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Are there opportunities in China for Foreign Invested Enterprises?

No business can succeed without understanding its customers, its

products and services, and the market in general. Competition is often

fierce and operating without conducting market research may give your

competitors an advantage over you, particularly in a jurisdiction such

as China. China offers additional obstacles, such as language and

cultural differences that may impact how you need to adapt your

business compared to your home jurisdiction or jurisdictions in which

you operate in globally.

Research is a requirement when entering the China market and can be conducted via internet searches, social media outlets, trade shows, networking or even on the ground investigations and due diligence.  There is a minimum of 10 key elements to research:
 

  1. Current Environment - How large is the China market and is it big enough to positively affect your business?
     

  2. Competition - What other companies are working within the China market already and is there really an opportunity for you to bring something different to the market that will enable you to steal market share?
     

  3. Money - How much of a financial investment is required to enter the Chinese market and operate effectively within it now and in the future?
     

  4. Resources - Can your existing business afford to re-route money, employees, and other resources to China?
     

  5. Technology - What kinds of technology investments in equipment and training are required to enter China? Do you want to bring the “know-how” into China? Is this “know-how” protected?
     

  6. Future Potential - The new market might look attractive today, but what is its potential in the future?
     

  7. Legal, Tax and Compliance - Are there any legal, tax or compliance issues that could negatively affect your success entering or operating in China?
     

  8. Customers - Are the consumers in China an appropriate match for your existing brand and products or will you need to launch new brands and products?
     

  9. Challenges - What are the barriers to entry into China and can you overcome them quickly and affordably?
     

  10. Goals - Why do you want to enter China? Is it truly right for your business? Does it match your business goals?

 

As you delve into these 10 key elements, you will first and foremost need to understand whether there are any restrictions for you in China to even enter the market. This information can be easily found via the “Negative List” catalogue.

 

The “Negative List” catalogue

In 2013 the State Council mapped out plans to implement a series of “Negative Lists” for market access, as part of the government’s efforts to establish an open, competitive and well-regulated China market. This was first tried and tested in the “new” Free Trade Zones – initially in Shanghai, but then expanded to Tianjin, Fujian and Guangdong. The pilot was a major step towards the government’s aim to explore a system that could be replicated nationwide for application in early 2018 as part of efforts to streamline government administration and give more freedom to the market.

 

Market access for foreign investors, therefore, can have equal access as local Chinese investors to industries, fields and businesses that are NOT on the list. Governments at all levels are responsible for enforcement.  In terms of the degree of enforcement, the lists can fall into two categories of prohibited entry and limited entry, both applying to initial and expanded investments, mergers, and other market entry activities by any voluntary market participants.

 

  • For the prohibited entry list, market players will not be approved to get access to such industries by the administrative authority, whereas;

  • For limited entry, market players will have to apply for access, which will then be assessed by the authority, and then meet the requirements laid out by the government.
     

 

Update on the “Negative List”

In June 2017 the State Council released the new foreign investment negative list for Free Trade Zones. The negative list covers 15 sectors, such as mining, leasing and commercial services, manufacturing, wholesale and retail, and financing. Among the sectors, 40 categories and 95 special management measures are included. Compared to the 2015 list, it cuts 10 categories and 27 measures concerning such fields as aviation manufacturing, waterway transportation, banking services and education.
 

 

Newly added as “Encouraged”

 

  • New in infrastructure: construction and operation of city parking facilities.

  • New for medical instruments: manufacturing of smart first aid medical equipment; remanufacturing of key components of medical imaging equipment.

  • New in VR, AR, 3D printing: research and development (“R&D”), and manufacturing of virtual reality (VR) equipment, augmented reality (AR) equipment, and key parts of 3D printing equipment.

  • New in food: R&D and manufacturing of formula food for infants, children, or for special medical use purposes.

  •   New in chemicals: manufacturing of nylon 12, and one raw material for synthetic materials.

  • New in automotive: manufacturing of seven key parts of new energy automobiles (e.g. air compressors); construction and operation of hydrogen refueling stations.

  • New in environment: manufacturing of hydrologic monitoring sensors.
     

 

Deleted from “Restricted”

 

  • Less restricted in automotive: company form for manufacturing of “automobile electronic network technology” and “components for the input (sensor and sampling systems) and output (actuators) of electronic control systems, EPS electronic controllers” are not limited to joint ventures anymore.

  • Less restricted for motorbikes: not limited to two joint ventures within China or share ratios anymore.

  • Less restricted in logistics: tallying for foreign vessels and highway passenger transport are not restricted anymore.

  • Less restricted in credit rating: credit checking, and rating services are not restricted

  • Less restricted in automotive: makers of pure electric cars are not limited to two joint ventures within China anymore.

  • Less restricted in agriculture: the construction and operation of large wholesale markets of agricultural products is not restricted anymore.

 

 

Added as “Restricted" in the FIE Negative List

 

  • Limitations for telecoms: limited to those operations promised to be opened under WTO agreements

  • Limitations for banking: for foreign invested banks (including wholly foreign invested banks, joint ventures or branches of foreign banks): the controlling shareholder(s)/investor(s) must be offshore commercial banks; the non-controlling shareholders can be offshore financial institutions.

  • Limitation for news and cultural services: for purpose of providing such services (including Internet related news and cultural services) within China, the service providers outside the territory of China must comply with prevailing rules regarding approvals, security evaluations, rules on senior management etc.

 

 

Added into the "Prohibited" FIE Negative List

 

  • Prohibited publications: editing of certain publications (e.g. books, newspapers, electric publications remain closed to foreign investors).

  • Prohibited radio/TV/video services: providing Radio/TV/Video services on demand; installing ground facilities to receive satellite TV/radio programs; and the import of radio/TV programs all remain closed.

  • Prohibited news: prohibited news institutions are now defined as “including but not limited to news agencies”; also not allowed for foreign investment are Internet news information services, information publishing/publication service via the Internet.

  • Prohibited research institutions: investment into research institutions of humanity and social sciences remains closed.

 

 

Conclusion

The perception in China is that that there are constant limitations and obstacles when doing business. However, as indicated above, the “Negative List” is looking to reduce the threshold for foreign investment and foreign startups to enter the Chinese market – a positive impact for foreign investors. This is just one initiative that the Chinese government is focusing on, to promote and entice foreign investment into the country. In addition, there are opportunities for foreign investors in key sectors and industries as outlined in the 13th five-year plan (FYP).

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DISCLAIMER: All information in this article is verified to the best of our ability and is assumed to be correct at time of release; however, Woodburn Accountants & Advisors does not accept responsibility for any losses arising from reliance on the information provided within. The information provided is for general guidance and does not replace specialized advice.

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