A Guide to Business and Banking How to Succeed in China

A GUIDE TO BUSINESS AND BANKING How to Succeed in China

1 1 Introduction SVB in China

HOW TO SUCCEED IN CHINA

3 4 4 5 6 7

General Business Climate Climate for Foreign Entities Forms of Investment in China Establishing Operations in China Foreign Exchange and Trade Restrictions Taxation in China

12 BANKING IN CHINA

12 14 14 17 19 20

Trade Foreign Exchange Accounts Payments and Receivables Liquidity Management and Investments Financing

22 COUNTRY OVERVIEW

Introduction
This guide provides insight into key business and banking considerations in the Chinese market. Whether youre evaluating your first business opportunity in China, or already have a well-established Asia operation and are looking to the future, we hope that this information serves as a valuable resource to you. In every country, there are challenges and opportunities. The key is finding the right partner one who understands both the market and your business. Silicon Valley Bank focuses solely on emerging, growth and established technology companies and the life science, venture capital and premium wine markets. We also bring a deep understanding of the Chinese market, developed through experience, and a level of expertise and advice that truly differentiates us from other financial institutions.

SVB in China
SVB Financial Group has been involved in the Asian markets since the early 1990s, and has been in China since 1999. For more than a decade, SVB has been building relationships with technology companies, entrepreneurs and venture capitalists to help our clients work with businesses in Asia and sell into a variety of foreign markets. We established our first China subsidiary, SVB Business Partners Shanghai, in 2005. Our second subsidiary, SVB Business Partners Beijing, opened in 2010. These subsidiaries provide local technology companies and venture capital investors with in-market client service support and advisory services. They also play a key advisory role in working with our U.S. clients as they expand into China. We have also invested in a loan guaranty company headquartered in Hangzhou and manage two local RMB funds for the Yangpu district. In addition, Silicon Valley Bank opened the Shanghai Representative Office in 2009 in the citys Yangpu District. The Representative Office introduces the Chinese entrepreneurial and technology communities to our offices around the globe, providing them with strategic introductions, and educational and networking programming.

SILICON VALLEY BANK: How to Succeed in China

SVB in China (cont.)

We recently received regulatory approval to proceed with the establishment of a joint venture bank in China with the Shanghai Pudong Development Bank, which has approximately 700 branches. We are actively working toward the establishment of a banking platform in China and continue to focus on building strategic alliances with local partners and the Chinese government, especially in the technology and life sciences sectors.
Our Capabilities

Financing: SVB can provide financing directly or through

our regional banking partners to Hong Kong or other offshore-based entities of mainland Chinese companies, and provide credit support that enables Chinese banks to issue guarantees and lines of credit to mainland companies. Most important, working with SVB in China means access to expert global treasury advisors and our client service team in Shanghai, who can provide you with strategic advice and support as your business grows. As you identify new opportunities in the region, please contact any member of your SVB team. We look forward to working with you and providing the right solutions that help your business succeed in China.

SVB provides expertise and a comprehensive suite of services to support your business operation in China, including crossborder and in-country payment delivery, foreign exchange, trade finance and working capital financing. Your SVB accounts, and their transactions and reporting, both domestic and foreign, can be managed through SVBeConnect, our online banking platform.
Cash management: Make cross-border payments through

wires in offshore renminbi (CNH) or U.S. dollar (USD) denominations, or through a CNH bank draft.
Renminbi accounts: Offshore accounts are provided by SVB,

and accounts in China and Hong Kong are provided through our partner bank network. Both types of accounts, can be viewed through SVBeConnect.
Foreign exchange: Manage your companys foreign exchange

exposure through spot and forward contracts, swaps, options, and non-deliverable forwards contracts.
Trade services: Accelerate cash flow and minimize risks of

non-payment through use of import letters of credit, export letters of credit, documents against payment, and documents against acceptance.

SILICON VALLEY BANK: How to Succeed in China

How to Succeed in China

General Business Climate
Economic and Political Overview

The Chinese economy has experienced rapid growth since the government took the decision to adopt its open-door approach towards economic development. Its economy has experienced double-digit growth for most of the past 10 years. The Chinese economy is now the second-largest in the world and China has replaced Germany as the largest exporter in the world. This rapid growth rate has created its own problems. There is a widespread concern at the possibility of the economy overheating, as consumer prices rose quickly during 2010. By the end of 2010, the consumer price index was 2 percent higher than the governments 3 percent target. The inflation target is 4 percent for 2011. The Peoples Bank of China (PBC) has raised interest rates and tightened bank reserve ratio requirements in a bid to restrain bank lending. The relative low value of the RMB may also cause problems for the Chinese economy in the future. The policy of retaining a weak RMB has allowed Chinese exports to grow. However, as China begins to import more, this policy is likely to further fuel domestic inflation, posing more problems for policy makers. The role of the Chinese Communist Party (CCP) is central to the exercise of political power in China. The president is both head of state and head of the CCP. Formally, political power is exercised by the National Peoples Congress (NPC), which is elected every five years by peoples congresses at provincial, municipal and regional levels. The NPC is the formal legislature. The NPC elects the president and approves the membership of the State Council, which exercises executive power for a five-year period. The president appoints the premier who chairs the State Council. The main challenge for Chinas government is to manage the process of economic development. To date, the main beneficiaries of the economic boom have been located

in urban areas. As a result, there has been large-scale migration from the rural areas into the urban centers. This has led to significant infrastructural challenges in the rapidly expanding urban areas, including housing and transport provision and pollution, and a growing problem of unemployment among migrant workers. In response, the Chinese government has tried to slow rural-urban migration by allowing rural communities to benefit from economic development. The government continues to liberalize trade rules with a view to encouraging private sector investment from both within and outside China.
Recent Developments

The PBC launched a pilot project in 2009 to allow crossborder trade settlement in RMB between entities in five Chinese regions and Hong Kong. This project has been extended to cover cross-border trade settlement between 20 Chinese regions and all countries. Approved banks and entities in the 20 regions are also permitted to make overseas direct investments in RMB. This development has led to an emerging market trading RMB offshore in Hong Kong, as well as a small number of RMB-denominated bond issues in Hong Kong. There are few restrictions on opening RMB-denominated bank accounts in Hong Kong and the Hong Kong Monetary Authority does not intervene to manage the offshore RMB exchange rate. This has led to a difference in the exchange rates where the RMB is traded onshore and offshore. The offshore exchange rate is increasingly referred to as the CNH market, although this is not yet a formal ISO-recognized currency code.

