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PoliticalEnvironment

c hc ahpatpetre 5r 1 Business Outlook

SWOT Analysis

Strengths
China is continuing to open up various sectors of its economy to foreign investment.
With its vast supply of cheap labour, the country remains the top destination for foreign direct
investment (FDI) in the developing world.

Weaknesses
Foreign companies continue to complain about the poor protection of intellectual property in
China.
Chinese corporate governance is weak and non-transparent by Western standards. There is a
considerable risk for foreign companies in choosing the right local partner.

Opportunities
China’s ongoing urbanisation and infrastructure drive will provide major opportunities for foreign
investment in the landlocked provinces, and the transfer of skills and know-how.
The Chinese government is giving more protection and encouragement to the private sector, which
is now the most dynamic in the economy and accounts for most of the country’s job growth.

Threats
China’s government will block attempts by foreign firms to takeover assets of national impor-
tance.
China is experiencing rising labour costs, prompting some investors to turn to cheaper destinations
such as Vietnam.

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china Q1 2009

BMI Business Environment Risk Ratings


Wu Xiaoling, a former deputy governor of the People’s Bank of China (PBoC) has con-
firmed that the central bank has decided to ‘strip out’ lending to small firms, farmers and
areas hit by the May 12 2008 earthquake from the total loan quota apportioned to domestic
lenders. She also confirmed that the PBoC had raised lending quotas – originally imple-
mented to try to cool credit expansion – by 5% for big banks and 10% for small banks.
Furthermore, Wu suggested that ‘next year there will be no quota checks and each bank
will be able to make their own lending plan’.

Business Environment Rank Trend


Singapore 83.8 1 =
Hong Kong 82.2 3 =
New Zealand 79.0 6 =
South Korea 73.4 10 =
Japan 72.6 12 =
Australia 71.8 15 =
Taiwan 65.2 24 =
Malaysia 61.5 33 =
Thailand 59.5 38 =
China 52.5 55 =
Philippines 44.9 79 =
Vietnam 42.0 86 =
Sri Lanka 40.6 89 =
Indonesia 40.2 90 =
India 39.8 92 =
Pakistan 37.7 100 =
Cambodia 36.7 106 =
Bangladesh 36.2 109 =
Laos 35.2 113 =
Myanmar 16.0 133 =
North Korea 11.5 134 =
Regional average: 51.9 Emerging markets average: 46.2 Global average: 49.7

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Business Environment Outlook


Introduction
With its vast supply of cheap labour, and rapid economic growth, China remains the top
destination for foreign direct investment (FDI) in the developing world. Positively, the
Chinese government is increasingly giving more protection and encouragement to the
burgeoning private sector, which is now the most dynamic part of the economy and ac-
counts for most of the country’s job growth. However, the commanding nature of China’s
economy means that bureaucracy remains a key obstacle to doing business within the
country, and the legal framework is still weak despite two decades of reform.

Latest Developments
• China is considering a plan to invest CNY5trn (US$731bn) in transport infrastructure
over the next five years, as it looks to public works projects to help stimulate the
economy amidst a slowdown in the global economy. The investment would overlap
with a previous plan that earmarked CNY2trn (US$292.3bn) for infrastructure between
2006 and 2020. The focus for the new plan will be on roads, waterways and ports.

• Beijing has endorsed a long-awaited restructuring of Agricultural Bank of China


(ABC), drawing to a close a decade-long reform drive to reorganise the domestic
banking sector which has so far drained state coffers of US$500bn. As part of the
restructuring deal, ABC – China’s third largest lender in terms of assets (CNY6trn,
US$878bn) – will receive US$19bn, and have US$120bn worth of bad loans removed
from its books, according to a company official. This will pave the way for the bank
to follow the path taken by the other three state-owned lenders, Industrial and Com-
mercial Bank of China, China Construction Bank and Bank of China, and launch
a public listing.

