Guide to Investment Structures for China

This guide has been prepared by the Zetland Financial Group Limited and is intended for the information of clients or prospective clients. As such, it is designed to provide general information about Investment Structures for China. The information set out is not, nor is it intended to be, exhaustive. Such information does not purport to be and is not legal, tax or other professional advice. Our aim has been to provide a broad overview. We will be pleased to offer more comprehensive and specific professional advice to individual clients depending on the situation.BackgroundChina has a poplualtion of more than 1.3 billion and covers an area of 9.6 million square kilometres. It is divided into 23 provinces, 5 autonomous regions, 4 Central Government municipalities, and two Special Administrative Regions (Hong Kong and Macau). The Chinese coastline is 18 thousand kilometres long with many commercial harbours. Early foreign investments, as a result of government policy, focused on the coastal provinces but increasingly the advantages of other provinces and inland cities are being discovered.Central Government MunicipalitiesBeijing the capital of China and the country's political, cultural and tourist centre, covers an area of 16,808 square kilometres with a population of 13.6 million. Beijing has the largest number and the most prestigious institutions of higher education and scientific research in the country. There are 73 institutions of higher learning in the city. At the end of 2003, there were more than 274,000 persons engaged in scientific activities. This strength in human capital is expected to help development of the Beijing-Tianjin-Hebei economic region.The service sector is now the largest sector in Beijing. In 2003, it accounted for 61.5% of the city’s GDP. Banking and insurance and social services are the two biggest sectors, accounting for 14.7% and 10.0% for the city’s GDP respectively. Further development and upgrading of the services sector is one of the policy objectives of Beijing’s 10th Five-year Plan, especially in information technology services, financial services, transportation and tourism.Chongqing the largest automonous municipality, has a total area of 82,400 square kilometres and a population of 31 million. The establishment of Chongqing municipality represents a major breakthrough of China’s initiatives to speed up economic development in the central and western regions. The Yangtze River’s Three Gorges Project will be very important in the development of Chongqing’s economy.Shanghai the most advanced and developed commercial and financial center of China, has a total area of 6,300 square kilometres with a population of 16.7 million. Shanghai contributes 5.3% of the nation’s GDP and 8% of the nation’s total industrial output value. Shanghai has China’s largest container port, which handled 11.3 million TEUs during the period of Jan-Nov 2004.Shanghai plays a leading role in China’s heavy industries and is a national leader in the production of chemical fibres, ethylene, cars, power generating equipment and personal computers. The six key industries of Shanghai are automobiles, petrochemicals and fine chemical, iron and steel, equipment, biomedicine, and electronic information.Tianjin has a total area of 11,919 square kilometres and a population of 10 million. Tianjin is an integral part of the Pan Bohai Bay Economic Zone, which is one of the three biggest economic zones in China. Tianjin has undergone rapid development growing at an average rate of 11.6% over the last 6 years.Tianjin Port, as the largest commercial port in North China, boasts China’s biggest containerised cargo dock. It handled 162 million-ton cargos in 2003. Tianjin International Airport is the largest cargo freight center in China. The city is well connected to other major cities by railroads and expressways.Tianjin is an important industrial center in northern China. Gross industrial output reached RMB 437.1 billion in 2003, ranked third after Shanghai and Shenzhen. Tianjin’s key industries include electronics, automobiles, metallurgy and petrochemicals.North Eastern RegionThe north eastern region include three provinces: Heilongjiang, Jilin, and Liaoning. The total area is amount to 800,000 square kilometres with population over 100 million. The growth rate of 9.2% is above the average rate but lower than other coastal provinces.Coastal ProvincesThe major coastal provinces running from north to south are Hebei, Shandong, Jiangsu, Zhejiang, Fujian and Guangdong. Guangdong province is the most developed and international thanks to Shenzhen and Hong Kong.Hebei has a total area of 187,700 sq.km, with total population of 67 million. Hebei province includes the Jing-Jin-Ji (Beijing-Tianjin-Hebei) Economic Region and the Bohai Bay Economic Region. Hebei’s GDP ranked the first in northern China and the fourth among all provinces and municipalities.Hebei is a major agricultural base in China with gross output value of agriculture ranked third in the country. In 2003, Hebei’s value-added industrial output totaled RMB180.2 billion. Leading industries in Hebei include smelting and pressing of ferrous metals; production and supply of electric power and heat; non-metal mineral products; petroleum and natural gas; chemicals; textiles and coal mining.Shandong lies in the Bohai Bay economic region. It spans a total area of 156,700 sq km, with total population around 90 million. It is China’s second most populous province.Major cities include Jinan, Qingdao, Yantai, Zibo, Weihai, Weifang, Dongying, Rizhao (collectively known as group of cities in Shandong peninsula). They represent 64.5% of Shandong’s GDP and are fast growing. In particular, Qingdao and Yantai are two of the largest ports in China.Shandong is endowed with rich mineral, agricultural and marine resources. It is the birthplace of