Comparison: Chinese Foreign-Owned Enterprises Versus Private Limited Companies in India

In China, a wholly foreign-owned enterprise (WFOE) is a limited liability company (LLC) formed solely by one or more foreign investor(s) with no mandatory requirements to have a domestic partner. The flexibility afforded to a WFOE through Chinese policies makes it a popular form of foreign investment in China.

Foreign investors increasingly believe that China’s economic and legal development make it unnecessary to over-rely on guidance from a local partner.

Many factors make the establishment of WFOEs attractive in China, especially for businesses engaged in manufacturing or trade.

These include:

  • 100 percent foreign ownership and control;
  • Security guaranteed to technology and intellectual property rights;
  • Ability to develop own internal structure;
  • Capacity to retain organizational culture even on foreign land;
  • Access to China’s large market; and
  • The ability to repatriate funds to holding company.

Under Indian law, foreign investors are able to establish wholly-owned subsidiary companies (WOS) in the form of private limited companies if they operate in sectors that permit 100 percent foreign direct investment (FDI).

WOS in India work in a similar manner to Chinese WFOEs, with a few key distinctions. The specifications for establishing a wholly-owned subsidiary in India can be found here and for establishing a WFOE in China can be found here.

Regulation of foreign-owned companies in India, China

In India, both 100 percent foreign-owned private limited companies and joint venture companies are governed by the same regulations. The Companies Act, 2013, regulates joint ventures (JVs) and wholly-owned subsidiaries in India.

In China, too, JVs and WFOEs are subject to the same general laws, such as the Company Law, 2013 and the Measures of Record-Filing for Establishment and Change of FIEs. However, there are other specific measures regulating each type of legal entity as well.

For example, a corporate JV in China, whether it is a limited liability company or a joint-stock limited company, is subject to Company Law, 2013. In addition, corporate JVs with foreign investments must also comply with the Sino-Foreign Equity Joint Ventures Law and the Sino-Foreign Co-operative Joint Ventures Law.

Different types of WFOEs have different registration criteria depending on their area of operation and category of industry. Some entities need pre-approval before setting up, trading WFOEs need to register with the customs department, manufacturing WFOEs need to pass an environmental impact report, among others. This is similar to the regulatory landscape in India.

The specifications for establishing joint ventures in India are discussed here.

Securing approvals for FDI in India

Foreign investment in India is regulated under the Foreign Exchange Management Act (FEMA), and is allowed under two different routes – the automatic and the government approval routes. (See the Consolidated FDI Policy published in August 2017 here. This has been amended in January 2018, which can be seen here.)

In both India and China, the scope of the business – the company’s intended activities – dictate the need to establish either a 100 percent foreign ownership or the requirement of additional national investors.

For example, any sector in India that attracts an equity cap or falls under the 49 percent government approval route for FDI needs an Indian investor to be involved within the business.

A business eligible for 100 percent automatic FDI requires no prior approval.

Setting up in India versus China

Setting up a private limited company / wholly-owned subsidiary in India differs substantially from the WFOE set-up in China.

The standard setting up process in India is known as the ‘automatic route’, which involves a comparatively easy establishment process.

Under this route, 100 percent investment is allowed in certain sectors, as per the Master Directions issued by the Reserve Bank of India (RBI).

For these sectors, no specific approval is required prior to setting up the entity, making the establishment process quite simple.

The investors are only required to notify the RBI within 30 days of the receipt of inward remittances and file the required documents with that office within 60 days of the issuance of shares to foreign investors.

For sectors that fall under the approval route, sectoral investment caps are defined, and investment requires government approval.

In this case, there is a separate set of procedures to be followed.

Among other things, the company must obtain approval for investment from respective ministries or administrative departments through the Department of Industrial Policy and Promotion (DIPP).

To improve the ease of doing business in India, the Indian government now allows 100 percent automatic FDI in most sectors.

In China, more industries are being opened up to FDI, such as the automotive and insurance sectors. The country released its latest Negative List in July 2018 reducing the restrictive measures from 63 to 48, and for a Negative List for Free Trade Zones, where restrictions were brought down from 95 to 45.

Major industries that are highly restricted because of FDI caps or other laws or practices in China include finance, telecommunications, education, healthcare, internet businesses, and any industry engaged in the extraction or processing of natural resources.

In India, the FDI regime is more liberal.

In its foreign investment policy released in January 2018, the government allowed 100 percent FDI under the automatic route for single brand retail trading and construction development sectors besides introducing relaxations for investing in power exchanges and the medical devices sector.

As mentioned earlier, most sectors in India allow 100 percent foreign investment without the need for specific government approval.

Industries were FDI restrictions apply include mining, defence, petroleum refining, broadcasting services, print media, and air transport services. However, even in these sectors, investments beyond regulated caps can be made after securing government approval.

Difference in organizational requirements 

Foreign investors interested in setting up a WFOE in China or a WOS in India must follow the government’s organization structure guidelines. However, distinctions exist here as well.

A WFOE set-up requires an executive director or board of directors, at least one supervisor, and a general manager.

The Indian WOS, on the other hand, must have a minimum of two directors and between two and 200 shareholders. A shareholder can be another legal entity, such as a Hindu Undivided Family (HUF), whereas directorship is held only by individuals.

As in the case of China, the amount of paid-up capital required should be a financial exercise to determine the business’ start-up and cash flow needs. For a WOS in India, there is a minimum share capital requirement of INR 100,000 (approximately US$1,500). This has been relaxed under the Companies (Amendment) Act, 2015.

Taxation of WFOE versus WOS

IB-Tax-Liability-–-India’s-Wholly-Owned-Subsidiary-ModelIB-Tax-Liability-–-China’s-Wholly-Foreign-Owned-Enterprise-Model

India does not charge a tax on profit repatriation whereas China levies a 10 percent tax on the value of repatriated funds. Additionally, China’s labour welfare costs are higher.

However, it is also important to note that domestic companies in India are liable to pay dividend distribution tax, levied at 16.995 percent of dividend payout, which is deducted from their reserve or surplus.

Foreign investors whose countries have double tax avoidance agreements (DTAAs) with India will need to calculate their respective tax liability according to the terms of the respective DTAA.

India DTAAs Part 1India DTAAs Part 2

Why India May Get ‘Limited Waiver’ From Trump to Keep Buying Iranian Crude

India will very likely get a ‘limited waiver’ from the US to keep buying Iranian crude – albeit at decreasing levels into 2019. A 6-7 September “2+2” strategic dialogue between US Secretary of State Mike Pompeo and Secretary of Defense Jim Mattis with their Indian counterparts will likely result in India receiving a limited waiver in recognition of the immense geostrategic considerations at stake in the bilateral relations between the US and India. India will likely commit to gradually reducing its purchases of Iranian crude oil into 2019. While Brent briefly flirting with $70 per barrel on demand concerns this summer increasing focus on both supply reductions from Iran and the potential for ever greater military tensions in the Gulf will provide support for Brent prices as we head toward the 4 November US-imposed deadline for implementing the US sanctions. China will probably stand alone as the market of last resort to take increased volumes of distressed Iranian oil.

The complex context of the US-India relationship at present makes the decisions of both Indian and US policymakers on implementing US secondary sanctions very difficult. On the surface, there seems to be an impasse as the 2+2 ministerial meeting approaches. The US has made clear that there will be little flexibility shown in terms of granting waivers of US sanctions for countries which continue to buy Iranian crude after 4 November, and certainly no “blanket waivers” which would allow countries to continue doing business as usual with Iran in the physical oil market. For their part, Indian officials’ public statements have hewn closely to their tradition of foreign policy independence, making clear that they feel bound to comply only with sanctions endorsed by the UN Security Council.