SILICON VALLEY BANK: How to Succeed in China

Climate for Foreign Entities

Incentives for Direct Foreign Investment

Forms of Investment in China

Foreign entities may invest in China in two main ways. Firstly, they can establish a legal entity in China. These are considered to be Foreign Investment Enterprises (FIE). There are three main forms of FIE:
{

In order to promote the development of some industries, the Chinese government has established a range of economic development zones over the past 30 years. These zones have offered preferential investment policies for direct foreign investment. The investment incentives China offers foreign investors have been centered on tax incentives. However, since the introduction of the enterprise income tax law in 2008 (see Corporate Taxation section), most tax incentives previously offered to foreign invested entities in China have also been made available to domestic entities. Some tax incentives, such as tax holidays, have also been withdrawn. The different types of economic zones providing incentives for investment in China are:
{

Wholly foreign-owned enterprise (WFOE) A WFOE is established as a fully owned subsidiary of a foreign parent company.

Joint ventures Foreign investors may participate in equity (EJV) and cooperative (CJV) joint ventures. In an EJV, foreign investors must hold a minimum of 25 percent of the registered share capital. Ownership and profit distribution is made in proportion to the level of registered capital held. In a CJV, ownership and profit distribution is made according to the contractual agreement between the partners. In a CJV, foreign investors normally make capital contributions to the venture with Chinese partners providing services.

Special Economic Zones (SEZs), located in the cities of Shenzhen, Zhuhai, Shantou and Xiamen and the island of Hainan. SEZs offer tax incentives and a freer regulatory regime for international trade activities;
{

Foreign investment joint stock company (FIJSC) These entities can be listed on a public stock exchange. Foreign investors in a FIJSC must hold a minimum of 25 percent of the registered share capital. They can be established via promotion, as long as half the promoters are China domiciled. Other FIEs can be translated into FIJSCs via a share flotation.

National Economic and Technological Development Zones (ETDZ). High-tech and new-tech enterprises located in the 56 ETDZs currently in operation benefit from tax reductions; Fifty-six Hi-tech Industrial Zones (HIDZ), some of which have been merged with ETDZs. HIDZs offer preferential investment policies for science and technology related industries; Free Trade Zones (FTZ). Business operating in the 13 active FTZs in China benefit from import customs tariff exemptions; Fourteen Border Economic Cooperation Zones (BECZ), offering tax incentives for businesses conducting trade and exportoriented processing services with counties bordering China; and Sixty Export Processing Zones (EPZ). EPZs provide investors with tariff exemptions and a freer regulatory environment for exports.

Other forms of legal entity used by foreign investors include Foreign-invested Holding Companies (FIHC), which are entities established by WOFEs or EJVs to engage in direct investment in China and Build-Operate-Transfer (BOT) projects, which are private foreign investments in government infrastructure projects, such as roads. Secondly, foreign entities can establish branches or representative offices in China. Branches are normally only used in financial services and oil exploration. Representative offices are not permitted to directly engage in trade and so are mainly used for marketing and liaison purposes.

The tax incentives offered to investors in Chinas economic zones vary according on the focus of the economic zone and the industry in which the enterprise operates. Investment in industries listed as encouraged in the governments Catalogue for the Guidance of Foreign Investment in Industries are likely to receive tax incentives.

SILICON VALLEY BANK: How to Succeed in China

There are specific requirements for the three main forms of FIE:
{

Wholly foreign-owned enterprise (WFOE) To establish a WFOE, a minimum registered capital of RMB 100,000 is required. This minimum will vary according to the nature of the companys projected business plan. Within three months of the issuance of the business license, 15 percent of the capital must be paid up and notarized by a Chinese certified accountant, with the remainder to be paid up and notarized within two years. A WFOE must describe its management structure, which must include an independent supervisor, in its articles of association. It must establish a general reserve fund account with a minimum value of 50 percent of its registered capital (the fund can be built up over time via a compulsory injection of 10 percent of post-tax annual profits).

Joint ventures To establish a joint venture, foreign investors require a Chinese partner. An EJV will be established as a limited liability company. A board of directors is appointed by investors (usually, but not necessarily, in proportion to the level of equity interest) to manage the company. A CJV does not need to be established as a limited liability company. If so, it is not legally considered to be a separate legal entity, although it can elect to be taxed as such. The control of the CJV is determined by the contract between the partners, so separate legal advice is essential.

Establishing Operations in China

Foreign Investment Enterprises (FIE) are usually established as a limited liability company and normally have a minimum of 25 percent foreign ownership. An FIE requires the approval of the Ministry of Commerce before it can be formed. The chances of approval depend on the governments characterization of the business sector. If the FIE wants to engage in encouraged activity, it may receive tax concessions and other benefits. If the activity is restricted, foreign participation may be limited to a minority shareholding. If the activity is prohibited, a FIE will not get approval. All other activities are permitted. The details are contained in the Catalogue for the Guidance of Foreign Investment in Industries, last published in 2007. The catalogue has been revised four times since its introduction in 1995. In April 2011, the government announced its intention to make a further revision. Within a month of being formed, the FIE must be registered with the State Administration for Industry and Commerce to get a business license. It must then register with the local tax authorities. Depending on the FIEs activities, approvals from other government agencies may be required. An FIE is required to pay a government fee on incorporation. The fee is calculated as a proportion of registered share capital.

Foreign investment joint stock company (FIJSC) These entities can be listed on a public stock exchange. To establish a FIJSC a minimum registered capital of RMB 30 million is required. These can be established via promotion, as long as half the promoters are China domiciled. Other FIEs can be translated into FIJSCs via a share flotation. Subject to approval, a FIJSC can issue RMB-denominated shares (A shares) which can be sold to Chinese residents and qualified foreign institutional investors. FIJSC may also issue USD or HKD-denominated shares (B shares).

Foreign companies are permitted to establish branches and representative offices in China.

SILICON VALLEY BANK: How to Succeed in China

Foreign Exchange and Trade Restrictions

Funding Operations

Foreign investors are permitted to open foreign currency bank accounts in China, subject to State Administration of Foreign Exchange (SAFE) approval. These can be used to hold foreign currency for the purposes of direct investment into China. Qualified foreign institutional investors are also permitted to open foreign currency bank accounts in China, subject to SAFE approval. Companies making direct foreign investment may pay initial expenses or fees in foreign currency without prior approval from SAFE. SAFE publishes a list of expenses or fees which do not require approval. Banks are required to check supporting documentation to ensure payments do not require prior approval.
{

Branch A branch is considered part of the entitys head office and is not classed as a separate legal entity. All branches must appoint a local legal representative. Branches are normally only used in financial services and oil exploration.

Joint ventures including a foreign-invested partner are able to borrow foreign currency. FIEs are permitted to borrow funds from outside China. As long as the level of foreign debt is within the difference between total investment (production funds plus working capital) and registered capital, approval is not required. However, all foreign borrowings must be registered with SAFE. Any foreign currency capital injection into an FIE requires a payment order from the FIE before it can be converted into RMB.
Repatriation

Representative office A representative office is not permitted to directly engage in trade. This definition includes a prohibition on signing contracts on the foreign entitys behalf. Their prime role is to support marketing and liaison activities in China on behalf of the foreign entity.

