In 2015, China experienced its lowest economic growth rate in more than a quarter century with real GDP growth decelerating to 6.9 percent. Many economists remain pessimistic about China’s medium-term prospects for economic growth due to the slow pace of economic reforms and a failure to bring rising debt levels under control. Significant policy adjustments will be necessary to sustain economic growth. President Xi’s historic anti-corruption campaign has had a notable impact on the way that business is conducted in China. Central, provincial, municipal officials—including those at state-owned enterprises—have adopted a more cautious approach to business. This includes showing greater reluctance to meet with their foreign counterparts.
China’s newly approved 13th Five-Year Plan (2016-2020) calls for ambitious policy reforms in order to “comprehensively build a moderately prosperous society” by doubling 2010 GDP and per capita incomes by 2020. This would require China to maintain at least 6.5 percent GDP growth over the next five years. The 13th Five-Year Plan also highlights “supply side structural reforms” particularly by prioritizing the reduction of overcapacity in manufacturing industries like steel and aluminum (in part by forcing the closure of “zombie” enterprises) and reigning in massive levels of debt and nonperforming loans. During the Fifth Plenum of the Central Committee 18th Communist Party Congress, the government emphasized five key concepts to guide development and reform: innovation as a driver for higher-quality economic growth; greater coordination to ensure balanced growth across industries and among urban and rural areas; environmentally-friendly economic growth; openness to foreign markets and taking an active role in global governance; and inclusive development that expands social services.
According to China’s Ministry of Commerce (MOFCOM), foreign direct investment in China last year rose 6.4 percent to 781.3 billion yuan (US$126.2 billion) compared to 2014’s increase of just 1.7 percent. Foreign investors set up 26,575 new enterprises on the Chinese mainland in 2015, 11.8 percent more than the year before, taking the number of foreign-invested firms to 836,404 by the end of the year with a total investment of US$1.64 trillion. Foreign capital channeled into the service sector rose 17.3 percent to US$77.2 billion, leading FDI growth and making up 61.1 percent of the total.
With respect to trade, U.S. good exports to China in 2015 were $116.2 billion, down 6.1 percent from the previous year. U.S. exports of services to China were an estimated $42.5 billion in 2014 (the latest data available). Despite significant market access barriers for foreign firms, U.S. foreign direct investment in China was $65.8 billion in 2014 (the latest data available), a 9.8 percent increase from 2013. The United States and China continue to negotiate a Bilateral Investment Treaty, which, if implemented, would provide a more level playing field for foreign investment in China. Recently enacted policies and laws, such as China’s Law on Non-Governmental Organizations (NGO) Law have somewhat soured the mood among the U.S. business community in China. The 2016 American Chamber of Commerce in China (AmCham) survey revealed that China remains a top priority, but fewer companies are increasing investment levels in China. Nevertheless, significant market potential exists for foreign companies, particularly those operating in industries where there is opportunity for collaboration and mutual benefit, such as energy efficiency, clean technology, healthcare, and e-commerce.
China is a challenging place to do business. According to AmCham, in 2015, American businesses in China faced challenges arising from slowing economic growth, the government’s efforts to shift the economy from one based on manufacturing to one based on services, an unclear timeframe for announced reforms, and many new laws, regulations, and other measures that called into question the openness of China’s investment regime.
Day to day business operations present a variety of obstacles. The World Bank in its Ease of Doing Business Report ranks China 84th (out of 189 countries) with respect to opening and running a business while complying with local regulations. For starting a business, the World Bank ranked China 136th (between Paraguay and Cameroon), reporting that starting a business requires at least 11 procedures in Shanghai and Beijing that average more than 30 days to complete. Despite the Chinese government’s efforts to streamline bureaucracy and reduce red tape, foreign companies continue to complain about administrative bureaucracy, with respect to registration and administrative licenses. Numerous companies offer consulting, legal, and accounting services for establishing wholly foreign-owned enterprises, partnership enterprises, joint ventures, and representative offices. The differences among these corporate entities are significant and investors should review their options carefully with an experienced advisor before choosing a particular corporate entity or investment vehicle.
With respect to foreign investment, China continues to pursue industrial policies that seek to limit market access for imported goods, foreign manufacturers, and foreign services providers, while offering substantial government guidance, and resources and regulatory support for Chinese industries. The principal beneficiaries of these policies are state-owned enterprises, as well as other favored domestic companies attempting to move up the economic value chain. China outlines its specific foreign investment objectives primarily through its Catalogue for the Guidance of Foreign Investment in Industries, most recently revised in March 2015, and maintained by MOFCOM and NDRC. The catalogue delineates sectors of the economy where foreign investment is “encouraged,” “restricted,” and “prohibited.”
In line with its own plans for domestic reform, including as expressed through the Third Plenum Decision, China continues to consider improvements to its foreign investment regime, including through the use of a “negative list” to govern market access. However, many aspects of China’s current investment regime, including lack of substantial liberalization, maintenance of a case-by-case administrative approval system, and the potential for a new and overly broad national security review, continue to cause foreign investors great concern. In addition, foreign enterprises report that Chinese government officials may condition investment approval on a requirement that a foreign enterprise transfer technology, conduct research and development in China, satisfy performance requirements relating to exportation or the use of local content, or make valuable, deal-specific commercial concessions.
