Economy & Trade

Dezan Shira & Associates Global Speaking Events – Late November & December 2014

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Speaking engagements in late November and December throughout South and East China, and Germany.

The accounting, tax and legal experts of Dezan Shira & Associates regularly attend and speak at international events pertaining to foreign investment in China, India, Singapore, Vietnam and the wider ASEAN region. Below, we provide a list of events taking place in late November and December, along with the relevant event and contact details to get meet our staff in person.

For further information on these events or to book a complimentary one-on-one session with our staff at any of the locations below, please contact info@dezshira.com. A comprehensive list of upcoming events that Dezan Shira staff will be attending is available here. Continue reading…

Australia Secures Far-reaching Benefits in Free Trade Agreement with China

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Op-Ed Commentary: Steven Elsinga

SHANGHAI – China and Australia concluded a Free Trade Agreement (FTA) on November 17 in Canberra, with Chinese President Xi Jinping and Australian Prime Minister Tony Abbott signing the official document. This marks the conclusion of negotiations originally begun in 2005.

China is Australia’s largest trade partner, with 20 percent of Australian imports coming from China, and 36 percent of exports going to China. Previously, bilateral talks had stalled over two main key points: China reducing its tariffs on agricultural products and services, and Australia easing the investor climate for inbound Chinese companies. Continue reading…

Shanghai-Hong Kong Stock Connect to Launch Nov. 17 – Interview with Prof. Terrill Frantz

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FICE

By Steven Elsinga

On Monday, the Shanghai-Hong Kong Stock Connect is set to officially launch, after months of anticipation. The scheme aims to link up the stock exchanges of Hong Kong (HKSE) and Shanghai (SSE), allowing investors in either exchange to trade on both stock markets.

On the Southbound link, institutional investors and individuals with over RMB 500,000 in their brokerage accounts may trade Hong Kong shares through a broker on the Shanghai stock market; while heading Northbound, Hong Kong investors and international investors with Hong Kong brokerage accounts may trade shares listed on the SSE. Note: there are no limitations on the type of investor or net worth on the Northbound link.

RMB liberalization

Both channels will use the RMB for transactions. Northbound investors will use offshore RMB deposits to trade on the Shanghai exchange; Southbound investors will trade on the Hong Kong Stock Exchange using Hong Kong dollars, like all other participants, but clearing will take place in RMB. Southbound investors trading on the Hong Kong exchange will have to convert their RMB into Hong Kong dollars when entering the market, and convert them back into RMB when exiting a position.

Not all shares will be eligible to be traded under the scheme. On the Shanghai Stock Exchange, Northbound investors are limited to purchasing A-shares listed on the SSE 180 and SSE 380 Indices. On the Hong Kong Stock Exchange, Mainland investors may trade shares listed in the Hang Seng Large Cap and Mid Cap Indices.

Investors on both sides may also trade shares of companies that are listed on both the SSE and HKSE, as A-shares and H-shares respectively. A-shares refer to RMB-denominated shares on Mainland stock exchanges and H-shares to RMB-denominated shares in Chinese companies traded on the HKSE.

Related Link IconRELATED: RMB Internationalization and the Shanghai FTZ

This has led to an interesting situation where shares in the same company now trade at different prices in Hong Kong and Shanghai, a phenomenon tracked by the Hang Seng China AH Premium Index. With these shares now available to both SSE and HKSE participants, this difference should erode. There is, however, a ban on all types of short selling in the Northbound link (HKSE participants trading on the SSE), so consolidation would likely see a rise in H-shares, rather than a tumble in Shanghai A-shares.

Trade quotas

Apart from the types of shares, the pilot scheme comes with limitations on the total RMB value of shares that can be traded through the exchanges. For the Northbound link, there is an aggregate cap of  RMB 300 bn and RMB 13 bn daily. Southbound trading, meanwhile, will be limited to RMB  250 bn aggregate and RMB  10.5 bn daily.

