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Intellectual Property Issues In China Intellectual Property Issues In China(0)

IP is very much an emotive issue when it comes to China, and there are many misconceptions or misunderstandings about the subject and how to cope with IP when it comes to ?the China issue?. Let?s examine some of the more common mistakes :

I have already registered my trademark and therefore it is covered
China is signatory to all the international protocols that the international community has drawn up concerning the registration and protection of international IP. Therefore, China follows the same system as is in place as most nations follow. This means:

  • Registration of your mark
    International recognition is only granted provided your mark has previously been registered in five other jurisdictions (thus proving its ?international? status) or can be otherwise argued as an ?internationally considered brand? ? which is a debatable point and subject to legal interpretation. This means if you have only registered your mark in your home country ? you are not covered in China. For practical purposes however, even if you have international protection, we still recommend registering in China as courts may have difficulty in recognizing international protocols if they are not used to them, and this will mean more time and expense in legal fees to educate the court and provide evidence of the significance of such protocols and China?s adherence to them. Trademark registration in any event is inexpensive and should be undertaken as a matter of good business sense.
  • The Legal System in China is Biased Against Foreigners
    Actually, China?s courts are improving in upholding claims of plagiarism. It is also worth noting that the vast majority of infringements in China are between Chinese firms themselves, and not purely international firms being targeted. Most of the valuable brands in China are of course Chinese ? mass sales of foreign products in China is still fairly limited. Courts can and do, in the main, uphold claims by foreign companies where the evidence is properly introduced and in order. The problem is not with the judiciary, although they are not perfect either. The main issue is that of enforcement ? actually stopping the infringement once a judgment in your favor has been awarded.
  • Enforcement
    As mentioned, more tricky. Should enforcement be an issue, then we recommend the hiring of off-duty Public Security Bureau personnel (or even PLA) to turn up at the offending premises, look threatening and intimidating. This usually does the trick. Anything beyond this and you will need to engage further legal action ? and that gets expensive.

The reality is you probably will get ripped off. Even our own ?China Briefing? brand and the name ?Dezan Shira & Associates? have been misused in the past by unscrupulous China-based businessmen ? and they were westerners ! (see China Briefing April 2004 issue for details of one such case). This means you need to defend yourself from the outset against the likelihood of such behavior. Getting your brand registered in China is the first line of defense.

Next :
Staff


To know more, the whole issue is available (after a free subscription) on China Briefing website with others archives
For more information on China’s legal and tax issues or to ask for professional advices in related matters, please write to info@dezshira.com

Mergers & Acquisitions Mergers & Acquisitions(0)

It?s the Government so everything is OK. Actually this is not necessarily true, and in our experience, additional, not less, attention to detail needs to be put into effect when dealing with State Owned Enterprises (SOEs). Although the management of the enterprise may well stress ?government connections?, thus implying some sort of favored status, the role of the government typically ceases at the level of shareholders. It does not really extend far into management, except for businesses of extreme national importance, such as in energy or in the manufacturing of certain key commodities and supplies. For non-essential SOE?s involved in various normal manufacturing and trading sectors in which the government has no particular vested interest, although the government will have a seat on the board, there is no guarantee that this actually manifests itself into anything meaningful within the operations of the business.

Cronyism within SOEs
As mentioned, although the government may be shareholders in an SOE, the management of the venture have often placed themselves in positions to cement a regular income and to position themselves personally, rather than the government as shareholders, in taking advantage of any business opportunities that arise because of the existence of the business. The Chinese government has in fact had to go to extraordinary lengths over the past two decades to instill a sense of nationalism across the country (the 2008 Olympics being the pinnacle of this) but in reality, most Chinese nationals still see the State as a provider and will exploit any business the state has for their own ends rather than for the good of the shareholders. Consequently, with the government paying the bills in any event, the following scenarios are likely :

  • Sales/Distribution relationships totally reliant on non-commercial activities, including the deliberate non-payment for goods or services received, or relationships that have been put in place on purely personal relationships first with any economic considerations being secondary;
  • Management in place that are ineffective and inefficient, with their sole interest being what they can take, rather than contribute to the business ? and that includes your investment;
  • Other necessary operational issues such as sub-contractors, suppliers, distribution channels, and sales, that may exist within a framework that may not be included as part of the entity you imagine you are purchasing ? thus ensuring you continue to be reliant on them even though you have purchased the manufacturing division.

