Despite the fact that both India and China are competing each other for space in the global markets, there is huge potential in China which Indian companies can explore.

SME Times brings you certain facts on not only the Chinese empire, but also about Indo-China trade relations and information on opportunities that can be explored.   

A bird's eye view

The fourth largest economy in the world, China offers multitude of trade and investment opportunities for Indian exporters. This country with 1.3 billion people and so many thriving sectors of economy, has become a dream business destination for companies from all over the world in the recent times.

Especially in the last few years, trading with China has become much more easier as the Chinese government has been encouraging foreign investment in the country. Previous legal restrictions to trading in the country has been removed gradually.

The Chinese government is also spending heavily on infrastructure projects, making the country a lucrative market for Indian manufacturers. As the country is witnessing rapid growth, demand for more sophisticated products have continued to grow. The private sector in the country is booming while sectors like IT and telecommunications, transport, construction, processed food and beverages, minerals and energy, gambling, environment protection currently experiencing rapid growth.   

Bilateral trade between China and India

According to the Ministry of Commerce & Industry, Govt. of India, the bilateral trade volume between China and India in 2006-07 reached  Rs. 11,653,839 lakh among which India's export to China was  Rs. 3,752,978 lakh, while India's import from China was Rs. 7,900,861 lakh. India mainly export ore, steel, iron, organic chemicals, plastics and plastic products, jewellery, cotton, etc., while China mainly exports to India electric motors, organic chemicals, mineral fuel and products, mulberry raw silk, special woven fabric, etc.  

Investment zones in China - a flashback

China is divided into several provinces and regions (including special administrative region of Hong Kong), each of which has different social and economic needs. While considering to start exporting to China, it is important to access  which areas need your products and services most. For example, the coastal cities and special industrial zones in China offer greater business opportunities. When China first opened up its market to foreign investment in 1979, it established some investment zones (IZ) or areas within which the Chinese government offered foreign investors incentives in return for their investment in the country. At present, there are many different types of IZ in China which were set up at different times. They include-

• Special Economic Zones (SEZs): Shenzhen, Xiamen, Zhuhai, Shantou and Hainan were China's first attempts at developing IZs. The reason behind establishing these IZs was to transform these poor, low-density areas into modern container terminals and provide them available facilities to deal with trading and investment opportunities from Hong Kong, Taiwan and other Asian trading nations. After China's accession to the WTO, Shenzhen is today the only IZ that remains nationally important due to its proximity to Hong Kong.
      
  
• Open Cities (OCs): In the year 1984, 14 cities (Beihai, Dalian, Fuzhou, Guangzhou, Lianyungang, Nantong, Ningbo, Qingdao, Qinhuangdao, Shanghai, Tianjin, Wenzhou, Yantai, and Zhanjiang) in southern and eastern China were designated as 'Open Cities'. Later, all provincial capitals and a number of border cities were included in the list in 1992.
  
  
• Economic and Technological Development Zones (ETDZs): The ETDZs were first established as part of the 14 open city projects with the objective to attract technology-intensive industries.
  
  
• High-tech Development Zones (HTDZs): 53 HTDZs were also established as part of the OC project with the intention to attract hi-tech industry into China.
  
  
• Free-Trade Zones (FTZs): There are 15 cities (Dalian, Fuzhou, Guangzhou, Hainan Haikou, Ningbo, Qingdao, Shanghai Waigaoqiao, Shantou, Shenzhen, Tianjin Port, Xiamen Xiangyu, Zhangjiagang, Zhuhai) designated as FTZs in China. These investment zones were established primarily for warehousing and export processing.
   
  
• Export Processing Zones (EPZs): There are 38 EPZs in China which are small areas and sometimes connected to ETDZs.

However, the benefits offered in the SEZs have been greatly reduced since China's accession to the WTO. As a member of the WTO, China had to create a 'level playing field' without discriminating between Chinese businesses and foreign enterprises. But still there are certain areas and industries that enjoy some special privileges. For example, FIEs based in a development zone has to pay considerably less tax  as opposed to FIEs based in Shanghai. In addition, these investment zones still attract Foreign Enterprises through the superior infrastructure.   