However, despite the stated Indian policy, there seems to be accumulating evidence of an unstated policy. Shortly after the initial response, there were anonymous comments in the early summer from Indian refinery managers in the press suggesting that government officials had discussed with them the possible need to reduce Iranian crude oil supplies. More concrete support for this has emerged recently in the preliminary data from Bloomberg, with a steep drop in Indian imports from Iran in August, from 787,000 bpd in July to 376,000 bpd in August. To be sure, there are significant monthly fluctuations in normal times, but with the approach of the deadline this seems to be too large a drop to be coincidence. It also is clearly not driven by other bilateral issues, which has happened before, such as over a dispute between Iranian and Indian parastatal firms over development of a gas field. One Indian refiner, part of the huge Reliance Industries conglomerate, already has halted purchases from Iran due to the exposure of other Reliance Industries’ business lines to the US market. The big question is around the parastatal refiners IOC, HPCL, and BPCL, which own the bulk of India’s refining capacity.

Given India’s very independent foreign policy orientation, the US demand to cut off oil purchases from Iran is a significant irritant in bilateral relations. Even when similar sanctions were implemented in 2012 by President Obama prior to the 2015 nuclear deal, India never formally said it was complying with US wishes – but somehow Indian purchases declined by 20%, which Asian importers had been told would get them a waiver.

In this case, the Trump administration is taking a harder stance – trying to cut Iranian exports to zero. There also have been other irritants in the relationship besides sanctions, including social media chatter in the Indian press alleging that President Trump has mocked Prime Minister Modi’s Indian-accented English in private, and lectured him in their summit meeting about the need to ‘buy American,’ and restricted access to US visas for Indian technology workers.

Countering that, however, is that Indian-US relations have continued to grow closer under the Trump administration, propelled by the perceived need for India to balance a rising China along with the US and Japan. Recent Chinese moves to invest and strengthen relationships with Sri Lanka, the Maldives, and Nepal have added to longstanding Indian concerns about Chinese ties to Pakistan. The geopolitical pull of rising Chinese military power is a very strong force on both sides of the US-India relationship. It has led to a surge in US-India defense contracts – with India currently having $18 billion in defense sector trade with the US, and Russia falling well behind into second place. That geopolitical pull also will influence the US side. Japan and South Korea will halt purchases of Iranian crude entirely, but if there is a country with the geopolitical weight to get a waiver from the US for some level of reduced imports, it is India.

We will not know the outcome of the talks on this issue immediately after the meeting ends this week, as there is no way India will take a formal policy decision to comply, and there also is no way the Trump administration will telegraph a decision on the issuance of a waiver so far in advance of the deadline. What will be telling is the reaction next week from Indian refiners, which should come out in the press in due time, as well as the tanker loading schedule into the fall.

As outlined in previous notes, the US could tap its Strategic Petroleum Reserve (SPR) to temporarily offset the bullish price trend, but they will probably hold off and use that only as a last resort. If the market is knocking against $80 per barrel in early October, or above, that is the most likely time for President Trump to pull the trigger, for maximum effect on the 6 November midterm elections in the US.

China-Russia-Iran Axis Emerges As Asian Oil Refiners Anticipate Escalating US Trade War

Although China has backpedalled on proposed tariffs on U.S. crude imports, the move is indicative of its need to diversify sources and steps may now be taken to enable China to play the oil card in the future – including imports from Iran despite sanctions, and drawing closer to Russia. 

A reshuffle of crude oil exports to Asia

Asian oil refiners have been rushing to secure crude supplies in anticipation of an escalating trade war between the United States and China. Last week, Dongming Petrochemical, an independent Chinese refiner, said it has halted crude purchases from the U.S. and turned to Iranian imports amid escalating trade tensions between Beijing and Washington. U.S. crude oil exports to China reached 400,000 barrels per day (bpd) at the beginning of this July, but Beijing has recently threatened a 25 percent duty on imports of U.S. crude as part of its retaliation for Trump’s latest round of tariffs on US$34 billion worth of Chinese goods. In addition, Iran’s foreign minister said on 3 August that China was “pivotal” to salvaging a multilateral nuclear agreement for the Middle Eastern country after the United States pulled out. A reshuffle of crude oil exports to Asia is possible, with China vacuuming up much of the Iranian oil that other nations won’t buy because of the threat of U.S. sanctions.

China, India, Japan and South Korea together account for almost 65 percent of the 2.7 million barrels a day that Iran exported in May. The U.S. has been lobbying these countries and other multinational oil giants to cut crude purchases from Iran to zero by November, the deadline for re-imposition of the secondary sanctions. In view of the current trade disputes with the U.S., China has reacted defiantly to U.S. sanctions banning business ties with the Islamic republic. This could be the determining factor in helping Tehran withstand the sanctions on its vital energy industry.

With China turning to Iran, U.S. oil would start flowing in greater amounts to other leading importers in the region, such as Japan and South Korea. In Japan, the oil industry has yet to respond to this issue publicly. The Petroleum Association of Japan previously warned refiners that they will have to stop loading Iranian crude oil from October onward if Tokyo doesn’t win an exemption on U.S.-Iran sanctions. However, this past weekend,South Korea’s embassy in Iran rejected media reports that the country had suspended oil purchases from Iran under pressure from the U.S. Whether Japan and South Korea would seek more crude imports from the U.S. remains to be seen.

China may have Russia on its side

The sanctions imposed on Russia from the West as well as the trade tensions between China and the U.S. may provide even more room for energy cooperation between China and Russia. Russia’s sour relationship with the West forces it to look for new trade and investment partners, which definitely include China and Middle East countries. Russia has already become China’s single largest crude oil supplier, exporting crude oil worthUS$23.7 billion to China in 2017. Now with China possibly cutting imports from the U.S., Russia may seek to export even more crude oil to China.

On 19 July, China received the first ever liquefied LNG cargo from Russian natural gas producer Novatek via the Northern Sea Route (NSR) alongside the Arctic coast. The $27 billion Yamal project is the world’s largest Arctic LNG project and the first large-scale energy cooperation project to be implemented in Russia after the “Belt and Road” initiative. China’s National Energy Administration said China National Petroleum Corp (CNPC) will start lifting at least 3 million tonnes of LNG from Yamal starting in 2019. Therefore, it’s highly possible that China and Russia will deepen their cooperation in liquefied natural gas (LNG) trade despite U.S. sanctions.

In addition, according to an anonymous Russian government official, Russia is ready to invest US$50 billion in Iran’s oil and gas sector amid mounting pressure from the U.S. to economically and diplomatically isolate Tehran. Russia’s energy minister Alexander Novak said that Moscow was interested in developing an oil-for-goods program that would allow Iranian companies to buy Russian products in exchange for oil contracts to be sold to third world countries. This was evidence of Russia’s consistent strategy of using its strong oil and gas industry to meddle in Middle East issues. Under the current situation, even though China may somehow reach an agreement with the U.S. promising that it will cut oil imports if the U.S. is willing to reduce the trade tariffs, in the short-term China is still likely to get Russia on its side in defiance of the U.S. oil campaign.

Yueyi Chen is a graduate student at the Center for Eurasian, Russian and East European Studies, School of Foreign Service, Georgetown University.

Roaming Tiger on the Belt and Road: Is Malaysia the Victim of Politically Motivated Cyber-Attacks?

The unexpected and stunning election victory of veteran politician Mahathir Mohamad in Malaysia this May caught both the Malay elite and international observers off guard, throwing out what many decried as a corrupt long-standing governing class primarily concerned with enriching themselves, a running sore which culminated in the widely reported IMDB scandal which saw billions being stolen from the Malaysian national wealth fund by politicians and their friends.