When ?Government? Ownership is not Government Controlled.
As mentioned, we wish to be very clear on the point of SOEs and Government connections. If mentioned, are these tangible or just being ?sold? to you as a sort of assurance ?everything will be OK? ? It is wise to remember that many of China?s largest fraud cases have been where management of SOE?s have deliberately sold out the company assets ? buying them effectively from their own government ? at a knock down price only to set up as a new, private firm, one month later, free of all liabilities and with millions of dollars of assets held privately that the State now does not possess. Yes, if uncovered, the Government can and does sue. But when SOE management are fully capable of ripping off the State ? what chance they?ll view your investment acquisition funding in a similar lamb to the slaughter fashion ? And with local regulations and connections on their side, what chance of success if you counter-attack and sue ?

Due Diligence Issues
Consequently, thorough due diligence needs to be conducted on SOEs way beyond the normal legal and financial standards to establish that what you think you are buying is actually what you are getting. These include:

  • Logistics, Supply Chain, Customers and Sales Team
    Are you sure these are properly identified and included in the package ?
  • Land and Other Utilities
    Have you properly identified all land use rights (see also page 7) and are satisfied that future access and the provision of utilities meet your expectations and are fully under your control ?
  • Environmental Issues
    In China, the concept of ?polluter pays? is in its infancy. If you inherit land that is polluted, you may face a clean-up bill later on from the very same people who sold you the land in the first place. Although you?ll need to go through the process of having core samples taken, and an expense will be incurred here, laboratories are close by in Hong Kong ? and any pollutants found can be used to negotiate the price of the land downwards.
  • Intellectual Property
    Does the sale include the China IP, patents and trademarks of the business you are purchasing ? Many Chinese brands are very valuable.

Next :
Intellectual Property Issues In China


To know more, the whole issue is available (after a free subscription) on China Briefing website with others archives
For more information on China’s legal and tax issues or to ask for professional advices in related matters, please write to info@dezshira.com

Important Tax Issues That Are Commonly Misjudged Important Tax Issues That Are Commonly Misjudged(0)

There is still one common misconception on the phantomatic ? VAT Exemption on Exports?. If the refund rate is lower than the levy rate, the company must bear the additional VAT cost on exportation. The VAT cost is calculated as follows :

Manufacturing Company :
VAT Cost = (Export ? Imported Raw Materials excluding customs duty)×(Levy Rate ? Refund Rate)

Trading Company :
VAT Cost = (The cost of Local purchased Raw Material)×(Levy Rate ? Refund Rate)
Generally speaking, the levied rate is 17%, the refunded rate is 13%.

Customs Deposit on Imported Raw Materials To Be Subsequently Exported
We often hear the misconceived statement ?There is no VAT and Custom Duty levied on imported Raw Materials used for manufacturing goods locally if these are then finally exported 100%?. It is incorrect. Actually, newly established Foreign Invested Enterprises must still make a tax deposit to Customs for VAT (at around 17%) and remit duty on the initial importation, for a period of time of generally six months. Many new businesses do not budget for this as initial working capital to be contributed as part of registered capital ? leaving them short of operating cash later on.

Enhanced Profits Repatriation ? Reducing Profits Taxes in Your Business
This is a tax issue, and applies to all FIEs that sell services or products in China. If no structural changes are made to your FIE articles, you lose out on between 4% and 13% of your total turnover in wasted unnecessary profits tax payments. FIEs, as mentioned earlier, are not just simple licencing applications, and if you treat them as such ? you end up with an inefficient business.

Enhancing your China profitability by reducing your profits tax burden is essentially a matter of introducing into the business a series of allowable service contracts between the FIE and it?s parent company back home. These services can include :

  • Royalties such as for trademark and patent use
  • Interests
  • Rental income

Royalties, interests and rental income rendered to the China FIE generally attract a withholding tax which rate is 10%. That means, if the income derived from above mentioned activity is USD1000, FIE located in China will withhold USD100 income tax for headquarter.

