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Jason Yang, president & CEO of AMISED COMMERCE CO., LTD. I have a degree of Bachelor of History from Hangzhou University and postgraduate of International Economic Law from China University of Political Science and Law (CUPL). AMISED is a leading international consultancy & management... More
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AMISED COMMERCE
  • Investment environment in China
    Compared with other countries, especially those emerging economies which are in competition with Chinese products and have a large domestic market, is there any advantage to China’s investment environment? If it is, how is the sustainability of this advantage? We try to compare China with India, Vietnam, Indonesia, Mexico and Brazil according to some important factors which affect the foreign investment environment and by a common way to look into factors related to social security, government regulation, tax burden, financing costs, and labor markets.
    Compared with others, China and Vietnam, the social order in good condition, basically no crime and violence against foreigners or foreign firms.In recent years, a few political campaigns emerged contra posing foreign projects. In the capital of Andhra Pradesh and Hyderabad, there is support for Telun Ganna province ，which caused strikes and violence in Kashmir and the Northeast and the eastern and central parts of some states .Meanwhile, India also has been the target of terrorist attacks.2008 in Jaipur, New Delhi, Bangalore, Hyderabad, Guwahati and Ahmedabad terrorist attacks have taken place, causing the attacks in Mumbai in November, including 28 foreigners, including 166 deaths. separatism, extremism, ethnic and religious conflict risks also exist in Parts of Indonesia .such as Aceh, Papua, Maluku, South Sulawesi, Central Sulawesi Province, and a few other counties .Although President Susilo Bambang Yudhoyono has increased efforts to curb terrorist activities since he was in power. There is still a spate of terrorist attacks. Since 2002, the second Bali bombings and other terrorist have happened in Bali, Jakarta Marriott Hotel, the Australian Embassy in Indonesia, causing heavy casualties. It should be noted that the explosion occurred in the intensive foreign tourist and entertainment places. Zapatista National Liberation Army, the People's Revolutionary Army and other rebel groups also exist in Mexico. In 2007, People's Revolutionary Army blew up a gas pipeline, causing the temporary closure of multinational corporations’ factory in western Mexico. Mexican government in 2009 triggered off massive demonstrations by closing a power company
    In addition to armed rebellion and protest, the drug and organized crime are also serious problems in Mexico. Drug-related violence in 2009 caused 7,800 deaths. There are some traffic jams caused by strikes or political demonstrations in Brazilian cities. Criminal organizations in Sao Paulo also occasionally attack public institutions. In addition, Colombia sporadic armed personnel’s entry into Brazil caused terrorist activities in adjacent areas of Colombia. The control of foreign capital of Indian is the greatest in southeastern areas. There are many restrictions on the service sector. Rail freight and forestry are monopolized by the public sector and not opened to foreign investment. Apart from exceptions provided by law, agricultural sector also prohibits foreign ownership.
    Press and publication industry can have at most 26% foreign stock. In Financial sector, foreign investment shares in the local banks accounted for no more than 87% and in the insurance company may not exceed 26% of total shares and in Telecom departments shall not exceed 75%.
    Openness to foreign investment in Vietnam is relatively high. In 33 departments，there are 18 fully opened to foreign investment. Explicit restrictions of foreign investment are mainly made in strategic services, such as communication, electricity and a number of transportation departments. In addition, according to its press law, foreign investment is prohibited to enter into radio and television and media industry. Indonesia gives more stringent controls on foreign investment. Almost all the 33 sectors have restrictions on foreign investment. The first 77 in 2007 and Presidential Decree No. 111, a list of restrictions were made in banning foreign investment entering into other industries. Specifically speaking, the press and publication industry is against foreign investment going into forestry, telecommunications and transportation for more than 50% .pharmaceutical, financial, construction and medical industries can be adjusted by the foreigners but can also be restricted. Mexico’s restrictions on foreign investment are higher than average foreign investment in Latin America and the Caribbean. Strategic sectors were set up by foreign investment law to prohibit or restrict foreign investment. Different from other countries, Mexico not only limited foreign investment in the service sector but also in the primary sectors. For example, the openness to foreign investment in oil and gas industry, agriculture and forestry shall not exceed 49%.Services industry, such as electricity transmission and distribution is also against foreign investment. Foreign investment in power generation has been severely restricted by law, the foreign investment in fixed-line telecommunications, rail freight, port and airport, news and publishing industry should be less than 50% and foreign ownership of national TV channels foreign investment shall not meddled.