Confucius and has many historic sites. Thus its tourism is well developed. Primary and tertiary industries are prosperous.Shandong is the 3rd largest industrial production base in China, after Guangdong and Jiangsu. Value-added of industrial output reached RMB470.1 billion in 2003, up 20.7% from 2002. Shandong is rich in natural resources, particularly oil and coal therefore the excavating and energy industry is strong. It has the second largest oil field (Shengli Oil Field) in China. Its output of crude oil accounts for 15.7% of the national total, after Heilongjiang. In its southern part, collieries cover a large area, whose production accounts for 8.8% of the national total, after Shanxi.Jiangsu is located at the eastern part of the Yangtze River Delta, next to Shanghai. It has a nearly 1,000km long coastline. Jiangsu has a total area of 102,600 square kilometres, with a population of 74 million. Jiangsu’s GDP ranks second in China, since 1993 accounting for more than 10% of the national total. The southern Jiangsu area, which is part of the Yangtze River Delta economic region is the province’s economic hub, accounting for 62.8% of Jiangsu’s GDP in 2004. The southern Jiangsu area covers 5 cities – Suzhou, Wuxi, Changzhou, Nanjing and Zhenjiang.Although a bastion of heavy industry, In recent years, Jiangsu is moving towards the development of new and high technology products. For instance, Suzhou is the main destination of Taiwan’s investment in the mainland mainly in high technology industry. Jiangsu pays much attention to three hi-tech industries — IT, new material and heavy petrochemical, and new medicine. Jiangsu has now become an important IT manufacturing base. Many Taiwanese and international IT manufacturers are attracted to invest in Kunshan and Wujiang for its proximity to Shanghai, yet it is cheaper relatively than Shanghai in land and labour costs.As one of the smallest provinces, Zhejiang has a total area of 101,800 square kilometres and its total population is around 45 million. The northeastern Zhejiang area is part of the Yangtze River Delta metropolitan region and is the province’s economic hub. It covers 6 cities / counties - Hangzhou, Ningbo, Jiaxing, Huzhou, Shaoxing, Zhoushan. Zhejiang has one of the longest coastlines in the country, and has excellent sea / river transport e.g. Ningbo is one of the largest ports in China.Zhejiang is the fourth largest industrial production base in China after Guangdong, Jiangsu and Shandong. Industries in the northeastern region are more developed than that in the southwestern region. Major industrial production bases are Hangzhou, Ningbo, Wenzhou, Jiaxing, Huzhou, Shaoxing, Jinhua, Quzhou, Zhoushan, Taizhou and Lishui.Fujian is located in the south eastern coastal area along the Taiwan Straits, opposite to Taiwan. It has a total area of 121,400 square kilometres with a population of 34 million. The Southeast Fujian area, consists five cities and counties -- Fuzhou, Xiamen, Putian, Quanzhou and Zhangzhou. Xiamen is a Special Economic Zone and the economic hub of Fujian.Light industry is well developed. Leading industries in Fujian include electronics and telecommunications, machinery and equipment, textiles and garment, food, leather and electric power. Paper, watches and clocks, cans, leather shoes and bags, furniture and crafts are major products, each ranking the top three in the nation.Guangdong has a total area of 179,756 square kilometres with a population of 90 million. The Pearl River Delta (PRD) Economic Zone is the province's economic hub, accounting for 80% of Guangdong's GDP. The PRD Economic Zone covers 14 cities and counties -- Guangzhou, Shenzhen, Zhuhai (both Special Economic Zones), Foshan, Jiangmen, Dongguan, Zhongshan, Huizhou city, Huiyang county, Huidong county, Poluo county, Zhaoqing city, Gaoyao and Sihui.Guangdong's economy has led China in many ways:The largest GDP among all provinces and municipalities, accounting for 11.7% of the national total.The highest industrial output value among all provinces and municipalities, accounting for about 13% of the national total.The largest export value among all provinces and municipalities, accounting for 32.3% of the national total.The largest retail sales value of consumer goods which accounted for about 12% of the national total.Guangdong's manufacturing industries have developed rapidly as a result of foreign investment, particularly in the PRD Economic Zone. It is noteworthy that Guangdong is a major export-processing base for foreign investors mainly from Hong Kong and Taiwan. Cities that have the largest industrial production include Guangzhou, Shenzhen, Dongguan, Foshan, Huizhou, Jiangmen and Zhuhai.Guangdong is strong at light manufacturing industry. Output of light industries used to account for over half of the province's total industrial output. Major products include electrical appliances such as television sets, electrical fans and refrigerators, and other consumer products like garments, bicycles, toys, shoes and electronics. Exports of most of these products rank the highest in China. In recent years, Guangdong's has been moving towards heavy, new and high technology industries including chip fabrication and aerospace.Other ProvincesFor the past ten years China first tried to open up the entrance of coastline provinces as a so called “try out point policy”, and the result turned out to be tremendously fruitful. Now other inland local province governments are mirroring the success with central government’s help. Many major public infrastructures projects are now permitted to have direct foreign investments, which was impossible in the past. Many other advances and even tax break incentives are provided to foreign investors for investing in specific areas.Structures for InvestmentsIt is reasonably complicated for a foreign firm to setup a business in China. The three typical methods