US justice department investigations of the 1MDB scandal resulted in a breakdown in relations with Kuala Lumpur and Washington as the Malaysian government resented what it saw as unwarranted US intervention.

The Malaysians instead turned north to forge ties with Beijing, who famously make non-interference a cornerstone of their foreign policy. Already a major trade partner, Chinese firms were soon backing major infrastructure projects like the East coast rail line which will have the effect of deepening Chinese economic ties and further cementing political relations.

But the election of Malaysia’s new government threw a major spanner in the works, the new administration in Kuala Lumpur wasted little time in reviewing relations with China and soon suspended several major projects following allegations of bribery and concerns over pricing. Probes into the IMDB scandal were given new life (the previous government had blocked them) and the former Prime Minister Najib Razak was arrested. Low Taek Jho a financier implicated in the scandal remains on the run, allegedly in China.

The affected projects include the multi-billion dollar East Coast rail line which could have transported Chinese goods via Malaysia and a major pipeline project. These have significant commercial and geopolitical implications for China and represent a major pushback of its Belt and Initiative, it also left some wondering how China would react to such a rebuff.

In the last week, cybersecurity firm FireEye identified Malaysia as the target of cyber attacks originating from China as it allegedly sought to punish Malaysia for suspending its projects. The firm suggested that Chinese threat actors were targeting Malaysia through targeted malware in an effort to collect intelligence on infrastructure projects in the country.

If true these incidents highlight the possibility of China using cyber attacks through proxy groups such as Roaming Tiger and TEMP.periscope to target companies, infrastructure or nations that deviate from or backtrack on commercial or diplomatic promises, particularly those concerning its flagship Belt and Road initiative. Using proxies gives China the ability to distance themselves from attacks.

Russia has demonstrated the effective use of cyber warfare in recent years, the release of the Democratic Party emails has shown it can be low cost and highly effective. Compared to an invasion such as Crimea which provoked an international diplomatic and economic backlash.

FireEye identified that Roaming Tiger used malware to attack Western European Foreign ministries (via Toysnake), the Cambodian elections using Litrecola malware, other attacks have been made on Tibetan independence organisations.

There should also be a fear that these developments could be the tip of the iceberg, as Chinese backed threat actors develop their abilities and gain confidence they could go after ever more high profile targets.

A Sino-Malaysian summit this week highlighted strong ties between the two and the desire to increase already substantial trade, but delicately skirted around the issue of the suspended investments. Publicly China has been demonstrating a humble attitude to recent developments and there has not been an outburst of anti-Malaysian propaganda.

Both sides face major losses if the infrastructure projects are called off as preliminary work has already begun. It remains to be seen whether Prime Minister Mahathir has suspended the projects as a bargaining ploy to get a better deal on the projects from China, or perhaps for the Chinese to hand over fugitive Low Taek Jho and help bring a conclusion to the IMDB scandal or does he genuinely see the projects as an unnecessary drain on an overstretched national budget and is just allowing the Chinese to save face by not immediately cancelling the projects.

More broadly China’s use of cyber-attacks on other countries will be a trend worth watching, will Beijing target countries that resist China or attempt to interfere in national elections and how will nations hit by such attacks respond.

Merlin Linehan has worked in development finance within Eastern Europe and Asia, and spends much of his time investigating the risks and opportunities that are created from the ongoing expansion of Chinese businesses that invest overseas in emerging markets.

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

North Korea Is Facing A New Food Famine — Worst Since Kim Jong-un Became Leader

North Korea faces a new food famine this winter. The expected fall in crop production will be the worst since Kim Jong-un became leader. A sustained famine could test the stability of his regime. Squeezed by new import restrictions induced by international enforcement of a tough UN sanctions regime, against the backdrop of a stalled nuclear negotiation with the US, a crippling heatwave, a shortage of fertilizers and the lack of farm equipment, North Korean fall crop harvests could fall by up to 20%. A new food famine in late 2018/ early 2019 is very likely unless UN sanctions are lifted, or China, Russia or others provide massive food aid to the beleaguered regime. North Korea’s precarious food balance may mollify its hard foreign policy stance at the US denuclearization talks and possibly produce a major foreign policy win for the Trump administration before the November mid-term elections.

Agriculture accounts for 22% of North Korea’s GDP, employs between 37% and 40% of the population. With a mere 22% of the total land area of North Korea arable, an imminent crop failure will have serious consequences for regime stability if no headway is made on US sanctions talks.

The likely crop failure this fall will hit the country’s west coast which shares a border with China much more significant than the rest of the country, and may see an upsurge of refugee inflows into China. The west coast of the country is the country’s ‘bread basket,’ accounting for 17% of available land. The country’s main food crops: rice, maize, potatoes, wheat and barley are all likely to be badly affected by the ongoing heatwave as they are harvested each year between August and October.

Further complicating the North Korean food situation is the poor quality seeds and proper fertilizers (made even harder by the strict oil import quota under the UN-sanctions enacted in November 2017). Frequent droughts and flooding do not help either. Additionally, environmental degradation, deforestation and economic mismanagement have conspired to stagnate crop yields over the past decade. With little economic incentives, most North Korean farms are run as socialist farm cooperatives where each household rely on a small plot of land – about 100 sq. m – to grow vegetables for their own consumption but also rear rabbits, pigs, goats and poultry to supplement household nutrition and income. The lack of economic incentives leads to massive inefficiencies and waste. The waste is staggering. A 2014 UN FAO study found that post-harvest loss of rice, maize, and wheat & barley, was 15.6%, 16.7%, and 16.4% of total production respectively.

North Korea’s food insecurity situation is so grave that the World Food Program (WFP) and its Global Hunger Index classifies the country as ‘serious’ with a rating of 28.2% of the population going hungry contrasted with India 31.4%, Sudan 35.5%, Chad 43.5% and Central African Republic 50.8% (the latter three labeled ‘alarming’/’extremely alarming’). Since 1995 WFP has regularly provided food aid and other assistance to North Korea.

The shortcoming of the agriculture sector is also visible in the trade sector. FAO’s Food Security Indicators shows that North Korea ‘average dietary requirement supply adequacy’ is just 88% – on the same level as Somalia. (Eastern Africa average 92% and world average 120%). Such shortfall ought to be met by ample food imports. That is not the case. The value of food imports as a percentage of merchandise exports is 11% (in 2013, latest available data) vs. 25% for Eastern Africa 11% – which is way below the 31% for low-income economies/frontier markets. Another way to illustrate the shortcoming is to compare with South Korea, which shares the same geographical and meteorological conditions, its southern neighbour imports 70% of its food needs.

In 2017 most of North Korea’s grain import came from China and increased three times according to Chinese customs data. Wheat (81,653 tons) was the biggest import, followed corn (57,887 tons) and rice (35,408 tons). Corn imports jumped 16 times to 31, 235 tons, and flour imports which stood at 7,000 tons increased 12 times from the previous year.

Furthermore, unregistered barter trade with China helps to mask the true size of imported agriculture products. However, the heavy trading sanction regimes levied on North Korea and stricter border controls are making increased agriculture imports challenging at the moment.

Strong Military Link

The North Korean military is called upon during labor-intensive planting and harvest periods to assist farmers. The North Korean military, the fourth largest in the world in manpower size, possesses the limited gasoline supplies and heavy machinery available. Thus military capabilities are significantly constrained during March-April and August-September months each year.

South Korea/Japan land reform model

Without a doubt the North Korean agriculture sector stands at a crucial juncture where major reforms are needed if the country is to maintain social stability. There has been some economic policy tinkering but a thorough reform package is yet to be unveiled. A Post US nuclear deal will give impetus to new economic reforms within the country.

