Economy
Since Deng Xiaoping opened China's doors to the world in 1978, China has experienced nearly 25 years of unprecedented economic growth during which the economy grew faster than any other in history and incomes more than quadrupled. China's success has been surprising, given the daunting task of simultaneously converting from a command economy to a market economy, moving from a rural society to an urban society and maintaining the political stability on which the enormous investments being made in China depend. But China's next 20 years are fraught with even greater challenges. Corruption, regional income inequality, weak financial institutions, industrial over-capacity, price deflation and unemployment associated with movement of workers from grossly inefficient state-owned enterprises ("SOEs") into the private sector are all significant problems that could derail China's remarkable record of economic success.
With 1.3 billion people, China's population constitutes one-fifth of the world's population and this huge population makes small percentages translate into very large absolute numbers. For example, according to official statistics, the unemployment rate rose from 2.6 percent in 1993 to just over three percent by the end of 2000. Although this statistic appears low by developed world standards, it represents more than 20 million unemployed people, even at the official unemployment rate which is widely thought to underestimate the actual number of unemployed in China. A large part of Chinese unemployment is 'frictional,' stemming from the increasing surplus workers leaving rural areas and the dismantling of SOEs. An estimated eight to 10 million people a year are leaving the farm for the city and by some estimates, 60 to 100 million surplus rural workers are currently adrift between the villages and the cities, many managing to survive through part-time low-paying jobs.
Regional income disparities are a thorny political and economic problem. The east coast of China enjoys fertile soil, close proximity to major urban areas and markets, several large industrial centers, and a developed infrastructure. In the major coastal cities, per capita GDP is as much as US$5,000 per year. The interior of China however, is barren, undeveloped and beleaguered by poverty; per capita incomes are growing but slowly and remain well below US$400 while whole-country GDP per capita is about US$1,000.
China is currently injecting government funds into the west and instituting measures to attract foreign investors to the interior of China. So, the area presents potential opportunity for investment, but high transportation costs and corruption have precluded many companies from building factories there. It is not clear whether the disadvantages of locating in the remote, rural west can be overcome by government incentives. And, some large SOEs were set up in remote interior areas based on political criteria and there is little hope that they can be economic under market criteria for success.
During China's development of its planned economy, SOEs played a key role in providing employment, directing investment to strategic industries and providing housing, medical care, retirement security and other social services. While these enterprises now epitomize the gross inefficiency of the Maoist regime, because of the broad role the SOEs played in Chinese society, dismantling them is a major challenge because replacement government services and safety nets must be instituted as the SOEs are phased out. And, of course, the SOEs represent a major source of patronage opportunities for local government cadres who therefore resist their demise. In any case, if the transition to a market economy is to be managed in a politically acceptable way, the pace at which SOEs can be restructured and their excess workers released depends upon the rate at which new private sector jobs are being created. Accordingly, rapid economic growth in China is an essential tool in restructuring. Maintaining the SOEs imposes a huge opportunity cost on China, which drags down other sectors of the economy, but shutting them down precipitously could create a politically unacceptable environment of unemployment and social insecurity that would undermine the government's legitimacy. For this reason, the Chinese government has taken a significant risk in signing on to WTO obligations as they can seriously limit the government's ability to control the rate at which SOEs are made redundant by competition from new players in the Chinese domestic market.
In considering all the problems China faces in transitioning its economy in the coming years, we must not lose sight of the fact that China also has some substantial assets and advantages as they confront these challenges. The country has mobilized huge sustained inflows of foreign direct investment, often making good use of the overseas Chinese Diaspora in this process, and it also mobilizes substantial domestic savings even though its financial system is beset by bad loans and is rudimentary in comparison to financial systems in the developed world. China has a huge agricultural sector that is second in the world behind the United States, and an enormous potential market of newly empowered consumers with rapidly rising incomes. China's people are an incredible asset-commercially oriented, hard-working, and prepared to sacrifice and move long distances from ancestral homes to better their lives. And, the country has lots of good productive investment projects in basic infrastructure that can sustain economic growth while raising the country's productive capacity and its productivity. So, the future of China's economy depends on the skill of the Chinese government and the country's business leaders in using these substantial advantages to overcome their huge challenges.
China And The World Trade Organization:
After an epic 15-year diplomatic quest to secure membership, China reached a historic final deal on the Sept. 15, 2001, to join the World Trade Organization ("WTO") and accessed into the WTO in December 2001. China benefits from entering the WTO in many ways. It will increase the speed of its economic reform process, improve its external economic relations and bring in increased competition, which will benefit the country's long-term growth prospects. However, as noted above, this will also pose significant risks to the Chinese government as it will also exacerbate the problems China is already having in managing its transition to a market economy. The deal was clinched after the United States, the European Union and China resolved their differences over terms governing the future allocation of life insurance branches in China, the final issue of a long list of contentious points that had to be agreed upon. Obviously, all sides wanted China in the WTO despite the problem of dealing with 'the losers' (for example, garment workers in other countries will have a very difficult time competing with their Chinese counterparts) from the opening of trade among these major economic blocks.