• The Yangkou Port, a new deep-water port on the Yellow Sea, has just opened to trans-
porters. The port, in Jiangsu Province, has been built on an artificial island connected
to the mainland by a 13km bridge. The port is in the early stages of development, and
is scheduled for completion in 2013. Just one berth is currently operational, which can
handle smaller ships carrying up to 10,000 tonnes of cargo. By 2013 the port will be
open to ships weighing up to 300,000 tonnes. These include very large crude carriers
(VLCCs), which are between 150,000 and 320,00 deadweight tonnes (dwt) in size,
and ultra-large crude carriers (ULCCs), which are large enough to handle 300,000
dwt and above.

• The eleventh National People’s Congress (NPC) standing committee has passed a
law aimed at curbing embezzlement. The law in question prevents managers of state
companies from exploiting their positions to secure large stakes of these enterprises
for themselves. Improved procedures for the restructuring of state assets are also re-
quired. Specifically, accurate audits will be required before any mergers or divestment
to enable better valuation of such assets. The law, which comes into effect in May
2009, also stipulates stiff punishment for officials who flout the rules. Nonetheless,
despite increased efforts to tackle graft, China was still ranked only 72nd (out of 180

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countries) by Berlin-based corruption watchdog Transparency International in its


latest corruption perceptions index. This means that China’s ranking was unmoved
from the previous year’s index, despite its score improving marginally from 3.5 (out
of 10) to 3.6, where a higher rating represents lower corruption.

• On November 4 2008, in the highest level meeting between China and Taiwan in over
60 years, top officials signed a series of agreements. The number of direct charter
flights across the Taiwan Strait will be tripled to 108 per week, with new flights being
permitted on all seven days of the week instead of just four previously. The flying
routes will also be shortened by allowing aircraft to transit directly between China
and Taiwan (they had previously been routed through Hong Kong), and increasing the
number of Chinese airports accepting flights from Taiwan from 5 to 21. Meanwhile,
60 direct cargo flights per month will be allowed to operate between Taiwan and the
mainland, putting paid to the current practice of diverting them through third countries.

TABLE: BMI BUSINESS AND OPERATIONAL RISK RATINGS


Infrastructure Institutions Market Orientation Overall
Afghanistan 20.73 29.85 40.59 30.39
Bangladesh 35.05 25.89 47.74 36.23
Bhutan 20.29 58.26 35.63 38.06
Cambodia 19.69 26.83 63.69 36.74
China 68.01 42.73 46.75 52.50
East Timor 32.47 30.62 59.50 40.86
Hong Kong 75.06 80.76 90.72 82.18
India 50.37 40.21 28.77 39.79
Indonesia 32.65 22.48 65.53 40.22
Japan 88.03 81.02 48.74 72.59
Laos 23.90 31.49 50.17 35.18
Malaysia 65.71 59.42 59.29 61.47
Maldives 40.42 54.31 67.17 53.97
Myanmar 21.44 3.06 23.43 15.98
Nepal 42.67 36.69 54.09 44.49
North Korea 23.63 8.98 1.97 11.53
Pakistan 36.08 29.57 47.50 37.72
Philippines 40.12 37.12 57.64 44.96
Singapore 83.09 88.18 80.16 83.81
South Korea 82.92 67.88 69.35 73.39
Sri Lanka 35.57 48.85 37.49 40.64
Taiwan 69.49 61.38 64.61 65.16
Thailand 59.54 60.06 59.00 59.53
Vietnam 37.23 39.11 49.71 42.01
Australia 86.43 81.44 47.57 71.81
New Zealand 83.41 90.25 63.21 78.96
Global ave. 47.39 47.46 48.65 47.73
Region ave. 49.00 47.56 52.31 49.62
Source: BMI. Scores out of 100, with 100 representing the best score available for each indicator.

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In addition, direct cargo routes between 63 Chinese and 11 Taiwanese ports will be
established, while a similar agreement will reduce postage times, with direct links
being established between five stations in Taiwan and eight in China.