Specific legal advice should be taken before establishing a presence in China.

Foreign investors are permitted to repatriate profits and pay dividends once obligations to the Chinese tax authorities, reserve fund and labor fund have been met. In the case of joint ventures, any losses from a previous year must be made up before a current year profit can be distributed. If a foreign direct investment is liquidated, SAFE approval is required before any foreign investors funds can be exchanged and repatriated.

SILICON VALLEY BANK: How to Succeed in China

Taxation in China
Resident/Non-resident

The Enterprise Income Tax Law (EITL) adopts the international concept of residence and expands the Chinese definition to cover both enterprises incorporated in China and enterprises that are effectively managed or controlled in China. Resident companies are taxed on their worldwide income (after the deduction of allowable expenses) and worldwide capital gains. A non-resident company is subject to Chinese corporation tax if it conducts a trade or business in China through a branch or agency, or is regarded as having a permanent establishment in China, in which case the nonresident is taxable only on the profits attributable to its operations in China.
Tax Year

enterprises that formerly benefited from certain preferential tax treatment in the form of reduced enterprise income tax rates or enterprise income tax reduction/exemption with fixed terms. Cost sharing arrangements (CSAs) for the development of intangible property and services are formally adopted in the Special Tax Adjustment (STA) chapter. The chapter emphasizes the application of the arms length principle to related-party transactions, preserves the use of informational returns and formalizes the use of Advance Pricing Agreements (APAs) as a means for taxpayers to address the risk of transfer pricing adjustments. The chapter also contains measures on thin capitalization and controlled foreign companies, as well as a general anti-avoidance rule that requires all arrangements to have commercial substance; otherwise they may be challenged and adjusted by the tax authorities, and interest may be imposed on any tax charged as a result of a tax adjustment.
Financial Instruments

The tax year for corporations corresponds to the calendar year. In general, companies pay provisional corporation tax in four quarterly installments, on the basis of the estimated liability for each quarter, within 15 days of the end of each quarter. Final settlement of the tax liability must be made within five months after the end of each tax year.
Corporate Taxation

Interest income from government bonds is exempt from income tax. In order to encourage the continued growth of securities investment funds, corporate investors are exempt from enterprise income tax for any income distributed from securities investment funds under Caishui [2008] No. 1.
Interest and Financing Costs

The EITL governs both foreign investment and domesticfunded enterprises by a single unified tax system and is effective from January 1, 2008. The EITL taxes both domestic and foreign enterprises at a flat tax rate of 25 percent, with the same expense deduction criteria and available tax incentives. The EITL has replaced most of the geographically oriented preferential tax treatment formerly available for foreigninvested manufacturing enterprises with a new tax incentive system that focuses on specific industries such as hightech and new-tech industries. The new incentive system continues the incentives available for R&D activities carried out by enterprises and extends to all qualified enterprises nationwide the tax preferential treatment that was available to qualified high-tech and new-tech enterprises located in special zones. The EITL provides a grandfather rule for

Certain interest expenses incurred by an enterprise in manufacturing or business operating activities are deductible:
{

Interest expenses incurred by a non-financial enterprise on debts borrowed from financial enterprises; Interest expenses incurred by a financial enterprise on deposit savings and interbank lending; Interest expenses incurred by an enterprise on bonds approved for issuance; and Interest expenses incurred by a non-financial enterprise on debts borrowed from non-financial enterprises if the loan interest rate does not exceed the rate charged on similar loans (e.g. same type and period) by financial enterprises.

SILICON VALLEY BANK: How to Succeed in China

Foreign Exchange

Exchange gains are included in taxable income. Exchange losses are deductible if incurred on currency transactions or derived from conversions of monetary assets and liabilities denominated in foreign currencies into RMB amounts at the end of the tax year (using the year-end middle spot exchange rate). However exchange losses are not deductible if they have already been recorded in the cost base of assets or in connection with profit distributions to shareholders. Income computed in foreign currencies is generally converted into RMB at the middle exchange rate on the last day of the quarter to compute the taxable income for purposes of quarterly installment tax payments. On computation of the final tax payment at the year-end, it is not necessary to re-convert the incomes on which tax has been paid by means of quarterly installment payments. Only the remaining balance of taxable income computed in foreign currencies (i.e. for which tax has yet to be paid) needs to be converted into RMB.
Business Tax

Certain repayable life insurance with a term exceeding one year is exempt from business tax, as is insurance for farming and husbandry. The revised business tax regulations, which define the provision of taxable services in China as the situation where either the service provider or recipient is located in China, are generally understood to subject foreign lenders to business tax on interest derived from loans made to entities in China.
Advance Tax Ruling Availability

Although the tax laws and regulations do not prohibit advance tax rulings, in practice it is generally difficult to obtain an advance tax ruling for hypothetical situations. The 2004 APA regulation in respect of the transfer pricing tax regime is incorporated in the EITL. Most of its contents are included within the Implementation Regulations for Special Tax Adjustments (Trial) (STA Rules) issued in January 2009.
Thin Capitalization

The provision of certain taxable services in China is subject to business tax. The business tax rate for banking and insurance companies is 5 percent based on the turnover of transactions. Turnover is generally the total consideration and all other incidental charges received or receivable by the seller for the provision of taxable services. However, for businesses buying and selling foreign currencies, marketable securities, non-commodity futures and other financial instruments, turnover is the difference between the selling price and the buying price. Commodity futures are not subject to business tax. The gains derived by Qualified Foreign Institutional Investors (QFIIs) from buying and selling securities in China through domestic agents are exempt from business tax. Royalty charges are subject to business tax at 5 percent. If the transferor is a foreign company, the payer must withhold 5 percent business tax from the payment made overseas. However, royalties in respect of technology transfer/ development and related consultancy services may be exempt from business tax if certain criteria are met.

China imposes mandatory debt-to-equity ratios for foreign invested enterprises, and the equity of a foreign invested enterprise should be paid up within a stipulated time period. The EITL has a thin capitalization rule, which is further specified in specific rules (Caishui [2008] No. 121): a debt-to-equity ratio of 2:1 for general enterprises and 5:1 for financial enterprises. A deduction is not allowed for interest expenses incurred on any related-party debt investments exceeding these debt-to-equity ratios, unless the underlying transactions are in compliance with the arms length principle (demonstrated through contemporaneous documentation), or the interest expenses are payable to domestic related parties subject to higher effective tax rates. The implementation rules of the EITL clarify that debt investments refer to arrangements where an enterprise has directly or indirectly acquired financing from related parties, and where the enterprise is required to repay the principal and make interest payments to the lending party (or any other form of compensation which is of an interest payment nature).