Pursuant to its WTO obligations, China is cutting tariff and non-tariff barriers, as well as opening up sectors of the economy that have long been off-limits to foreigners, such as banking, insurance, telecommunications and tourism. China promises to protect foreign intellectual property and get rid of a raft of local content requirements that have hobbled foreign manufacturers. Some analysts express concern that China's potential as the 'workshop of the world' will mean the exportation of deflation in prices of manufactured goods. Indeed, the country does have a huge pool of good labor that has proven it can make manufactured goods that are attractive and competitive in world markets. But, China's economy is still quite small in relation to the world economy (GDP was US$1.2 trillion in 2002) and its share of world exports is still less than five percent. By contrast, in the mid-1980s, Japan's share of world exports exceeded 10 percent. While China does run an merchandise trade surplus, it is only about two percent of GDP, smaller than South Korea's, and is becoming a very large market for exports from Southeast Asia and for higher valued products from the developed world such as automobiles. Of course, China has a very large merchandise trade surplus with the United States, but it is certainly not unique in that respect.
China's market-oriented reforms have brought highly visible success and economic transformation, raising hundreds of millions of people out of poverty. The progress made includes large increases in per capita incomes, a substantial rise in non-state sector activity, growing integration into the global economy and an effective start to resolution of financial sector reform. Economic growth gained momentum during 2000, aided by supportive macroeconomic policies and a favorable external environment. As in the previous two years when stimulative policies were adopted to counter the effects of the Asian financial crisis, strong fiscal spending and private consumption drove domestic demand. Export growth accelerated to 28 percent as the global IT boom entered its final year. Deflationary pressures gradually receded, with the CPI rising by 0.4 percent in 2000. At the same time, unemployment pressures remained a concern.
The economy slowed to just 7.3 percent growth in 2001 as the economic slump in the developed world hit Chinese exports hard. In 2002, growth rebounded to eight percent as the export sector expanded again and fixed investment spending continued very strong. Private consumption and fixed investment are rising, reflecting strongly rising incomes and the many infrastructure development opportunities being exploited in China, but the government's fiscal stance also remains strongly expansionary. The government finances major infrastructure projects by issuing treasury bonds-150 trillion yuan in 2002 (US$18 billion) Consumer price deflation continued and the GDP deflator fell about one percent during the year, as services and housing prices increases were overwhelmed by falling goods prices. China has not been affected as much by the weakening global economy in the early years of this decade as some of its "Asian Tiger" neighbors. Exports of high technology goods comprise a much lower share of China's GDP than in Singapore, Taiwan and Malaysia, for example and it has a large and growing domestic aggregate demand driven by rising incomes and many good investment projects.
World Bank Group Data
|
|
1997 |
2000 |
2001 |
|
871.5 billion |
1.1 trillion |
1.1 trillion |
|
|
710.0 |
840.0 |
890.0 |
|
|
898.2 billion |
1.1 trillion |
1.2 trillion |
|
|
8.8 |
7.9 |
7.3 |
|
|
0.8 |
0.9 |
0.0 |
|
|
19.1 |
15.9 |
15.0 |
|
|
50.0 |
50.9 |
52.2 |
|
|
30.9 |
33.2 |
32.9 |
|
|
23.1 |
25.9 |
25.6 |
|
|
18.3 |
23.2 |
24.7 |
|
|
38.2 |
37.3 |
39.1 |
|
|
5.8 |
.. |
.. |
|
|
-1.5 |
.. |
.. |
With continuing export growth, a current account surplus of 1.5 percent of GDP and a financial account surplus driven by continuing substantial inflows of foreign direct investment, China's foreign exchange reserves rose to US$286 billion at year-end 2002 from US$210 billion a year earlier. Following the devaluation of the yuan in 1993, China's trade balance has expanded rapidly and it has continued to attract substantial inflows of foreign investment as the rest of the world sees the huge potential for growth in this very large, fast-expanding market.
Since 1994, China has run consistent trade surpluses, although those have been shrinking in the recent past as imports have been rising more rapidly than exports. Within the current account, China shows persistent deficits in trade in services (a trend likely to expand with WTO membership) and in net international investment income, reflecting returns to foreigners on their large investments in China. Nevertheless, the current account has remained in substantial surplus, although the surpluses are declining as a percentage of GDP. In 2002, the current account surplus is expected to be about 1.5 percent of GDP, about the same as in 2001; as recently as 1998, the current account surplus was more than three percent of GDP.
