China - Background
With growth rates averaging 10% per annum over the last thirty years, China is the world’s fastest growing economy and the second largest economy after the United States. China is also the second largest importer of goods and is now the largest exporter of products as well.
The Chinese economy has been transformed from its old, centrally planned economy to a socialist market economy; a mixed economy that combines the old communist state economy with aspects of a western styled market economy.
Changes in the Chinese economic model first began in the late 1970’s when Deng Xiaoping introduced the initial reforms of decollectivizing agriculture and allowing private businesses and foreign investment which led on to the later, more radical reforms, of privatisation of the state sector, and the liberalisation of trade and prices.
The private sector in China now accounts for over 70% of the county’s GDP and is still rising and though the state still retains ownership and control of large enterprises, central government has taken a step back from direct control allowing them to behave in a much more of a free market manner.
The Chinese economy consists of a mixture of state owned and privately owned business and now, even the state owned enterprises have been turned into Western-style corporations with the state retaining control through majority shareholdings. The main forms that enterprises in China take are:
Wholly state owned and managed commercial organisations with their management and senior executives appointed by the government or state bodies.
These are publicly listed companies but where the state has retained a controlling interest or a large proportion of the issued shares thereby retaining the state influence over the running of the business.
Privately Owned Enterprises
Much the same as in a Western economy, these are the privately owned corporations, partnerships and sole trader enterprises.
In addition to these corporations, the traditional Chinese Urban Collectives and Township-Village Enterprises also still exist.
China is expected to overtake the USA and become the world’s biggest economy by the year 2020 and, as the economy of China continues to grow so the population becomes more affluent and hungry for the finer things in life. The opportunity for foreign trade in China seems to be almost limitless for those companies willing to invest the time developing the expertise, contacts and knowledge needed to do business in China.
China - Opportunities
It is estimated that by 2020, there be almost four hundred million Chinese consumers with incomes in the USD 16,000 to USD 36,000 making the Chinese consumer market on par with that of the United States itself and, as the Chinese consumer becomes more and more familiar with Western products and services so the market potential for Western companies to make an inroad into this huge market will grow.
China is changing its emphasis from export to industrial restructuring and the development of its own domestic consumption, all of which opens up further opportunities for trade. Beijing’s recent focus has been on creating regional hubs around which new cities are developing and gradually spreading prosperity into Chinas interior. Indeed, China is such a vast country, business are well advised to think in terms of regions rather than a national market.
To date, China has been an export driven economy but now, the country’s leaders are looking to diversify away from this and create more domestic wealth and consumption and this growth in Chinas consumer market is opening the doors for foreign imports as well as home produced goods.
There is a huge range of trading and investment opportunities available in the Chinese market and sectors that are currently experiencing growth include; gambling, minerals, energy, transport, processed food and beverages, environment protection, IT and telecommunications, building construction products and services to name but a few.
China is still a rapidly changing country and should not be thought of as just Shanghai and Beijing. China already has six cities larger than London or New York and it is expected that between now and 2030, more will follow and that Chinas urban population will grow by some 350 million which is more than the entire population of the United States.
In just twenty years’ time, more than one billion people will live in the major cities of China and, as urbanisation continues, demand for products and services such as healthcare, education, food and drink and luxury goods in these regional hubs will grow.
Doing business in China is not that different from doing business at home but entrepreneurs will need to do their research, China should be viewed not as a single national market but as many regional centres each with their own demands and requirements. People doing business in China should also be aware though that a written contract in China is, perhaps, not as cast in stone as it might be elsewhere.
Building relationships and networks in your chosen region is vital as relationships are highly valued in Chinese business and essential part of doing business in China and remember that the government is still heavily involved in businesses in China so understanding the country’s five year plan, which can easily be found on the internet, will be a good place to start in understanding the current, approved, opportunities in China.
China – Setting up in Business
Foreign businesses setting up in China need to be aware that protocol and official instructions from government and local agencies must be adhered to. Compared to some countries, the official route may seem slow and frustrating but, if business want to stake their claim in this ever growing market it is a well worthwhile, if time consuming, journey.
There are three main business entity types open to foreign businesses to trade in China; representative offices, joint ventures, and wholly foreign owned enterprises (WFOE).
The simplest presence a foreign company can have in China is a representative office. In this format, a business can open a local office to represent the company in China, make contacts and build a brand in the country. Whilst this format gives an organisation a simple, low cost presence in China, it exists only to promote offshore operations and cannot, in its own right, deliver goods or services.
An alternative, which would allow for trading in China is, a joint venture with a Chinese Citizen. Whilst a joint venture brings with it the advantages of local expertise and knowledge, most sources do not recommend it as most joint ventures in China appear to fail due to the differing objectives and goals of the partners.
The most common type of entity is a wholly foreign owned enterprise, known as a WFOE. A WFOE is a limited liability company wholly owned by a foreign investor. It is always recommended to get expert assistance in setting up a WFOE in china but the documents and pre-requisites to registering a WFOE include: Articles of Association, detailing what the company will do and how it can operate, a statement of business scope which will need to be selected from Chinese Government publication ‘The Catalogue of Guidance to Foreign Investment’ and an office address that will need to be obtained before applying for registration.
Although not the only options, the major centres for business, government and industry are Shanghai, Beijing and Guangzhou.
Situated at the mouth of the Yangtze River in East China, Shanghai is the largest city by population in China. Shanghai is truly a global city and a major commercial and financial centre as well as being the busiest container port in the world.
Beijing, the capital city of China, is the second largest city of the country after Shanghai. Beijing is the, cultural, educational and political centre of China and most the largest state-owned companies have their headquarters there. Beijing is a major hub for road, rail and air transport with Beijing International Airport being the second busiest in world.
Known historically as Canton, Guangzhou is located in Southern China, 75 miles North West of Hong Kong. Guangzhou is a leading manufacturing and commercial centre and the main manufacturing hub of the Pearl River Delta. The city is the third largest in China and has a population of some 13 million people.
Selecting a location for a business in China needs consideration of transportation and logistical needs just as it would in any country but government inspection requirements and restrictions will also have to be considered and don’t forget that a business cannot be registered at all until it has proof of lease of an office in China.