SILICON VALLEY BANK: How to Succeed in China

Transfer Pricing

Transactions between related parties must be carried out at arms length. The tax bureau can make adjustments (based on reasonable methods) to business transactions between an enterprise and its related parties that are not at arms length if they result in reduced taxable income for the enterprise or its related parties. Since the introduction of the EITL, it was generally anticipated that the tax authorities would undertake more transfer pricing investigations. In particular, the EITL (and the STA Rules) specify that enterprises are generally required to submit a nine-form filing package detailing related-party transactions during the year in an appendix to their annual income tax return, and provide relevant documentation when requested by the tax authorities during a tax audit. Failure to provide relevant information or to demonstrate compliance with the arms length principle can lead to a tax adjustment as well as interest on taxes charged as a result of the adjustment. The STA Rules specify that contemporaneous documentation must be prepared by May 31 of the year following the tax year and maintained for 10 years. Enterprises may be exempt from this requirement if certain conditions are met (e.g. the amount of annual related-party transactions does not reach the threshold specified in the STA Rules). The EITL specifically endorses CSAs for the joint development or transfer of intangible assets, or the provision or receipt of services. However, according to the STA Rules, a CSA involving services is generally limited to group purchase and group marketing planning activities. All CSAs should be filed and approved by the State Administration of Taxation (SAT). During the course of a CSA, participants must file contemporaneous documentation with tax authorities before June 20 of the following year, for each taxable year.
Capital Gains Tax

Capital gains derived by foreign companies from China are subject to a 10 percent withholding income tax under the implementation rules of the EITL. Specific guidance released by the SAT (Guoshuihan [2009] No. 698) addresses the transfer of an equity interest by nonresident companies. It outlines reporting requirements and taxation guidelines for non-residents direct and indirect transfers of Chinese resident companies equity interests. A 10 percent withholding income tax will generally be imposed on the gains from the transfer of a Chinese resident company by a non-resident company unless an exemption is available under a tax treaty. Subject to the SATs approval, the tax authorities may disregard the existence of an offshore intermediary holding company and tax the transfer of its shares in China where the parties to the transaction are considered to have abused the legal form and conducted the transaction with a view to avoid Chinese tax, without bona fide commercial purposes.
Stamp duty

For resident companies with foreign investments, capital gains are taxed as part of a companys taxable profits at the applicable corporation tax rate. Capital gains derived from the transfer of equity interest are calculated as the difference between the sale proceeds and the original cost of the investment. Specific guidance (Guoshuihan [2010] No. 79) further clarifies that undistributed profits and other reserves of shareholders are included in the computation of capital gains.

Loan contracts (except interbank loan agreements) are subject to stamp duty at a rate of 0.005 percent based on the loan amount. This tax is paid by each party to the loan contract.

SILICON VALLEY BANK: How to Succeed in China

Stamp duty on the trading of listed A and B shares is charged at a rate of 0.1 percent. This tax was previously paid by each party to the transaction but only imposed on sellers due to a suspension by the State Council for purchasers. The applicable tax rate for the transfer of equity shares, other than A and B shares, is 0.05 percent of the indicated transaction value. This tax is paid by each party to the contract. The applicable tax rate for property insurance contracts, including property insurance, bonding, guarantor, surety and credit undertakings and similar insurance contracts, is 0.1%. This tax is paid by each party to the contract.
Withholding Tax (Subject to Provisions in Tax Treaties)
Payments to Resident companies Non-resident companies Dividends NA 10% / 20% Interest NA 10% / 20% Royalties NA 10% / 20% Other income NA 10% / 20%

Tax Treaties / Tax Information Exchange Agreements (TIEAs)

China has tax treaties in place with more than 90 countries and two tax arrangements, with Hong Kong and Macao. A circular (Guoshuifa [2009] No. 124) clarifies the procedures and documentation requirements for nonresidents attempting to obtain benefits under Chinas tax treaties. It is mandatory for the non-resident either to request approval for treaty benefits and/or to file prescribed reports in respect thereof with the tax bureaus that are in charge. Failure to comply with the formalities in the circular results in the denial of treaty benefits. A circular released by the SAT (Guoshuihan [2009] No. 601) provides guidance for determining whether a resident of a contracting state is the beneficial owner of dividend, interest or royalty income under Chinas tax treaties. It emphasizes that a beneficial owner must generally be engaged in substantive business activities. It has signed TIEAs with seven jurisdictions.
Controlled Foreign Companies (CFCs)

Although the EITL provides for a 20 percent withholding tax, the rate is reduced to 10 percent according to implementation rules. Chinese-sourced income (including dividends, interest, royalties and other payments derived by foreign enterprises without a permanent establishment in China or where the income generated is not effectively connected to the foreign enterprises establishment in China) are subject to withholding tax. Dividends paid to a foreign investor of a foreign investment enterprise were formerly exempt from withholding tax, but the situation has changed under the EITL, with a 10 percent withholding income tax introduced. Specific guidance (Caishui [2008] No. 1) further clarifies that the retained earnings of a foreign-invested enterprise accumulated up to January 1, 2008 that are distributed to its foreign investors in or after 2008 are still exempt from withholding tax. Profits newly created in 2008 and later years that are distributed to non-resident corporate investors are subject to a 10 percent withholding income tax unless a preferential treaty rate is available under a tax treaty (or a tax arrangement).

Under the CFC rule in the EITL, where an enterprise (the CFC) is controlled by enterprises resident in China and/ or individual Chinese residents, established in a country or region where the effective tax rate is significantly lower than 25 percent, and the CFC either does not distribute profits or distributes less profit than it should (without justification), then a portion of the profits will be attributed to the Chinese resident enterprise and included in the latters taxable income in the current period. The implementation rules further clarify that the term significantly lower than the effective tax rate of 25 percent means that the effective tax rate is less than 50 percent of the 25 percent tax rate. In addition, the term controlled, as cited above, includes:
{

A resident enterprise or an individual resident of China directly or indirectly holding 10 percent or more of the total voting shares, and such resident enterprise(s) or individual resident(s) jointly holding more than 50 percent of the total shares of the foreign enterprise; and

10

SILICON VALLEY BANK: How to Succeed in China

Cases where the shareholding percentage of the resident enterprise(s) and individual resident(s) of China does not meet the percentage standard as stipulated above, but substantial control is formed over the foreign enterprise in respect of shareholding, financing, business, purchase and sales, etc.