Institutions
Legal Framework
The People’s Republic of China (PRC) operates a civil law system that includes some
common law elements, although relatively less emphasis is placed on legal precedent. Two
decades of reform have resulted in a number of changes in institutions, laws and practices.
A formal legal system has resulted in a nationwide court system comprising 3,000 basic
courts and some 200,000 judges. The Chinese courts are divided into Courts of General
Jurisdiction, and the Courts of Special Jurisdiction.

In 1979 economic courts were established as part of China’s Supreme People’s Court and

TABLE: BMI LEGAL FRAMEWORK RATINGS


Investor Protection Rule of Law Contract Enforceability Corruption
Afghanistan 34.8 0.6 17.4 23.3
Bangladesh 61.1 25.1 8.0 3.3
Bhutan 25.6 75.4 57.0 82.0
Cambodia 51.2 13.8 38.9 6.0
China 7.8 50.3 54.7 54.7
East Timor 11.8 12.6 36.3 na
Hong Kong 62.5 89.8 87.5 92.7
India 38.0 62.9 8.9 54.7
Indonesia 22.3 25.7 26.5 18.0
Japan 58.3 89.2 90.5 91.3
Laos 44.8 19.8 28.7 28.7
Malaysia 53.8 72.5 47.8 75.3
Maldives 91.8 64.1 46.5 23.7
Myanmar na 4.8 na 1.3
Nepal 44.3 31.7 43.0 23.3
North Korea na 9.0 na na
Pakistan 56.2 26.9 17.5 8.7
Philippines 56.4 46.1 54.4 23.3
Singapore 64.5 94.6 75.9 98.7
South Korea 31.7 79.0 81.8 76.0
Sri Lanka 57.6 59.9 47.7 48.0
Taiwan 19.7 81.4 53.1 80.7
Thailand 19.5 60.5 60.1 62.0
Vietnam 22.8 49.7 45.6 28.7
Australia 27.9 94.0 89.2 95.3
New Zealand 66.9 97.0 82.4 100.0
Global ave. 36.8 48.8 49.9 40.2
Region ave. 43.0 51.4 50.0 50.0
Source: BMI. Scores out of 100, with 100 representing the best score available for each indicator.

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three levels of provincial courts. The economic courts enjoy jurisdiction over:

• Contract and commercial disputes between Chinese parties.

• Trade, maritime, intellectual property and insurance.

• Other business disputes involving foreign parties.

• Various economic crimes including theft, bribery, and tax evasion.

There is also an administrative legal system, which adjudicates more minor criminal
cases.

Judges are often vulnerable to corruption, political control and the pressures of guanxi
(connections based on family or local ties). Their appointment, promotion and removal
are all at the discretion of local government and Communist Party leaders rather than the
Supreme People’s Court or provincial High Court. Both the judges and the litigants who
appear before them are subject to the influence of local protectionism.

Legislation is frequently inadequate, with numerous conflicts between national and local
norms, and a proliferation of regulations, interpretations and other edicts often producing
incoherence and inconsistency. Laws and regulations in China tend to be far more general
than in most Organisation for Economic Co-operation and Development (OECD) countries,
and therefore need more specific implementing rules and measures.

Even government arbitration, to which many foreign businesses and Chinese turn in an effort
to avoid the vagaries of the courts, sometimes suffers from the same types of pressures that
distort judicial justice. Prosecutors, who are supposed to guard against such illegal conduct,
are usually too weak politically and China’s current legal and regulatory system can be
opaque, inconsistent and often arbitrary. Implementation of the law is inconsistent.

Although China is a member of the International Centre for the Settlement of Investment
Disputes (ICSID) and has ratified the UN Convention on the Recognition and Enforce-
ment of Foreign Arbitral Award, it places strong emphasis on resolving disputes through
informal conciliation and mediation.

Property Rights
Chinese law states that all land is owned by ‘the public’. Individuals are not permitted to
own land. However, both Chinese nationals and 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.

