Foreign Investment in Guangdong: New Incentives Announced

Guangdong province, China’s manufacturing heartland, has announced new measures to attract foreign investment.

On December 1, the Guangdong provincial government issued a report delineating 10 policies to expand the province’s openness to foreign investors and foreign capital.

The measures are in support of the State Council’s Measures to Expand Opening-up and Actively Utilize Foreign Investment (Guo Fa [2017] No. 5) and the Measures to Promote Foreign Capital Growth (Guo Fa [2017] No. 39). They include policies to improve Guangdong’s business environment, promote fair competition between foreign and domestic companies, expand market access, and offer investment incentives.

The 10 measures for relaxing foreign investment:

  1. Further expand market access, including relaxing ownership limits and/or operation scope in the following industries:
    • Special vehicle manufacturing;
    • New energy vehicle manufacturing;
    • Ship design;
    • Regional aircraft and general aircraft maintenance;
    • Human resources service agencies;
    • International maritime transport companies;
    • Railway passenger transport companies;
    • Construction and operation of gas stations;
    • Internet service and call centers;
    • Performance brokerages;
    • Brokerage, banking, securities, futures, and life insurance companies;
    • Law firms jointly owned by Hong Kong/Macau investors and domestic investors; and
    • Hong Kong/Macau airlines will be treated as special domestic airlines.
  2. Increase the use of financial incentives for foreign investment for the 2017-2022 period, including:
    • For new projects worth more than US$50 million, replenishment projects worth more than US$30 million, and for multinational or regional headquarters worth at least US$10 million, the provincial government will give financial bonuses worth no less than two percent of the year’s actual investment amount, capped at RMB 100 million (US$15.1 million).
    • For Fortune 500 companies and leading global companies with actual investments (new projects or replenishment projects) in manufacturing worth over US$100 million in one year, and newly established IAB (new generation of information, automatic equipment, and bio-pharmaceuticals) and NEM (new energy, new material) projects with actual investments of no less than US$30 million in one year, the provincial government will provide financial support on a case-by-case basis.
    • For multinational or regional headquarters that contribute over RMB 10 million (US$1.5 million) to provincial revenue, 30 percent of the contributions will be awarded to the company in a lump sum payment, capped at RMB 10 million (US$1.5 million).
    • Local governments can provide other financial incentives based on provincial incentive standards.
  3. Strengthen the use of land security, including land-use incentives for Fortune 500 companies, regional headquarters, and advanced factories.
  4. Support innovation and research & development (R&D), including financial support for foreign R&D institutions and encourage participation in the development of public service platforms.
  5. Increase financial support, particularly for Fortune 500 companies, global industry leaders, and cross-border mergers and acquisitions.
  6. Strengthen personnel support, including incentives and visa conveniences for high-level foreign talent.
  7. Strengthen the protection of intellectual property rights, including by accelerating the construction of the China (Guangdong) Intellectual Property Protection Center.
  8. Enhance the level of investment and trade facilitation, including the full implementation of the Negative List and access to national treatment.
  9. Optimize the environment for attracting foreign investment in key parks, including implementation of administrative streamlining in eligible development zones and other supportive policies.
  10. Improve the use of foreign investment guarantee mechanisms, including setting up a coordinated mechanism to coordinate and solve the key problems that prevent investment in Guangdong.

The measures represent a step forward in boosting Guangdong’s competitiveness in attracting foreign investment. Although Guangdong is China’s richest province by GDP, and already one of the most open to foreign investment, rising labor and land costs have seen many businesses relocate their manufacturing operations to lower cost alternatives, such as Western China, Vietnam, and India.

Some areas in Guangdong have been successful in upgrading their local economies beyond low-value manufacturing. Most notably, Shenzhen has emerged as a hub for innovation and high-tech startups, and also boasts a robust financial sector.

Guangzhou has also had success in moving up the value chain, by producing higher-end goods like automobiles and high-tech products, while surrounding cities like Foshanhave also benefited from regional integration and high-tech manufacturing.

The new measures reflect Guangdong’s continued desire to attract high quality capital-heavy investments; many of the policies specifically state a preference for Fortune 500 companies or recognizable industry leaders.