Financial Transactions / Banking Services Tax

There are no specific financial transactions or banking service taxes in China. The financial and insurance services are generally subject to business tax as discussed above.
Payroll and Social Security Taxes

The STA Rules introduce a reporting obligation for Chinese resident enterprises to file an annual reporting form on overseas investment together with the annual tax return. The competent tax authorities will issue a confirmation notice where a CFC is identified based on the review of the reporting information. A specific circular (Guoshuihan [2009] No. 37) includes a white list of countries: Australia, Canada, France, Germany, India, Italy, Japan, New Zealand, Norway, South Africa, the UK and the USA. If a CFC is incorporated in a white list country, its undistributed earnings may be exempt from inclusion in its Chinese corporate shareholders taxable income of the current period.
General Anti-avoidance Rule

The EITL also introduced a general anti-avoidance rule that allows the tax authorities to make reasonable adjustments where an enterprise has reduced its taxable income by engaging in a business arrangement without a bona fide commercial purpose.
Cash Pooling

Employers are required to register with the local social security authorities and make social security contributions in respect of local employees. The statutory social security contributions generally include pension, medical, housing and unemployment funds. The rates for these pension, medical, housing and unemployment funds are approximately 20 percent, 10 percent, 713 percent and 2 percent, respectively, depending on the rates fixed by local governments. There is normally a ceiling for the calculation base that is three times the average monthly salary in the preceding year in that location. The rate varies from location to location. Local governments can determine the calculation base and rates within a framework provided by the central government, and these are usually reviewed and revised by local governments on an annual basis. The employers contribution is normally deductible for corporation tax purposes. Foreign invested enterprises are required to allocate a percentage of their after-tax profits to the employees bonus and welfare fund. The board of directors can decide the percentage of the contribution. The fund can be used to pay for the collective welfare of employees (such as the construction and maintenance of a dormitory). Employers are required to withhold income tax on behalf of their employees on their salaries and wages. From September 1, 2011, the applicable tax rates are between 3 percent and 45 percent on a progressive basis for salaries. The first CNY 3,500 each month is not taxable for local employees. Generally the threshold is CNY 4,800 each month for expatriate employees. All tax information supplied by Deloitte Touche Tohmatsu (www.deloitte.com). Data as of August 1, 2011, and may be subject to change.

There are no specific tax rules in China that apply to cash pooling arrangements.
Sales Taxes/VAT

VAT is generally levied on the sale of goods, the provision of repair and replacement services, and the importation of goods into China. The taxpayer will be responsible for output VAT based on taxable income, while the input VAT paid on the purchase of goods or services should be available as a credit to offset against output VAT. The standard VAT rate is 17 percent, but there are reduced rates of 13 percent (for food grains, tap water, heating, natural gas, books, feeds, fertilizers, etc.). Exported goods are generally exempt from VAT, with different VAT refund rates.

SILICON VALLEY BANK: How to Succeed in China

11

Banking in China
Trade
Trade Finance

commitment to reduce tariffs with the other four members (Cambodia, Laos, Myanmar and Vietnam) by 2015. China has entered into bilateral trade agreements with Chile, Costa Rica, Jordan, New Zealand, Pakistan, Peru, Senegal, Singapore and Thailand. It is negotiating agreements with Australia, the European Union, Iceland, India, Norway and Switzerland. China has Closer Economic Partnership Arrangements with Hong Kong and Macau. Prohibited Imports Controlled or restricted items include narcotics, weapons, and recorded and printed materials. Goods are also prohibited to protect the public interest, the environment and accordance with international commitments. Prohibited Exports The export of specified technology is prohibited. Some goods (including coal, corn, cotton and rice) can only be exported by the state. Tea can only be exported by designated traders.
Importing

Factoring Factoring of domestic receivables is not a widely used source of finance in China. Chinese factoring companies work with international partners to offer factoring on import and export transactions. In these circumstances, the international partner would assume the credit risk of the non-Chinese party in the transaction. Bills of Exchange Trade-related bills of exchange are discounted by both local and foreign banks. Supplier Credit Supplier credit can be arranged by direct negotiation between the parties.
Trade Rules

General Rules Any company which wishes to import to or export from China must register with the Administration for Industry and Commerce and be authorized by the Foreign Trade Administration. China has 13 free trade zones (for imports) and 60 processing zones (for exports). China joined the Asia-Pacific Economic Co-operation (APEC) in 1991 and World Trade Organization (WTO) in 2001. Since joining the WTO, China has been reforming its trade regulations gradually. China has entered into a trade agreement with the Association of South East Asian Nations (ASEAN) to create the China-ASEAN Free Trade Area (CAFTA). This has cut tariffs on trade with six members (Brunei, Indonesia, Malaysia, the Philippines, Singapore and Thailand) with a

Taxes and Tariffs Import tariffs apply in five bands depending on the trading partner country: most favored nation tariff rate, treaty tariff rate, conventional tariff rates, preferential tariff rate and a general tariff rate. Licenses Non-automatic import licenses are required for around 96 product lines covering specific old mechanical and electronic goods and ozone-depleting materials. Automatic licenses may be required for goods that the Chinese authorities want to examine. Automatic licenses may be used up to six times in a six-month period.

12

SILICON VALLEY BANK: How to Succeed in China

Financing Requirements If an advance import payment is required, the import contract must be provided to the bank arranging payment. Documentary Requirements The following documents are required to permit the purchase of foreign currency or make payments from a foreign currency account:
{

Documentary Requirements The following documents are required to permit the purchase of foreign currency or make payments from a foreign currency account:
{

Customs declaration Cargo release order Commercial invoice Bill of lading Packing list Terminal handling receipts If required (e.g. for textile / apparel), a certificate of origin

Customs declaration Commercial invoice Bill of lading Packing list (in some cases) If required (e.g. for textile / apparel), a certificate of origin If required, (if the goods are subject to control or an import quota), an import permit

Risk Mitigation None.

Exporting

Taxes Certain exports attract export taxes, which are levied on a most favored nation basis. Licenses The Chinese government provides a list of products that require export licenses and permits. These are usually implemented in accordance with Chinas international agreements. For some product lines exporters require an export permit prior to applying for a license from the Ministry of Commerce. Permits are also obtained from the Ministry of Commerce. Financing Requirements None.

Risk Mitigation Chinas state export credit agency is the Export-Import Bank of China (China Eximbank). It provides support to Chinese exporters, especially enterprises exporting mechanical, electronics, high and new technology items and construction activities outside China. Support takes the form of export credit facilities, guarantees and help in arranging RMB and foreign currency loans (both in and outside China). Export credit insurance is available from the China Export and Credit Insurance Corporation (Sinosure), especially for high technology or high added value capital goods. Insurance is available against both political and commercial risk for a range of terms. Support with guarantees and debt collection is also available.