The most likely pathway is to follow in the footsteps of South Korea and Japan on land reform. Following the end of WW2, South Korea introduced the first land reform, which involved putting a cap on rent charged to farm tenants to 1/3 of annual yield. In 1948 the government transferred farmland expropriated from the Japanese government and Japanese private owners to tenants where a cap was put on the land per tenant. The acquired land was sold to the farm tenants on generous terms. In 1950 a new Land Reform Act meant that government and government-vested lands (such as owned by absent landlords) were redistributed at similar generous terms.

The land reform led to former owners transformed into entrepreneurs who would start businesses in the manufacturing sectors the government had earmarked as having the best potential. The government also offered low-interest loans for them getting into business.

The land was distributed to recipients under strict conditions, such as they would actively farm the land. And recipients of land could only sell or donate the land after they paid it off, and the government could take the land back if the owners failed to meet regular payments. A similar reform scheme was enacted in Japan during the same period. Farmers used their land as collateral for bad loans, selected the crops cultivated, mechanized and applied fertilizers, which pushed up the yields/profitability that helped them free up family members/children to join other industries/study which oiled the fast-paced economic growth of North Asia through 1950-80s.

September 24 Harvest Festival will signal whether a famine is afoot or not

To better gauge internal North Korean sentiment around food security ahead of the winter, two major upcoming events will signal whether the food insecurity situation within the country is nearing a critical point or not. The National Day on September 9, (which also marks 70-years anniversary of the nation), and the Harvest Festival on September 24, (one of the country’s most cherished festivals) will see the regime signal the level of concern within North Korea over social stability. The regime may well push to sign a final denuclearization deal with the US by then. A sustained famine could severely challenge the stability of the Kim Jong-un led regime.

DaMina Advisors is an Africa-Asia focused independent frontier markets political risk research, due diligence, M&A transactions consulting and strategic geopolitical risks advisory firm. DaMina Advisors is legally registered and has offices in the US, Canada, The UK and Ghana. DaMina is headquartered in Toronto.

Shanghai Is Piloting A New Startup Visa For Foreign Entrepreneurs

A new “business startup visa” has been piloted across select districts in Shanghai, giving foreign entrepreneurs the ability to live in China as they establish a business.

In May 2018, the Shanghai Public Security Bureau updated the policies for a new “Private Residence Permit (entrepreneurship)”, commonly referred to as the “business startup visa” (创业签证) , which offers foreigners a chance to establish a new and innovative startup business within Shanghai.

This visa is valid for one year, but can be extended for a further one year if the foreign entrepreneur is able to demonstrate the successful incorporation of a company within this time. Alternatively, this visa can be transferred to a work permit once the company is set up.

To date, the visa has only been piloted in certain districts in Shanghai, including Changning and Yangpu.

The business startup visa is unique in that its scope of eligibility is expansive — it includes individuals who have traditionally been excluded from many other visa categories, such as inexperienced graduates and individuals older than 60 years old.

Compared to traditional work permits, the business startup visa also gives investors and key management staff alike flexibility in conducting auxiliary business activities such as market research, business development, staff recruitment, lease searching, initial company setup procedures, etc. before getting the company legally established.

The following people are eligible to apply for the business startup visa:

  1. Foreign students who have the willingness to innovate and start a business in Shanghai and graduated from a higher education institution in China;
  2. Foreigners planning to invest in Shanghai or innovate in business; and
  3. Excellent overseas graduates from top Chinese universities or world-renowned universities who have been graduated for no more than two years but have made outstanding achievements in innovation and entrepreneurship in Shanghai.

Besides these special requirements, most of the required documents are similar to that required of other types of visa applications.

The business startup visa is just the latest policy rolled out by the Shanghai government to stimulate the city’s economic development through innovation and attracting high-level talent.

Recently, Shanghai released a series of 100 new measures, which include a variety of opening-up measures designed to ease market access in many key industry sectors.

Earlier this year, Shanghai also rolled out preferential visa and green card policies and business establishment incentives for top foreign talent.

However, Shanghai is far from the only Chinese city to launch visa incentives for foreign talent. Beijing and Yunnan province, for example, are among the regions that have released policies this year to attract high-end foreign talent.

What Are The Top Five Fastest Growing Cities in China?

In China, lower-tier cities are challenging the dominance of first-tier cities like Beijing and Shanghai for attracting foreign investment.

In recent years, the increasing cost of labor, housing, and land in first-tier cities has led many Fortune 500 companies — especially those in the computer, software, information technology, and e-commerce sectors — to settle in second- and third-tier cities.

Lower-tier cities are continuously announcing business incentives to attract investment and promote pillar industries, while also offering a variety of entrepreneurship and housing subsidies to attract talent.

China’s next generation of workers are aware of these trends. According to the 2018 Research Report on the Employment Market for Graduates, 40 percent of the 90,000 graduates surveyed hope to work in so-called “emerging first-tier cities” such as Chengdu, Hangzhou, and Chongqing, while only 27 percent hope to work in first-tier cities.

To understand how these lower-tier cities are performing compared to established first-tier cities and to identify those with the greatest economic potential, China Briefing examined all cities in mainland China with a gross domestic product (GDP) of more than RMB 500 billion (US$74.1 billion) in 2017 and calculated their GDP growth rates between 2012 and 2017.

In this article, we examine the business environment and latest developments in the top five fastest growing cities in China.

1. Hefei, Anhui

Hefei is the fastest growing city in China, with its GDP rising from RMB 416.4 billion (US$65.9 billion) in 2012 to RMB 721.3 billion (US$106.8 billion) in 2017 – an increase of 73.2 percent.

A survey by the State Administration of Foreign Experts Affairs titled ‘2017 Charming China’, revealed that Hefei was the third most attractive Chinese city in the eyes of foreign talent, placing just behind Shanghai and Beijing.

The city currently has eight core industries: automotive, equipment manufacturing, home appliances, chemicals, new materials, software and electronic information, biomedicine, and food processing.

Last year, Hefei was selected as a pilot city under the Made in China 2025 initiative, and as a result increased its investment in the manufacturing sector. To this end, in June 2018, Hefei announced subsidies of up to RMB 20 million (US$3 million) to eligible newly settled businesses in the circuit and software industries to promote investment in both these sectors.

Further, Hefei has ramped up efforts in targeting Fortune Global 500 companies in the equipment manufacturing, new energy vehicles, and logistics sectors in order to attract more foreign businesses and high-end human resources. The city has also committed to improve incentives targeting overseas professionals.

Earlier, in 2014, Hefei launched a system to promote industry development, introducing five specific measures to advance industrialization, innovation, agriculture, services, and culture.

By 2020, Hefei aims to realize a GDP of more than RMB 1 trillion (US$150.9 billion).

2. Yangzhou, Jiangsu

Ranked as the second fastest growing city, Yangzhou’s GDP rose from RMB 293.3 billion (US$46.4 billion) in 2012 to RMB 506.4 billion (US$75 billion) in 2017, an increase of 72.65 percent.

Traditionally, the dominant industries in Yangzhou have been automobile, machinery, tourism, software, and food processing.

In 2017, the city released plans to strengthen strategic emerging industries such as new energy, new medicine, novel materials, energy conservation, high-end manufacturing, information technology, and biotechnology. The objective is to generate an output value of RMB 700 billion (US$105.6 billion) from these industries by 20

Furthermore, Yangzhou is the bedrock of the software and information service industry in Jiangsu. Accordingly, analysts acknowledge that the city is well-positioned to influence regional industry development and industrial transformation.

In April 2018, the government announced generous incentives to attract high-end professionals, including a monthly rental allowance of up to RMB 3,000 (US$452.10) and a one-time housing subsidy worth up to RMB 2 million (US$ 301,390).