RECHRF-00012398-001To gain a better understanding of these new developments, China Briefing spoke with Terrill Frantz PhD., a professor at Peking University HSBC Business School. While much has been made of the possibility of A-share/H-share arbitrage following the launch of the pilot Connect, Prof. Frantz believes this opportunity may be short-lived.

In his mind, a much more interesting dynamic will come from the daily caps on the RMB value of trading. Prof. Frantz foresees real time tracking of the daily trade volume by regulators, but noted uncertainty of what will happen when the volume reaches its daily limit – e.g., will trading be halted ? This could mean the price of a particular popular stock soaring in a short amount of time as trading approaches the quota.

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Prof. Frantz likened it to trading a German company while in New York, where the company files an earnings report at the end of the day. New York traders can take full advantage of the new information, whereas German investors must wait for the market to open the next day. Based on the daily quotas in the Shanghai-Hong Kong Connect scheme, this could happen during the day, on a daily basis.

Impact on QFII program

Previously, the only way for foreign investors to trade A-shares was through the Qualified Foreign Institutional Investors (QFII) program. This was one of the first efforts to internationalize the RMB. Under the program, a small number of foreign financial institutions are allowed to invest in the RMB-denominated securities market in China, including A-shares on the Shanghai and Shenzhen stock exchanges, but also bonds and futures.

Shanghai Stock ExchangeThese financial institutions can then sell financial products based on their investments in China. Investments through this channel are still subject to capital controls, with quotas allocated to individual entities. Over the past several years, these quota allocations have played a role in Chinese diplomacy, such as a RMB 80 billion quota granted to French investors during Chinese President Xi Jinping’s European tour earlier this year.

In Prof. Frantz’s view, the impact of the Shanghai-Hong Kong Connect will be to annul the QFII program’s current monopoly on A-shares. He believes the biggest beneficiaries of this development will be individual investors – who in the Northbound link are now allowed to invest directly in the SSE – as well as Mainland investors who will now be legally able to trade on the Hong Kong markets.

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But overall, he does not expect the new liberalization to have too great an effect on the market: “The hedge funds and individuals who are able to invest large enough amounts to matter already have access to these shares. The major players have long found ways around the limitations, regardless of whether they were allowed to.”

RMB exchange limits lifted for Hong Kong residents

In preparation for the launch of the Connect, the Hong Kong Monetary Authority (HKMA) announced the abolition of all previous restrictions on Hong Kong residents exchanging RMB to and from other currencies, also effective 17 November. Previously, Hong Kongers could only exchange up to RMB  20,000 a day. Had the restrictions not been lifted, Hong Kong investors would have hardly been able to participate in the new trading channel.

Because Hong Kong banks draw their RMB from the offshore pool in Hong Kong – also referred to as CNH – the move will not affect the flow of RMB from China into Hong Kong. This is also why the daily limit of RMB  80,000 on remittances to China shall remain in place. The new move therefore widens the range of options for offshore RMB, but otherwise does not loosen access to the China-side currency.

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Remaining uncertainty

Overall, a great deal of uncertainty still surrounds the Connect program, despite its pending launch. It is unclear, for example, whether China will charge a capital gains tax (CGT) on the sale of shares, which Hong Kong does levy. Furthermore, under the QFII program, the Chinese authorities have not always collected CGT in the past, which adds to the confusion.

Neither does the Hong Kong-China Double Taxation Agreement touch upon the issue. Levying CGT on Northbound traders would require Hong Kong brokerages to withhold tax on their clients, something they have no experience with – the China Securities Regulatory Commission, for its part, has not given a definitive answer on the question.


About
Us

Terrill L. Frantz is a Professor of Management at Peking University HSBC Business School, in Shenzhen, China. His research is focused on cross-border mergers and acquisitions, particularly post-merger integration dynamics. He can be contacted at terrill@phbs.pku.edu.cn.

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.