However, this compares favourably against the profits tax man at the year end, who is more avaricious. If the money is left in the company, the profits tax man will levy rates of either 15% (if in FTZ, SEZ and similar status zone), 24% (if in a municipality) and 33% if elsewhere (tax holidays excepted). That means payments in profits tax of USD150 if in a free trade zone, or USD240 or USD330 if elsewhere, obviously being less competitive in tax treatments.

Accordingly, to take advantage of this, an enhanced profits repatriation structure needs to be built into the FIE articles and inserted (they do not appear in normal drafts), and a series of contracts agreed between the parent and the FIE and registered with the tax authorities in China for assessment.

Next :
Mergers & Acquisitions


To know more, the whole issue is available (after a free subscription) on China Briefing website with others archives
For more information on China’s legal and tax issues or to ask for professional advices in related matters, please write to info@dezshira.com

Wholly Foreign Owned Enterprises, Foreign Invested Commercial Enterprises & Joint Ventures Wholly Foreign Owned Enterprises, Foreign Invested Commercial Enterprises & Joint Ventures(0)

The scenarios and problems below apply to all the above categories of foreign investment but for sake of convenience we have used the ?Foreign Invested Enterprise? (FIE) term to cater for all.

Sending Start-up Funds to Somebody Else before FIE is ready
It takes normally three to four months to complete the FIE application, however, some foreign investors can?t wait that long and try to send the start-up funds to their local agent or local staff to cover the cost for the initial office fit-out, overhead or even equipment purchases. The problem is that these funds, as paid for the FIE setup can not be recognized as part of your capital injection once the business license is issued, as the capital injection has to be transferred by the foreign investor from their overseas account to the nominated Capital Account directly, and not via any third party.

We have previously had clients remitting up to USD200,000 to their local supplier to ask them pay for rental and purchase equipment prior to the licence being issued, with them subsequently finding it very difficult for them to pursue the balance and show such purchases as part of their capital injection. Rather, it is better to arrange this as an internal loan between the parent and the FIE and book it as a roll over amount instead of including it as part of the FIE?s registered capital budget.

Registered Capital Issues – Undercapitalization
One of the most common ? and serious- problems with FIE applications, especially for small businesses, is the issue over registered capital. This is a much misunderstood area. Confusion exists, and many ill-advised investments are made in China due to misinterpretation of the local governments term ?minimum registered capital?. And is not supposed to be a ruling on how much you need to invest. Actually, the amount of registered capital needed in the business depends on a number of different factors :

  • Location. Some regions in China apply different levels of capital requirements than others to reflect their lower or higher regional operational costs
  • Scope of Business. For certain industries or services, the applicable registered capital amount can be quite high. This is sometimes used as a protectionist tool to discourage foreign investment, and is sometimes used to ensure only the right standard of international business can enter the market to ensure quality of applicant. Please note that if some existing businesses wish to expand their current scope of business, it may be a requirement to increase the amount of registered capital.
  • Cashflow. This is critical and often overlooked. Registered capital is also required to fund the business operations until it is in a position to fund itself. Generally speaking this should be catered for in the ?feasibility report? ? which is a business plan type document that is submitted to the authorities as part of the application process. However, in the rush to attract new investments, and as a result of a lack of even basic economics, many government agents do not pay much attention to detail to this report. Often the happy foreign investor will naively assume he?s gotten a great deal due to ?minimum amounts? being identified as all that is required. However, the business can come to a shuddering halt if the registered capital amount is insufficient to support the operations cash flow. It is not just a simple matter of wiring additional funds to China. Procedures have to be followed :

    • Application to increase the registered capital with the original licencing authority
    • Re-issuing of business licence reflecting this ? important as the registered capital amount is also the limited liability status of the business
    • Application to the State Administration of Foreign Exchange to transfer funds into China
    • Bank to bank fund transfer

The above steps take between six to eight weeks to fulfill. If you have already run out of operational money, you by now have not paid staff for two months, your suppliers, and possibly your utilities. In effect, your business has been throttled before it even had a chance to breathe. It is vital you properly capitalize your business in China in accordance not just with government guidelines over ?minimum registered capital? but also pure economic and operational realities. Businesses can and do go broke in China because of this issue ? and unscrupulous consultants may not always advise on the matter as they seek to gain more fees from you in terms of sorting the problems out when they arrive, or because they are just in the business to make a quick cheap buck out of handling your registration processes without putting any thought into the business aspects of your operations.