SILICON VALLEY BANK: How to Succeed in China

13

Foreign Exchange
Central Bank and Bank Supervision

Exchange Controls

All transactions within China must be settled in local currency. Companies are permitted to hold foreign currency receipts in line with operational requirements. (In the past, companies were only permitted to hold foreign currency receipts within a quota.) Resident entities must provide supporting commercial documents to a foreign exchange bank before they are able to exchange local currency into the required foreign currency or to make a payment from a foreign currency account (for example, to pay for imports). Forward foreign exchange earnings can be invested outside China, subject to SAFE approval.

The Peoples Bank of China (PBC) is controlled by the State Council. Its main role is to maintain a stable currency. It also acts as banker to the government, supports government economic policy (including implementing monetary policy) and manages the countrys payment systems.
http://www.pbc.gov.cn/english

The China Banking Regulatory Commission is responsible for supervising banks.

www.cbrc.gov.cn/english/home/jsp/index.jsp

The State Administration of Foreign Exchange (SAFE) is responsible for managing central bank reporting requirements and applying exchange controls.
www.safe.gov.cn

Accounts
Bank Account Availability

Central Bank Reporting Requirements

All payments between resident and non-resident bank accounts must be reported to SAFE. All foreign currency payments to or from a resident bank account must be reported to SAFE. These payments must be made through an authorized financial institution which is responsible for reporting all such payments to SAFE. Trading entities must also submit any supporting data to SAFE, including details of all foreign trade transactions.

Regulations Local currency accounts (RMB) can be held by resident and non-resident entities within China. The following types of local currency account are available:
{

Basic local currency account Each legal entity can open a maximum of one basic local currency settlement account, from which cash withdrawals and payroll payments must be made.

General local currency account Each legal entity can open an unlimited number of general local currency settlement accounts, which can be used for all settlement activities except cash withdrawals and payroll.

Generally local currency accounts (RMB) cannot be held outside China by residents or non-residents.

14

SILICON VALLEY BANK: How to Succeed in China

However, under a pilot scheme, non-resident entities are permitted to open RMB-denominated accounts outside of China for cross-border trade transactions with entities resident in 20 regions approved by the PBC (see Recent developments above). These accounts are subject to approval and only authorized banks can offer the service. Accounts are freely convertible into foreign currency. Foreign currency accounts can be held by resident entities within and outside China and by non-resident entities in China. The following types of foreign currency accounts are available:
{

Electronic banking Electronic banking services continue to develop under the encouragement of the PBC. In 2010, the PBC launched its online interbank payment clearing system (Super-ebanking), which will allow users to manage all their bank accounts held with participating banks from one location. It will also allow customers to make real-time electronic transfers (up to a maximum RMB 50,000) and access intraday balance information. The system is expected to be fully operational by November 2011. Bulk electronic payment files can be submitted from company ERP systems to some banks. The main issue is the processing of automated payments if Chinese characters are used as some systems cannot process them.
How to Open a Bank Account

Foreign currency capital account Foreign currency capital accounts are required for managing direct capital investment in a foreign investment enterprise and for capital payments.

Foreign currency current account Foreign currency current accounts are used to make and receive payments to support imports and exports. Entities are permitted to retain foreign currency earnings in these accounts according to their operational needs.

An entity requires SAFE approval to open its first foreign currency account (additional accounts must be registered with SAFE). Residents also require approval from SAFE to open foreign currency accounts outside China.

To open a bank account in China, a company must provide its articles of incorporation (with any amendments), a list of directors (including proof of identity and residence), a board resolution, a business license (from the State Administration for Industry and Commerce), an enterprise standard code certificate (from the State Administration of Technical Supervision), a certificate of approval (from the Foreign Economic and Trade Commission, Ministry of Commerce and/or other competent authorities), certification of the companys English name and a registration certificate for both state and local tax. These documents must be provided with the account application forms, specimen signatures and bank or commercial references.

SILICON VALLEY BANK: How to Succeed in China

15

Anti-Money Laundering Rules

{

China has implemented anti-money laundering legislation (Articles 191, 312 & 349 of the Criminal Code of 1997 as amended; Rules for Anti-Money Laundering by Financial Institutions of 2003; Regulations on Anti-Money Laundering for Financial Institutions of 2003; Law of the Peoples Republic of China on Anti-Money Laundering of 2006; Regulations on Real Name System for Individual Savings Accounts of 2006; Rules for Anti-Money Laundering by Financial Institutions of 2006; Administrative Rules for Reporting of Large-Value and Suspicious Transactions (entered into force March 2007); Rules on Reporting Suspicious Transactions for Terrorist Financing by Financial Institutions 2007 and Administrative Rules for Financial Institutions on Customer Identity Verification and Record Keeping of Customer Identity and Transaction Information). China is a member of the Eurasian Regional Group on Combating Money Laundering and Financing of Terrorism (EAG) and the Financial Action Task Force (FATF). China has established a financial intelligence unit (FIU), which is housed within the Peoples Bank of China (PBC). The FIU is split into two operational units namely, the Chinese Anti-Money Laundering Monitoring and Analysis Centre (CAMLMAC) and the Anti-Money Laundering Bureau (AMLB). Account opening procedures require formal identification (by means of an authentic and valid identity card or other identity document) of the account holder. Similar customer identification is also required when providing occasional financial services such as cash remittance, cash exchange or note cashing exceeding RMB 10,000 or the USD 1,000 equivalent. Financial institutions are required to identify the natural person(s) who actually control(s) the customer and the actual beneficiary of the transaction.

Financial institutions must take reasonable steps to determine whether the customer is conducting business on behalf of others and must obtain and record information to verify the identity of the representative. When providing cash deposit or cash withdrawal services for an occasional transaction for a value exceeding RMB 50,000 or the equivalent of USD 10,000, financial institutions must verify the identity of the customer. Customers are required to give one days notice of withdrawals exceeding RMB 50,000 in cash. Financial institutions in the broadest sense must record and report suspicious transactions within five days if made electronically and within 10 days if in writing, to the CAMLMAC. All transactions with possible links to terrorism must be reported within 10 days to the CAMLMAC. Money transfers between companies equal to or exceeding RMB 2 million, or between an individual and a company equal to or exceeding RMB 500,000, made in one day, must be reported. All cash deposits, withdrawals and foreign-exchange transactions equal to or exceeding RMB 200,000 or USD 10,000 made in one day must be reported to CAMLMAC. All cross-border transactions of sums equal to or greater than USD 10,000 made in one day where one of the parties is an individual must be reported to CAMLMAC.

16

SILICON VALLEY BANK: How to Succeed in China

Payments and Receivables

Payments

Payment Volumes and Values

Transactions (million)
2008 Checks Other bills* Bank cards Credit transfers Direct debits Total 860.3 21.8 16,670.2 740.3 34.2 18,326.8 853.7 21.8 19,691.2 818.2 29.4 21,414.3 2009 - 9.8 0 18.1 10.5 - 14.0 16.8

% change 2009/2008
233.8 17.4 127.2 246.8 7.7 632.9

Traffic (value) RMB trillion

2008 248.6 21.2 166.0 270.2 9.5 715.5 2009 6.3 21.8 30.5 9.5 23.4 13.1

% change 2009/2008

* Includes drafts, commercial drafts and promissory notes. Source: Peoples Bank of China Payment System Report 2009.

