Since the beginning of the 1980s, China was known not only for its impressive growth but also for the difficulties foreign investors faced upon entering the Chinese market.  In recent years the policies regarding foreign direct investment have been changing gradually, with the Chinese government giving assurances repeatedly about its willingness to make market entry easier.  In this article, we will address the main factors that affect foreign direct investment in the current economic and political climate.

China – decades of economic growth

Chinese GDP growth is in decline, but the fact is that the Chinese economy still grew by 6.4% in the first quarter of 2019 – an increase worth more than the whole economy of Australia. Slower growth is not unusual for an economy that is changing into a maturing stage. In 1979 China opened up for the first time to foreign direct investment.  In the following years investment growth was small due to foreign investment being restricted to specific sectors and areas.  After 1991 interest in China spiked and with the easing of restrictions, foreign direct investment was flowing.

Reference: https://mgmresearch.com/china-gdp-data-and-charts-1980-2020/

Currently, China ranks second in the world in attracting foreign direct investment with US$ 142 billion in 2018, an increase of 3% compared to the previous year. Regardless of declining GDP growth, companies and individuals still see China as a great economic opportunity. One of the reasons is the massive population of currently 1.42 billion people, which creates enormous consumption power.

China has evolved into an economic powerhouse that keeps on growing. At the same time, China continues to expand its economic power beyond Chinese borders; with Chinese foreign direct investment in Europe peaking in 2016 with investments worth EUR 37,2 billion. The government encourages foreign investment and paves the way with programs such as the belt and road initiative, a global development strategy initiated by China and focused on connecting China and the Eurasian Countries.

2020 brings new Foreign Investment Law

A new Foreign Investment law had been under discussion since 2015. In March 2019, it was finally passed by the Chinese legislative body, the People’s Congress. It will take effect on the January 1st, 2020.The new law promises to open the Chinese market, promising less restrictions and a more equal treatment of foreign and Chinese firms.

According to analytics, critics and the press this bill has been pushed through with unprecedented speed as it addresses the criticism from Donald Trump on last year’s summit. According to the president of the United States, it is time that China plays by the rules of international trade.

The main difference the legislation addresses is the protection of technology transfers and equal treatment for foreign investment enterprises (FIE).  With the arrival of the new legislation, the three current investment laws will be eliminated. According to Chinese premier Li Keqiang,” this piece of legislation is designed to better protect and attract foreign investment through legislative means”.  Nevertheless, a lot of critics are claiming it does not address the full problem. The main point of criticism is that the law is written too vague and therefore open for interpretation. The impact of the legislation remains to be seen, but it is considered a step in the right direction. More detailed regulations, expected to be issued before the law takes effect, will also shed more light on how the new foreign investment law will be applied.

Trade War effects are felt, but not by everyone

In May 2019, when the trade conflict appeared close to being resolved through bilateral negotiations between the US and China, events took an unexpected turn. The Chinese delegation ended its visit to Washington without a deal, which prompted the United States to raise tariffs on $200 billion of Chinese goods on May 9th. The following Monday, China retaliated by raising tariffs on $60 billion of United States commodity goods. These tariffs primarily affect companies manufacturing in China and exporting to the US.

Why it is a good time to do business in China

Companies that manufacture or provide services for markets other than the US market are not directly affected by the tariffs.  At this point, the trade war does not seem to have a significant impact on foreign direct investment into China. For a long time, the appeal of China was their low cost of manufacturing. The attractiveness of today’s market is more and more based on spending power and domestic growth potential.

For companies interested in the Chinese market for selling product or services, setting up a local presence in China can be an increasingly attractive option in the light of recent political and economic developments. Relocating your business to China creates two main advantages. First, a presence in the Chinese market reduces the risk of exposure from the effects associated with the trade war. Secondly, it will provide more control in pursuing your business purposes in China. The most common investment vehicle used by foreign investors to establish companies in China is the Wholly Foreign Owned Enterprise (WFOE). For more information about the different types of WFOEs and the setup process please refer to our article “How to set up a WFOE in China”. Changes in the setup process make it easier for companies to establish a WFOE. The main reason for choosing a WFOE above another legal form is the freedom in operations and the fact that Chinese partnering is not required.  With policies loosening, foreign invested companies benefit strongly from the WFOE structure. Especially in high-tech industry and other specialized industries that are on the rise.

In a more volatile economic environment with concerns over the lingering trade war and the slower economic growth in China, investment into China might look like a risky move. But the Chinese economy, still growing by more than 6% per year and outpacing all other big economies, provides numerous opportunities.  China remains an immensely popular destination for foreign direct investment, and that is no more than logical.

Richard Hoffmann

Richard Hoffmann is a partner at Ecovis Beijing. He obtained an honors degree in law and worked in Germany, the United States, and China for various prestigious law firms prior to joining Ecovis. In addition to being a member of the board of Ecovis International, he is Supervisor for the China business of several respected German companies. Richard shares his extensive knowledge to students by teaching commercial law in China at SRH Hochschule Heidelberg. He has published more than fifty articles in international magazines, frequently speaks at high profile events in China and abroad and is often invited as a legal expert by international TV stations. Contact: richard.hoffmann@ecovis-beijing.com

ECOVIS Beijing

ECOVIS Beijing is the trusted tax and legal advisor to several embassies and official institutions in China. It specializes in mid-sized international companies and is focused on tax & legal advisory, accounting and auditing. If you’re interested in finding out more about tax and legal, don’t hesitate to sign up for our Newsletter, give us a call +86 10-65616609 or contact us directly via service@ecovis-beijing.com