Stephen O’Regan, Senior International Business Advisory Associate at Dezan Shira & Associates in Guangzhou said, “These new regulations certainly show a more open approach by the Guangdong government towards foreign investment, particularly in trying to attract high level talent. However, many smaller companies still find it difficult to incorporate in China; the country is lowering entry barriers only for already strong enterprises.”

According to O’Regan, “The new policies show a step in the right direction, but overseas SMEs may still find it difficult to enter the south China market without more government support”. In this environment, local expertise proves valuable.

O’Regan noted that SMEs can still benefit from some of the new measures both directly and indirectly, as well as other regional incentives. He explained, “Many of Guangdong’s cities offer incentives and subsidies that foreign SMEs find attractive. The Guangdong government is ultimately paving the way for more foreign SME investment by making it easier to access incentives.”

 

Alexander Chipman Koty contributes to Editorial and Research operations for Asia Briefing in China.

 

This column does not necessarily reflect the opinion of the editorial board or Frontera and its owners.

A Complete Guide To 2017 Minimum Wage Levels Across China

Labor costs in China continue to rise – 19 regions have increased their minimum wages so far in 2017.

Regional authorities in Beijing, Fujian, Guizhou, Henan, Hubei, Hunan, Inner Mongolia, Jiangsu, Jiangxi, Jilin, Ningxia, Qinghai, Shaanxi, Shandong, Shanghai, Shanxi, ShenzhenTianjin, and Zhejiang have all raised their minimum wages in 2017. In total, these 19 regions are more than the nine that increased wages in 2016, equal to the 19 in 2015, and less than the 24 in 2014.

While the growth rate of minimum wages is lower than that of much of the last decade, wages are growing from a higher base than before, and wage increases continue to outstrip increases in productivity.

Minimum wages in parts of China – such as Beijing, Shanghai, and Shenzhen – are now higher than certain areas in the EU, namely Bulgaria. However, at their lowest levels – like in parts of Anhui, Guangxi, and Heilongjiang – wages are more comparable to countries such as India and Vietnam.

Since 2016, regional governments have had more authority and discretion to make minimum wage adjustments according to local conditions. Most provinces set different classes of minimum wage levels for different areas, depending on its stage of development and cost of living. For example, a higher class for the provincial capital and the most developed cities, and a lower class for smaller cities and rural areas.

Qinghai, however, has eliminated class brackets this year and has instituted a common minimum wage across the province instead. Hunan allows individual districts to choose their class rather than imposing one, while Guizhou assigns each urban area in the province the highest class rather than specific cities, with more rural areas falling under the lower classes. Meanwhile, Fujian and Jilin have rearranged their class brackets in 2017 to add more nuance to wage differences between regions.

The complete guide to China’s minimum wages is as follows:

Overall, more regions increased their minimum wages in 2017 than appeared to be on track to do so earlier in the year. Minimum wages are typically updated in the first half of the year (if at all), but by early June only five regions had done so. Further, major provinces such as Guangdong and Sichuan announced wage freezes in an effort to maintain economic competitiveness.

Since then, however, 14 more regions updated their minimum wages to bring the total to 19. This may be partially explained by the politically important 19th Party Congress, which started October 18, when the Chinese Communist Party’s top leadership convenes to announce changes in policy and leadership positions.

Chinese President Xi Jinping has pledged to eradicate rural poverty by 2020, making the campaign a key pillar of his tenure as president. The late increases to minimum wages, in conjunction with other policies, such as tax cuts aimed at small and micro sized businesses, can earn the support of a key constituency at a politically sensitive juncture.

Regardless of the impetus, China’s wages have risen in 2017, and should continue to do so going forward. For many foreign businesses, however, the impacts of wage growth will be a result of market demands, rather than statutory wage increases.

According to a survey released by the German Chamber of Commerce, 86.4 percent of German companies in China cited rising labor costs as a major challenge to their business in China. However, only 11.8 percent considered minimum wage increases as being very important factors influencing wage levels in China.

This is largely a result of the Chinese economy’s transition away from low-value and labor-intensive manufacturing towards higher-value manufacturing and services, in combination with its rapidly aging work force. Businesses reliant on low wages are increasingly looking to alternatives in India and Southeast Asia for their operations, while others invest in China for higher value businesses processes and access to the domestic consumption market.