U.S. companies surveyed in 2015 by AmCham cited inconsistent regulatory interpretation and unclear laws as their top challenge doing business in China. Other challenges cited include: labor costs; obtaining required licenses; hiring and retaining qualified employees; industrial overcapacity; increasing protectionism; corruption; taxes; and lax enforcement and protection of intellectual property rights. In its Business Climate Survey Report, one in four of AmCham’s member companies reported declining revenues. The U.S.-China Business Council (USCBC) in its Business Environment Member Survey cited similar challenges, such as: competition with Chinese companies; foreign investment restrictions; cost increases; lack of transparency in rulemaking; administrative licensing; and restrictions on data flow. Both AmCham and USCBC member surveys illustrate degrees of pessimism about doing business in China. According to 77 percent of AmCham survey respondents, foreign businesses are less welcome in China than before. Likewise, only 24 percent of USCBC member companies remain fully confident in their future prospects in China, the lowest number reported in ten years. While perhaps due to President Xi’s anti-corruption campaign, U.S. companies are less frequently reporting concerns about corruption. U.S. companies have expressed that it is becoming more difficult to resolve port issues which may be due to reluctance from Chinese officials to make decisions without several additional layers of senior clearance.
Even though China was the world’s top destination for foreign direct investment in 2015, broad sectors of the economy remain closed to foreign investors. China relies on an investment catalogue to encourage foreign investment in some sectors of the economy, while restricting or prohibiting investment in many others. China’s investment approval regime shields inefficient and monopolistic Chinese enterprises from foreign competition – especially in certain industry sectors that China has deemed strategically important.
In 2015, global concerns heightened over a series of Chinese measures that would impose severe restrictions on a wide range of U.S. and other foreign information communication technology (ICT) products and services with an apparent long-term goal of replacing foreign ICT products and services. Concerns centered on requirements that ICT equipment and other ICT products and services in critical sectors be “secure and controllable.” The 13th Five-Year Plan included a target of having certain “strategic emerging industries” account for 15 percent of total GDP by 2020 and promised favorable policies and incentives in sectors such as new-energy vehicles, advanced information technology, biotechnology, clean energy, high-end equipment and materials, advanced semiconductors and robotics. It is unclear to what extent foreign businesses will be able to benefit from any favorable policies or incentives in these important industries.
Despite these and other longstanding concerns, China remains an extremely attractive market for many U.S. companies. In general, U.S. companies are reporting that their investments in China have generally produced a return on investment. As a result, China remains a priority market for the majority of (USCBC) member companies, with 94 percent citing it among their companies’ top five global priorities. Likewise, 70 percent of companies that responded to the USCBC survey are optimistic on domestic market growth. Likewise, China remains a top-three investment priority for 60 percent of AmCham member companies.
In general, U.S. companies continue to feel that China’s increasing domestic consumption and growing middle class will lead to market opportunities across a number of industries. According to AmCham, companies in consumer-based industries and the services sector are the most likely to prioritize China in growth plans, while industrial and resources companies are the least likely. Consumer-based and services sector companies view e-commerce as an explosive area for growth. Companies in the services sector by a wide margin (70 percent) expect to benefit from the globalization of Chinese companies and increased outbound investment. Companies in the industrial and resources industries expect to benefit from China’s urbanization push and continued support for infrastructure projects. Companies offering clean energy goods or services stand to benefit from stronger environmental regulation and more stringent emissions standards.
As always, companies should consider their own resources, previous export or business experience abroad, and long-term business strategy before entering the China market. Representation in China by a Chinese agent, distributors, or partners who can provide essential local knowledge and contacts will be critical for success. Intellectual Property rights holders should understand how to protect their IP under Chinese law before entering the China market, and should conduct thorough due diligence on potential partners or buyers before entering into any transaction. Foreign companies have a wide range of options for corporate formation in China, including Wholly Foreign Owned Enterprises, Joint Ventures, Representative Offices, and other investment vehicles. Each option has its own advantages, disadvantages, and risks. All companies, IP rights holders and otherwise, should consult closely with lawyers who have extensive experience with the China market, including lawyers based in the United States and China.
The U.S. Department of Commerce, United States Foreign Commercial Service (USFCS) offers customized solutions to help U.S. companies, including small- and medium-sized enterprises, succeed in the China market. USFCS stands ready to help U.S. companies develop comprehensive market entry or expansion plans, learn about export- and customs-related requirements, obtain export financing, and identify potential partners, agents, and distributors through business matchmaking programs, trade shows, and trade missions led by senior U.S. government officials. For U.S. companies that purchase our Gold Key Service, USFCS can facilitate one-on-one meetings with: pre-screened buyers; potential customers or end-users; experienced professional services providers; and key government officials. Furthermore, by engaging USFCS, U.S. companies can learn how to leverage the outcomes of high-level policy discussions, such as the U.S.-China Joint Commission on Commerce and Trade and the U.S.-China Strategic and Economic Dialogue, where senior U.S. officials have been successful in expanding market access and improving the business climate for U.S. companies in China. With these tools, explained in greater detail in this Country Commercial Guide, U.S. companies will be better positioned to take advantage of the many economic reforms that are being rolled out in the wake of the Third Plenum.
In addition, the U.S. Department of Agriculture’s Foreign Agricultural Service (FAS) provides equivalent-level trade services for U.S. companies interested in exporting agricultural, fishery, and forestry products through their Agricultural Trade Offices at no cost. FAS maintains offices in the cities of Beijing, Chengdu, Guangzhou, Shanghai, and Shenyang. FAS works with USDA agencies and other U.S. food safety-related agencies (in particular, the United States Food and Drug Administration) to coordinate the U.S. response to newly arising sanitary and phytosanitary and technical barriers to trade obstacles, such as identifying and resolving new procedures introduced at port or acquiring, translating and coordinating the U.S. response to regulations adopted by China without notification to trade partners at the draft stage.
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