Looking back to summarize 2017 we've seen many new developments the will influence 2018. Here is our summary about some of the more important changes for those of you doing business in or with China.
It is generally perceived that Xi Jin Ping got an overwhelming mandate to carry out his program and the personality cult built around him is compared to what Mao Zedong had. For foreign business it is one hand positive that there is a clear direction and that corruption has been severely curtailed. One the other hand it is quite clear that Xi’s policy is a China first policy and many of the initiatives and new rules coming out are still unclear and open for interpretation, giving uncertainty in compliance. Overall the trend is heading to a much stricter regulatory environment and especially for foreign companies. As always in China the recommendation is not to try to interpret the written law as there are big time lags and often adjustments from announcement to implementation, always engage with your local government officials to see what policies are under implementation.
Xi has been ruthless in punishing with corruption allegations anyone who do not align to his leadership. With over 1.1 million punished officials one might wonder when this group become so big that it can become a political force.
The months before the party congress the Chinese government started a campaign to shut down thousands of polluting companies. It had an impact on many exporters.
This is a very typical campaign in China. It is possible for companies to be non-compliant and nobody pays attention and suddenly there is a campaign and overnight factories has to shut down. From first of January 2018 a new national environmental tax has been introduced replacing an inconsistent system of local rules. Western companies with manufacturing partners in China are advised to have due diligence and supplier code of conduct audit programs in place.
One Belt One Road
The One Belt One Road (OBOR) initiative is one of the cornerstones in Xi Jin Pings economic and political program. The planned more than 4 trillion dollars the Chinese government will pump into this program from its accumulated trade surpluses gives Chinese businesspeople that dreamy look with dollar signs in their eyes.
The initiative initially called for the integration of the economies along the old Silk Road into a cohesive economic area through building infrastructure, increasing cultural exchanges, and broadening trade. Apart from this zone later also the sea routes to Europe via South Asia and Southeast Asia and even countries in Europe has been included. Many of the countries that are part of this belt are also members of the China-led Asian Infrastructure Investment Bank (AIIB).
While the purpose and definition is somewhat unclear and changing with time, some often stressed are e.g.to be to build stability in the Muslim countries to Chinas west, to give Chinese state owned construction and development companies opportunities by financing investment and loans in these regions, utilizing overcapacity in the Chinese industry, making neighboring countries financially dependent on China, putting China firmly at the center of the map and a revival of Chinese global influence, at the expense of the Americans.
Chinese business people knows where the wind is blowing and it will be one important factor to do business with a company from a country that is aligned. Many European countries e.g. Germany, Italy and Belgium has also cleverly joined the initiative scoring a tactical advantages for its companies in China.
In doing business with Chinese, the mentioning and alignment of belt and road in any situation will situation will give your host a feeling of that you have a clear view of opportunities in China. There are also opportunities for foreign firms in China’s western region to get financial government support incentives, including free warehouses and offices as part of this policy.
While the OBOR spending has maybe not yet reached full speed, China increased scrutiny of its cross border investments to stabilize its currency after a record outflow in 2016. It then included some questionable investments in entertainment, including several football teams. Year 2017 saw outbound M&A deals dropping 50% to 140 billion USD.
It is of course still a lot of money for Chinas international expansion.
Innovation in Industry
There is a transition in the Chinese economy where they are going from foreign investment and export led growth to innovation and consumption led growth. The Chinese government has been very supportive in both in creating a dynamic start-up environment with plenty of funds available to young high tech companies as well as possibilities to finance acquisition of foreign technology.
Productivity by Automation
China will have 40 million less workers in 20-30 age bracket in the next decade because of aging population and with raising salaries and less interest in industrial jobs. A new wave of automation has started pushed by the National Development and Reform commission ( NDRC) and China has already been the largest robotics market in the world since 2013. China now yearly installs about the same amount of industrial robots as USA and Europe together with about 1/3 of the robots domestically made. We have seen more and more suppliers in the mechanical industry upgrading their production for better productivity but also more consistent quality.
New pilot free trade ports
Shanghai and many cities has since long had free trade zones and bonded zones in its port areas. However, import and export out of a port in these zones has still involve a complicated customs processing.
It was announced at the 19th national party congress in October 2017 that China will establish pilot free trade ports where goods, capital and people should be able to enter and exit freely. This will enable real offshore trade. It is speculated that the first one will be in Shanghai but a more specific time table has not yet been announced. We might eventually see a couple of new Hong Kong copies along Chinas coast.
Encouragement of small business.
Chinas corporate income tax rate is 25% for full scale general tax payers (companies that use VAT). New tax incentives for smaller companies last year excluded corporate income tax on companies below 30,000 RMB monthly sales. And for small scale tax payers (companies that don’t use VAT but a sales tax) with taxable income less than 300,000 per year the corporate income tax was kept temporary lowered from to 10%.
While corporate income tax is relatively normal with international standard, there are also many other taxes and fees to pay and there is an awareness that the total tax pressure is too high. We might see reform in this area fairly soon and especially in view of the American tax cut.
Also full scale tax payers has got their breaks last year. We were positively surprised by tax officials’ unannounced visit a few months back handing us back 50,000 RMB in paid taxes (!) as part of a local incentive program.
New work permit System for foreigners
A new system for qualifying foreigners for work permits was introduced making the process more complicated and also expensive. Immigration authorities now require extractions of criminal records from the home country and educational certificates need to be legalized by the foreign ministry and the Chinese Embassy in the home country.
In addition foreign workers are classified into three tiers according to attractiveness and applicants get points for e.g. Chinese language skills. It has become harder to employ people with experience but lacking formal higher education as well as young graduates lacking work experience.
End of the One Child Policy
After 37 years with the one child policy, it has now been a year with the new two child policy in China. This is a huge change in the Chinese society. Obviously there will be some effects on the demographic, especially in long term. More than half of the new babies born in the first half year where second children. The new baby boom will have an impact on consumption but also the social aspect is not to be underestimated, considering the generation of children who has grown up being a single child with a bit too much attention from the family.
Opportunities in Consumer Industry
Some years back I started, more as a hobby, to import some food from my home country Sweden. At that time most Chinese consumers were resenting to eat anything foreign and we had not foreseen the rapid development in this industry spurred by Chinese peoples increased wealth, travelling and changing sentiments in the last years. China will in 2018 become the biggest imported food market globally and we find ourselves, in addition to our consulting activities, to also be the leading independent importer of Scandinavian foods in China with a team of 20 dedicated people spreading the words of a healthy Scandinavian life style.
The opportunities in China are not discovered at home but by being engaged with the market on site in China. Talk to us to learn more about how to go about it.
We want to thank our staff, customers, suppliers and partners for a great 2017 and we wish everyone a healthy and prosperous 2018!
Per Linden and the Scandic team