Intellectual Property Rights


China lacks effective protection for intellectual property rights (IPR). In spite of some
reforms under its WTO commitments – China has committed to full compliance with the
WTO Agreement on Trade-Related Aspects of Intellectual Property (TRIPS) – enforcement

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is poor and penalties, in the rare cases they are applied, are insufficient to act as proper
deterrents. Trademark and copyright violations are widespread. Lack of co-ordination
among public bodies undermines attempts at enforcement. There is also wide variation in
the application of IPR protection.

Corruption
Corruption is prevalent and anti-corruption efforts are obstructed by weak or non-existent
monitoring mechanisms. Embezzlement and financial mismanagement have been identi-
fied by numerous audit reports. The use of guanxi is widespread in the upper echelons of
business. Many of those who come under investigation are able to deploy their connections
so as to avoid prosecution.

However, anti-graft efforts have improved significantly under President Hu Jintao, who
has made tackling rampant corruption one of his top priorities. January 2008 saw sports
magnate Yu Zhifei jailed for embezzlement and the launch of an investigation against the
former head of oil giant Sinopec, Chen Tonghai, while 2007 witnessed two of China’s most
high profile anti-graft cases – the sacking and arrest of Shanghai’s former Communist Party
boss, Chen Liangyu and the execution of Zheng Xiaoyu, the former head of the country’s
food and drug watchdog. Yet, during a month-long leniency offer that began on May 30,
almost 1,800 officials confessed to corruption according to the Chinese Communist Party
watchdog, the Central Commission for Discipline Inspection (CCDI).

Red tape is a major issue for investors. Given that many laws are defined in very general
terms, it is often left to the bureaucracy to make decisions. With a lack of accountability,
this process provides opportunities for corruption, and numerous bureaucratic obstacles
stymie the easy acquisition of licenses. According to World Bank data, 20 separate pro-
cedures are required to enforce a contract, which takes an average of 180 days.

Infrastructure
Physical Infrastructure
As one of the fastest-developing economies in the world, China has an insatiable appe-
tite for infrastructural development. BMI valued the country’s construction industry at
US$146.40bn in 2006, registering a growth rate of about 13% y-o-y. We are expecting
the construction industry in China to be worth about US$315.32bn by 2012, contributing
about 7.17% to the nation’s gross domestic product (GDP).

Much of the ongoing construction work in the country is at the higher-value end of the
industry (power plants, hydroelectric schemes, high-speed rail links). Most of this will be
funded through private-sector involvement. However, public-infrastructure spending will
also need to increase substantially to meet the government’s targets.

A boom in residential construction is expected to continue, as increasing numbers of


workers migrate to urban centres for employment opportunities. The government intends
to increase the number of new homes built by 15% over the next five years, and we expect

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new housing to reach 1.5bn m2 of completed dwellings in 2006.

However, site safety is a concern. The Ministry of Construction put the industry death toll
at 2,288 people in 2005, and while this represented an 11.4% y-o-y drop, the industry was
still responsible for the highest number deaths of any Chinese industrial sector, including
mining. As well as having to deal with these social and structural problems, the industry
is trying to reform in other ways, such as improving environmental performance and in-
troducing a regulatory framework for building materials.

The major test for the Chinese government will be to eliminate the physical and financial
dangers from the industry. The action it takes over the coming years to curb corruption and
improve working conditions will be crucial to the success of its ambitious infrastructure
building plans and, ultimately, the country’s economic development.

The quality of roads in China is poor. In 2005 China had a total road network of more
than 3.3mn km, although approximately 1.47mn km of this network – almost 45% – is
classified as ‘village roads’. Paved roads totalled 770,265km in 2004; the remainder were
gravel, improved earth standard, or merely earth tracks.

Rail is the major mode of transportation in China. The national rail system – the third
largest in the world at approximately 76,000km – is modernising and expanding rapidly,
but still possess a number of weaknesses, as highlighted by the recent snow storms which
brought the country’s railways to a virtual standstill.