The Basic Means of China's Absorption of Foreign Investments (Since China’s Accession to the WTO)

In China, the foreign investments are basically divided into direct investment and other means of investment. The direct investment, which is widely adopted, can be categorized into the following forms-

1. Sino-foreign joint ventures: Also known as share-holding corporations, this type of joint ventures can be formed with joint capitals by foreign companies, enterprises, other economic organizations and individuals with Chinese companies, enterprises, other economic organizations and individuals. The main features of Sino-foreign joint ventures are:

• The joint parties invest and operate business together, take risks together according to the ratio of their capitals
  
• The capitals from different parties are translated into the ratios of capitals. In general, the foreign party's capital should not be lower than 25%
  
• At present, Sino-foreign joint ventures account for a great part in the absorption of foreign investments
  

• The rights and obligations of the foreign party and the Chinese party are embedded in a contract
  
• In general, the foreign party is responsible for supplying all or most of  the capital
  
• The Chinese party, generally speaking, provides useful facilities like land, factory buildings, and sometimes even some capital 
  

• The enterprise must adopt international advanced technology and facility.
• All or most of the products of the enterprise must be export oriented.

• Joint exploitation involves  high risk, high investment and high reward
  
• Joint cooperation accounts for a small ratio a very small part in China's absorption of foreign investments.   

• Total capital of the company is formed by equal shares
  
• Foreign shareholders (more than 25%)0  and Chinese shareholders will hold the shares of the company
  
• Shareholders will take due responsibilities for the company according to shares purchased.

6. New Types of Foreign Investment: With the changes of time, China is also introducing new types of foreign investment such as BOT, investment company and so on.  

Business taxation in China

At present, China has two independent and distinct tax systems, one for domestic enterprises and one for Foreign Investment Enterprises ("FIEs") and Foreign Enterprises ("FEs").  There are primarily five taxes most applicable to FIEs and FEs in China:

1. Enterprise income tax: EIT applies to FIEs with income derived by them from production and business operations and other income. FEs have to pay EIT for their income which is derived from production and business operations and other income in China.

2. Business tax : BT is levied upon enterprises and individuals that provide labour services, transfer intangible assets or sell immovable property in China. BT is generally levied at the rate of 3% or 5%.

3. Value-added tax: China first implemented VAT in 1984; as the former taxation system of the country undertook an overall and structure reform in 1994,  the State Council of China promulgated "The Provisional Regulation of the People's Republic of China on Value Added Tax".

According to this regulation, VAT should be paid by enterprises or individuals who sell merchandise, provide processing, repairing, or assembling service, or import goods within the territory of the People's Republic of China on the added value derived from their production, selling merchandise, providing industrial repairing or assembling service.

As per the current VAT system in China, the input tax of fixed-assets (houses, construction and equipment, etc.), can't be deducted from the output tax when computing the tax payable. In some industries (transportation, construction, post and telecommunications, cultural activities and sports, finance and insurance, entertainment businesses and services) the state does not collect VAT but Business Tax. Business Tax is levied as a percentage of sales, not just value added.

4. Consumption tax: In China, CT is levied upon  enterprises and individuals that produce, entrust third parties with processing or import consumer goods (such as tobacco, alcoholic beverages, cosmetics, petrol, cars, etc.) specified in the relevant rules and regulations on consumption tax in China.

5. Stamp duty: It is levied on enterprises and individuals that conclude or receive any document declared to be taxable by the tax authorities.

Taxes that are of most relevance to foreign businesses are Deed Tax, Land Value-added Tax, Vehicle and Vessel Purchase Tax, Vehicle and Vessel Use Tax, Resources Tax, Urban Real Estate Tax, etc.
        
Items encouraged for foreign investment in China

To regulate foreign investment in the country, the Chinese Government promulgated in June 1995 the Interim Provisions for Guiding Foreign Investment and the Industrial Catalogue for Foreign Investment.

In the Industrial Catalog, the industrial projects are divided into four main categories: the encouraged, permitted, restricted, and prohibited. In late 1997, the aforesaid categories are revised and the scope for foreign investment in the country was expanded.

The encouraged categories in the new catalog mainly includes new agriculture technologies, energy resources, communications, important raw materials, comprehensive development of agriculture, new and high technologies, export-oriented and foreign-currency-earning projects, prevention of environmental pollution, comprehensive utilization and regeneration of resources, etc. Keeping in mind the development scenario of Chinese industries, the Chinese Government has continued to make appropriate revisions to the Industrial Catalog for Foreign Investment time to time.

