China has accumulated advantages to back up its outstanding position in the global market and maintain investor confidence, including a huge market growth potential, a skilled labor pool, unparalleled infrastructure, and investment in its capabilities as a manufacturing base for industries of the future.
In this guide, we discuss why China is proving to be a hotbed for companies looking to leverage market advantages such as:
- World’s largest domestic market;
- Leading global manufacturing capacity;
- Multiple special economic zones and business incentives;
- Developed infrastructure and supply chain;
- Network of Free trade and tax agreements; and,
- Market reform and improving business environment;
Global manufacturing capacity
China’s manufacturing dominance remains significant despite the changes brought about by the pandemic – China makes up 28.7 percent of the total global output for manufacturing.
China remains an attractive destination for manufacturing overall and holds many advantages over its competitors:
- Skilled workforce and labor pool
- Developed shipping and logistics infrastructure; and,
- Government incentives promoting the sector, among others.
While wages have risen, so has worker productivity as the workforce becomes more skilled with higher-quality resources. China also has a developed shipping and logistics infrastructure and is increasingly a market for manufactured goods rather than just a producer, letting businesses take advantage of the proximity for reduced shipping costs.
While a diminishing workforce and stronger government enforcement of regulations are increasing the costs of labor, China aims to remain competitive by boosting productivity and producing higher-value goods. As certain labor-intensive industries such as apparel shift to lower-cost locations like Vietnam and India, Beijing is responding by encouraging manufacturers to move up the value chain and produce more innovative products.
The “Made in China 2025” campaign promotes this effort, hoping to spur the country into a global power in manufacturing advanced technology in place of cheap and often imitated merchandise.
Although the country has not yet fully transitioned from low cost to high value manufacturing, capitalizing on government incentives promoting the sector can pay dividends.
Investors can also take solace in the fact that the factories they contract are gradually providing their employees with better conditions and benefits, thus providing often marginalized groups with improved living standards. China’s vast financial resources and significant domestic market present lucrative opportunities during the industry’s transition phase.
Incentives for doing business
The Chinese government offers numerous investment-related business incentives and is continually making further improvements through reforms and by further upgrading its incentives to maintain the country’s high appeal to foreign investors. Among all investment incentives, tax incentives tend to be one of the most important to foreign investors and one of the most attractive features of the business landscape.
From the investor’s perspective, tax incentives are legitimate tools for reasonable tax planning and cost savings. It is also a useful indicator of market trends and government priorities.
China has implemented a series of preferential tax policies, in turn attracting a large number of foreign capital and foreign-invested enterprises and effectively promoting the adjustment and optimization of various industrial structures.
There are multiple forms of tax incentives available to businesses and can be primarily categorized as tax incentives based on:
- Type of tax – particularly Corporate income tax (CIT), value-added tax (VAT), and individual income tax (IIT).
- Size of businesses – such as small and low-profit enterprises, small- and medium-sized enterprises and small-scale VAT taxpayers.
- Sector-wise – to guide industrial upgrade, to support the development of the sector, or to respond to the special characteristics of the sector.
- Region-based – to encourage investments in certain less attractive areas or to give comparative advantages to more economic zones.
Several other types of incentives are offered by the Chinese government in qualifying special circumstances. These are explained in our incentives guide, and summarize below:
- Tariff exemptions on imported equipment – for encouraged foreign-invested projects, the import of self-use equipment within the total amount of investment can be exempted from customs duties;
- Access to preferential land prices and looser regulation of land uses – land can be preferentially supplied for encouraged foreign-funded projects with intensive land use. The land transfer reserve price can be determined at 70 percent of the national minimum price for the transfer of industrial land, which yet shall be no less than that of the local land; and
- Other bonuses for foreign investment engaged in the encouraged sectors, such as more flexibility in hiring talents, a shorter turnaround in dealing with government administration, a lower threshold in the financing, etc.
