning to invest in a US$25 million or more—each—in that same time frame. (more…)

May 16 –The Australian mining group, Rio Tinto, is protesting over what it calls aggressive negotiating tactics after China Iron & Steel Association (CISA) asked its members to boycott the company’s spot sales of iron ore.

In a statement made on its web site, CISA said: “We appeal to domestic mills and traders not to support or take part in Rio Tinto’s spot iron ore sales activities in China.”

CISA, Rio Tinto and BHP Billiton have been gridlocked in price negotiations for months now. Rio is demanding a 65-71 percent price hike compared to what CISA pays for ore from Brazilian miner,Vale.

It is cheaper for Chinese steel makers to transport Rio’s ore from western Australia because it is almost three times closer to China than Brazil.

(more…)

May 13 – The amount of foreign direct investment pouring into China increased by up to 59.32 percent to US$35.02 billion for the first four months of the year, reports the Ministry of Commerce. On the other hand, the number of approved foreign-funded companies decreased by 23.15 percent to 9,490 compared to the same period last year.

China has been implementing new measures to control foreign investment in the country. Recently, it standardized corporate income taxes for both foreign and local companies while also publishing a catalogue to attract foreign investment to high-tech or environment-friendly projects.

Zhang Hanya, director of the Research Institute of Investment with the National Development and Reform Commission, told Xinhua that the figures indicate that China remains the favored destination among foreign investors.

(more…)

May 5 - China’s trade with the Association of Southeast Asian Nations increased to US$54.4 billion in the first quarter of 2008, a 26 percent increase over the same period last year, sources with the Ministry of Commerce reported on Friday.

According to Xinhua, bilateral trade reached US$202.5 billion last year, representing a year-on-year increase of 26 percent and achieving the trade target of US$200 billion three years ahead of schedule.

Besides trade, two-way investment, contracted engineering and labor cooperation between China and ASEAN members have developed rapidly. (more…)