Yangzhou is also the only city in Jiangsu province to be awarded “pioneer” status as a result of its support for small and micro-enterprises.

Yangzhou, acknowledged as a highly livable city, is likely to continue its progression of economic growth and talent retention, as it continues to stimulate its economy through innovation and industry expert input.

3. Shenzhen, Guangdong

Shenzhen is the only first tier city that continues to expand at a country-leading pace. The city has seen GDP growth of 72.1 percent from 2012 to 2017, rising from RMB 1,295 billion (US$205.1 billion) to RMB 2,228.6 billion (US$330.1 billion).

For the first time, Shenzhen has overtaken Guangzhou to become the city with the third-highest GDP in mainland China in 2017, behind only Shanghai and Beijing.

As the fastest growing first-tier city and the most successful special economic zone, Shenzhen owes its success in part to its proximity to Hong Kong.

Shenzhen’s pillar industries are the cultural and creative industries, high and new technology industries, modern logistics, and finance.

In the future, the government will focus on developing emerging industries, including new energy and materials, life and health, robotics, intelligence equipment, and aerospace and aviation.

In recent years, the secondary (manufacturing) sector has received increased attention so as to avoid industrial hollowing-out due to the relocation of manufacturing caused by rising production costs.

Shenzhen is also known for its dynamic and booming startup scene. Unlike Beijing and Shanghai, which have more state-owned enterprises, Shenzhen is home to younger, private companies.

In 2016, Shenzhen had the highest density of startups of all the mainland cities. The government plays an important role in promoting these companies by providing abundant resources and funds for entrepreneurs to invest in the various sectors.

For example, qualified leading e-commerce enterprises setting up headquarters in Shenzhen may be awarded RMB 5 million (US$748,875.0), while qualified individuals or teams who establish startups may be awarded up to RMB 1 million (US$150,690.0). In addition, in June, the city announced housing policies that provide qualified Chinese citizens with substantial subsidies for renting or buying a home.

The drawbacks of doing business in Shenzhen is that the monthly cost of living is relatively high – an average of RMB 7,000 (US$1,056.2) – meaning that land and labor is expensive.

4. Chengdu, Sichuan

Chengdu’s GDP grew from RMB 813.8 billion (US$137.1 billion) in 2012 to RMB 1,388.9 billion (US$205.7 billion) in 2017, amounting to a 70.66 percent increase.

In late 2017, Chengdu announced that by focusing on six aspects of the new economy (digital, intelligence, green, creative, mobile, and shared), it aims to reach a new-economy output value of RMB 500 million (US$75.4 million) by 2022.

Analysts believe that Chengdu is a strong candidate for developing the new economy because of its many comparative advantages, including being a logistics hub for the Belt and Road Initiative, boasting a huge consumer market, having abundant scientific and technological talents, and being a highly livable city. However, some observers argue that Chengdu’s new economy is currently still capital intensive and lacks innovative capabilities.

The government has also rolled out key measures to support new economy-related companies, including the establishment of an RMB 10 billion (US$1.5 billion) new-economy development fund and subsidies of up to RMB 40 million (US$6.0 million) for financial institutions and their headquarters that are newly-established in Chengdu.

In addition, this year, the city introduced a series of measures to further attract foreign investment. If the regional headquarters of newly registered multinational corporations (MNCs) are located in Chengdu for at least a year, they can receive establishment funds of up to RMB 500 million (US$75.4 million).

Chengdu’s continuous efforts to attract investment have proven fruitful. According to Yicai’s 2018 Business Attractiveness of Chinese Cities Ranking, Chengdu is the most attractive emerging first-tier city for businesses in China, ranking at the top in its concentration of commercial resources, the vitality of its people, its urban pivot ability, and urban plasticity.

5. Nantong, Jiangsu

Nantong’s GDP grew from RMB 455.8 billion (US$ 72.2 billion) in 2012 to RMB 773.4 billion (US$ 114.5 billion) in 2017, representing a growth rate of 69.67 percent.

Nantong continues to develop its mainstay industries – such as high-end textiles, electronic information, and marine engineering – while nurturing the development of emerging industries, including intelligent equipment, new materials, new energy, and new-energy vehicles.

Located on the Yangtze River Delta, Nantong has fostered greater cooperation with other cities in the region, especially Shanghai. In 2017, the government published details of a strategic policy aimed at escalating the construction and development of Nantong, which will improve its integration with surrounding areas.

By integrating and collaborating with Shanghai’s capital, technology, and human resources, Nantong aims to become the economic and transportation hub of the north wing of the Yangtze River Delta. The two cities complement each other: Nantong utilizes Shanghai’s resources to accelerate industry innovation and transformation; while Shanghai expands its market share and advances industry development through Nantong.

Nantong offers generous subsidies to attract top-end talent. Nevertheless, the measures taken to attract graduates and youth are proving ineffective. This was reflected in the 2017 China Urban Research Report, released by Baidu Map, which revealed that Nantong’s ranking in terms of attractiveness to the urban population has steadily dropped.

In recognition of this, a city official announced in June that developing Nantong as an innovative city that appeals to young professionals is a priority. Analysts pointed out that it is vital to deliver what matters most to potential residents, particularly a housing and cost-of-living subsidy, a reduction of hukou restrictions, and opportunities for career development.

Capitalize on regional dynamics

Aside from government support, the driving forces behind the five cities’ are strongly related to their location and their efforts to join China’s macroeconomic trends to innovate pillar industries.

In our ranking, three of the five cities are located in the Yangtze River Delta, and one is in the Pearl River Delta. The government has been creating city clusters and super-regions to facilitate urbanization, which may be positively correlated with GDP growth.

Notably absent from the list are cities from northern China, where much of the economy is struggling compared to China’s dynamic eastern and southern regions and booming west.

The rise of lower-tier cities has also brought huge investment opportunities in the daily consumptioneducation, and elder care markets. Consumption growth in second-, third-, and fourth-tier cities is nearly 1.5 times larger than that of first-tier cities, according to the 2017 Consumption Upgrade Big Data Report.

However, some analysts claim that, for the short term, second- and third-tier cities will continue to suffer from talent and capital disadvantages over emerging and first-tier cities, which have more abundant cash flows.

Nevertheless, as the government continues to restrict population growth in first-tier cites, many businesses and talented individuals may still choose to settle in lower-tier cities as they continue to offer lower living costs and a variety of investment incentives.

See article as originally appears here

Cambodia’s Pivot to China Heralds a New Era of Authoritarianism

Increasing Chinese influence is casting a shadow over Cambodia’s political freedoms. On the backdrop of the elections, Nathan Paul explores how the result is a great deal of leeway for Prime Minister Hun Sen to suffocate dissent and criticism, and to strengthen his own power.

The month of May saw the last remaining bastion of press freedom in Cambodia wither and all but die. The Phnom Penh Post, the only fully independent newspaper left in Cambodia, saw a mass exodus of its editorial staff following a controversial takeover. Resignations included the managing editor, the web editor and a number of senior journalists following the dismissal of editor-in-chief Kay Kimsong.

This is just the latest in a series of attempts to undermine free press in Cambodia, part of a wider effort by Prime Minister Hun Sen to dismantle democratic processes in the country. There are, in fact, three overlapping targets in this campaign: the press, political opposition, and any NGOs that champion human rights in ways that are critical of, or run counter to, government policy and ambitions.

Historically, Hun Sen reluctantly tolerated these factions as a condition of Western donations and investment. However, as Phnom Penh increasingly aligns itself with China – it accounts for 70% of total industrial investment in the country – and moves away from the EU and US, the Prime Minister has become increasingly brazen in his attacks, stating openly that Chinese money does not come with the same demands and obligations.

