Middle enterprise FDI in China covers a wide range of service industries as well as the country’s core manufacturing sector. These companies typically lack a deep knowledge of China’s foreign investment environment, and must stay abreast of ongoing shifts in the country’s FDI regulations to achieve their growth objectives.

 

In addition to reducing tariffs on most imported goods and broadening foreign investors’ access to banking, insurance, franchising, architecture, and other formerly restricted industries, China’s accession to the World Trade Organization in 2001 lowered entry barriers to foreign investors. However, not all Chinese industries are fully open to foreign investment. In fact, China’s Foreign Investment Guide specifies four FDI categories: Encouraged, Permitted, Restricted, and Prohibited.

 

China’s corporate income tax (CIT) reform of January 2008 is also transforming the country’s FDI environment. That reform harmonizes tax rates for domestic and foreign companies, prescribing a step-wise increase in the CIT leading to a uniform rate of 25% in 2012. The result of this measure is to reduce tax incentives for foreign-owned enterprises, which previously paid a preferential rate of 15 percent. Despite the less favorable tax environment, inbound FDI reaching China has actually increased since the enactment of the CIT reform.

 

China’s continued success in attracting FDI, despite the elimination of tax incentives, demonstrates the country’s competitive advantages as an FDI destination: High GDP growth rate, huge domestic market, low labour costs, large installed multinational base, and proximity to the dynamic Asia-Pacific theater. Moreover, other recent changes in Chinese business law (including reforms of the country’s Anti-Monopoly, Labour Contract, and Merger & Acquisition Laws) have heightened China’s allure to foreign companies. Midsized companies lacking experience in China would be well advised to engage consultants to help navigate the country’s evolving legal environment.

 

Prior to WTO accession, foreign investors surveying China were ordinarily limited to joint ventures. However, foreign companies now enjoy a wide range of entry modes: Mergers and acquisitions (M & A), representative offices (RO), wholly owned foreign enterprises (WOFE), and foreign invested commercial enterprises (FICE). Middle enterprises entering the Chinese market must carefully align these investment modes with their strategic objectives.

 

Under the “Zouchuqu” (to venture out of China) policy, the Chinese government encourages local enterprises to venture into overseas markets either through M & As or greenfield investments.

 

Up to now, outbound investments by Chinese companies have focused on hydrocarbons and raw materials. However, Chinese authorities anticipate an expansion of outbound FDI in key manufacturing industries (notably automobiles and capital equipment), Information Technology, and financial services. South East Asia, South Asia, Africa, and the Middle East have received the bulk of Chinese foreign investment. However, Chinese companies are increasingly looking to the developed Western markets for M & A opportunities to access advanced technologies and acquire international brands.

 

With rapidly expanding foreign reserves and increasing purchasing power resulting from RMB appreciation, Chinese outbound investment is likely to post strong growth rates in coming years.

 

Chinese middle enterprises, often supported by provincial or local governments, are now launching overseas investments. Mid-sized companies are building manufacturing bases in low cost countries like Vietnam and Cambodia along with trading hubs in entrepôts like Hong Kong, Singapore, and Dubai. Foreign real estate is also attracting growing attention by Chinese middle enterprises as well as wealthy individuals.

 

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