In the financial account, China's attractiveness to overseas investors has generated surpluses there as well, although they have been mitigated significantly by 'recycling' of foreign currency deposits to overseas banks by Chinese financial institutions. Net inflows of direct investment have been between US$35 and US$45 billion per year since 1995. Prior to the Asian financial crisis of 1997 and 1998, net portfolio investment flows also showed surpluses, but that trend has largely reversed in recent years as enthusiasm for equity investment in developing markets has cooled. But, the overall balance of payments has been strongly in surplus-and that has generated the huge buildup of official reserves.
|
Balance of Payments |
||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|
|
|
1997 |
2000 |
2001 |
|
36.2 |
43.9 |
.. |
|
|
52.4 |
65.8 |
.. |
|
|
12.7 |
18.6 |
.. |
|
|
106.0 |
.. |
.. |
|
|
Foreign direct investment, net inflows in reporting country (current US$) |
44.2 billion |
38.4 billion |
.. |
|
.. |
133.2 billion |
.. |
|
|
8.5 |
7.4 |
.. |
|
|
31.5 billion |
17.2 billion |
.. |
|
|
1.7 |
1.4 |
.. |
|
Exports: |
$262.1 billion (f.o.b.) |
|
Exports - commodities: |
Machinery and equipment; textiles and clothing, footwear, toys and sporting goods; mineral fuels |
|
Exports - partners: |
US 21%, Hong Kong 18%, Japan 17%, South Korea, Germany, Netherlands, UK, Singapore, Taiwan (2000) |
|
Imports: |
$236.2 billion (f.o.b.) |
|
Imports - commodities: |
Machinery and equipment, mineral fuels, plastics, iron and steel, chemicals |
|
Imports - partners: |
Japan 18%, Taiwan 11%, South Korea 10%, US 10% Germany, Hong Kong, Russia, Malaysia (2000) |
The
Stock Exchange of Hong Kong was incorporated in 1980, and has become the
seventh largest market in the world.
At the end of the 1990s, China's stock exchanges had 950 listed companies.
100 percent foreign investment is limited to B- and H-class shares. A 20
percent withholding tax applies to dividends. There are no restrictions on
foreign investors except in regards to shares of Television Broadcast Ltd. of
which no individual may hold 10 percent and total foreign ownership is limited
to 49 percent. There are no withholding taxes on capital gains, dividends or
interest.
Foreign individuals are limited to $5 million in investments per year.
Institutional investors must be a major bank, insurance company, financial
institution, or securities firm and must meet specific requirements of the
Securities and Futures Commission.
The ceiling on foreign ownership of total market capitalization is 25 percent;
foreign ownership of shipping companies is 49 percent; and the foreign
investment capital ceiling is 10 percent. A 20 percent withholding tax applies
to interest, and there is a 35 percent withholding tax on dividends.
Repatriation of capital and earnings is unrestricted.
For more information on the different Chinese stock exchanges, see the URLs
for:
• Shanghai Stock Exchange http://www.sse.com.cn/
• Shanghai Stock Exchange http://www.sse.com.cn/
• Shenzhen Stock Exchange http://www.sse.org.cn/
• Taiwan Stock Exchange http://www.tse.com.tw/
The Stock Exchange of Hong Kong http://www.sehk.com.hk/index.htm
For the past seven years, China has been the
second largest recipient of foreign direct investment (FDI) in the world after
the United States. According to Chinese statistics, by the end of 1999,
realized FDI in China since 1979 reached a cumulative total of just over $308
billion. The flow of new FDI into China dropped 11 percent in 1999; the first time Chinese
statistics recorded a decline since China's opening and reform began in 1979. The value of new
contractual investment, a harbinger of future investments, dropped even faster,
by 21 percent China's economic slowdown, uncertainties over how WTO accession
would affect the investment climate, and the effects of the Asian Financial
Crisis on China's traditional investors contributed to the decline.
China's
investment climate has changed dramatically in 20 years of reform and opening.
In the early 1980s, China restricted foreign investments to export-oriented
operations and required foreign investors to form joint venture partnerships
with Chinese firms in order to enter the market. Since the early 1990s,
however, China
has allowed foreign investors to manufacture and sell a wide variety of goods
on the domestic market. In the mid-1990s, China authorized the establishment of wholly foreign-owned
enterprises, now the preferred form of foreign direct investment. However, the
Chinese government's emphasis on guiding FDI into manufacturing has led to
market saturation and overcapacity of that sector, while leaving China's service sector
highly underdeveloped.
In the past, China attempted to guide new foreign investment towards
"encouraged" industries. Over the past five years, China has implemented
new policies introducing new incentives for investments in high-tech industries
and in the central and western parts of the country in order to stimulate
development in less developed areas. In December 1997 and again in August 1999,
China
published revised lists (originally promulgated in July 1995) of sectors in
which foreign investment would be encouraged, restricted or prohibited.
Regulations relating to the encouraged sectors were designed to direct FDI to
areas in which China could benefit from foreign assistance and/or technology,
such as in the construction and operation of infrastructure facilities.
Policies relating to restricted and prohibited sectors were designed to protect
domestic industries for political, economic or national security reasons. The
list of restricted industries - which currently includes many service
industries such as banking, insurance, and distribution - will soon dwindle to
a small number, however, as China has committed itself to opening its service
sector upon accession to the WTO. The production of arms and the mining and
processing of certain minerals remain prohibited sectors.