Next :
Important Tax Issues That Are Commonly Misjudged


To know more, the whole issue is available (after a free subscription) on China Briefing website with others archives
For more information on China’s legal and tax issues or to ask for professional advices in related matters, please write to info@dezshira.com

Faulty or inefficient Business applications – Representative Offices Faulty or inefficient Business applications – Representative Offices(0)

REPRESENTATIVE OFFICES
Applications ? Commonly Missing Documents

Premises
When arranging office premises with the landlord, you must ensure he has a certificate giving him permission to rent commercial property to foreign entities. This document is a requirement of all RO applications and without it your application cannot proceed. However, this also places the landlord in a higher tax bracket, so many do not obtain the required certificate. If you sign a contract and pay a deposit without ensuring the documents are all in place you may lose the deposit as well as lose time on the application.

Grade A Building Status
Most (but not all cities) require that the office is in a Grade A building. This certificate is issued by Ministry of Commerce (MOC), and a copy is required as part of the application. Fortunately, most cities now have a large number (and varying qualities) of Grade A buildings so it is not as much of a choice or cost problem as before.

Premises Ownership Certificate
This needs to be provided by the landlord and with the company seal.

Landlord’s Business Licence
This is also required with the company seal.

RO Resident’s Certificate
Issued by the property management company responsible for the building.

New Shanghai Regulations
Shanghai has recently been developing more, and not less, official bureaucracy and administration somewhat out of step with its purported international image. These new regulations have also mainly been issued without prior warning and at great inconvenience to applicants with licences pending. The main new procedure affects the lease agreement as follows:

Notarised Lease Agreements – Shanghai
Additionally, in Shanghai, a fairly recent additional requirement has been for all RO applications to require the regional lease record certificate, which has to be obtained from the real estate authority. This document should be notarized as a true copy. An original copy of this also needs to be provided to the pertinent local Shanghai tax bureau and also the Administration of Industry & Commerce.

Government Agents ? Shanghai
Shanghai is also unique in that all applications for all business licences must go via Government Agents. This adds another layer of cost and administration as of course they also require payment for their services as well. It also means applications are effectively taken out of the hands of professional services firms and can be held up ? if for example a smaller or cheaper agent is used and then goes on holiday or is just lazy or overworked ! Larger professional services firms tend to obtain better results when dealing with Shanghai?s government agents due to the volume of business they put through them and it is prudent to note this. Cheaper does not mean better service in Shanghai (or anywhere else in China for that matter).

Common RO Finance & Administration Problems

RO Bank Accounts :
Many clients authorize their agent to deal with the bank account opening, although in reality they can do this themselves. However, in order to avoid any inconvenience, and minimize the time and effort spent on the account opening procedure, the agent just simply opens the bank account without asking the clients how to manage the account. If the agent is a friend of the local employee assisting you there can be a conflict of interest here, as there are security issues that need to be discussed before opening the bank account, such as :

  • (a) Whether to use chops (company seals) to manage the bank account in addition to signatures (we recommend this as it places an additional layer of security)
  • (b) Whose signature and chops will be used for account management
  • (c) Whether other signatories can manage the account with differing responsibilities, and if so who ?

Many agents will just open the account with the accounting chop and legal representative chop (often a local Chinese national appointed by Head Office) without checking the security or desired wishes concerning the above issues with their client?s Head Office. It is quite dangerous for clients to wire their registered capital into such an account, of which the clients know nothing, and cases of money disappearing or being skimmed off have unfortunately been far too common.