Eight Chinese cities (Beijing, Tianjin, Shanghai, Guangzhou, Wuhan, Shenzhen, Nanjing
and Chongqing) currently have metro systems, and at least seven more are planning them.
Currently proposed extensions and new networks amount to more than 2,000km, with
a cost of at least CNY500bn (US$65bn). In Beijing alone, which currently has around
114km of metro routes, there are plans to expand the network to a total of 561km by 2020.
Some of this expansion has been driven by the 2008 Olympic Games, but most of it is
aimed at relieving congestion and expanding the city. Indeed, the World Bank in June
2006 urged China to do more to improve public transport to ease traffic jams rather than
building more highways to accommodate cars. Overall, with China projected to have 125
cities with more than one million people each by 2010, there is still huge scope for urban
railway expansion.

As a result of the country’s rapidly expanding civil aviation industry, by 2007 China had
around 500 airports of all types and sizes in operation, about 400 of which had paved
runways. China plans to build another 97 airports by 2020.

China has more than 2,000 ports, 130 of which are open to foreign ships, and 16 ‘major’
ports with a capacity of over 50mn tonnes per year. China’s total shipping capacity is in
excess of 2,890mn tonnes. By 2010, 35% of the world’s shipping is expected to originate
from China. China also has more than 140,000km of navigable rivers, streams, lakes and
canals, and in 2003 these inland waterways carried nearly 1.6trn tonnes of freight and 6.3tr
passenger/km to more than 5,100 inland ports.

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Labour Force
The Chinese labour force is expanding rapidly. Estimated in 2007 at 798mn, this represents
a participation rate of around two-thirds. The urban unemployment rate averages 4.2%.
However, the government admits that the statistics ignore many unemployed workers,
including those laid off from state-owned companies.

Though China has a reputation for having a bottomless well of cheap labour, the Chinese
economy has actually experienced labour shortages in recent years. Minimum wages
are rising as the economy responds to the labour shortage, setting a new salary floor for
employers. For example, textile factories in Bangladesh and India are undercutting China
on price. The affluent Pearl River cities are also drawing labour away from traditional
industrial sectors, with workers able to command larger wages.

Shortages of rural workers are spreading from the nation’s coastal areas inland. Out of
2,794 villages investigated in a 2007 nationwide survey, 74.3% of them no longer have a
surplus of young labourers as all had left for the cities for work. It projected that the total
rural labour force would not be able to satisfy the demand from non-agricultural sectors
by 2010.

According to China’s Ministry for Labour, 12mn big city residents will be out of work in
2007. An additional 24mn people were expected to join the ranks of the labour force dur-
ing the year. News agency Xinhua estimates that a total of 200mn Chinese have travelled
to cities to find jobs.

Education levels vary by region. English-speaking graduates are most commonly found
in Beijing or Shanghai. However, companies warn that technical skills or training in ac-
counting and finance are scarce. Skilled managers are also in short supply.

The labour market is heavily regulated. New labour rules state that non-Chinese may be
hired only where there is a demonstrable need, and approval is required from local labour
authorities. The law provides for collective and individual contracts specifying wage levels,
working hours, conditions, insurance and welfare. Since local Communist Party committees
select union leaders, collective agreements are usually not part of negotiations.

The Labour Law makes it more difficult to fire staff than previous regulations, which al-
lowed foreign enterprises to dismiss staff as a result of technical and production changes.
Now, only imminent bankruptcy and major production problems justify redundancy. There
is a minimum wage – each province or municipality must set a minimum wage that must
not be less than half the local average wage. Furthermore, every month, foreign companies
have to contribute 2% of total wages (including those payable to expatriate employees) to
the trade union fund. This contribution comes out of after-tax profits.