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Related Reading Double Taxation Avoidance in China: A Business Intelligence Primer
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Revisiting the Shanghai Free Trade Zone: A Year of Reforms
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Republican Congress Could Shape Obama’s Legacy on U.S. Investment in China

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Op-Ed Commentary: Andrew Salzman, Dezan Shira & Associates, North American Desk

With the Republican Party reclaiming a majority in the U.S. Senate, it is fair to ponder what this will mean for American businesses with an international presence, such as in China. With their Senate takeover, Republicans now have a majority in both houses of U.S. Congress. This could lead President Obama to place a greater emphasis on foreign policy during his last two years in office.

The U.S.’s well-publicized ‘pivot to Asia’ could receive a new shot in the arm as the President looks to define his legacy achievements.  For example, the passage of the Trans Pacific Partnership (TPP) – a large free trade agreement that covers both sides of the Pacific, but notably excludes China – may receive an added impetus with the GOP in Congress.

Notably, the TPP fits in with traditional Republican goals of reducing tariffs and regulatory barriers. If passed, the pact could help to deepen ties between the U.S. and ASEAN and increase American investment in that region. Continue reading…

Beijing-Promoted FTAAP Will Delay TPP, Driving US Companies to ASEAN for FTA Benefits

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CDE Op-Ed Commentary

The main outcome of the Asia-Pacific Economic Cooperation (APEC) annual meeting in Beijing has been an agreement to  launch a “strategic study” of a trade pact known as the Free Trade Area of the Asia-Pacific (FTAAP). Scheduled to take two years to complete, APEC officials have been keen to stress that the study is not an opening of negotiations. Notably, it is backed by China.

Through APEC’s agreeing to the study however, the alternatives – the long-promoted Trans-Pacific Partnership (TPP) and Regional Comprehensive Economic Partnership (RCEP) agreements – will, in my opinion, probably fall by the wayside. The TPP is led by Washington and excludes China, while the RCEP is promoted by China and excludes the United States. Negotiations for each will continue – officials from the countries concerned will want to keep up political and trade pressure on any future FTAAP agreement through using the TPP and RCEP negotiations to push their own agendas.

Continue reading…

Shanghai: The Economic Nexus of China

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With a population of over 25 million, Shanghai, often referred to as the “Paris of the east,” is the economic nexus of China. Situated in the Yangtze River Delta (YRD) in east China, the city aims to be the world’s global financial and economic center and international transport hub by 2020.

In this article, Rainy Yao from Dezan Shira & Associates takes a closer look at this modern metropolis with its well-developed infrastructure and sound investment environment.

Economic overview

Shanghai accounts for one-eighth of China’s total financial income while taking up only 0.06 percent of the nation’s land. In 2013, the city’s gross domestic product (GDP) exceeded RMB 2.16 trillion, the highest in all of China. Of this total, the city’s primary industry contributed RMB 12.9 billion and its secondary industry RMB 802.7 billion (up 6.1 percent from 2012). The most notable contribution was from the service sector – a monumental RMB 1.34 trillion, or 62.2 percent of total GDP. In the first half of 2014, the city’s GDP stood at RMB 1.09 trillion with a stable annual growth rate of 7.1 percent.

The finance sector has also played a key role in Shanghai’s economic development, with an added-value in 2013 of RMB 282.3 billion (up 13.7 percent from 2012). By the end of 2013, 215 foreign-invested financial institutions and 198 representative offices had been established in the city.

From January to September 2014, Shanghai has witnessed a sharp increase in foreign direct investment. Over 400 foreign-invested projects were introduced in September alone – a y-o-y growth rate of 34.1 percent. Continue reading…

China Outbound: Connecting Your China Business to the ASEAN Region

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

 In this edition of China Outbound, we survey the growing integration between China and the ASEAN region – whether in terms of low value-added Vietnamese products flooding into China, the use of China’s extensive network of double taxation treaties for optimizing international tax liability, or Hong Kong’s own efforts to adopt a free trade agreement with ASEAN. We also highlight diversity in the region, where a wide range of economic and political agendas comprise the ten-member bloc, giving rise to their differential participation in multilateral agreements such as the Trans-Pacific Partnership.