China's has
developed and expanded a complex system of investment incentives over the last
twenty years. The Special Economic Zones of Shenzhen, Shantou, Zhuhai, Xiamen and Hainan, 14 coastal
cities, dozens of development zones and designated inland cities all promote
investment with unique packages of investment and tax incentives. Chinese
authorities have also established a number of free ports and bonded zones. In
recent years, SEZs have sought to enhance their autonomy while officials from
inland China
have sought to reduce SEZ privileges. To make progress toward a consistent national
trade regime as part of its WTO accession, China has indicated that it will not introduce any new SEZ
investment incentives and will decrease existing incentives over time.
In 1999, China
announced that it would offer special investment incentives to attract foreign
investors to its highly underdeveloped central and western regions. Although
the government has yet to formalize concrete measures, it has proposed special
tax breaks and rebates as an investment incentive. The government has also
proposed giving regional governments the flexibility to specify their own
"encouraged industries."
1. Currency Conversion and Transfer Policies
In periods when foreign currency was relatively scarce in China, profits that were
not generated in foreign exchange could only be repatriated with great
difficulty. Since 1994, however, China's foreign reserves have grown rapidly (exceeding $156
billion by early 2000), and FIEs have generally enjoyed liberal access to
foreign exchange. On December 1, 1996, China announced the full convertibility of its currency on the
current account (for trade in goods, services and remittance transactions,
including profits). To prevent rampant fraud, in 1998, China tightened the
scrutiny of underlying documentation. Bureaucratic procedures as authorities
implemented the new regulations created difficulties for many foreign and
domestic companies requiring hard currency to complete their transactions.
Foreign bank branches are allowed to engage in foreign currency business
according to the same rules as Chinese banks and to engage in limited local
currency business.
All FIEs in China are entitled to open and maintain a foreign exchange
account for current account transactions. In order to do so, an FIE must first
apply to China's
State Administration of Foreign Exchange (SAFE) for permission. After SAFE
grants permission for the account, it establishes a limit, based on the FIE's
anticipated foreign exchange operational needs, beyond which foreign exchange
must be converted to local currency. Foreign representative offices and
individuals may also open such accounts. No limits are placed on the amount
such accounts can hold, though reports for transactions involving more than
$10,000 must be filed by a bank. In general, the restrictions on FIE accounts
are less onerous than for wholly Chinese-owned firms. Establishing foreign
exchange accounts for capital account transactions involve more complex
reporting and qualification requirements. The final onus for ensuring
compliance rests with the banks, which, from time to time, interpret the
regulations more or less strictly.
2. Expropriation and Compensation
Chinese law forbids nationalization of joint ventures, wholly foreign-owned
enterprises, and investments from Taiwan, except under "special" circumstances. The
Chinese government has not defined "special" circumstances"
although officials claim that "special circumstances" include
national security considerations and obstacles to large civil engineering projects.
Chinese law calls for compensation of expropriated foreign investments but does
not define the terms of compensation.
There have been no cases of outright expropriation of foreign investment since China opened to the
outside in 1979. However, the State Department believes that there are several
cases that may qualify as expropriations under Section 527 of the FY1994-95
Foreign Relations Authorization Act, most notably in the telecommunications
sector. These apparent forced divestitures from legitimate projects raise
questions about the stability of China's investment climate in telecommunications as well as
other industrial sectors.
3. Dispute Settlement
Although China is a member of the International Center for the Settlement of Investment Disputes (ICSID) and has
ratified the United Nations Convention on the Recognition and Enforcement of
Foreign Arbitral Awards (the New York Convention), it places strong emphasis on
resolving disputes through informal conciliation and consultation. If it is
necessary to employ a formal mechanism, the authorities greatly prefer
arbitration through Chinese agencies. Most foreign investors consider
litigation as a final option and have found it to be time-consuming and
unreliable. In addition, many foreign litigants have found the Chinese
government unwilling to restrain Chinese joint venture partners from asset
stripping as a case winds its way through arbitration or the courts.
Investment contracts often stipulate arbitration in Stockholm because the
forum there is considered neutral. Most Chinese contracts stipulate arbitration
by the China
international Economic and Trade Arbitration Commission (CIETAC). Another forum
for resolving investment and trade disputes is the Beijing Conciliation Center
(BCC), an organization affiliated with the China Council for the Promotion of
International Trade (CCPIT).
Enforcement of arbitral awards is sporadic. Sometimes, even when a foreign
company wins in arbitration, the People's Intermediate
Court in the locality where the foreign
venture is situated may fail to enforce the decision. Even when the courts do
attempt to enforce a decision, local officials often ignore court decisions
with impunity.
There have also been investment dispute cases in which local authorities have
intervened on the part of a Chinese company in a manner considered unfair and
capricious by the foreign investor. For example, local courts have occasionally
intervened to prevent the sale or transfer of foreign-owned property, pending
resolution of a commercial dispute between a foreign company and Chinese
company. In general, most cases have been resolved through negotiation between
the commercial parties and/or intervention of central authorities.