Foreign companies only rarely report strikes affecting their Chinese operations. Workers
have the right to organise and participate in trade unions, but the law does not allow for the
creation of unions, which must be organised ‘in accordance with law’. The only permit-
ted unions are state affiliates of the All-China Federation of Trade Unions (ACFTU). The
ACFTU is more interested in maintaining relations between the government and foreign

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companies than in seeking to promote industrial strife. Although China does not allow
independent trade unions, it does tolerate some forms of activism.

Market Orientation
Foreign Investment Policy
As repeated surveys and actual foreign direct investment (FDI) flows bear out, China
remains the top emerging market destination for foreign investors. Low labour costs, and
better competitive and productivity rates give China a leading edge in the manufacturing
and assembly sectors – the dominant areas for FDI inflows.

Since the early 1990s, China has substantially reformed its investment regime and foreign
investors are now able to manufacture and sell a wide variety of goods on the domestic
market. In the mid-1990s, China authorised the setting up of 100% foreign-owned enter-
prises – the preferred vehicle for FDI. This precipitated the rampant FDI performances
of recent years. However, there is concern that the government’s concentration on luring
investment to the manufacturing sector has led to saturation and overcapacity. UN Confer-
ence on Trade and Development (UNCTAD) figures show that China pulled in US$74.8bn
in FDI in 2007, setting yet another record.

The government wants to make the service sector a key area to attract foreign investment.
China is to channel FDI into research and development (R&D) centres, new high-tech
industries, advanced manufacturing and the energy conservation sectors.

Wholly owned foreign enterprises are now the most popular entry route for investors. Since
the late 1990s, the authorities have attempted to direct FDI towards ‘encouraged’ industries
and regions, bringing in new incentive schemes for investments in high-tech industries and
in the central and western parts of the country. A revised list came into effect in April 2002,
outlining areas and sectors where foreign investment would be encouraged, restricted or
prohibited. The raft of investment incentives developed over the past two decades mainly
centre on the special economic zones. The list is partly intended to abide by the promised
sectoral openings that were part of Beijing’s WTO accession agreements: opening up
banking, insurance, petroleum extraction and distribution. For example, the upper limit is
20% for a single foreign investor in one Chinese bank and combined foreign shareholding
in banks is not allowed to exceed 25%.

Regulations issued in November 2002 have eased foreign investment intended for the acqui-
sition of stakes in Chinese companies. Non-Chinese investors can now purchase traded and
non-traded (state-held) shares of Chinese companies. However, foreign investors have been
put off by the requirement to undergo an extensive approvals process with trade unions.

China allows for full profit repatriation and since the mid-1990s, foreign investors have
broadly had free access to foreign exchange. Since WTO accession, an overhaul of regula-
tions has been implemented to improve intellectual property rights. It has committed to full
compliance with the WTO Agreement on Trade-Related Aspects of Intellectual Property
(TRIPS), as well as other TRIPS-related commitments. But enforcement remains negligible

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with penalties frequently failing to be imposed.

Most FDI remains focused on the export-oriented manufacturing and assembly sectors. But
services – mainly tourism, telecoms and finance – form a growing proportion of the FDI stock in
China. The top sectors in terms of attracting FDI are chemicals, machinery and industrial goods,
and IT including software. The main sources of investment are Japan, the US and Germany.

Foreign Trade Regime


In line with its WTO accession requirements, China has lowered its import tariffs. In
2006, the general tariff level on imports was 9.9%, a decline of more than 40% on the
early 1990s level. The commitment to lower tariffs has been borne out by thriving import
levels, which have surged faster than China’s exports in recent years. China is now the
world’s third-biggest importer.

The government has pursued multilateral agreements as a priority, with a series of regional
and bilateral free trade negotiations underway as part of its wider commitments under
the Doha Development Round. China’s formal accession to the WTO in December 2001
cemented its integration into the global economy. The two key bilateral deals were the
EU-China agreement signed in May 2000, and the US-China agreement signed in Novem-
ber 1999. Beijing is actively pursuing regional trade deals, with recent progress towards
a free trade agreement (FTA) between China and the 10-member Association of South
East Asian Nations (ASEAN). It has also initiated FTA talks with the Southern African
Customs Union (SACU) and the Gulf Co-operation Council (GCC). The possibilities of
FTAs with Australia, New Zealand and Chile are also under study.