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

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.

Outlook on ASEAN Investment 2015

Indonesia, Malaysia, and the Philippines are surging ahead of their regional neighbors, with FDI increases of 17, 19 and 20.4 percent, respectively, in 2013, according to Bank of America Merill Lynch. Meanwhile, Singapore continues to receive the lion’s share of total FDI in the region, which last year grew five percent to a net value of nearly US$64 billion. The city-state’s attraction for foreign investors derives not only from its often overlooked manufacturing base, but also as a channel for routing FDI into other locations in ASEAN.

Why Your 2015 China Business Strategy Must Include Asia

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.

An Introduction to Double Taxation Avoidance in China

China has made significant strides in the past five years in building up its regulation in the area of double taxation avoidance, as well as implementation assurance techniques. Following the 2008 Corporate Income Tax Law, which laid the basis for anti-avoidance in China, the State Administration of Taxation (SAT) issued a flurry of related circulars stipulating reporting requirements for offshore transactions, describing qualification as a beneficial owner, and dictating protocol for claiming treaty benefits.

Hong Kong-ASEAN FTA Could be Implemented by 2016

According to Hong Kong government officials, a free trade agreement with the Association of Southeast Asian Nations (ASEAN) should be ready for implementation in 2016. The first round of the trade talks were completed in July of this year. Hong Kong is eager to deepen its relationship with ASEAN. In recent years, the city has seen trade start to move away from the island as a result of exports from China now being able to move directly to ASEAN nations with reduced or zero tariffs.

ASEAN Update: Understanding the Geopolitics of the South China Sea Dispute

In recent years, the South China Sea has become a key area of concern for the ASEAN organization. In the face of an increasingly expansionary China, ASEAN has often seemed slow to react and unsure of what strategy it should pursue. While there are options in place, such as the Declaration on the Conduct of Parties in the South China Sea (DOC), there has been little unity in the actions of the ten member nations.

Trade Ministers Report Progress on Trans-Pacific Partnership (TPP)

Trade Ministers and Heads of Delegation for the nations involved in the negotiations over the Trans-Pacific Partnership (TPP) have reported significant progress in the talks over market access and trade and investment rules. The recent talks took place in Canberra, Australia on October 25-27. After the close of the meeting, negotiators stated that “the shape of an ambitious, comprehensive, high standard and balanced deal is crystallizing,” and pledged that they “will continue to consult widely at home and work intensely with each other to resolve outstanding issues.”


About Us

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.

 

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‘Bad Faith’ Trademark Registration in China

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Having decided to formally enter the Chinese market several years ago, electric carmaker Tesla was surprised to discover that they could not register or officially use their trademarked name, as another party had already registered it. Faced with no legal grounds for cancellation, the company was forced into prolonged negotiations to purchase it from the Guangzhou-based business man who had been granted the rights in 2009, or otherwise face the prospect of an entire China rebranding campaign. The RMB 2 million (€250,000) Tesla offered to buy the rights was turned down and eventually, after further negotiation, an undisclosed settlement was reached, presumably far higher than the former offer.

This kind of situation is far from out of the ordinary and while stories of large international companies experiencing this problem are common, cases of small and medium sized businesses facing the same difficulties are even more frequent. Prior trademark registrations, also called ‘bad-faith registrations’, involve a Chinese company first registering the trademark of a foreign company in China with the express intention of selling it back to the foreign company at an inflated price. Discovering that a Chinese company has registered a trademark in bad faith is one of the biggest complaints of European Small and Medium Enterprises (SMEs) trying to enter the Chinese market. These prior registrations can limit the foreign company’s freedom to operate by restricting its ability to enter the China market or even to source goods from China.

A sound knowledge of the instruments available to protect your company’s intellectual property is of utmost importance. It is worth remembering that trademarks not only protect particular products, but also the company’s wider reputation. Continue reading…

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