Radio Silence

Attacks on press freedom and on media companies with Western ownership, affiliations or funding in particular, have intensified over the past twelve months, as Cambodia began preparations for its general election in July.

English-language publication The Cambodia Daily, which frequently wrote stories critical of the Cambodian government, was shut down in September 2017 over a controversial tax bill. The previous month, the Cambodian government closed 15 independent radio stations, including the Phnom Penh-based Moha Nokor. This station hosted shows produced by Voice of America, Radio Free Asia and the (now non-existent) Cambodian National Rescue Party (CNRP), Hun Sen’s only genuine opposition at the time.

In May 2018, Bill Clough, the Australian owner of the Phnom Penh Post, sold the paper to Malaysian businessman Sivakumar S. Ganapathy for an undisclosed fee, in a move that some former staff members believe was coerced by the government in return for settling a similarly exorbitant tax bill. Both Clough and Ganapathy emphasised that the Post would retain editorial independence, but days later, editor Kimsong was fired for refusing to take down an article detailing the new owner’s ties to both the Malaysian government and Cambodian Prime Minister, Hun Sen.

Ganapathy is the managing director of the Malaysia-based Asia PR, which lists “Cambodia and Hun Sen’s entry into the Government seat” as a former “project”. Ganapathy’s personal biography also states that he currently “leads the Asia PR team in managing ‘covert operations’ for our clients.”

Deputy Asia Director of Human Rights Watch, Phil Robertson, referred to the deal as a “staggering blow to press freedom”.

The end of opposition

Hun Sen not only shut down his opposition’s mouthpieces; he effectively shut down opposition itself.

Former leader of the CNRP, Sam Rainsy, who claimed that China enables human rights abuses in Cambodia by providing no-strings attached loans to the Kingdom, has been in political exile since 2015 – and is now barred from re-entering the country at all. The same month as the the Cambodia Daily shut down, Rainsy’s successor Kem Sokha was arrested on allegations of treason.

Tellingly, Hun Sen framed this crackdown on opposition not only as a domestic political issue, but also as a necessary step to protect Cambodia against an existential threat. It resembles an attempt to resuscitate Khmer Rouge-era paranoia about Western infiltrators seeking to undermine the country’s identity and prosperity from within. Leading media outlet Fresh News, which he owns, accused Sokha of conspiring with the United States via a combination of Western freelance journalists (labelled as foreign spies) and NGOs with Western affiliations (such as the Cambodian Center for Human Rights) in order to bring down his regime. Sokha is still under arrest.

Then, in November 2017, the Supreme Court of Cambodia dissolved the CNRP altogether,. accusing it of trying to topple the government. This has, in effect, left Cambodia with no serious political opposition in the upcoming July elections. Hun Sen is now all but guaranteed to continue his 33 year rule unchallenged.

Biting the hand that (used to) feed you

Hun Sen also directs attacks against NGOs that oppose his actions. Last year, for the first time since 2001, the Cambodian government expelled an NGO and its foreign staff from the country. The National Democratic Institute, which receives funds by the National Endowment for Democracy, USAid and the US State Department, and works to strengthen democratic institutions around the world was targeted. Hun Sen also threatened the closure of the Cambodian Center For Human Rights (CCHR), but held back after a public outcry.

The Cambodian PM has responded to international condemnation of his actions by challenging the United States and other western countries to withdraw their aid from Cambodia. He has done this while citing confidence in continued support from China. The US responded, as did the EU, by cutting their funding for the upcoming 2018 elections. It has since imposed sanctions and visa bans on Cambodian government officials while also reducing its foreign aid assistance.

This represents a stark shift in loyalties and perspective by the Prime Minister, who in the 1980s decried China as “the root of all evil”, but by 2016 was confident enough in his new, powerful ally to warn Western donors who threatened to reduce aid that “China has never made a threat to Cambodia, and has never ordered Cambodia to do something.” His tone has become no more conciliatory since, even despite US Senator Lindsey Graham pushing for further sanctions on the grounds that “democracy is dead in Cambodia,” and that China is trying to “colonize” the nation.

Hun Sen’s arrogance was well-founded. following the withdrawal of financial support for the upcoming elections by the EU and US, China stepped up, with Beijing pledging to donate more than 30 kinds of equipment for the July election, including 60,000 polling booths and 15,000 ballot boxes. Historically, Chinese assistance has focused on developing infrastructure in Cambodia, while the US has funded support for the democratic process – respective foci that make sense given the two nations’ stated international priorities. China’s assumption of responsibility for electoral aid represents a troubling development.

A notch on the belt

“Basically what you are now seeing is the end of a western-dominated era in Cambodian nation building and politics,” says political analyst Ou Virak, who maintains that the US’s “diminishing voice on human rights and democratic freedoms” combined with “China’s largesse and influence” is precisely what ultimately emboldened the CPP to clamp down on political and press freedom and destroy their opposition.

While there’s no doubt that Western influence in Cambodia has been supplanted by China’s, it’s less clear what China will ultimately demand in return. Cambodia is key to China’s ambitious belt and road initiative and already acts as a mouthpiece within ASEAN for Chinese interests, such as those related to the highly contentious South China Sea. For now, these strings have proved far more acceptable than the West’s to a leader primarily concerned with consolidating power and silencing dissent. It seems likely that this trend will only strengthen into the future.

 

Nathan Paul Southern holds a BA in Criminology from Caledonian University, a law degree from the University of Strathclyde and and MSc in Global Security from the University of Glasgow. Article as originally appears https://globalriskinsights.com/2018/07/cambodias-pivot-china-heralds-new-era-authoritarianism/

Pakistan: Who is Imran Khan and What Can Investors Expect from the PTI?

The much anticipated National Assembly elections were held across Pakistan on 25th July 2018 and as expected the Imran Khan led Pakistan Tehreek-e-Insaf (PTI) party has emerged victorious with the party winning a higher than expected number of seats. Though the entire vote count is not yet complete, the PTI has won 115 of the National Assembly seats so far out of the 272 up for contest amongst the major political parties. A tally of 137 seats is needed to gain a simple majority and the PTI is well placed to form the next government along with the help of smaller political parties and independent candidates to get to the 137 mark which would make Imran Khan the next Prime Minister of Pakistan. This result is a much needed relief for the country and the stock market as it would be a strong coalition government with one party (PTI) having a majority of the seats.

(Source: Election Commission of Pakistan, Topline Securities
2013 elections: Elections were not held for all 272 seats due to law and order issues
2018 elections: Full vote count is not completed as of this writing)

Earlier expectations were of the PTI winning anywhere between 85-95 seats which would have meant that it would have most likely needed greater support from potential coalition partners and this would have portrayed the coalition as weak. Therefore the current set up of the PTI having the majority in the coalition it forms will be viewed as effective and be able to have a stronger footing while implementing economic policies.

The PTI victory does not come as a surprise given the anti-corruption platform which it has gained on especially over the past year after the ouster of former Prime Minister Nawaz Sharif amid the fallout of the “Panama Papers” scandal which weakened the Pakistan Muslim League (Nawaz) PML (N) in run up to the elections and which is the main opposing party to the PTI.

Below we try to answer some of the questions that will be on investors’ minds.

Who is Imran Khan?

Imran Khan is the the former Pakistan Cricket captain who led his team to the country’s only Cricket World Cup victory in 1992 even though many experts did not give the team a chance to make it to the finals. After this win, Imran Khan retired from the game and focussed more on social issues starting initially by helping fund the establishment of Pakistan’s first specialised cancer hospital which was set up in Lahore in 1994. Thereafter, in 1996 he formally entered politics by forming the Pakistan Tehreek-e-Insaf (Pakistan Movement for Justice) party with one of its main focus areas being increasing accountability and reducing corruption. This focus has allowed the party to gain a lot of momentum and followers over the past decade especially amongst the younger voters who want change and development.