RO Car Importation
RO are entitled to import a foreign vehicle, duty free. The importation is logged with the tax bureau and the value of the vehicle should appear in the accounts and at annual audit as an asset. If it is not, the assumption can be that the office sold the vehicle for a profit and is subject to tax on this transaction. All well and good if you don?t import a vehicle. But have you ? There are many cases of vehicle dealers calling local staff in RO to see if they will ?sell? the rights ? the going rate being about RMB20,000 (USD2,500) to them. The employee then arranges for the RO certificate and documents to be chopped, pockets the money, and the RO licence is then used, unwittingly by the foreign investor, to import a vehicle. Serious problems occur when the office is subjected to a scrutinized audit or closed.

Next :
Wholly Foreign Owned Enterprises, Foreign Invested Commercial Enterprises & Joint Ventures


To know more, the whole issue is available (after a free subscription) on China Briefing website with others archives
For more information on China’s legal and tax issues or to ask for professional advices in related matters, please write to info@dezshira.com

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Chongqing

The Guardian newspaper recently called Chongqing ?the megalopolis you?ve never heard of?, which is probably true for most people outside China. The paper noted that every day builders lay 137,000 sq m of new floor space for buildings, the economy grows by RMB99m, and 1,370 people arrive from the countryside.

It was designated a municipality in 1997, bringing it under the direct control of Beijing, to spearhead the development of the west and to manage the Three Gorges project. Its 31m population makes it the world?s largest city by some definitions ? indeed its population is already bigger than that of Peru or Iraq – although the metropolitan area has (only !) around 12m, expected to grow to 20m in 10 years. Chongqing is still very much a Sichuanese city. Located in a rugged valley, and bisected by the Yangtze and Jialing Rivers, it has for centuries been a strategically important city for trade in and out of China?s heartland.

During the Sino-Japanese War, it was transformed into a heavy industrial city, with military industries that thrived after 1949. Since the 1980s, many of these enterprises turned from producing military goods to mostly civilian goods. Chongqing has undergone dramatic development over the past few years, with high rise tower blocks and many new logistics facilities. Excellent transport links exist, by rail, road, and river, to the rest of China. Pollution is a major issue, however, and the city waste dumps are struggling to absorb 3,500 tonnes of rubbish daily. For this reason, it seems to be somewhat less popular amongst the expat community than its near neighbour Chengdu.

Wuhan

?A huge, sprawling beast of a city?, as the South China Morning Post recently put it, Wuhan is a conglomeration of three towns around the confluence of the Yangtze and Han rivers. At the very centre of China, it marks the intersection of the Beijing-Zhuhai and the Shanghai-Chongqing expressways, and is the biggest river port in the Yangtze?s middle reaches. Wuhan is notable for its universities too ? it has seven of the top 100 universities, and 13 other large educational institutions. And it is forever associated with Chairman Mao – he swam across the Yangtze here in 1956 to demonstrate his physical fitness.

About 90% of Wuhan?s imports and exports – dominated by the car, electronics and petrochemicals industries – are shipped along the Yangtze. The prices are competitive ? RMB2,000 to ship a container by barge to Shanghai, compared to RMB5,000 by rail and RMB8,000-10,000 by road. In other infrastructure developments, the largest marshalling yard in Asia began construction in April, new high-speed trains will connect Wuhan to Shanghai in 10 hours instead of 18 later this year, and it will also become one of China?s new ?regional hubs? for air traffic.

Expensive bars and cafes occupying the old European colonial buildings along the Shanghai-style waterfront lend Wuhan an air of commercial sophistication. But business people report that profits are low. Willy Zhang, manager for Swedish packaging firm, told the South China Morning Post, ?foreign investors need to understand it will take 10 years to make a profit here, not three?.

Taiyuan

Taiyuan has abundant mineral resources, and is known as ?the home of coal and iron?. Its industries include metallurgy, machinery, and chemical engineering and it is China?s largest base for producing coke and specialized steel. This combination makes it a fairly polluted place !

The skyline is changing fast ? as city area starts spreading outwards, chimneys are lost to modern condominium-like construction. The city centre is full of interesting modern restaurants and shops along the streets ? including a Burberry store. The city was also the home of the first banker in China, whose family invented the concept of cheques.