Those factors make market considerations more important for determining wage increases for many foreign businesses. In China’s flourishing tech sector, for example, average wages are about five times higher than the local minimum wage, and far higher for positions that require greater skills and education.

As a result of rising wages, many investors are looking west towards inland China to benefit from lower labor costs, special incentives, and the growing markets there. Other businesses, however, are continuing to invest in China’s affluent coastal regions where infrastructure is the most developed and talent is more readily available. When investing in China, foreign investors are advised to not necessarily chase the lowest wages, but consider where their business plans best match the local conditions.

 

 

Alexander Chipman Koty contributes to Editorial and Research operations for Asia Briefing in China.

 

This column does not necessarily reflect the opinion of the editorial board or Frontera and its owners.

China Announces Import Ban On Foreign Waste To Combat Pollution

China will ban the import of 24 types of waste by the end of the year as part of a campaign against “foreign garbage”.

The ban was announced by five government agencies in July and will go into effect on December 31, 2017. It affects several classes of waste including waste plastic, glass, slag, waste wool, ash, cotton, yarn, and unsorted paper.

The ban has already affected both overseas exporters of waste and China-based purchasers of waste, as well as companies who purchase raw materials made from reprocessed waste.

Many developed countries depend on Chinese demand to handle their excess waste, which Chinese recyclers purchase, sort, process, and subsequently re-sell. As a result of the ban, prices of materials like paper and plastic have skyrocketed, driving up costs for businesses reliant on cheap recycled goods.

Waste imports in China

China’s industrial boom helped spur the growth of its immense recycling industry, as recyclers provided manufacturers with cheap materials to produce their goods. The appetite for raw materials from the manufacturing sector led China to become the world’s largest importer of foreign waste.

Last year, China imported over US$18 billion worth of waste, mostly coming from developed countries such as the US and Japan. It imported 7.3 million metric tons of waste plastics alone, representing 56 percent of the world total, valued at US$3.7 billion.

According to the Wall Street Journal, in 2016 over two-thirds of the US’ waste paper exports and over 40 percent of its discarded plastic exports were sent to China, while paper and plastic scrap exports to China were worth over US$2.2 billion. The EU27 is similarly dependent on China to take its waste, as it sends 87 percent of its recycled plastic directly or indirectly to China.

Chinese recyclers reprocess waste to make a wide range of usable materials for re-selling, such as cardboard and yarn. Businesses – both domestic and overseas – purchase these goods at an affordable rate, and are also able to market their use of recycled materials.

However, while businesses tend to tout their environmentalism by using such materials, the recycling process itself can be highly polluting within China.

The country’s recycling industry is highly decentralized and poorly regulated. Workers in the industry rarely take safety precautions – or even have access to proper equipment and supplies – to handle waste that is often contaminated with hazardous substances. Further, recyclers often discard unrecyclable waste into landfills or bodies of water, or simply have it incinerated.

Such practices are highly polluting and create health hazards for the local population.

As China seeks to address its myriad environmental challenges, including air pollution and water contamination, it is banning the import of waste that can cause environmental issues at home.

In a notification to the World Trade Organization, China’s Ministry of Environmental Protection stated, “We found that large amounts of dirty wastes or even hazardous wastes are mixed in the solid waste that can be used as raw materials. This polluted the environment seriously.”

It continued, “To protect China’s environmental interests and people’s health, we urgently adjust the imported solid waste list, and forbid the import of solid wastes that are highly polluted.”

Consequences of the ban

The ban on imported waste will have far-reaching effects, both within China and abroad.

In the short-term, prices of recycled goods have plummeted as collectors desperately seek new buyers, while waste inventories are immobile and piling up. For example, Hong Kong’s waste paper collection points have reportedly become overloaded since the ban was announced, while cargo ships loaded with paper meant for recycling have been stuck in port with no destination.

In the long-term, manufacturers in China will face higher costs for materials as they buy from other sources. Many manufacturers may have to make up for the shortfall in plastics, for instance, by purchasing from petrochemical companies.

Meanwhile, waste collectors may have to store their waste until they can find new markets. Developed countries that are used to exporting their waste now face a more pressing need to develop technology that makes waste sorting more efficient and reduces contamination levels.

