China’s economic and demographic scale make it a cannot miss market for many companies, but the country faces growing economic headwinds and American companies report increased pessimism about their prospects in the market.
In 2016, China experienced its lowest economic growth rate in more than a quarter century with real GDP growth decelerating to 6.7%. Although economic indicators in late 2016 [and the first half of 2017] suggest a short-term cyclical upturn may be underway, many economists remain concerned about China’s medium-term prospects for economic growth due to the slow pace of economic reforms and a failure to bring corporate debt levels under control.
China’s 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 will require China to maintain an average of 6.5% annual GDP growth over the plan’s five-year period (2016-2020). Achieving this growth without further exacerbating the build-up in debt will be a major challenge for the Chinese leadership, requiring significant policy adjustments that could impede short-term growth and be opposed by powerful vested interests.
U.S. good exports to China in 2016 were $115.8 billion, down slightly from the previous year. U.S. exports of services to China were an estimated $45.4 billion in 2015 (the latest data available), which is over 400% higher than 2005 levels and approximately 800% higher than the year prior to China’s WTO accession in 2001. The United States had a services trade surplus of approximately $37.4 billion in 2016, which is an increase of 25% from the previous year.
While China’s leadership has, in response to increasing global concerns about Chinese economic policy, repeated long-standing commitments to gradually opening China’s market to foreign participants, little tangible progress has been made in recent years. Indeed, foreign companies report growing concerns about the business climate in China. China continues to rely upon industrial policy tools – including subsidies, market access restrictions, pressures to transfer technology, and other support for domestic competitors – to drive the economy, calling into question the ability of foreign firms to operate on a level playing field in the market.
Furthermore, Communist Party control over SOEs, non-government organizations, and think tanks has increased over the last year. The United States continues to vigorously engage Chinese counterparts to push for a more balanced and fair bilateral economic relationship. Nevertheless, significant market potential exists for foreign companies, particularly those operating in industries such as energy efficiency, clean technology, and healthcare, where critical Chinese needs provide an opportunity for mutual benefit.
China is a challenging place to do business. According to the American Chamber of Commerce in China (AmCham), in 2016, American businesses in China faced headwinds arising from slowing economic growth, inconsistent and generally unfavorable interpretation of regulation, growing pressures from domestic industrial policy, and rising costs of doing business. AmCham’s most recent member survey reported that 81 percent of respondents felt foreign businesses are less welcome in China than before. Likewise, less than three-quarters of U.S. China Business Council member companies have an optimistic five-year outlook, the lowest total over the past decade.
Day to day business operations present a variety of obstacles. The World Bank in its Ease of Doing Business Report ranks China 78th out of 190 countries with respect to opening and running a business while complying with local regulations. For starting a business, the World Bank ranked China 127th, reporting that starting a business requires at least 11 procedures in Shanghai and Beijing that average more than 30 days to complete. Despite significant Chinese government efforts to streamline bureaucracy and reduce red tape, foreign companies continue to complain about administrative procedures, especially with respect to registration and licensing.
China also 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, resources, and regulatory support to 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. Provincial and local governments often have an ownership stake in private companies, which can result in government support.
Foreign enterprises report that Chinese government officials may condition approvals on a foreign enterprise’s agreement to 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.
An area of growing concern for the foreign business community in China in 2016 are numerous draft and final measures that would impose severe restrictions on a wide range of foreign information communication technology (ICT) products and services, which have an apparent long-term goal of replacing foreign ICT products and services with domestic competitors. Concerns centered on the requirement that ICT products and services used or procured in many sectors be “secure and controllable.”
Finally, while foreign firms overwhelmingly continue to report profitability in China, their margins are shrinking, reflecting increasing competition, rising costs, heightened regulatory impediments, a shrinking labor pool, and—in some sectors—overcapacity.
In general, U.S. companies continue to feel that China’s 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 (71%) 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. Some top sectors we will explore in this report include:
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 others 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 high-level bilateral policy discussions. With these tools, explained in greater detail in this Country Commercial Guide, U.S. companies will be better positioned to take advantage of opportunities in China’s market.
In addition, the U.S. Department of Agriculture’s Foreign Agricultural Service (FAS) provides equivalent-level trade services at no cost for U.S. companies interested in exporting agricultural, fishery, and forestry products through their Agricultural Trade Offices. 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, phytosanitary, and technical barriers to trade, such as identifying and resolving challenges posed by new procedures introduced at port or acquiring, translating, and coordinating the U.S. response to draft regulations that could affect U.S. exports.
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