In China, foreign investment is strictly prohibited in projects that may endanger the security of the state and the normal function of military facilities, can pollute the environment, bring damages to public interest, damage natural resources and public health, that use large farmland causing damage to land resources, etc.           

Formalities required for overseas investment to establish enterprises in China

In China, the establishment of enterprises with foreign investment is subject to project-by-project examination, approval and registration by the Chinese government. The procedures to establish a Chinese-foreign equity joint venture or a Chinese-foreign contractual joint venture involves the following steps-

Submission of the project proposal to the relevant department (planning department or technological renovation administration). Get approval from the relevant department so that the investor can proceed with various jobs related to the feasibility study of the project.

• Submission of the feasibility study report to the relevant department and get approval so that the investor can further proceed with various jobs like sign legal documents (mainly contract and articles of corporation of the enterprise).
  
  
• The third step involves submission of the contract and articles of corporation of the enterprise to the examination and ratification department. After the Ministry of Foreign Trade and Economic Cooperation approved the aforesaid documents, the concerned examination and ratification department will issue the Approval Certificate for Enterprises with Foreign Investment.   
  
  
• After getting the  Approval Certificate for Enterprises with Foreign Investment, the investor can now go through registration procedures with the administration of industry and commerce.
      
• The investors can go through registration procedures with the administration of industry and commerce.  

The procedures to establish an enterprise with foreign investment involves:

• Firstly, the investor has to submit the the initial project application
  
  
• After approval of the initial project application by the examination and ratification authorities, the investor may submit formal application with articles of corporation and other required documents
  
  
• After receiving the Approval Certificate, the investor can can proceed with the registration formalities.     

In China, the state adopts a classification administrative system for foreign investment. There are various provinces, municipalities, autonomous regions and cities which are listed as independent units in the state plan. These units have the authority to examine and approve investment of less than US $30 million in areas encouraged and permitted by the state.

When an investment exceeds US $ 30 million, the project application and feasibility study report must be examined and approved the State Development Planning Commission or the State Economic and Trade Commission. The Ministry of Foreign Trade and Economic Cooperation examines the the contract and articles of corporation.

Most of the provinces, autonomous regions and municipalities which are directly under the central government have established foreign investment service centers at different places. These service centers provide various services like legal consultation, procurement of project approval, etc. to foreign investors.  

Market Entry in China

As China undergoes rapid economic development over the past ten years, it has become  it an attractive place for foreign investment for foreign companies. Foreign companies which who wish to enter this huge market and explore its potential should give careful consideration to the following major issues:

• Is your type of business is allowed under the current Chinese regulations? Can China's WTO market-opening timetable affect your business?
  
  
• What type of investment structure would be the best for you- a wholly foreign owned enterprise, a joint venture? Should you buy an existing business or use a combination of structures?
  
  
• Where shall you locate? Are there any particular local policies and incentives from which your business may benefit?
  
  
• How much it will cost for setting up a business in the area you have chosen?
  
  
• How much and what types of taxes you will have to pay?
  
  
• Do you have clear understanding of what legal procedures to follow and which authorities to approach to set up your business?     
  

Things to remember:

• China is a large country with several provinces and regions. These regions have different social and economic needs.

• The coastal cities and special industrial zones offer greater opportunities for foreign businesses.
  
  
• Chinese people use more than one major language. In mainland China, Mandarin is the principal language while in Hong Kong,  Cantonese is the commonly spoken language. Most Chinese people do not understand English.
  
  
• While doing business in mainland China, your sales literature should be translated into Simplified Chinese characters. In Hong Kong, you should use sales literature translated into traditional Chinese characters.
  
  
• Chinese businesses usually prefer the Letters of Credit payment mode. Remember that it is very difficult to exchange Chinese currency outside the country.
  
  
• Exports of most products to China are zero-rated for VAT. There are no additional export taxes.
  
  
• When products are exported to China, they will attract import duty which you (or your representative) must pay before the goods will be released by Customs. The amount of duty greatly depend on the type of product.
  
  
• Export of some products to China is strictly restricted while one may need a special licence for some kinds of products.
  
  
• You may face restrictions on the amount of currency you can remove from China.
  
  
• While trading with China, you must be very aware of different aspects of IPR (Intellectual Property Right). In different areas, the IPR regulations may be upheld to different degrees.