Doing Business in China:
Update and Opportunities
July 20, 2006
Andrew M. Pan
North American Representative Office of
Shenzhen, China (NAROS)
Agenda
• China Trade and Economic Developments
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China Economic Update
Domestic Market Momentum
New Economic Plan
Regulatory and Tax System
• Emerging Market Opportunities
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Manufacturing
Procurement
Service and Distribution
Acquisition of SOE
Industrial Zones
• Shenzhen: A Story of China’s Success
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China Trade and Economic
Developments
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Economic Update
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China’s economy grew 9.9% in 2005
China’s GDP US$ 2,279 billion– world’s 4th largest
Foreign direct investment (FDI) – US$ 60.3 billion
Foreign trade volume – US$ 1,422.1 billion
Foreign currency reserve – US$ 818.9 billion
Total household savings in banks – US$ 1,838.1 billion
Source: China State Statistics Bureau, 2005
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Domestic Market Momentum
• Recent survey conducted by PwC
– Survey of 1,410 CEOs from 45 countries
– Projected overseas investment (2006-2009)
– 55% of respondents will invest in China (vs. 36% in India, 33% in
Brazil)
– 75% of respondents are attracted by China domestic market
opportunities
– 48% are attracted by lower manufacturing costs
Source: PricewaterhouseCoopers
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American Chamber of Commerce Survey:
Number One Goal for China Business
Serve as regional
headquarters
Others
Q: No.1 goal of the US investment in China?
A: China domestic market opportunities.
(62%+ 11% = 73%)
Produce goods or
services for other
(non-China, nonUS) market
Export to China
5%
5%
11%
14%
Produce goods or
services in China
for the US market
3%
62%
Produce goods or
services in China for
the China market
100% = 345 companies
Source: 2005 AmCham-China and AmCham-Shanghai Member Questionnaire
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New Economic Development Plan
• China’s 11th 5-year Socioeconomic Development Plan
(2006-2010)
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Establish a “harmonious society”
Coordinate growth among different regions
Stimulate development of the agricultural sectors
Facilitate healthy growth in urban areas
Transform from export-processing to higher-technology-content
products
– Convert from a manufacturing driven economy to a more diversified
domestic services economy
• Targets by end of 2010
– Double 2000 GDP per capita by 2010
– Reduce energy consumption per GDP unit by 20% from 2005 level
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China Regional Economy
West and Central
Regions
Northeast Region
Beijing
China
Dalian
Beijing-TianjinHebei Region
Tianjin
Xian
Suzhou
Shanghai
Chongqing
Guangzhou
Chengdu-Chongqing
Region
Macau
Shenzhen
Yangzi River
Delta Region
Pearl River Delta
Region
Hong Kong
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Regulatory and Tax System
• Forms of Doing Business in China
– Direct Investment Forms
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Equity Joint Venture (EJV)
Contractual Joint Venture (CJV)
Wholly Foreign-Owned Enterprise (WFOE)
Investment Holding Company (CHC)
Joint Stock Company
Foreign Investment
Enterprise (FIE)
– Indirect Investment Forms
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Direct purchase and sales
Toll/Contract manufacturing
Licensing
Financing
Representative offices
Foreign Enterprise (FE)
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Foreign Investment Regulatory
Framework
Principal Laws Applicable to Foreign Investment
(Company Law, Wholly Foreign-Owned Enterprise Law,
Equity Joint Venture Law, Contractual Joint Venture Law )
Industry Regulations
“Catalogue on Guiding
Foreign Investment ”
“Administrative Measure for
Foreign Investment in the
Commercial Sector”
… ...
Government Department
Regulations
Economic Zone
Regulations
“Foreign Investment Enterprise
Income tax Law”
“Administrative Measure for
Free Trade Zone”
“Rules of the PRC on Foreign
Exchange Control”
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“Administrative Measure for
Export Processing Zone”
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China Taxation and Incentives
• Corporate Income Tax rate is 33% (Central + Provincial)
• Tax incentives and holidays
– Manufacturing tax incentives
– High technology incentives
– Special Economic Zone incentives, e.g.