The ban is not China’s first attempt to regulate the industry. In 2011, the Ministry of Environmental Protection issued regulations on the import of foreign waste, but its implementation was questionable. Most notably, Operation Green Fence, which environmental authorities launched in 2013, sought to curb imports of low quality waste.

China has instituted the latest ban in tandem with an inspection campaign within the industry. Through the first two weeks of the campaign, from July 1 to July 14, regulators inspected 888 plastic recycling factories. Of those, 590 violated certain rules, 383 had their production suspended, and 53 were shut down.

Chinese President Xi Jinping recently announced his goals for China to become a leader in pursuing “ecological civilization”. As China continues to modernize its industrial processes and combat its vast environmental problems, more stringent regulation of polluters – and possibly additional bans on waste imports – is likely.

The complete list of products included in China’s waste import ban is as follows:

 

Alexander Chipman Koty contributes to Editorial and Research operations for Asia Briefing in China.

 

This column does not necessarily reflect the opinion of the editorial board or Frontera and its owners.

China Bans Weird, Long, And Sensitive Company Names

A company in northwest China that has gained notoriety for its verbose name – ‘There Is a Group of Young People With Dreams, Who Believe They Can Make the Wonders of Life Under the Leadership of Uncle Niu Internet Technology Co. Ltd.’ – will have to change its name in the wake of new company naming regulations.

The Rules for the Prohibition and Restriction of Enterprise Names, released by China’s State Administration for Industry and Commerce (SAIC), ban businesses from registering company names authorities consider “weird”, overly long, politically sensitive, or mimicking existing brands. Businesses already registered with names authorities deem inappropriate may be compelled to alter them. The new rules came into effect on July 31, 2017.

While authorities mainly designed the regulations to curb unwieldy and outlandish names – Uncle Niu’s registered name is 39 characters in Chinese – foreign companies should consider whether the new rules could affect their brand. Existing businesses whose names include puns or religious references, for example, could run into problems with the new rules, while new registrants will need to consider the guidelines when entering China.

Names now banned by the regulations

The regulations ban names that are entire sentences or paragraphs, like that of Uncle Niu. There is no formal character limit on the length of permitted names; rather, it appears that local regulators will have discretion to determine if they are compliant.

The rules also ban names that are “too weird”, which is a more subjective designation. Media outlets and social media users have uncovered numerous examples of company names that authorities might consider “too weird”, including:

  • Anping County Scared of Wife Netting Products Factory;
  • Beijing Under My Wife’s Thumb Technology Co. Ltd.;
  • Hangzhou No Trouble Looking for Trouble Internet Technology;
  • King of Nanning, Guangxi, and His Friends Trading Co. Ltd.;
  • Shenyang Prehistoric Powers Hotel Management Limited Company;
  • There Is a Group of Young People With Dreams, Who Believe They Can Make the Wonders of Life Under the Leadership of Uncle Niu Internet Technology Co. Ltd.; and
  • What Are You Looking At Shenzhen Technology Company.

Although many of the above company names appear nonsensical, there is business logic behind some of them. For example, “Shenyang Prehistoric Powers Hotel Management Limited Company” is a reference to the Chinese swimmer Fu Yuanhui, who attributed her Olympic success to channeling prehistoric powers. Businesses that include cultural references and internet memes such as “prehistoric powers” as a way to market themselves may now find themselves in the crosshairs of AIC regulators.

Under the new guidelines, other types of banned company names include those that contain:

  • Names that have negative political connotation (e.g. “Chi Na”, “Black Sun”, “Large Landowner”);
  • References to terrorism, separatism, or extremism (e.g. “9/11”, “East Turkistan”, “Occupy”);
  • References to colonial culture (e.g. “Yamato”, “Formosa”);
  • References to other illegal organizations (e.g. Falun Gong);
  • References to undesirable ‘feudal era’ cultural concepts and superstitions that hinder social stability;
  • References to drug, obscenity, eroticism, and gambling;
  • References to current and revolutionary Chinese leaders or the People’s Liberation Army (e.g. Dong Cunrui, Lei Feng);
  • Language that discriminates against genders, sexes, races, or ethnicities;
  • References to religious organizations or significant religious elements (e.g. “Christianity”, “Buddhism”, “Islam”);
  • Names of foreign countries, regions, or names of international organizations;
  • Names that give the impression that they are non-profit organizations;
  • Names that include names of political parties, organizations, and designation of troops;
  • Name of region, industry, and organization structure (e.g. “Beijing”, “Steel”, “WFOE”);
  • Names that refer to prohibited sectors;
  • Names that mimic existing brands;
  • Names that say they are “national” or “the best”; and,
  • Names of occupations, positions, degrees, job titles, military ranks, and police ranks.