Though there are concerns that he was supported by the “establishment” in the run up to the elections, this victory for Imran Khan is the culmination in a journey of transforming from a flamboyant cricket star used to a privileged lifestyle and being married three times to one of political, social and economic development based on integrity. The country will now have high hopes and expectations from Imran Khan similar to when he came out of retirement to win Pakistan the 1992 Cricket World Cup. We hope for a repeat on the political field!

What can we expect from the PTI?

The PTI has gained strength on an anti-corruption platform given that its leader, Imran Khan has a much cleaner image than the leaders of the other major political parties. Therefore it would not be surprising if the senior leadership of the PTI takes measures to bring in greater accountability within the system as well as take steps to reduce unaccounted wealth. Besides this, the PTI has also focussed on social issues and we could therefore see more thrust towards healthcare, education and low cost housing based initiatives as well as more support for the agricultural sector.

From an economic perspective, the PTI will most likely appoint Asad Umar as the next Finance Minister who has a private sector background with his last role being the CEO of conglomerate Engro Corporation. Hence, economic policy making should be stable going forward and we also expect the new government to continue with the execution of the China Pakistan Economic Corridor (CPEC) as this initiative has had all round political support from its very start. With respect to the current balance of payments issues that the country is facing we expect that the new government would most likely go to the IMF (International Monetary Fund) for a loan programme (more details below).

What is the outlook for the economy?

The macro economic situation for the country has deteriorated over the past year as the current account deficit has widened to 5.7% of GDP in the financial year ending June 2018 which has led to a reduction of foreign exchange reserves with import cover of just over 2 months while export growth and foreign remittances have not fully helped plug the gap in the current account as imports have grown at a much faster pace over the past 12-18 months. The reason for the increase in imports is two-fold. The execution of the CPEC projects, most of which are power projects, has led to a surge in machinery imports while the higher oil prices over the past year have also pressured the current account as Pakistan is a net energy importer. Though the current account deficit has widened, we would like to add that the CPEC based power projects will be important to overcome the power deficit in the country and help improve productivity as the lack of power has been cutting 1-2% from Pakistan’s GDP growth rate.

Since 2018 was also an election year the outgoing government loosened its fiscal stance towards higher expenditure in order to satisfy various voter bases and this has led to a higher than expected fiscal deficit. Given the situation that the new government will find itself in, it is widely expected to request the IMF for a loan programme and this amount could be in the range of USD 10 billion due to the upcoming financing needs of the country.

The growing current account deficit and declining foreign exchange reserves have already led to a greater than 20% depreciation of the Pakistani Rupee (PKR) since December 2017 while the Central Bank has raised benchmark interest rates by 175 basis points so far this year. In all likelihood we will see interest rates rise further this year as the Central Bank tries to contain the impact of higher commodity prices on inflation as well as rein in demand while some more weakness can be seen in the PKR in order to reduce the pressure on the current account.

Pakistani Rupee has weakened due to a widening current account deficit

 (Source: Bloomberg)

If the IMF loan program goes through, it would most likely require the new government to implement reforms linked to a reduction of subsidies, reform of the power sector, increase in the tax base, privatization of state-owned entities and reduction in government expenditure. All in all, with constraints on further government spending, higher interest rates as well as a weaker PKR, final demand is expected to soften going forward leading to a slowdown in GDP growth.

What is the impact on the stock market and what are our views on Pakistan going forward?

Both, the political and economic uncertainties over the past year have already had a negative impact on markets as well as valuations. The KSE-100 Index has lost 31% in USD terms from its high in May 2017 while the trailing 12 month P/E of the index at 10.2x is now at a large discount to most markets in the region. It appears the worst of the political and economic issues have been priced in and from a political perspective we should have a stable government while from an economic standpoint there will be more to be done to stabilise the current economy and until we have policy measures such as an IMF program in place, economic uncertainty may continue.

Further, as mentioned above, economic growth would possibly slow down due to higher interest rates, a weaker PKR and measures put in place by the IMF to cut government spending.

KSE100 Index valuations have corrected (Trailing 12 months P/E)

(Source: Bloomberg)

(Source: Bloomberg. P/E is based on Trailing 12 Months and P/B is latest reporting period.)

AFC Asia Frontier Fund’s outlook on Pakistan

Overall, given these issues above, we think most negatives have been factored into valuations but with growth expected to slow down in FY 2019 there may not be any major trigger which can lead to a significant rally in the stock market. Hence, since we have already reduced the fund’s exposure to Pakistan over the past six months, going forward we expect to maintain our current exposure and look for bottom up opportunities as valuations appear attractive in sectors such as banking, cement, and oil & gas.

 

Beijing Plans Another Minimum Wage Increase, Still Only 3rd Highest in China

On June 29, Beijing’s Human Resources and Social Security Bureau announced that the city will increase its minimum wage, effective September 1, 2018.

Beijing will increase the monthly minimum wage from RMB 2,000 (US$300.57) to RMB 2,120 (US$318.60), and the hourly minimum wage from RMB 22 (US$3.31) to RMB 24 (US$3.61).

The wage hike of RMB 120 (US$18.03) per month is similar to last year’s increase, when the city raised minimum wages by RMB 110 (US$16.53) per month.

Given the cost of living in Beijing and the nature of its economy, most workers in the city are paid according to market rates rather than minimum wages.

Beijing is increasingly becoming a post-industrial economy, with services constituting over 80 percent of its GDP in 2017.

Once the minimum wage adjustment goes into force, Beijing will have the third highest minimum wage in the country.

Currently, Shanghai holds the highest minimum wage rate, at RMB 2,420 (US$363.69) per month, followed by Shenzhen, at RMB 2,200 (US$330.63) per month. Both cities increased their minimum wage in 2018.

Besides having the highest minimum wages, Beijing, Shanghai, and Shenzhen also have the highest average wages in China.

Last year, the Chinese career platform Zhaopin reported that Beijing had an average monthly salary of RMB 9,942 (US$1,494.13) – the highest in China – followed by Shanghai at RMB 9,802 (US$1,473.09) and Shenzhen at RMB 8,892 (RMB 1,336.33).

In addition to Beijing, Shanghai, and Shenzhen, other regions that have increased their minimum wages this year include: Guangdong, Guangxi, Jiangxi, Liaoning, Shandong, Sichuan, Tibet, Yunnan, and Xinjiang.

As originally appears http://www.china-briefing.com/news/2018/07/03/beijings-minimum-wage-to-rise-september-1.html

China Cuts Tariffs for These Five Asian Countries

China has adopted conventional tariff rates on a range of imported goods originating from India, South Korea, Bangladesh, Laos, and Sri Lanka, following a recent announcement from the Customs Tariff Commission of the State Council.

Beginning July 1, 2018, tariffs on a total of 8,549 goods were reduced or cut to zero.

The tariff cuts target goods such as soybeans, precision instruments, chemicals, agricultural products, clothing, and steel & aluminum products.

Some of the significant tariff cuts include:

  • Soybeans: tariff of three percent reduced to zero percent
  • Beef: tariffs ranging from 12-20 percent reduced to zero percent
  • Liquefied petroleum gas (LPG): tariff of three percent reduced to 2.1 percent
  • Textile raw materials: tariff of 10 percent reduced to 6.5 percent
  • Medical x-ray devices: tariff ranging from two to four percent reduced to zero to 2.8 percent

The complete list of tariff reductions can be found here.

The tariff concessions are part of a larger commitment to improve trade relations between China and the other five Asia-Pacific member countries that are part of the Asia Pacific Trade Agreement (APTA).

