China enacts new foreign investment rules

On April 13, China’s State Council issued new guidelines for foreign investment in China. The new rules were reported in People’s Daily as well as the other official news organs of the Chinese government.

Since then, businesses have been trying to decipher the new policy, which is long on general goals and short on the specific procedures to achieve them.

The consensus seems to be that China is taking a quality-over-quantity approach in the major cities, which emphasizes attracting foreign direct investment in higher-margin businesses and discouraging those enterprises with significant environmental footprints.

In the poorer and less developed western regions, China is now giving local governments the direction and ability to attract labor-intensive, lower-margin business, apparently in the hopes that the energy which propelled the major costal cities will serve as a development model for these unknown cities.

What should you take from this?

The “new rules” are an incremental adjustment to the rules which were put into effect in 2006, not a radical sea change. The emphasis is on attracting the businesses and knowledge that China sees as vital to the next phase of its economic development in the eastern regions while trying to help areas which were not able to participate.

Areas like high-tech manufacturing, back-office service operations, research and development facilities and the headquarters will receive tax incentives, property discounts and the ability to issue debt and import materials without paying import duties.

If you need cheap labor to produce exported goods with a significant economic impact, you will now have to consider second- and third-tier cities in the west. They will retain and be given new economic incentives, which will allow them to offer many of the benefits once only available in the costal cities.

While China’s major cities are well known throughout the world, its hundreds of second-and third-tier cites go unnoticed, despite the fact that these cities have populations in excess of 1 million people.

Today, China is in the process of introducing some of its emerging economic hubs to the outside world. Looking at it, it seems the Chinese government is using an economic wave process which starts in the east and which they are now trying to move west. Economically established areas are being asked to find new ways which suit their needs, both economically and socially. The west while not offering a wide open subsidiary, will provide the types of benefits once only Gunagdon, Shenzen, Shanghai and Beijing enjoyed.

What does this mean for you?

If you have something to offer the Chinese market or you want to produce in China for export, this incremental change will provide some opportunities. Corporate debt/bonds will be allowed, although the procedure has yet to be full developed or tested. Relocation costs for existing businesses will be available to qualifying entities.

On the flip side, moving a company to a western city will have a different set of challenges; foreign managers will have to be strong but flexible to handle the local authorities and language issues.

Despite their size, many Chinese cities do not even have a Starbucks, and other amenities may be in short supply. Despite these concerns, though, there are and will be many opportunities in China, even if it’s just a KFC franchise.

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