Table: Asia, FDI Annual Inflows


2006 2007
US$bn Per capita US$bn Per capita
Australia 25.74 1,255.4 22.27 1,075.7
Bangladesh 0.79 5.7 0.67 4.7
Cambodia 0.48 34.2 0.87 60.3
China 72.72 55.3 83.52 62.5
Hong Kong 45.05 6,520.6 59.90 8,602.3
India 19.66 17.3 22.95 19.9
Indonesia 4.91 21.5 6.93 29.9
Malaysia 6.05 231.6 8.40 316.2
Pakistan 4.27 27.5 5.33 34.0
Philippines 2.92 33.9 2.93 33.3
Singapore 24.74 5,646.5 24.14 5,441.2
South Korea 4.88 101.6 2.63 54.6
Sri Lanka 0.48 24.0 0.53 26.0
Taiwan 7.42 324.0 8.16 354.8
Thailand 9.01 142.0 9.58 149.9
Vietnam 2.36 27.5 6.74 77.5
Source: UNCTAD, BMI.

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In January 2002, China implemented tariff cuts required as part of its WTO accession
agreement and beefed up access to trading rights. This was followed one year later by a
further lowering of tariffs, again dictated by the WTO. China has substantially reduced the
number of goods subject to import quotas and is committed to phasing out remaining quotas.
Licensing procedures have been streamlined to comply with transparency requirements.

Some WTO commitments have been met ahead of schedule, and there are ongoing plans
to further liberalise trading rights. China may apply tariff rates significantly lower than the
published most-favoured nation (MFN) rate in the case of the goods industry. Import tariff
rates are divided into three categories: general rates, MFN rates and Bangkok Agreement
rates, applying to ASEAN members.

Non-tariff barriers remain in force. China has agreed to drop all agriculture export subsidies
as part of the WTO agreement. But there has been criticism over its lack of adherence to
trade agreements, particularly when discretionary elements are involved – specifically the
absence of implementation on IPR protection.

TABLE: BMI TRADE RATINGS


Protectionism Bureaucracy
Afghanistan na 21.6
Bangladesh 0.7 22.9
Bhutan 4.2 18.3
Cambodia 7.5 25.4
China 51.7 52.9
East Timor na 40.5
Hong Kong 100.0 98.6
India 12.9 23.0
Indonesia 54.4 44.3
Japan 76.9 81.5
Laos 19.7 6.7
Malaysia 64.6 50.9
Maldives na 55.3
Myanmar 1.4 na
Nepal 13.6 34.1
North Korea 4.2 2.3
Pakistan 16.3 42.9
Philippines 76.2 66.9
Singapore 100.0 88.9
South Korea 42.2 69.1
Sri Lanka 48.3 35.6
Taiwan 95.9 64.1
Thailand 55.8 37.6
Vietnam 11.6 44.0
Australia 70.7 80.3
New Zealand 72.1 76.3
Global ave. 47.1 45.2
Region ave. 43.5 47.4
Source: BMI. Scores out of 100, with 100 representing the best score available for each indicator.

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US officials have also accused Beijing of intervening to keep the renminbi artificially low,
thereby boosting its exports to the US and creating a debilitating trade surplus. But the
Chinese government appears likely to resist pressure to adjust its currency regime solely
to suit US whims. Concerns also remain over inconsistencies in the legal system, as well
as over government attempts to control trade flows through the deployment of import and
export licenses. The government retains regulatory controls through commodity inspec-
tions and a plethora of registration requirements.