The agreement, signed in 1975, is the oldest preferential trade agreement in the Asia-Pacific region and encompasses approximately three billion people.

Currently, all member countries, including China, have agreed to reduce tariffs by an average of a third on more than 10,000 items.

Critics, however, argue that the timing and target of these tariff cuts are not a coincidence. The announcement comes a mere two days after China stated it would impose an additional 25 percent tariff on soybeans, chemical products, and medical equipment imported from the US.

Many observers suspect that China’s decision to give effect to tariff reductions – agreed to in negotiations held over a year ago – is less about adhering to APTA commitments, but rather an attempt to diversify import channels in response to the escalating US-China trade fallout.

While it is uncertain whether imports from these five Asian countries will fill the void left by a decreased reliance on US importers, particularly in commodities such as soybeans, the tariff cuts are nevertheless a positive step to opening-up trade opportunities for countries in the Asian-Pacific region.

Many countries holding trade deficits with China have long been lobbying to expand their market access in the country. India, for example, recently pitched for increased exports of soybeans and sugar at the recent India-China strategic dialogue in April.

In addition to these tariff cuts, previously announced tariff cuts on a range of consumer goods also went into force on July 1.

Article as originally appears http://www.china-briefing.com/news/2018/07/02/china-cuts-tariffs-for-five-asian-countries.html

India’s Relationship With Maldives Sours as China Tightens its Grip

The Republic of Maldives is an important member of the SAARC and offers key strategic value to its allies, especially India. This article examines how a souring in relations between Malé and New Delhi, along with an unprecedented Chinese presence in the archipelago, raises geopolitical risks for India.

The situation in Maldives is not just about democracy. It also concerns the peace, stability and security of the entire Indian Ocean region, as explained by former Maldivian Foreign Minister, Ahmed Naseem. This situation refers to the collapse of democratic progress under the leadership of President Abdulla Yameen, who in February 2018 ordered a state of emergency and jailed opponents across the legislative and judiciary. A change in President has also simultaneously tipped a switch in preference for premier ally from India to China.

The importance of the Maldives

The Republic of Maldives is comprised of 26 atolls, holds a strategic position in the Indian Ocean Region (IOR) southwest of the Indian peninsula, and is situated along major sea lanes of communication. Most notably, it lies between the Gulf of Aden and the Gulf of Hormuz with the Strait of Malacca, which are the prime routes for oil exports and world trade. It is also a member of the South Asian Association for Regional Cooperation (SAARC).

Maldives and New Delhi: souring bilateral ties

Historically, India has been a major influencer in Maldivian economic development, providing social and financial aid, and acting as the first responder to offer assistance. Famously, the Indian army helped foil a coup against President Maumoon Gayoom in 1988, landing at Hulhule airport just 16 hours after receiving a request from the leader.

However, in order to counterbalance New Delhi’s position, President Yameen has increasingly leaned towards China in an effort to expand economic opportunities, and he has broken from the tradition of adopting an ‘India First’ foreign policy. His action of illegally terminating a $500 million contract with Indian firm GMR for expanding the airport facilities caused ties with New Delhi to plummet to an all-time low. Strained diplomatic relations were further compounded in June 2018, when India denied entry to a Maldivian parliamentarian for health check-ups. Maldives has retaliated by holding up thousands of work permits to Indians, with public advertisements from companies stating “Indians need not apply”.

Concurrently, Indian retrenchment has been substituted by Chinese presence. Until 2012, Beijing did not even have an embassy in Maldives; whereas in 2018, Chinese investments are estimated at over $1.5 billion. This has caused Maldives to become a potential flashpoint in regional discontent and raises geopolitical concerns for India that finds itself unable to rely on a historically close ally for economic, cultural, and security ties.

Geopolitical risks for India

This section discusses the reasons why India perceives a Chinese presence in Maldives as a geopolitical threat. Firstly, Maldives has agreed to be a part of the Chinese Belt and Road Initiative (BRI) – a development strategy to forge a 21st century Maritime Silk Road, increasing connectivity among  Eurasian countries and promoting uniform economic development. India has consistently opposed this agreement, citing the need to respect sovereign boundaries and national security. India’s stance is, however, an increasingly isolated one in the neighbourhood, with Maldives, Myanmar, Nepal, Sri Lanka and Pakistan all considering to join China’s initiative. This will result in the Indian coast being surrounded by Chinese dominated ports. While the BRI serves to improve connectivity, it also erodes the Indian sphere of influence and increases its neighbours’ dependency on Chinese infrastructure. Diminishing the potency of a regional power through a multilateral effort is a familiar strategy employed by Beijing, and its enhanced capacity to become the first responder in the region holds severe implications for India’s leadership in South Asia.

Secondly, the Chinese have responded to President Yameen’s actions by making quantum investments in the country. This has raised questions about a Chinese ‘debt trap’ — a term that refers to China taking over infrastructure projects when the beneficiary country cannot repay loans — being employed. Currently, 60% of Maldivian economic debt is accounted for by Chinese development projects and translates into payments of $92 million annually, or 10% of the entire Maldivian budget. At the end of 2018, public debt will be 60% of GDP and is set to rise to 121% by 2020. While rapid scale-ups in infrastructure can result in economic development, they are almost certain to leave Maldives over-exposed to Chinese debt because the local economy is not diversified. The country is heavily reliant on tourism to generate revenue and employment opportunities and is now increasingly dependent on China for tourists and a $800 million airport expansion plan. .

Indian concerns arise from the possibility of Maldivian insolvency, in which case Chinese assistance could turn into management of economic resources through debt-leverage and land grabs. Another Indian ally, Sri Lanka, had to formally relinquish 85% of the Hambantota Port, which provides critical access to the Indian Ocean sea lanes, to China on a 99-year lease after failing to service its debt.

President Yameen has frequently been criticised by opposition members for ‘handing over’ Maldives to China because its economic influence has the ability to impact legislative change. In 2017, a thousand-page Free Trade Agreement with China was passed in Maldives’ parliament after less than an hour of discussion. Laws were also changed to allow foreigners to buy land, which has led to Chinese acquisition of 16 islands for development projects.

Despite Maldivian and Chinese assurances, India is concerned about the possibility of a Chinese naval presence in the IOR. Should China choose to reinforce its military presence here, it is highly unlikely that India would be able to retaliate in kind. The military expenditure of India has significantly declined in recent Union Budgets, signalling the unwillingness to militarily engage unless absolutely necessary. A realist approach would highlight the asymmetry in power between the two Asian giants when extending their influence.

Thirdly, Maldives’ shift in allegiance to China has allowed internal security threats to go unchecked – the Chinese model of non-intervention in domestic functions makes it indifferent to local problems. Maldives has seen a steady rise in Islamic fundamentalism brought about by Saudi-sponsored preachers, and has the highest per-capita departures of fighters to join the Islamic State. India perceives this as a national security threat because it has been the target of multiple terrorist attacks planned within Pakistan and Bangladesh by the same radical groups that are now operational in the archipelago. With its waning influence, India cannot urge the Maldivian government to curb rampant extremism.

While India does not have the ability to offer the same economic incentives to Maldives, it is likely in the short to medium term that it will engage to re-strengthen diplomatic relations and provide assistance in internal security matters. This is a niche not covered by China and it could allow India to reclaim the ability of being first responder and the opportunity to safeguard national security for both itself and Maldives.

Malvika Singh holds an MSc in Comparative Politics with a specialisation in Political Economy from the London School of Economics and a BA Honours in Politics from the University of Nottingham. Article as originally appears https://globalriskinsights.com/2018/07/indias-concerns-over-the-strengthened-china-maldives-relations/