Chinese society is in transition from rule by man to rule of law. Most laws are
general; details are specified in implementing regulations. Many foreign
businesses report that Communist Party officials and officials in other
government departments at times interfere in court decisions. China's top leaders
undoubtedly play a big role in deciding sensitive political cases. China's legal system is
a mixture of common law and continental legal systems, but it places relatively
less emphasis on legal precedents.
The 1979 "Organic Law of the People's Courts of the People's Republic of China" authorized establishment
of economic courts at China's National Supreme Court and three levels of provincial
courts. The economic courts are given jurisdiction over contract and commercial
disputes between Chinese entities; trade, maritime, intellectual property and insurance;
other business disputes involving foreign parties; and various economic crimes
including theft, bribery, and tax evasion. In 1994, the lowest level of
provincial courts started to try economic cases involving foreign parties.
Foreign lawyers cannot act as attorneys in Chinese courts, but may be present
informally.
China's
bankruptcy law, passed in December 1986, provides for creditors' meetings to
discuss and adopt plans for the distribution of bankrupt property. The
resolutions of creditors' meetings, which are binding on all creditors, are
adopted by a majority of the attending creditors, who must account for more
than half of the total amount of unsecured credit.
Even Chinese officials contemplating broad enterprise reforms recognize the inadequacy
of China's
current bankruptcy laws. However, debate continues over what additional
legislation is needed. A major problem for Chinese commercial banks is the
formal and informal constraints on liquidating the assets of non-performing
state enterprise loans. The failure of the Guangdong International Trust and
Investment Company (GITIC) in 1998 highlighted the need to develop specialized
rules for financial institutions. For the time being, however, the Office of
the National Leading Group for Merger, Bankruptcy and Re-employment and the
State Economic and Trade Commission (SETC) have the final say with regard to
large industrial SOE bankruptcies.
In October 1995, China put into effect a new "Guarantee (Security) Law"
- the first national legislation covering mortgages, liens, rules on guarantors
for debt and registration of financial instruments as pledges for debt. The law
defines debtor and guarantor rights and provides for mortgaging of property,
including land and buildings, as well as other tangible assets such as
machinery, aircraft or other types of vehicles. While some areas of the law
remain unclear -- such as how the transfer of property under foreclosure is effected
- the law represents an important step forward. Chinese commercial banks have
successfully repossessed vehicles from delinquent borrowers.
4. Performance Requirements and Incentives
China has
agreed to implement the Agreement on Trade-Related Investment Measures (TRIMs)
upon WTO accession. China has committed to eliminate and cease enforcing trade and
foreign exchange balancing requirements and local content and performance
requirements. It has also agreed not to enforce contracts imposing these
requirements. China has also committed to only enforce laws or provisions
relating to the transfer of technology or other know-how if they are in
accordance with WTO terms on protection of intellectual property rights (IPR)
and trade-related investment measures (TRIMS).
Export requirements are inconsistent with WTO principles, and Chinese law has
never formally listed export requirements. China has said it would not enforce export performance
requirements in private contracts. However, in the past, the Ministry of
Foreign Trade and Economic Cooperation (MOFTEC) and the State Development Planning
Commission (SDPC) have strongly encouraged contractual clauses stipulating
export requirements.
Chinese regulations grant foreign-funded enterprises freedom to source inputs
both in China
and abroad, though priority is given to Chinese products when conditions are
equal. Chinese regulations forbid "unreasonable" geographical, price,
or quantity restrictions on the marketing of a licensed product. The foreign
venture, thus, retains the right to purchase equipment, parts, and raw materials
from any source.
Chinese officials, however, still encourage localization of production.
Investment contracts often call for foreign investors to commit themselves
gradually to increase the percentage of local content. In addition, officials
carefully examine the sourcing of inputs at various stages in the approval
process for FIES. Effective implementation of China's WTO commitments should affect this bias.
Most joint ventures involve the transfer of technology through a licensing
agreement, the transfer of technology from a third party, or the transfer from
the foreign partner as part of its capital contribution. Many regulations
governing specific industries currently require such transfers. China has committed to
enforce only those laws or other provisions relating to the transfer of
technology or other know-how if they are in accordance with WTO provisions on
protection of IPR and TRIMS. Despite these commitments, foreign investors may
still encounter pressure to transfer technology.
Rules for hiring Chinese nationals depend on the type of establishment.
Although wholly foreign-owned companies are not required to nominate Chinese
nationals to their upper management, in practice, expatriate personnel normally
occupy only a small number of managerial and technical slots. In some ventures,
there are no foreign personnel at all.
The amended Chinese-Foreign Equity Joint Venture Law provides that the joint
venture partners will determine, by consultation, the Chairman and
Vice-Chairman, leaving open the possibility for a foreign or a Chinese
representative to hold either of these positions. If the foreign side assumes
the chairmanship, the Chinese party must have the vice-chairmanship, and
vice-versa.
While FIEs are free to recruit employees directly or through agencies,
representative offices of foreign companies must hire all local employees under
contract with approved "labor services companies." These foreign
companies pay the contracted local employees' salary directly to the
"labor services companies" that, in turn, give only a portion of the
salary to the contracted employees. The employees remain technically employed
by the labor services company.