In what is one interesting development for this city, Sunnylife Global, a US-based health care management company, signed a US$12m deal with Taiyuan No.7 Hospital to remodel it as the Shanxi World Friendship Hospital. Sunnylife is in multiple JV agreements with the Chinese government to renovate and revitalize China?s older hospital facilities to meet current international standards.

Guiyang

The capital of Guizhou province, the city is home to heavy industry and still has to really benefit from the boom times on the eastern seaboard, but it?s not an unattractive place and has its merits. It is one of China?s major producers of nonferrous metals and tobacco, and major industries also include machinery, steel making, food processing, and chemicals.

The urban landscape is being transformed with the construction of the Jinyang New District, northwest of the city proper, which will have a population of 180,000 by 2010 in 17 sq km of new development.

Chengdu

The Sichuanese capital has advanced computer and precision manufacturing industry and is the financial and IT hub for southwest China. Intel is one major investor with several factories and more building. According to Cendant, 36% of companies expect it to be an active assignment location in next three years. According to local expats, ?Chengdu is swapping its older Chinese flavour for a more modern, stylish Chinese look, but despite its efforts, Chengdu still remains chaotic in traffic patterns, hygiene standards, and construction methods?.

An increasing number of foreigners are moving in, bringing an ?explosion? of foreign restaurants, and clothing shops such as Peter?s Tex Mex, the Grandma?s Kitchen restaurant chain, Joyce?s Barbeque, United Colours of Benetton, and Lapis Lazuli. Competing with Carrefour is Sabrina?s, a small import store carrying ?everything that an American could want?. 24-hour convenience stores, similar to those in Shanghai, have also appeared recently, and there are now five Starbucks.

In terms of infrastructure, metro construction has begun, and the city has also started ?an incredible make-over project?, residents say, with intersections, lights, flower beds, sidewalks all looking ?disturbingly modern and clean?. There is also a major effort to make air breathable – heavy industry must now exist outside of the second ring road and ?there is now a noticeable difference in the air quality?, locals tell us.

Kunming

Kunming is the capital of Yunnan province and one of China?s most attractive tourist cities. Because of its remote location, Kunming was somewhat ignored by China?s rapid economic growth in the 1990s. However, recently the city has received more attention, launching it into an international hub to access Southeast Asia. Several railroads and highways have been planned to connect Kunming to areas of Thailand, Vietnam, and Laos, providing direct access to ports.

The salt and phosphate mines around Kunming are some of China?s best. It is developing as a major international flower center, and fresh blooms are everywhere, and inexpensive, often sold by the roadside.

Central Kunming is a fairly sterile modern city, but the area around the Cuihu Park is nice, full of peacocks nesting in trees and a whole area of bars and restaurants on the west shore. There are some decent bars and cafes, Hump Over The Himalayas and Cafe Francais Lan Bai Hong. Kunming is also a golfing destination with a Jack Nicklaus signature course in nearby Yiliang.

To know more, the whole issue is available (after a free subscription) on China Briefing website with others archives
For more information on China’s legal and tax issues or to ask for professional advices in related matters, please write to info@dezshira.com

iResearch: User Penetration Rate of Search Engines, IM and Email Ranked Top Three iResearch: User Penetration Rate of Search Engines, IM and Email Ranked Top Three(0)

iResearch estimates that the number of Internet users in China will exceed 130 million in 2006 with a increase of 18% year on year. The compound growth rate is expected to be 10% in the next five years and the number of Internet users will rise to 232 million. The number of China’s Internet users has access to the fresh period of rapid, sustained and stable development. With the increase of the number of Internet users, the number of Internet application services’ target clients and usage users is increasing significantly.

The huge number of Internet users in China is not only promoting Internet traffic and advertising efficiency, but is also transforming the increase of Internet user amount to the growth of industry revenues in Internet industries that rely on the payment of individual users. This is a simple rule for online game, online travel booing and C2C ecommerce. If user penetration rate reached a certain level, Internet enterprises will gradually face the trial of user satisfaction, user loyalty and other product proof. The core of competition will transform and enhance the level of user experience.