Tax Regime
China is pushing ahead with reform, with the emphasis on reducing taxes and unifying
income tax rates for domestic and foreign companies. China’s dual-tier tax system offers
separate rates for domestic and foreign enterprises. A new tax reform will unify the income
tax treatment of domestic and foreign enterprises. As of January 1 2008, both domestic and
foreign-funded enterprises will be subject to a 25% statutory rate. The reform also includes
rules relating to controlled foreign corporations, thin capitalisation (when a company has
excessive debt in relation to its arm’s length borrowing capacity, leading to the possibility
of excessive interest deductions) and foreign tax credits.

Corporate tax: The standard rate is 33%, comprising a 30% national tax and a 3% local
tax. Foreign investment enterprises (FIEs) generally pay tax at concessional rates depend-
ing on the location and type of business. The state tax rate of 30% may be reduced to 15%
or 24% if the FIE is located in one of the specially designated zones. Qualified FIEs are
entitled to a tax exemption or reduction during a tax holiday period. The local tax of 3%
may be waived or reduced by the local government. A unified tax for Chinese and foreign
enterprises, involving the removal of concessional rates and exemptions, is anticipated.

Income tax: Income tax is levied on Chinese and foreign individuals at progressive rates
ranging up to a 45% limit. Non-residents who are resident for less than a year are subject to
personal tax only on income sourced in China. Individuals resident for one to five years are
subject to personal tax on income sourced in China, plus foreign income actually remitted
to China. Those resident for more than five years are taxed on their worldwide income.

Indirect tax: China is obliged by WTO rules to offer identical tax treatment for domestic
and imported products. VAT is levied at two rates, a standard 17% rate and a lower 13%
rate. A 6% VAT rate applies to small enterprises. VAT is applied to most products, the

Table: TOP EXPORT DESTINATIONS


2000 2001 2002 2003 2004 2005 2006 2007
United States 52,162 54,395 70,064 92,633 125,155 163,348 203,898 233,181
China,P.R.:Hong Kong 44,520 46,503 58,483 76,289 100,878 124,505 155,435 184,289
Japan 41,654 45,078 48,483 59,423 73,514.3 84,097 91,773 102,116
Korea 11,293 12,544 15,508 20,096 27,818.4 35,117 44,558 56,129
Germany 9,278 9,759 11,382 17,536 23,755.9 32,537 40,302 48,729
Total exports 249,208 266,709 325,744 438,364 593,358 762,337 969,284 1,218,130
Top 5, % of total 63.8 63.1 62.6 60.7 59.2 57.7 55.3 51.3
Source: IMF, Direction of Trade Statistics.      

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lower 13% rate pertaining to grain and edible oil, books, water and agricultural times.
Exports are zero-rated and exporters can obtain VAT refunds. The business tax rates are
3-5% for most services, but a 20% rate applies to entertainment.

Withholding tax: There is no withholding tax on dividends, but a 10% rate is applied to
interest and 10% on royalties.

Operational Risk
Security Risk
Overall, China is a relatively safe country with a low – albeit growing – crime rate. While
violence against foreigners is fairly rare, it does occur and severe injuries have occasion-
ally been the result.

The threat of political violence against foreigners in China is low. However, the potential
for violent outbreaks exists and foreigners operating businesses on Chinese soil should
keep aware of the political situation. It should also be noted that incidents of violence have
taken place between members of various ethnic groups in China.

Indeed, the risk of political violence was heightened in 2008, as due to Beijing hosting the
Olympic Games. There was a growing concern among China’s elite that pro-democracy,
pro-Tibet, and Falun Gong activists, who have been quiet in recent years, could use the
Olympics to highlight their various causes to those outside China. In turn, China’s pre-
emptive crackdown on dissidents is fostering an increasingly vocal human rights move-
ment, which could yet escalate into non-peaceful protests. Having said that, however, the
Chinese authorities have successfully ensured that there have been no large gatherings of
people advocating violence against US facilities or interests in recent years.

There is a low threat from terrorism in China. However, the British Foreign and Common-
wealth Office advocates that people should remain aware of the global risk of indiscriminate
terrorist attacks. Within the past year there have been no reported instances of terrorism
committed against foreign interests in China.

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