5. Private Ownership Rights
In the past, China restricted private ownership and establishment of business
enterprises, particularly in the service sector. In 1999, China amended its
constitution to provide a legal basis for private sector development. China has committed to
reduce over time many restrictions on the private sector upon accession to the
WTO. Nevertheless, some sectors - insurance, for example - will retain many
restrictions.
China has
agreed to grandfather all existing current market access and activities in all
services sectors. This will protect existing American distribution services,
financial services, professional and other service providers in China, including those
operating under contractual or shareholder agreements or a license, from
additional restrictions as China phases in its commitments.
6. Protection of Property Rights
Chinese law provides that all land is owned by "the public," and
individuals cannot own land. However, consistent with the policies of reform
and opening to the outside, individuals, including foreigners, can hold
long-term leases for land use. They can also own buildings, apartments, and
other structures on land, as well as own personal property.
Chinese leaders have acknowledged that protection of patents, copyrights, and
trademarks is needed to promote a "knowledge-based economy" in China. China has committed to
full compliance with the Agreement on Trade-Related Aspects of Intellectual
Property (TRIPS) upon accession to the WTO. It is now reviewing and revising
its patent, trademark, and copyright laws to ensure compliance with TRIPS
requirements. China is a member of the World Intellectual Property
Organization (WIPO), the Paris Convention for the Protection of Industrial
Property, the Berne Convention, the Madrid Trademark Convention, the Universal
Copyright Convention, and the Geneva Phonogram Convention. The Chinese
Government is still debating, however, whether China's Copyright Law will be brought into full compliance with
the WIPO Copyright Treaty and the WIPO Performances and Phonograms Treaty.
In spite of steady, significant progress in improving its intellectual property
regime, IPR protection in China remains problematic. IPR enforcement, through either
judicial or administrative means, remains a serious problem. Industry
associations representing copyright and consumer goods industries report
staggering levels of piracy and counterfeiting of all types of products. They
also report increasing exports of IPR-infringing goods to other countries. The
Business Software Alliance estimates that more than 90 percent of business
software used in China is pirated. Consumer goods companies report that, on
average, 20 percent of their products in the Chinese market are counterfeits.
Chinese companies experience similar, or greater, problems with piracy and
counterfeits. The administrative penalties for IPR violations, often no more
than confiscation of the counterfeit products, are generally insufficient to
deter counterfeiters. China's criminal sanctions against IPR violations are seldom
used, in part, because of restrictions on types of admissible evidence and
cumbersome procedures.
Combating IPR piracy in China is a long-term, multi-faceted undertaking. China has established
special IPR courts in all provinces and major cities. Judges in Chinese courts
are charged with fact-finding and have greater discretion in the adjudication
of cases than those in the U.S. The lack of legal training of many of the trial court
judges undermines the effectiveness of these courts. Authorities are attempting
to remedy this training gap by establishing IPR law centers at Beijing University, Qinqhua University, and People's
University. Chinese IPR professionals are also studying in foreign countries.
The U.S. and
the European Union have made IPR - and commercial dispute resolution - a key
feature of "Rule of Law" discussions with Chinese authorities.
7. Transparency of Regulatory System
China's legal
and regulatory system lacks transparency and consistent enforcement despite the
promulgation of thousands of regulations, opinions, and notices affecting
foreign investment. Although the Chinese government has simplified the legal
and regulatory environment for foreign investors in recent years, China's laws and
regulations are still often ambiguous. Foreign investors continue to rank the
arbitrary enforcement of regulations and the lack of transparency as two major
problems in China's investment climate. No prospective foreign investor
should venture into the China market without experienced counsel.
In accordance with China's WTO commitments, the State Council's Legislation Office
recently announced that all of China's foreign trade-related and foreign-investment related
laws, regulations, rules, and policy measures would be published. It further
announced that China would use "proper ways and means" to help other
WTO members and other pertinent individuals and enterprises under-stand those
rules and regulations. The Legislation Office went on to acknowledge that, in
the past, some departments and localities relied on their own internal
documents to conduct business. Some even issued documents under their own
"internal control" and resorted to "disguised forms of market
blockades" and local protectionism. The State Council has announced that
it is committed to stop-ping such practices in order to avoid international
disputes.
8. Political Violence
Corruption, SOE layoffs, and economic disparities between rural and urban areas
and between coastal and interior regions contribute to dissatisfaction among
the Chinese populace. As China continues to implement its SOE restructuring campaign
begun in 1998, unemployment and other social pressures have risen. As a result,
there have been a growing number of local labor actions. Most of these have
been fairly small and resolved peacefully. Some, however, including protests by
20,000 laid-off miners in China's northeast Liaoning province in early 2000, turned violent. Declining rural
incomes have contributed to a similar increase in protests by farmers in the
countryside. Local authorities have generally dealt with these protests in a
peaceful manner and have not resorted to violence. Northwest China has been
troubled by occasional unrest among minority ethnic and religious groups. As in
years past, there were a number of isolated violent actions by disgruntled
individuals who - in some cases motivated by personal, not political reasons.
