Foreign businesses have a major role to play in helping China transition to a high-skills, innovation-based economy
As the world’s second largest economy and most populous country, China’s appeal to foreign investors and businesses dealing in international trade is self-evident. And while the pandemic and geo-political tensions have recently introduced some practical challenges, China remains a land of immense opportunity.
“Investment will always come to a place where there is a clear path to rapid and sustainable capital growth,” says Ann Yu, International Business Centre Director at Grant Thornton China. “According to Ministry of Commerce forecasts for 2021, inbound foreign direct investment is expected to exceed 1trn yuan [US$157bn]. This country is still very attractive to foreign investment despite the uncertainties we see at the moment.”
While China has in the past been viewed as a source of low-cost manufacturing for much of the developed world, this is no longer the case, Ann adds. “The country is now seeking a new pattern of development with key words such as sustainability, high quality, green economy as well as innovation, due to significant changes in the social structure over the past 40 years – for example, in terms of environmental and demographic challenges.” However, the manufacturing and service sectors are the parts of the Chinese economy that attract the most investment and interest from international businesses.
Meanwhile the government has taken a number of steps in recent years to make China more open to international investors, and to make the process of setting up and running a business more straightforward.
China boasts a large, highly educated and youthful workforce: around 6 million people graduate from the country’s universities every year and the government has made significant investments in upskilling programmes, as well as in promoting innovation and high-tech industries. The Global Innovation Index ranks China 14th in the world, while the country has the highest rate of patent applications globally.
“The government sees innovation as the cornerstone of our future economic success,” says Ann. “And while China is no longer a global source of cheap labour, salaries for top engineers here are about a half or two-thirds of earnings in somewhere like the United States."
Increased emphasis is being placed on sectors such as life sciences, and high-end manufacturing like semiconductor production. Environmental pressures mean that China now has a stated goal of reaching carbon neutrality by 2060 – another area where foreign investment and expertise is likely to play an important role, Ann says.
“We are seeing continuous improvements in the business environment in China,” Ann says. “Nowadays there is much less red tape and more efficient government functions: the aim is to eliminate a lot barriers in terms of administrative procedures for business registration filings, for example by rolling out digital services.”
China reduced corporate tax rates in 2020 in response to the pandemic, and while the tax system is relatively complex, reforms aimed at simplification are under way – for example the combination of state and regional tax collection agencies.
Meanwhile, the scope of the so-called negative list – the official policy setting out which parts of the Chinese economy are open to foreign investment only with explicit government approval – is being scaled back in order to attract more international businesses.
At the same time, a number of major economic centres such as Guangzhou and Shanghai have special incentives such as lower tax rates or research & development subsidies to attract foreign investment.
However, having the right support systems in place to deal with red tape and other practical trade issues is vital, Ann stresses.
China’s market opportunity
The large and growing middle-class in China – currently around 400m consumers, Ann says – represents a massive opportunity for foreign businesses. “We have already seen a large number of foreign brands have huge success in market niches here,” she explains.
“The scale of the country means that businesses can reconsider their strategy when they come here, to take account of the differences and to take advantage of what this market has to offer.”
Ann adds: “China is a very welcoming and hospitable country. English is spoken widely in our major cities, and there are entrepreneurs and workers here from all over the world. This is a great time to see what China has to offer.”
Access a world of resources, connections and expertise to help your international plans
Selling into, supplying or setting up operations in China can be a step into the unknown. At Grant Thornton, we have the experience to guide you. Our China International Business Centre director can co-ordinate access to international teams, resources and global delivery, while also helping you forge valuable trading relationships in the Chinese market.
Ann Yu
International Business Centre Director
Grant Thornton China
E ying.yu@cn.gt.com
Kelvin Kwong
International Business Centre Director
Grant Thornton Hong Kong
E kelvin.kwong@hk.gt.com