Source : Chinatechnews

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Nanjing

The city sits astride the Yangtze, its port a key waterborne transport hub. It is East China?s second largest business centre, with leading industries such as heavy chemicals, petrochemicals, electronics, automobiles, iron and steel, food, garments and building materials. Infrastructure is improving – the city opened a new subway system in autumn 2005, and the railway station underwent a major refurbishment. A new high-speed rail link from Nanjing to Hangzhou and Ningbo begins construction this year. The newly-expanded Shanghai-Nanjing expressway joins the cities in two hours. Other recent developments include a second road tunnel under Xuanwu Lake, a new road from the airport that allows quick access to central, and the opening of Zhongshan International Golf Club.

Ford is one investor currently making a big commitment, with a new engine plant opening in 2007. Three factors brought Ford here, according to reports ? a ?good deal on land? ; the city?s port, allowing easy shipment of parts ; and a booming local car market. Nanjing also has one of China?s highest per capita tertiary education rates. As an official said, ?the average salary is lower than in Shanghai, but the number of engineers is twice as high?. But the city doesn?t seem suffer from Shanghai?s turnover and high retraining costs.

Hangzhou

In the 13th century, Marco Polo admired Hangzhou, capital of Zhejiang, as a ?paradise on earth?. He?d probably still be pretty impressed ? modern tourists certainly are with the famous West Lake, historical attractions and scenery.

The city is two hours by rail or car from Shanghai ? by 2010 it will have a Maglev link – and it has an international airport with passenger and freight volume up over 25% in 2005. There is upmarket property available or in the pipeline, with prices to match. As an investment destination, Hangzhou has attractions beyond simply its environment. Local expats say office set up costs are lower than Shanghai or Beijing, the tax incentives are very competitive, and the network of local IT companies is second to none.

Ningbo

Ningbo is not just an ordinary city ? it has the same authority as provincial governments for economic administration ? and has a port second only to Shanghai. Unlike Shanghai, the port is deepwater and capable of handling 300,000 tonne vessels. By 2007, cargo throughput will be 250m tonnes and container throughput 7m TEUs, and by 2010 300m tonnes and 10m TEUs. With bulk container breakdowns, hugely improved logistics, and massive chemical and foodstuff processing developments, Ningbo could yet win the race with Shanghai as port of choice for servicing the east coast.

The city has suffered from the fact that Hangzhou Bay stands between it and Shanghai, but soon this will not be a barrier either ? by late 2007, a 33km cross-sea bridge will allow travel to Shanghai in less than two hours. The bridge is already having an impact on the local economy, according to foreign business people in the city ? property prices are rising dramatically. One long-term foreign resident calls this ?an incredibly dangerous spending spree?, noting that industrial land is now twice that of similar land around Shanghai. It remains to be seen whether this will correct itself ? and whether the correction will be hard or soft. We have also heard some concerns about local corruption, and as ever we recommend extensive due diligence. Make sure you know who your partners really are.

Wenzhou

Wenzhou pioneered the market economy in China. The ?Wenzhou model? of economic development involved private companies using their own sources of financing and their own way of marketing and management, without much intervention from external investors, either government or FDI.

Some 80% of the world?s metallic-shell lighters and zippers are produced here. The single district of Qiaotou produces 15bn buttons a year. Wenzhou also produces 25% of China?s shoes, 80% of its spectacles, 60% of its razors and 65% of its electricity transformers. In the 1990s, electric appliances manufacturing became a major industry in Wenzhou, with some of the large private enterprises setting up joint ventures with GE and Schneider.

In terms of expat life, it is at an early stage of development ? there are no Western hotels yet, and only one McDonalds ! But bars and restaurants are popping up, such as ?Blue Shell?, ?Ladefense?, ?Champs Elysees? and ?Power House?.

Next :
« second tier-cities » in South China


To know more, the whole issue is available (after a free subscription) on China Briefing website with others archives
For more information on China’s legal and tax issues or to ask for professional advices in related matters, please write to info@dezshira.com

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Shenyang

Construction cranes tower over the city, a gleaming new development zone is filling up beside the Hun river, and the hotels are bustling with foreign business people. Texi district is being redeveloped as the city?s centre for tertiary industry, and many old ?rustbelt? factories are gone. A metro is coming, and Shenyang is to become a ?regional hub? airport. But it is no Shanghai – as expats put it, it is ?a frontier town?.