Following NATO's mistaken bombing of China's Belgrade embassy in 1999, violent protests erupted at U.S. diplomatic
facilities and a few American fast-food franchises throughout China. Soon after the
bombing, government-controlled press discouraged protests or acts of violence
against foreign investors. Most foreign investors in China believe that the
chances of political violence are low because Beijing is able and willing to repress any sizeable
anti-government protests.
9. Corruption and Crime
Corruption remains widespread in China despite the government's high-profile anti-corruption
efforts and harsh penalties for those convicted of corruption. According to
Chinese government statistics, three ministerial-level officials and hundreds
of other senior officials were charged with corruption nationwide in 1999. In
February 2000, a senior official from Jiangxi province was executed for receiving bribes and other
abuses of power. Also in 2000, the government found other senior officials from
Jiangxi and Guangxi
provinces were involved in corruption scandals. There have been reports that
other, more senior officials used their connections to avoid prosecution in
other corruption investigations. Banking and finance are among the sectors most
afflicted by corruption, as are government procurement and construction
projects. Premier Zhu Rongji has criticized corruption in the construction
industry resulting in safety hazards.
Offering and receiving bribes are both crimes under Chinese law, but it is
unclear if giving a bribe to a foreign official in another country is a crime.
Bribes cannot be deducted from taxes.
Three different government bodies and one Communist Party organ are responsible
for combating corruption in China: the Supreme People's Procuratorate, the Ministry of
Supervision, the Ministry of Public Security, and the Communist Party Committee
for Discipline Inspection. The Procuratorate and the Ministry of Public
Security are responsible for investigating criminal violations of China's anti-corruption
laws, while the Ministry of Supervision and the Party Discipline Inspection
Committee enforce Government ethics and Party discipline.
10. Labor
FIEs can integrate a joint venture partner's work force, hire through a local
labor bureau or job fair, advertise in newspapers, or rely on word of mouth.
Representative offices, for the most part, must hire their local employees
through a labor services agency.
Skilled managers, especially those with marketing skills, are often in short
supply although many companies have found an abundance of talented and
highly-motivated recent university graduates. Experienced managers command
salaries far greater than their counterparts in Chinese enterprises, making
localization an expensive proposition for many companies. Finding and keeping
engineers and technicians can also be difficult. Shortages of skilled labor
are, at times, especially acute in south China due to the relative dearth of southern higher learning
institutions. Many Chinese workers move rapidly from job to job within the
foreign-invested and growing private sectors.
Workers are paid a salary, hourly wages, or piece-work wages. The provision of
subsidized services, such as housing and medical care, is common, and
compensation beyond the basic wage constitutes a large portion of a venture's
labor expenses. With recent moves by China to reform the housing system and promote home purchases
through a mortgage system, however, employer-provided housing has been
decreasing. Investors should check whether they will have to provide housing
and other incentives in the locality in which they establish.
Local governments also tax enterprises and workers to support pension and
unemployment insurance funds. In general, FIEs ventures are free to pay
whatever wage rates they choose as long as it is above the locally designated
minimum wage. In practice, income-tax laws often make it desirable to provide
greater subsidies and services rather than higher wage rates. Most FIES
determine their methods and calculations of salaries and benefits after
observing local practice. China's national labor law also requires compensation for
overtime work.
The ability to terminate workers varies widely based on location, type and size
of enterprise. Terminating individual workers for cause is legally possible but
may require prior notification/consultation with the local union. In general,
layoffs are easier in south China than in the northeastern China, and in smaller enterprises than in larger ones. FIEs generally
do not encounter problems letting workers hired on a short-term go at the end
of the contract period. Large-scale layoffs by SOEs, especially in northeastern
China, have
led increasingly to worker demonstrations, though not to a degree that would
threaten social stability.
It is illegal under Chinese law to oppose efforts to establish officially
sanctioned unions. The Communist Party controls the country's sole officially
recognized workers' organization, the All-China Federation of Trade Unions (ACFTU).
Independent trade unions are illegal. China's Joint Venture Law and 1994 Labor Law require joint
ventures to allow union recruitment but do not require a joint venture actually
to set up the union - as required in SOEs. Many FIEs, including joint ventures,
do not have unions although several coastal provinces have recently passed
stricter regulations requiring that all FIEs have unions. FIEs without unions,
however, often have worker organizations that perform functions similar to
Chinese unions, such as organizing social and charitable activities.
China's Labor
Law provides for collective labor contracts to specify wage levels, working
hours, working conditions, and insurance and welfare. In 1996, the ACFTU
launched a drive to conduct collective negotiations in at least 90 percent of FIEs,
a target that the ACFTU claims to have reached. Most collective negotiations,
however, appear to be pro-forma in nature. This is because local Communist
party committees, rather than the workers themselves, control the selection of
the union leaders who conduct collective bargaining.