of doing so are Representative Offices, Wholly Foreign Owned Enterprises and Joint Ventures. The regulations, tax treatment, business categories, and requirements for each type of business are different. These differences are not only limited to the types of business, but are also specific to each province, city and sometimes district.The general information below is intended to give a general idea of the major holding structures but detailed advice is necessary since each case is different. Zetland has years of experience in helping clients to start operations in China and is able to further assist. Zetland also has an extensive network of professional advisers to tap into in China.Representative OfficeAs the name suggests, this type of entity is set up for representing the parent company in China. It is the easiest and most cost-effective method to establish an initial presence in China. Foreign enterprises can set up one or more representative office in high profile cities, such as Shanghai, Beijing, Shenzhen, Guangzhou, and Tianjin.Representative offices are permitted to conduct non-profit making activities, such as liaison with clients, market research, quality control, technology exchange, marketing and sales administration, etc. Representative offices are not permitted to conduct any profit making activities in China.Applicants for setting up a representative office must show a record of being legally registered in their home jurisdiction for at least 12 months. The documents filed with the licensing authority must be translated into the Chinese language. A set of corporate documents has to be notarised, apostilled and authenticated by a China Embassy.Depending on the province, city and/or district, taxation of the representative office is assessed on declared expenses at the rate of 7% - 10%. The funds for the representative office must be transferred directly from the parent company.Wholly Foreign Owned EnterpriseA Wholly Foreign Owned Enterprise (“WFOE”) is the most popular choice for the foreign company seeking to do business in the fields of international trading, manufacturing, processing, assembling or other profit making activities.A WFOE is a Chinese limited liability company which is established with 100% foreign capital and is, therefore totally under the foreign investors’ control. The registered capital may be paid up through a combination of equipment and cash. A WFOE's operations, including what it can or cannot do, capital structure, financial and accounting practices are governed by the articles of association. The minimum registered share capital, which has to be paid up within the initial twelve months of operations, is normally US$140,000. The amount depends on the nature of the WFOE’s business and the registered share capital can be significantly higher for certain heavily regulated areas of business.The tax rate for WFOE varies based largely on where it is registered. Generally, a WFOE is subject to a business tax of 5% for selling goods or services in China. A rate between 15% - 33% on profits tax will be charged by the provincial and city governments.Many cities in China now offer incentives via special economic and free trade zones to WFOEs primarily engaged in exporting and re-exporting. These zones usually provide attractive tax breaks to encourage foreign investment. The rates and terms are usually different from zone to zone and city to city. Certain areas of business, such as high technology, manufacturing and agriculture are favoured.For companies seeking to access the local market, it is important to know that the Chinese government defines foreign goods and services under three categories: “encouraged”, “limited” and “prohibited”. Each has its own requirements and regulations that guide the activities of the WFOE. In addition, it is important to mention that China’s internal reform of the legal, financial, accounting and tax standards is an ongoing and often confusing process that is evolving to meet World Trade Organisation requirements.Joint VentureA Joint Venture is a legal entity in China that is usually composed of two parties: foreign investor(s) and Chinese investor(s). This business arrangement is usually set up by equity or cooperative methods. The main difference between Equity Joint Ventures and Cooperative Joint Ventures is the allocation of profits. The Cooperative Joint Venture offers more flexibility than the Equity Joint Venture.The Chinese government favours and encourages this form of arrangement for obtaining advanced technology, modern administration and management skills. In return, foreign investors are able to access the Chinese market and enjoy low labour and production costs.A Joint Venture may be more suitable for business activities deemed “limited” and “prohibited” by the Chinese government. These include, but are not limited to, restaurants, bars, construction, car production and cosmetics. These types of business activities would NOT be approved as WFOEs by the Ministry of Foreign Trade and Economic Cooperation.How Zetland Can HelpAlthough China has developed greatly in the past 30 years doing business there can often be confusing, frustrating and damaging to one’s financial well-being should experiences and competent professional advice not be obtained. Zetland is based in Hong Kong – still the premier gateway to China and has a team of experienced locals who are fluent in Mandarin. Zetland maintains a liaison office in Shanghai and executives travel frequently throughout the country. Zetland can enlist the help of many professionals including lawyers, accountants, real estate agents and marketing experts. Of particular note is Zetland’s sister human resources company – Gemini Personnel which has offices in Shanghai, Beijing and Guangzhou providing recruitment of permanent and temporary staff.
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