China’s economy experienced a turbulent 2022 as the country grappled with multiple COVID-19 outbreaks. Against these odds, sectors such as foreign trade and investment continued to see double-digit growth as the country lifted COVID restrictions and forged a way toward economic growth.
The parallel experiences of China versus much of the rest of the world have put the country in a uniquely advantageous position. Foreign investors who had moved their supply chain out of the country due to the US-China trade tension and China’s rising labor cost are now seriously considering moving back to China.
On top of why foreign investors choose China as an investment destination in the first place, i.e.:
- Great growth potential: The British Consultancy Centre for Economics and Business Research (CEBR) projects China’s economy to continue growing at 5.7 percent per year through 2025 and then 4.7 percent by 2030, at which point it will surpass the US to become the world’s largest economy. China’s GDP per capita was US$12,551 in 2021, about six times lower than that of the US. The gap shows that there is still significant room for economic activity and household wealth to continue to grow before leveling off at a saturation point.
- Tremendous domestic market: China is the world’s second-largest retail market and is touted to be the first in the near future with China’s rising purchasing power, expanding middle class, and population of over 1.4 billion.
- Strong supply chain: China is the only country that possesses all the industrial categories in the United Nations industrial classification, which allows firms to source goods easily.
- Sophisticated infrastructure: China boasts the largest network of high-speed rail and expressways in terms of mileage, which allows products to be transported efficiently.
- Improving business environment: China moved from ranking 78th to 31st on the World Bank’s Ease of Doing Business rankings in the years between 2017 and 2019 as a result of a series of business reforms.
- Continuous market opening to foreign investment: China rolled out two 2021 negative lists for foreign investment, reducing the number of items from 33 to 31 on the national negative list and 30 to 27 on the free trade zone negative list.
- Workforce and labor: China has the world’s largest labor market while at the same time holding advantages in expertise and efficiency compared to lower-cost emerging markets.
- Increasing trade and investment agreement framework: China has signed 23 free trade agreements (FTAs) with 26 countries or regions on a bilateral or multilateral basis, with another 10 FTAs under negotiation; China has 107 bilateral investment agreements (BITs) in place, with another 17 under negotiation; China has signed 110 double tax avoidance agreements (DTAs) with countries and regions.
Given China’s strength and high growth potential across a multitude of industries, it is inevitable that it will continue to attract investors globally.
Below, we summarize why foreign companies relocate to China:
China +1 strategy
China is a significant base for the China Plus One strategy as it creates a strong foothold for foreign companies when looking to diversify their investment in Asia.
As the Chinese economy continues to transition towards consumption-led growth, both statutory minimum and real wages will rise further. With the rising costs for Chinese manufacturing operations, investors are choosing to supplement Chinese operations with assembly and low-value-added production in markets such as Vietnam, India, Indonesia, etc.
Moreover, China’s proximity to other Asian countries, coupled with its resilient supply chain and logistics, has led companies to set up operation plants in different locations with ease. By situating manufacturing cost centers close to traditional hubs in mainland China, investors can reduce costs with limited interruption or delays to currently existing supply chains.
Resilient supply chain and export capacity
Foreign trade in 2022 has remained relatively stable, although growth has slowed gradually over the course of the year. Imports and exports reached a total of RMB 6.2 trillion (US$890.6 billion) at the end of February, a year-on-year growth rate of 13.3 percent. Of this, exports grew 13.6 year-on-year while imports grew 12.9 percent year-on-year.
China is the only country that possesses all the industrial categories in the United Nations industrial classification, which allows firms to source goods easily. China also boasts of the largest network of high-speed rail and expressways in terms of mileage, which allows products to be transported efficiently.
Global businesses may consider applying a dual-track supply chain strategy to alleviate supply chain risks even in the future after-pandemic scenarios. Beyond the global supply chain, the business relies on normal times, and they may relocate some core operations to China to avoid being caught in future supply chain shocks.
Strong Free Trade and Double Tax agreements
China has developed a strategic position when it comes to entering into free trade agreements – the policy of allowing dutiable and tax reduction on certain products and services being one of the main cornerstones that has projected the nation to be the world’s manufacturing hub over more recent years.
In total, China has signed off 23 FTAs impacting 26 countries or regions countries (including the 10 ASEAN nations), has another 10 under negotiation, and a further eight under consideration.
Further, Double Tax Avoidance Agreements treaties effectively eliminate double taxation by identifying exemptions or reducing the amount of taxes payable in China.
DTAs not only provide certainty to investors regarding their potential tax liabilities but also act as a tool to create tax-efficient international investments.
So far, China has signed DTAs with 110 countries or regions.
Lower Corporate Income Tax rates, Incentives for doing business
The standard CIT rate in China is 25 percent, applicable to resident enterprises and non-resident enterprises with income-generating establishments. Comparatively, in India and Mexico, the CIT rate is higher at 30 percent. This 5% gap provides companies operating in China a competitive edge over Asian counterparts - making it a preferred destination for relocation.
Moreover, the CIT rates in China could be lower based on the entity type, size, sector, or location:
- A 10 percent withholding rate (temporarily reduced from 20 percent) is applied to China-sourced income not related to a non-resident enterprise’s establishments in China or China income derived by non-resident enterprises without establishments in China;
- Small and low-profit enterprises are entitled to a reduced CIT rate of 20 percent in combination with a reduction of their tax base; and
- A reduced CIT rate of 15 percent is applied to high-tech enterprises or enterprises registered in special zones, such as enterprises engaging in encouraged sectors in Hainan.
- A reduced CIT of 10 percent is applied to encourage key software enterprises and key integrated circuit enterprises after the first five years of CIT exemption.
There are multiple forms of tax and non-tax incentives available to businesses in China, such as tax exemptions, tax reductions, lower tax rates, tax refunds or rebates, tax credits, etc.
These can be primarily categorized as tax incentives based on:
- Type of tax;
- Size of business;
- Sector-wise; and
- Region based.
Fastest growing economy
China’s economic outlook at the beginning of 2023 was cautiously optimistic. China’s gross domestic product (GDP) reached RMB 121,020.7 billion (US$17,881.30 billion) in 2022, up three percent year on year, according to data released by the National Bureau of Statistics on January 17, 2023.
Moreover, the British Consultancy Centre for Economics and Business Research (CEBR) projects that China’s economy will continue to grow at 5.7% per year through 2025 and then at 4.7% by 2030, at which point it will surpass the US to become the world’s largest economy. This steady growth and economic potential have acted as a catalyst for businesses moving to China.
Domestic market, experienced workforce, and market liberalization
The Chinese government’s increasing market liberalization policies, coupled with a large domestic market and a more experienced, more educated, and better-resourced labor pool, provide foreign companies with an unparalleled competitive advantage for operating in China.
The Chinese government offers numerous investment-related business incentives and is continually making further improvements through reforms to maintain the country’s high appeal to foreign investors. In a concrete effort to expand market access to foreign investors, China has continued to expand its Catalogue of Encouraged Industries for Foreign Investment. The 2022 version of the catalog includes a total of 1,474 items across two catalogs (a nationwide catalog and a regional catalog), an increase of 19 percent from the 2020 version.
Furthermore, China is the world’s second-largest retail market and touted to be the first in the near future with China’s rising purchasing power, expanding middle class, and a population of 1.3 billion.