Payment Systems China has three main interbank payment clearing systems:
{

CNAPS Bulk Electronic Payment System (CNAPS-BEPS). Lowvalue electronic retail payments (credits and debits) are processed for settlement usually on a same-day or next-day basis. Local Clearing House systems (LCHs). These clear all paperbased credit and debit payments. Settlement takes place within 24 hours if both parties are located in the same city or otherwise within three days.

China National Advanced Payment Systems Large Value Payment System (CNAPS-LVPS). This is a real-time gross settlement system for high-value and urgent electronic payments. Payments are settled in real-time if both banks are direct members of the system; otherwise settlement may take up to 48 hours.

SILICON VALLEY BANK: How to Succeed in China

17

The China Domestic Foreign Currency Payment System (CDFCPS) settles foreign currency payments denominated in eight international currencies (AUD, CAD, CHF, EUR, GBP, HKD, JPY and USD) on a same-day basis. A new Online Payment Interbank Clearing System was launched in 2010, which allows customers to initiate internet credit transfers with a value equal to or less than RMB 50,000.
Checks

Payment Cards

Payment cards are increasing in popularity, especially among retail consumers. They are widely used in Chinas major cities. Most payment cards (1.8 billion, about 81.7 percent of the cards in issue in 2009) are debit cards. They are issued when a bank account is opened. There were almost 200 million credit cards in circulation in 2009 (about 9.1 percent of the cards in issue). There were just over 200 million prepaid cards in circulation in 2009. They represent about 40 percent of the total number of card transactions, although only 2 percent of the value of card transactions. Card payments are processed via the bulk entry payment system (CNAPS-BEPS).
ATM/POS

Checks are the most common method of payment between small businesses, especially on a local basis. Checks have a maximum value of RMB 500,000. They are valid for 10 days from issuance. Company checks must include a handwritten signature and a company finance chop stamp. Local checks can be processed in 24 hours. Intercity checks can be processed within three days, since the introduction of the Nationwide Check Imaging System (CIS). Where checks cannot be processed via the CIS, they are not usually used for intercity payments because of their 10 day validity.
Credit Transfers

At the end of 2009, there were approximately 2.15 million ATMs and 2.41 million POS terminals in China.
Electronic Wallet

There are some electronic wallet schemes in China, primarily for use on public transportation.
Receivables (Collections)

Electronic credit transfers are the most common method of payment between large companies, especially in larger financial centers. Larger companies use these instruments to make salary, tax and treasury payments. Companies are often required by local tax offices to open dedicated tax accounts with their preferred Chinese bank. Payroll payments can only be made from the companys basic account. Urgent electronic credit transfers can be settled in realtime, as long as the remitting and the beneficiary bank are both direct members of the large-value payment system (CNAPS-LVPS). Other urgent payments can be settled within 24 hours. Non-urgent payments are usually settled on a same-day or next-day basis, via the bulk entry payment system (CNAPS-BEPS).

Direct Debits Direct debits are available in the form of preauthorized collections and dated debits. Their use is increasing, although they are still not a common payment method. Direct debits are settled via the bulk entry payment system (CNAPS-BEPS) on a same-day (pre-authorized collections) or next-day (dated debits) basis. Lockbox No information is currently available.

18

SILICON VALLEY BANK: How to Succeed in China

Liquidity Management and Investments

Liquidity Management

Intra-group liquidity management is difficult in China because direct inter-company loans are prohibited. Any direct inter-company transaction must be a result of an underlying economic transaction. Any company establishing a liquidity management scheme must advise the PBC of the existence of the scheme, the nature of the company operating the scheme and its directors. Cash Concentration It is possible to create a local currency cash concentration structure based on an entrustment loan (EL) agreement. An EL allows two entities to transfer funds between each other, using a domestic bank or other China-registered financial company as a financial intermediary. All EL agreements require approval from SAFE. Under the terms of exchange controls, resident entities are not usually permitted to concentrate cash on a cross-border basis. Some non-resident multinational companies are able to use the EL structure to concentrate foreign currency cash balances, as long as they qualify under the terms of the 2005 Pudong Measures. These measures allow qualified multinationals to fund and repatriate funds from Chinese subsidiaries, as long as these subsidiaries provide explicit authorization. Non-resident entities may also concentrate local (with approval from SAFE) and foreign currency cash balances via offshore banking units. Notional Pooling Notional cash pooling is not permitted in local currency.

Investments

Interest-Bearing Checking and Demand Deposit Accounts Some banks pay interest on surplus balances held in checking accounts and demand deposit accounts. The PBC sets a maximum interest rate for these accounts, except for foreign currency deposits with a value above USD 3 million. Call deposit accounts (with a minimum notice period of one day) are available in both local and foreign currency. Time Deposits Fixed term deposit accounts are available in local and foreign currency. The PBC sets maximum interest rates for time deposits, which are published for one week, one month, three months and one year. The PBC also sets maximum interest rates for foreign currency time deposits, which are published for three, six, 12 and 24 months. These rates apply for deposits up to a maximum USD 3 million. Certificates of Deposit Some banks issue Certificates of Deposit (CDs). However, there is no significant secondary market, so they are not a popular investment instrument. Treasury Bills The Chinese government issues Treasury bills. Qualified Foreign Institutional Investors are able to deal in Treasury bills. Commercial Paper Commercial paper is only available from domestic issuers. It is a popular investment instrument because of the maximum interest rates applied on bank deposits. Repurchase Agreements Repurchase agreements are available. Money Market Funds Money markets funds are available.

SILICON VALLEY BANK: How to Succeed in China

19

Financing
Overdrafts

Overdraft facilities are available from Chinese and foreign banks. Foreign-invested enterprises often seek overdraft and other unsecured financing from banks in Hong Kong, as interest rates are usually much lower.
Bank Lines of Credit / Loans

Short-term Short-term bank finance is available in the form of temporary advances (up to three months) and loans (up to 12 months). Some banks will roll over short-term loans at maturity to create a long-term financing facility. The PBC reference rates determine the interest rates on loans. Chinese banks are required to consider the creditworthiness of borrowers under the terms of the PBCs General Rules on Loans. Long-term Long-term bank loans are available in local currency from both Chinese and international banks. Borrowers usually provide security in the form of receivables, parent or bank guarantees (for facilities provided to subsidiaries of foreign companies) or standby letters of credit (for U.S. banks). The PBC sets guidelines on the maximum interest rate which can be charged for RMB-denominated facilities. Domestic foreign currency loans are also available. These are priced against the market rates in leading financial centers, such as LIBOR.