    The same restrictions on foreign investment in Brazil are also higher than the average level in Latin America and the Caribbean. Foreign air transport sector should not exceed 20%, media industry no more than 30% .foreign investment is prohibited entering into medical industry.
    China also has restriction on foreign investment. The "Catalogue for the Guidance of Foreign Investment Industries (Amended in 2007)" listed the foreign investment industries that we encouraged; restricted and prohibited .Publishing industry does not open to foreign investment. Foreign investment in Telecommunications, power distribution, rail freight, air transport, airport and port operations and other industries should be less than 50%.
    There are more stringent restrictions on foreign investment in Oil and gas, financial services, health and tourism industry. However, most of China's manufacturing sector is fully opened to foreign investment. Overall, China's trade restrictions on foreign investment are less than that in India, Indonesia, and the Mexican equivalent, but stricter than in Vietnam and Brazil.
    As the part of statutory tax rate, it’s higher than that of India and as same as other countries. Foreign income tax rate of India is 48%. The royalties of the withholding tax rate is 20%.Less than 2500 Million rupee’s rate in Indonesia is 10%.between 2500 to 5000 million rupee is 15%. More than 50 million rupees is 30%.Dividends, interest and royalty withholding tax rate is 20%.In addition to 15% statutory corporate income tax, the Brazilian also collected 12% of the social contribution tax (18%tax for the financial industry contributions to society) Dividends are not subject to income tax and interest and royalties’ withholding tax rate is 15%.Vietnam‘s income tax rate is usually 32%.the income tax rates ranges from 25% to 50% according to different industry.
    Period of Approval of the license contract of 5 years has the royalties withholding tax rate of 10%, 15% over 5 years.In Mexico corporate income tax is 35%. Interest income tax rate is 10%. PRC enterprise income tax rate is 33%. Interest and royalty withholding tax rate are 20%.In fact, the tax burden on foreign-funded enterprises in China is far lower than the statutory tax rate due to the existence of a variety of concessions. The taxes on state-owned enterprises are 30% and 20% of private enterprises, while an average of only 12% of foreign enterprises. The cost of financing is an important aspect of estimating the local business environment. In general, the higher banking system or the efficiency of capital markets, the lower funding costs.
     
    Furthermore, the lower the interest rate of bank loans of a country, the larger scale the capital market is. You can roughly determine that the higher the efficiency of the country's financial system is, and lower financing costs of local foreign-funded enterprises are. From the end of 2008 commercial banks prime lending rate (Commercial bank prime lending rate) we can see 13.31%in Indian, 15.78% in Vietnam, 13.6% in Indonesia, 47.25% in Brazil , 8.71% in Mexico, 5.31% higher than China’s. As for capital market capitalization scale, 239.8 billion U.S. dollars in India, 25.52 billion U.S. dollars in Vietnam, Indonesia, $ 41,710,000,000, $ 95,030,000,000, Brazil, Mexico, $ 92,340,000,000, less than China's $ 2,434,000,000,000 (India ,one of the largest is less than one-tenth of China), Which can be roughly said that China's foreign domestic financing costs is lower than the other countries.