• Shanghai 24%, Pudong 15%
• Guangzhou 24%, Shenzhen 15%
• Tax incentives and holiday rates are not applicable to
service and domestic distribution income
• Value Added Tax (VAT), Business Tax etc. often apply
• Transfer pricing has become an emerging issue
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Emerging Market Opportunities
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Manufacturing in China
• Take advantage of low cost,
skillful labor force and collegegraduated engineers, lower
manufacturing cost
• Incentive income tax rates and
other tax holidays
• For some products, Chinese
government only allows those
manufactured in China to enter
into China domestic market
• Good OEM/ODM capability,
covering almost all industrial
sectors of consumer and capital
products
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US Companies – China Manufacturing Facilities
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China Procurement
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Direct purchase from manufacturers
Access to a larger manufacturer and supplier base
Lower purchasing cost
Better quality control
Better supply chain management
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Domestic Service and Distribution
• WTO opens the door of China domestic and distribution
market
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Distribution: retail, wholesale, franchising and direct marketing
Banking, consumer lending and insurance
Telecommunication and content driven providers
Freight forwarding, transportation and package delivery service
Customer service
Entertainment: film and TV production, audiovisual products
distribution, movie theatres
Construction engineering and consultation
Hotels and restaurants
Education
Professional services: legal, accounting, tax, medical, dental,
management consulting and advertising services etc.
Business process outsourcing/offshoring (BPO)
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Acquisition of SOE
• Industries from banking, infrastructures, public utilities to
retail chain stores, machinery equipments etc.
• A good solution for US companies to expand their China
operation without a substantial front-end cash investment
• A shortcut for US companies to expand their China
operation and enter China domestic market
• May allow US companies to access China domestic
regulated market segment
• Some SOEs are down-sizing/spin off to increase efficiency
at a fair low cost
• Endorsed by central and local governments with various
incentives (case-by-case)
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Industrial Zones
• Industrial zones provide various incentives and
opportunities for US companies with different business
models
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Special Economic Zone (SEZ)
Economic and Technological Development Zone (ETDZ)
Free Trade Zone (FTZ)
High-Tech Park
Export Processing Zone (EPZ)
Bonded Logistics Zone (BLZ)
Bonded Port
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Shanghai Bonded Logistics Park
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Shenzhen: A Story of China’s Success
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Shenzhen in Greater China
Shenzhen
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Shenzhen and the Pearl River Delta
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Shenzhen in 1982
Shenzhen Today
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Facts and Figures
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City founded in 1979
Became China’s first SEZ in 1980
About 10 million population, average age about 30
Only city in mainland China borders on Hong Kong
GDP in 2005 USD 61.5 billion, ranks 4th among all
mainland China cities
Average GDP growth rate over 25% per annum from
1980 to 2005
Export in 2005 USD 115 billion, ranks the 1st among all
mainland China cities for 13 consecutive years
Hong Kong, US and EU ranks the top 3 trade partners
FDI in 2005 USD 3 billion, total USD 40 billion since
1980
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Facts and Figures
• 120+ Global Fortune 500 companies have operations in
Shenzhen
• The home for Shenzhen Stock Exchange and the
regional financial center in Southern China
• Shenzhen Port-the 4th largest container terminal in the
world, 16.2 million TEUs in 2005
• Shenzhen International Airport-the 4th busiest airport in
China
• The corporate headquarters for Huawei, ZTE, China
Merchant Bank, Ping’an Insurance and many other
local China big private companies
• 10+ five-star hotels, 10 world class golf courses.
Mission Hills Golf Club is the biggest golf club in the
world
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Features and Characteristics
• Major Industries
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Traditional consumer products manufacturing
Technology products manufacturing and R&D
Imp./Exp. trade city in mainland China
Logistic center for Southern China, especially Pearl River Delta
Regional financial center
• A young, vigorous migrant city with the culture of
creativeness and entrepreneurship
• A coastal city with excellent infrastructures and utilities
• China’s first SEZ with the most open market economy
and a pro-business government
• Much lower operation cost compared with Shanghai,
Beijing and Hong Kong
• One of the best living cities in mainland China (air
quality, green space, foods and entertainment)
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NAROS and Our Services
• Set up in 2001
• Based in Los Angeles, CA
• Shenzhen’s only investment and
trade promotion office in North
America
• Our FREE services:
– Provide China general/business
information
– Consult on China business
policies and incentives
– Facilitate business setup and
transaction
– Build up Chinese government
connections
– Support daily operations
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Thank You!
Please contact NAROS for more information.
Tel: 213-628-9888 Fax: 213-628-8383
E-mail: andrewpan@shenzhenoffice.org
Web: www.shenzhenoffice.org