China's economy has had a turbulent year in 2022, dealing with multiple COVID-19 outbreaks. However, despite these challenges, areas such as foreign trade and investment have continued to record double-digit growth as China lifts COVID-19 restrictions and paves the way for economic growth.
China is experiencing the same things as many other countries around the world, which puts it in a very advantageous position: Due to the US-China trade war and rising labor costs in China, foreign investors who had been relocating their supply chains out of China are now seriously considering moving back there.
There are several reasons why foreign investors choose China as an investment destination:
- Great growth potential: China's GDP per capita falls to $12,700 in 2023, about one-sixth of that of the U.S. The difference suggests that there is still a lot of room for economic activity and household wealth to continue growing before reaching a saturation point.
- Huge domestic market: China is the world's second largest retail market and is expected to become the number one market in the near future with rising purchasing power, a growing middle class and a population of over 1.4 billion.
- Strong supply chainChina is the only country that has all industrial sectors in the United Nations Industrial Classification, making it easy for businesses to source goods.
- Sophisticated infrastructure: China boasts the world's largest network of high-speed rail and highways by mileage, allowing it to transport products efficiently.
- Improved business environment: China improved its ranking in the World Bank's ease of doing business rankings from 78th to 31st between 2017 and 2019 as a result of a series of business reforms.
- Continued opening up of markets to foreign investment: China has announced two foreign investment negative lists for 2021, reducing the number of items on the national negative list from 33 to 31 and the number of items on the free trade zone negative list from 30 to 27.
- Labor and workforce: China has the world's largest labor market and an advantage in expertise and efficiency over low-cost emerging markets.
- Expanding the framework for trade and investment agreements: China has concluded 22 bilateral or multilateral free trade agreements (FTAs) with 29 countries or regions, with 10 more FTAs under negotiation. China has concluded 107 bilateral investment treaties (BITs), with 17 more under negotiation. China has concluded double taxation avoidance agreements (DTAs) with 114 countries or regions.
Given China's strength and high growth potential across many industries, it is inevitable that the country will continue to attract investors from around the world.
Below we summarize the reasons why foreign companies relocate to China.
China +1 Strategy
China has become an important base for the China Plus One strategy, as it provides a strong foothold for foreign companies looking to diversify their investments into Asia.
As the Chinese economy continues to transition to consumption-led growth, both the statutory minimum wage and real wages will likely rise further. As manufacturing operations in China become more costly, investors are choosing to supplement their China operations with assembly and low-value-added production in markets such as Vietnam, India and Indonesia.
Moreover, China's proximity to other Asian countries and stable supply chains and logistics make it easy for companies to set up factories in different locations. By locating manufacturing cost centers close to traditional hubs in mainland China, investors can reduce costs while minimizing disruptions and delays to existing supply chains.
Strong supply chains and export capacity
Foreign trade in 2023 remained relatively stable, albeit with slight growth. Total imports and exports in 2023 reached US$41.76 trillion (US$5.86 trillion), a growth rate of 0.2% year-on-year. Of this, exports increased by 0.6% year-on-year, while imports decreased by 0.3% year-on-year.
China is the only country with all the industrial categories of the United Nations Industrial Classification, allowing companies to easily source goods, and it boasts the world's largest network of high-speed rail and expressways by distance, allowing for efficient transport of products.
When the active implementation of epidemic prevention and control measures caused serious disruptions to global supply chains, the advantages of supply chain and infrastructure have become one of the most important driving forces for foreign enterprises to relocate to China.
Global companies may consider adopting a dual supply chain strategy to mitigate supply chain risks even in future post-pandemic scenarios. Beyond global supply chains, companies may relocate some core operations to China to avoid being caught in future supply chain shocks, as they rely on them in peacetime.
Strong free trade and double taxation agreements
China has been strategic about entering into free trade agreements, and policies allowing for taxation or reductions on certain products and services have been one of the main foundations for China's position as a global manufacturing hub in recent years.
China has concluded 22 FTAs affecting a total of 29 countries or regions (including the 10 ASEAN countries), with another 10 under negotiation and a further eight under consideration.
In addition, double taxation avoidance treaties effectively eliminate double taxation by identifying taxes that are exempt in China or reducing the amount of taxes payable in China.
DTAs not only provide investors with certainty regarding their potential tax burden but also act as a tool to generate tax-efficient international investments.
To date, China has concluded DTAs with 114 countries and regions.
Lower corporate tax rates and incentives to promote business
China's standard CIT rate is 25 percent, applicable to resident companies and non-resident companies with income-generating establishments. In comparison, India and Mexico have higher CIT rates of 30 percent. This 5 percent difference gives companies operating in China a competitive advantage over their Asian counterparts, making them a preferred relocation destination.
In addition, China's CIT rates may be lower depending on the entity's type, size, industry and location.
- A withholding tax rate of 10% (temporarily reduced from 20%) applies to China-source income of a non-resident enterprise that is not related to its China establishment, or China income derived by a non-resident enterprise that does not have a China establishment.
- Small and low-profit businesses will be entitled to a 20% reduction in the corporate tax rate, together with a reduction in the tax base.
- A reduced corporate tax rate of 15% is available to companies registered in the special zone, including high-tech enterprises and those working in sectors encouraged by Hainan province.
- To encourage focused software enterprises and focused integrated circuit enterprises, a reduced CIT of 10% will be applied after the initial five-year CIT exemption.
Incentives
China has several tax and non-tax incentives available to businesses, including tax exemptions, tax reductions, tax rate reductions, tax refunds or rebates and tax credits.
These can be primarily categorised as tax incentives based on the following criteria:
- Type of tax;
- Business size;
- By sector;
- Region-based.
Huge growth potential
China's gross domestic product (GDP) is expected to reach 126.6 trillion yuan (US$17.52 trillion) in 2023, up 5.2% from the previous year, according to data released by the National Bureau of Statistics.
Moreover, China's GDP per capita falls to $12,700 in 2023, roughly one-sixth that of the United States. This difference indicates that there is still a lot of room for economic activity and household wealth to continue growing before reaching a saturation point.
Domestic markets, skilled labor, and market liberalization
The expansion of the Chinese government's market liberalization policy and the large domestic market One A more experienced, better educated and better resourced labour pool provides foreign companies with an unparalleled competitive advantage when doing business in China.
The Chinese government offers numerous investment-related business incentives and continues to improve them through reforms to remain attractive to foreign investors. As a concrete effort to expand market access for foreign investors, China continues to expand its investment-related incentives. List of industries where foreign investment is encouragedThe 2022 catalog contains a total of 1,474 items across two catalogs, the national catalog and the regional catalog, a 19% increase from the 2020 edition.
Additionally, China is the world's second largest retail market and is expected to soon become the world's number one market, thanks to rising purchasing power, a growing middle class and a population of 1.4 billion people.