    Finally, as an important factor of production, labor force quality, especially labor costs are all essential to examine foreign investment environment. We use literacy rate (Literacy) to represent the quality of labor. India, Vietnam, Indonesia, Brazil, Mexico's literacy rate was respectively 61%, 90.3%, 90.4%, 88.6% and 91%.China's literacy rate was 91.6%, the highest in the country. Given China's manufacturing sector is fully opened to foreign investment, and the manufacturing power of China is also known to the world. Here we only make a comparison of national manufacturing costs. according to International Labor Organization data ,we know that in 2008 the average monthly wage of manufacturing employees in India, Indonesia, Brazil, Mexico, in China were respectively $ 57.9, $ 99.4, $ 650.8, $ 468.0 and $ 290.6. And another survey showed the average monthly wage of manufacturing Employees in Vietnam is about $ 101.Only from wages, we can see that China's manufacturing wage is higher than that in India, Indonesia and Vietnam, but less than that in Brazil and Mexico. If we consider labor productivity, there is a great change in the situation. The secondary industry from countries where output and employment in secondary industry, said the ratio of labor productivity, while India, Indonesia, Brazil, Mexico, China and Vietnam, the second industry labor productivity were $ 5,204.7 / person, $ 11,553.2 / person $ 29,177.0 / person, $ 33,169.9 / person, $ 9,559.9 / $ 4,834.7 people / person, when China's labor productivity rate than India and Vietnam, slightly lower than Indonesia, much lower than Brazil and Mexico. We regard wage as costs and divide the wages by labor productivity, converted to monthly data, unit labor costs per month per capita output is respectively 89.9, 116.2, 44.8, 70.9, 32.9, and 47.9 in India, Indonesia, Brazil, Mexico, China and Vietnam. This means that the output value of China's unit labor costs has been higher than other countries.
    In summary, the overall environment for foreign investment in China still has advantages. its main advantages are a stable social security, lower financing costs and relatively low effective tax rate, but the relaxed trade restrictions, especially labor costs per unit of output, etc. don’t have a comparative advantage no longer, which is worth our attention. To make the overall strength of China's investment environment sustainable, we must unswervingly maintain social order and improve capital markets and the efficiency of the banking system and in accordance with WTO commitments and China's current situation, we should further relax restrictions on foreign trade.
    Oct 11 7:08 AM | Link | Comment!
  • Investment environment in China, getting worse or better?
     
    In recent years there are some voice kept on complaining & querying that the business environment in China were getting worse. Coca Cola failed in buying Huiyuan, some comments on Rio Tinto Trial and Google China moved its head office from Chinese mainland to Hong Kong, Jeffrey Immelt the CEO of GE even complained it was most hard time to the Chinese commerce environment since passed 25 years. All above seem to be indicated that its really getting worse.More than this, a research report was published by World Bank recently comparing four points of foreign capital investing environment among 87 countries (foreign stock ownership proportion limited in some industries, procedure of setting up a foreign firm, procedure of taking land and system of commercial mediation).The report said compared among East Asia and Asia Pacific area, there were more rigid rules in China than in other countries. Pierre Guislain, one of the main reporter, said that compared with the other 86 countries there were too much restrictions on foreign trade in China.
    However an opposite viewpoint appears at the same time. The American Chamber of Commerce in South China which has more than 1,700 members of enterprise published “White Paper on the Business Environment in China 2010” in March 2010. It reported that in 2010 investment budgets for foreign enterprises appear to have increased by 44 percent—nearly recovering to pre-financial crisis levels—although 3-year budgets lag in recovery. AmCham South China estimates that its members will reinvest a minimum of $9.4 billion over the course of the year, and notes that 90 percent of study participants consider the business environment to be good, very good or excellent. Furthermore, the Chamber estimates that its member companies have contributed to the creation of approximately 429,000 additional jobs for urban residents—about 4 percent of the 11 million total new urban jobs.
    Why so different comments came out at the same time? Is it strange? No.
    In all conscience, the commerce environment in China for the foreign investors is not so perfect and there are lot of things need to be improved in fact but anyway it is not getting worse like somebody worried. The most important thing is that if you really understand what position you have and what kind of business you are doing in the country you invested. You should know completely everything concerning your business including the government policy & rule information, and learn how to deal with all relationship and make a right plan for your business development then you can control and deal with your business freely and easily, as we said like a fish in the water.
    Later I will post another article making expatiate on a real situation of the investment environment in China comparing with other similar countries.
    Oct 09 10:27 AM | Link | Comment!
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