20

SILICON VALLEY BANK: How to Succeed in China

Commercial Paper

Only Chinese-owned entities are permitted to issue commercial paper (CP). To issue CP, a legal entity must be registered in China and comply with PBC documentation requirements, including being able to demonstrate continuous profitability. Financial institutions are required to demonstrate their risk management policy, regulatory approval, an appropriate capital ratio and hold an appropriate rating from a rating agency. Non-financial institutions must file due diligence and financial reports, demonstrate strong internal controls, appropriate solvency and liquidity and hold an appropriate rating from a locally-registered rating agency. Non-financial institutions can issue CP for a maximum of 365 days.
Bonds

Most foreign currency leases are in the form of finance leases offered by joint ventures operated by Chinese and foreign companies to finance the use of imported equipment.
Intercompany Borrowing

Direct intercompany borrowing is not permitted. It is possible to manage intercompany loans via an entrustment loan (EL) structure.
Structured Finance

Securitization is not available.

Government Finance

The Chinese government is encouraging private sector participation in infrastructure projects, especially in power, water supply and waste treatment. Foreign entities can participate in these through Build-Operate-Transfer (BOT) projects. Any involvement by such companies must be approved by SAFE.

Bond issues are available for domestic borrowers, subject to annual quotas set by the PBC. Before issuing a bond, a domestic issuer has to meet requirements set by the PBC and the National Development and Reform Commission. If approved, the PBC sets the interest rate on any bond issue. Subsidiaries of foreign companies are permitted to issue bonds, but these are not subject to the PBC quota system. Bonds and other debt instruments do not tend to be issued privately. Subsidiaries of foreign companies are not permitted to issue debt instruments privately.
Leasing

Lease facilities are available in local and foreign currency. Lease terms are usually for periods of between two and five years. Leasing is used to finance the use of Chinese-produced equipment.

SILICON VALLEY BANK: How to Succeed in China 21

21

Country Overview
Country Information

Capital Beijing Area 9,596,960 km2 Population 1.330 billion International dialing code 86
Monetary Unit

China is divided into 22 provinces, four municipalities controlled by central government and five autonomous regions. Hong Kong and Macau are both special administrative regions of China.
Bank Holidays

2012 January 2, 22-28, April 4, May 1, June 23*, September 30*, October 15 2013 January 1, February 915, 17, April 5, May 1, June 12*, September 19*, October 15
Source: www.goodbusinessday.com. * The date, which may vary by plus or minus one day, is derived by converting from a nonGregorian calendar to the Gregorian calendar. The date cannot be determined in advance with absolute accuracy. Also some feast days are determined by the actual sighting of a new or full moon and cannot be confirmed until close to the actual date. The rules around this practice vary from country to country, making it difficult to predict holiday observances with complete accuracy.

Renminbi (RMB), also called Yuan (SWIFT code: CNY) The value of the currency is determined against a basket of 10 currencies. It is permitted to fluctuate within a 0.5 percent band against the USD and a 0.3 percent band against other currencies.
Government

Head of state President Hu Jintao (since March 15, 2003) Head of government Premier Wen Jiabao (since March 16, 2003) The national government is administered by the State Council, which is elected by the National Peoples Congress. The Chinese Communist Party has formed the government since 1949.

22

SILICON VALLEY BANK: How to Succeed in China

Economic Statistics
2005
General Population Unemployment Rate Consumer Price (year-on-year) Interest Rate* Gross Domestic Product (GDP) GDP Local Currency GDP (USD) GDP Per Capita GDP Volume Growth (year-on-year) Trade Exchange Rate Current Account Current Account as % of GDP Total Reserves (Yuan/USD) bn (USD) % bn (USD) 8.1943 134 5.87 822 7.9734 233 8.35 1,069 7.6075 354 10.13 1,530 6.9487 412 9.09 1,949 6.8314 261 5.15 2,416 6.7699 2,667 6.6609 2,866 6.7703 305 5.24 2,866 6.5846 3,067 6.5022 3,220 bn (Yuan) bn (USD) USD % 18,713 2,284 1,740 + 11.4 22,224 2,787 2,110 + 12.7 26,583 3,494 2,629 + 14.1 31,496 4,532 3,389 + 9.6 34,632 5,069 3,767 + 9.2 NA NA 39,431 5,824 4,301 + 10.3 NA NA m % % % Unit 1,312 4.2 + 1.8 3.33 1,321 4.1 + 1.5 3.33 1,329 4.0 + 4.8 2.79 1,337 4.2 + 5.9 2.79 1,346 4.3 - 0.7 2.79 + 3.5 2.79 + 4.7 3.25 1,354 NA + 3.3 3.25 + 5.1 3.25 + 5.7 3.25

2006

2007

2008

2009

2010 Q3 Q4 YEAR Q1

2011 Q2

Source: International Financial Statistics, IMF October 2011. * Bank Rate Period Average ** Total reserves minus Gold

Country Credit Rating

Trade Statistics
Major Export Markets
Country USA Hong Kong Japan South Korea Germany % 20.0% 12.0% 8.3% 4.5% 4.3% Japan Hong Kong South Korea USA Taiwan Germany

Fitch Ratings rates China for issuer default as:

Term Short Long Long-term rating alert AA Outlook Stable Local currency rating F1 A+ Foreign currency rating

Major Import Sources

Country % 12.3% 10.1% 9.0% 7.7% 6.8% 5.5%

Source: www.fitchratings.com, June 2011.

SILICON VALLEY BANK: How to Succeed in China

23

24

SILICON VALLEY BANK: How to Succeed in China

SILICON VALLEY BANK: How to Succeed in China

25

Silicon Valley Bank Headquarters 3003 Tasman Drive Santa Clara, California 95054 U.S.A. Phone 408.654.7400 svb.com

The material contained in this report is not intended to be advice on any particular matter. No subscriber or other reader should act on the basis of any matter contained in this report without considering appropriate professional advice. Silicon Valley Bank and its contracted information supplier expressly disclaim all and any liability to any person, whether a purchaser of this report or not, in respect of anything and of the consequences of anything done or omitted to be done by any such person in reliance upon the contents of this report. All rights reserved. No part of the material provided by SVB and its contracted information supplier and third-party suppliers may be reproduced, stored in a retrieval system or transmitted in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without the prior written permission of SVB and its contracted supplier. 2011 SVB Financial Group. All rights reserved. Silicon Valley Bank is a member of FDIC and Federal Reserve System. SVB>, SVB>Find a way, SVB Financial Group, and Silicon Valley Bank are registered trademark. B-11-11543. Rev. 11-02-11