Streamlining company registration

While the new guidelines add a variety of rules to company naming in China, the SAIC most likely designed them to filter out egregious and politically sensitive names, rather than to strictly regulate the naming process. In addition to eliminating duplicate names and intellectual property infringers, the guidelines aim to limit the potential for company names that authorities may find embarrassing to China.

China seems determined to save face linguistically and architecturally as well. Earlier this year, authorities released new standards for the use of English translations on public signage in an attempt to curb China’s infamous “Chinglish” mistranslations. Last year, authorities also banned the construction of “bizarre” buildings after both domestic and international observers derided numerous questionably designed buildings across China.

Allan Xu, Business Advisory Services Manager at Dezan Shira & Associates, notes that the new rules are part of a larger effort to manage China’s sprawling private sector. “Every day, more than 10,000 new companies get registered in China, resulting in a total amount of about 30 million nationwide. This huge number makes it difficult for new companies to find a name that is not similar to any of the existing ones.”

To prevent duplicate names, last year the SAIC established the “Enterprise Name Query System”, which enables companies to check their prepared names online. The SAIC also recently issued the Rules for Comparison of Similarity between Enterprise Names, which also seeks to streamline the naming process by limiting duplicate and similar sounding names.

Naming your company

The new guidelines underscore the intricacies of naming a company in China – which foreign businesses find especially challenging. Just as Chinese companies translating their names literally into English can find their brands sounding awkward or in some cases offensive, foreign companies opting for literal translations can run into similar situations.

Although a direct translation can sound innocent on the surface, a name might unintentionally be associated with an offensive or absurd word or phrase, given the similarities in Chinese characters, tones, or cultural symbols. For example, the French auto company Peugeot’s Chinese name, Biaozhi, can sound similar to the word for prostitute (Biaozi).

Many foreign companies localizing their products to China strive for a name that sounds phonetically similar to the original, but also captures the essence of the product. One well-known example is the soft drink Coca-Cola, whose Chinese name Kekoukele means “Tasty Fun”. The home sharing company Airbnb tried to use this strategy earlier this year when announcing its Chinese name, Aibiying (“Welcome each other with love”), but Chinese netizens ridiculed it, saying the name was hard to pronounce and sounded like a sex product.

Navigating the various considerations of naming a company in China just got more complicated with the new restrictions. Xu warns that “Based on China’s new regulations on naming enterprises, there is a possibility that foreign companies with puns, cultural references, or religious undertones, among other features, could have their names rejected during the registration process. Getting approval will depend on the extent of their compliance with rules, the existence of companies with similar names, and the discretion of local government authorities.”

Further, even if the local branch approves a name, authorities could review it again in the future. Xu continues, “Any organization or individual who thinks a registered enterprise name is inappropriate may request the registration authorities to correct it. As such, a strange, controversial, or provocative company name might be problematic for businesses.”

Beyond complying with the new enterprise naming restrictions, preexisting laws stipulate that a name must consist of more than two Chinese characters. The SAIC does not accept names containing foreign languages or alphabets, as well as numbers and special characters. Before submitting the application, businesses can conduct a preliminary check through the local Enterprise Name Query System to identify similar company names that are already registered. Further, businesses should prepare at least five potential names for AIC approval.

Naming companies in China is a delicate art, and foreign entrants now have additional considerations when developing their local name. Foreign businesses looking to develop a Chinese company name that both captures their brand and complies with government regulations should enlist professional consultation services to successfully localize their name to China’s unique business environment.

 

 

Alexander Chipman Koty contributes to Editorial and Research operations for Asia Briefing in China.

 

This column does not necessarily reflect the opinion of the editorial board or Frontera and its owners.