There are a number of major manufacturers here including BASF, Bekaert, BMW, Coca Cola, GE, Johnson, Lear, Michelin, and Toshiba. But it is not all heavy industry. Last month the Shenyang International Horticultural Exposition opened, to take advantage of the region?s expertise in horticulture. This also has the objective of providing a spur to regenerate parts of the city, in the same way as Shanghai?s World Expo 2010, and is expected to attract 5m visitors annually.

Dalian

This is a modern, well run city ? clean streets and top-class facilities, with an educated and reasonably affluent young population supporting international shops. Thirty minutes from the station on a new light rail system takes you to Dalian Development Area ? not just a DZ, but a whole new town built in 20 years. And the city has friends in high places – the Minister of Commerce, Bo Xi Lai, was Dalian?s mayor and Liaoning?s provincial governor before going to MOC.

Dalian is an excellent location for businesses involved in metal and lumber processing, component parts consolidation and distribution. The quality of life here is excellent according to both locals and expats, and in the Cendant study on expectations for expat assignments, 29% of companies expected it to be a destination in three years, compared to 15% now.

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« second tier-cities » in East China


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Why are investors going to the second-tier cities ? Why are investors going to the second-tier cities ?(0)

Push and pull

The internal factors (?push?) driving investors to second-tier cities include :

  • a need to drive down the price for land, labour, energy and other elements of manufacturing costs ? why pay US$200/sq m in Shanghai when you can pay US$30 in Nanjing or US$15 in Dalian ? Shanghai?s rising costs, in particular, have driven many investors to seek better locations up the Yangtze
  • saturation in some retail and service markets in the first-tier cities, and the corresponding immaturity of such markets in the second-tier, providing new opportunities
  • for manufacturing suppliers, the fact that many of the large foreign manufacturers are already in these cities forces their suppliers either to move with them or lose out to domestic competition

The external factors attracting investors to second-tier cities include :

  • government policy, such as the ?Go West? campaign and the strategy to revitalize the northeast
  • for those selling products or services to the domestic consumer, rising personal incomes and sophistication in these cities (in 2005, real per capita disposable income for urban households was up 9.6%, while the equivalent for rural households rose 6.2%)
  • recent WTO-related changes to regulations have lifted most restrictions on the retail and distribution industries, and increasing urbanization means consumers are easier to reach through various advertising media
  • improved facilities such development zones and transport links ? there are a lot of high-speed rail links and new airports going in – and expat facilities such as hotels, schools and hospitals (and as you will see from our sister site www.chinaexpat.com, more expat websites with information and news)
  • road access will be significantly improved with the country?s mileage to rise from 1.9m km in 2005 to 2.3m km in 2010 ? this will connect all provincial capitals and cities with at least 500,000 population. In coastal provinces, people will be able to reach good roads within half an hour, while in central China it will be within one hour and in the west, two hours

Some interesting trends emerged from the Jones Lang Lasalle study. They found second-tier cities have a narrower range of industries ? notably, a high presence of professional service firms indicates a city is first-tier, while the absence of this type shows it city is second- or third-tier. In addition, the ?first movers? to emerging cities are IT/telecoms, logistics/transport and manufacturing. This makes sense ? you need infrastructure in place before more sophisticated activities can follow. But it is notable, looking at some of the investments recently announced that while there are quite a few manufacturers, service industries are notable ? banks/ financial services, supermarkets, even healthcare providers.

Another recent study, Emerging Trends in Global Mobility : Perspectives on China, by Cendant Mobility, emphasized that second-tier cities are ?becoming increasingly popular destinations for every type of [expat] assignment?. They note that ?while cities like Chengdu, Dalian, Tianjin, Qingdao, Shenyang and Chongqing are currently regarded as active assignment locations by only a small minority of companies, all are expected to grow significantly over the next few years?.

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