Although China
is a signatory to several ILO conventions, it has not signed key ILO
conventions on freedom of association and collective bargaining.
11. International Investment Agreements
China has
entered into bilateral investment agreements with more than 50 countries,
including Japan,
Germany, the United Kingdom, France, Italy, Thailand, Romania, Sweden, the
Belgium-Luxembourg Economic Union, Finland, Norway, Spain, Canada, and Austria. The provisions of these agreements cover such issues as
expropriation, arbitration, most-favored-nation treatment, and transfer or
repatriation of proceeds.
The United States does not have a bilateral investment treaty with China. Any American investor
investing in China should make sure that expropriation and arbitration are
covered in the terms of the contract.
12. Foreign Trade Zones
China's
principal duty-free import/export zones are located in Dalian, Tianjin, Shanghai, Guangzhou and Hainan. In addition to
these officially designated zones, many other free trade zones offering similar
privileges exist and are incorporated into economic development zones and open
cities throughout China. However, restrictions and charges often apply and can affect
venture operations and business in the latter zones.
China's
Customs Administration claims success in controlling the duty-free importation
of production inputs into the zones, but the lack of physical barriers makes it
difficult to control the flow of non-duty items out of the zones.
Taxing Structure and Incentives
The corporate income tax rate
for foreign investors is 30 percent with an additional local corporate income
tax rate of three percent. There is a 20 percent withholding tax on interest.
Capital gains are taxed as ordinary income. Tax rates for pension funds may run
as high as 20 percent of an enterprise's total wage bill. Employees must also
contribute between three to eight percent of their salary, depending on the
locale.
A foreign investor may obtain a refund of 40 percent of the tax paid on its
share of income, if the profit is reinvested in China for at least five years. Where profits are reinvested in
high technology or export-oriented enterprises, the foreign investor may
receive a full refund. In addition, many foreign companies have adopted a
strategic plan for China that requires reinvestment of profits for growth and
expansion.
Those enterprises located in special economic zones (Shenzhen, Zhuhai, Shantou, Xiamen, and Hainan Province) receive a
reduced income tax rate of 15 percent. A 15 percent income tax rate also
applies to foreign production and manufacturing enterprises in the Pudong
development zone in Shanghai and in the 14 open cities (Beihai, Dalian, Fuzhou,
Guangzhou, Lianyungang, Nantong, Ningbo, Qingdao, Qinhuangdao, Shanghai, Tianjin,
Wenzhou, Yantai, and Zhanjiang) and to all infrastructure projects. A tax rate
of 24 percent applies to foreign production and manufacturing enterprises in
the coastal open economic regions (Liaodong and Shandong Peninsulas, the Chiangjiang and Pearl
river deltas, and Southern Fijian) and the 14
open cities, provincial capitals, and cities of Changjiang.
Foreign investors sometimes may have to negotiate incentives and benefits
directly with the relevant government authorities; these incentives and
benefits may not be automatically conferred. The incentives available include
significant reductions in national and local income taxes, land fees, import
and export duties, and priority treatment in obtaining basic infrastructure
services. The Chinese authorities have also established special preferences for
projects involving high-tech and export-oriented investments. Priority sectors
include transportation, communications, energy, metallurgy, construction
materials, machinery, chemicals, pharmaceuticals, medical equipment and
electronics.
As part of a national campaign to standardize tax treatment and increase
collection rates, the State Taxation Administration began work on a planned
unification of the tax system in 1998. China's weak trade performance during most of 1999, however, put
this process on temporary hold. The Chinese government, in fact, increased VAT
rebates for selected exports twice in 1999. Despite the 1999 reprieve, State Taxation
Administration officials plan to eventually phase out VAT rebates to increase
tax revenues.
The tax incentive system is complicated and difficult to implement.
Discrepancies between central, provincial and local government tax regulations
hamper foreign investment, particularly in remote and impoverished areas.
Still, initial efforts at reform are beginning to level the playing field.
Collection efforts have been centralized and the responsibility for assessment
and filing of returns was shifted to the taxed enterprise in late 1999. A
standardized reporting and payment procedure was also implemented nationwide to
reduce overpayments and loopholes.
China
encourages reinvestment of profits. A foreign investor may obtain a refund of
40 percent of taxes paid on its share of income, if the profit is reinvested in
China for at
least five years. Where profits are reinvested in high technology or
export-oriented enterprises, the foreign investor may receive a full refund.
Many foreign companies invested in China have adopted a strategic plan that reinvests profits for
growth and expansion.
China is a land of mystery and charm. Its glorious history, spectacular landscapes, splendid culture and intriguing national customs have always offered a panorama of colour and excitement for visitors.
Over the past 20 years with the adoption of the reform and open policy to the rest of the world, China has become a world-class tourist destination with a great achievement and development on modern infrastructure. With ancient oriental civilization, yet full of modern vitality, China has fascinated travelers from around the world.
Sources: Country Watch, Central Intelligence Agency: http://www.cia.gov
International Monetary Fund: http://www.imf.org
World Bank: http://www.worldbank.org