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

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.

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

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

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.

China’s Pollution Crackdown: How Severe is the expected Macro-Economic Impact?

China is undergoing an environmental paradigm shift, transitioning from the world’s top polluter to global leader in the fight against climate change. In recent months, China has dramatically strengthened the enforcement of its environmental regulations as it pursues its goal of promoting ‘ecological civilization’, and has inspected and fined countless businesses in the process.

Many areas in China suffer from severe levels of pollution, and the central government under the leadership of President Xi Jinping has initiated several crackdowns on heavily polluting industries that are non-compliant with current environmental regulations. These measures have affected business as usual in various sectors and have had rippling effects throughout the economy.

Measures taken by the government

The Ministry of Environmental Protection (MOEP) and the environmental bureau have adopted an intolerant stance against businesses flouting environmental laws over the last year, which is expected to cut air pollution levels in northern cities. Although predominantly targeting air pollution, the authorities are also stringently curbing other types of pollution, including water and soil pollution, in addition to scrutinizing waste management systems across the country.

It is important to note that although environmental laws have not been substantially altered recently, the enforcement of pre-existing laws has been tremendously increased. As enforcement of environmental laws has been historically lax in China, this sudden change in government policy has rattled the industry and made polluting businesses cautious.

In 2016, the government began conducting a series of investigations in heavy industries, and as a result, several non-compliant and illegal steel mills, coal mines, aluminum smelters, and other manufacturing units were shut down. To date, it is estimated that more than 80,000 factories have been shut down across the country by the anti-pollution drive. Other establishments caught infringing environmental regulations have been ordered to clean up their operations within a short time frame or risk closure by the inspection squad.

Penalties have been levied on around 40 percent of factories across the country as environmental inspectors have been dispatched to more than 30 regions in recent months. Inspectors have reportedly imposed hefty fines totaling over RMB 870 million (US$132.2 million) to date, and in some cases criminal liability on employers who are facing jail time for violating environmental regulations. Further, additional inspectors have been deployed to act as watchdogs and ensure that local inspectors are fulfilling their duties.

In addition, municipal authorities have filed a large number of environmental pollution cases in the past year. Beijing municipality alone has filed close to 13,000 cases against non-compliant polluters.

Rippling impact on business and economy

The sectors most severely impacted by the anti-pollution drive have been textiles, energy, heavy metals, coal and gas, mining, cement, paper, automobile, and consumer goods. The impact is also expected to shock international supply chains due to disruption in exports from China.

Inflation has spiked as firms cope with increasing costs of compliance with environmental regulations and adapt to clean energy. Increased production costs will ultimately have to be shouldered by the consumer, and the middle class will be particularly vulnerable to inflationary trends in consumer goods and electricity.

Financial and social stability has also been disrupted as more than 60,000 jobs have been lost as a result of factory shutdowns. Employers who are unable to repay debts have left their factories closed and unproductive.

In many manufacturing sectors, small-scale firms are closing down, as they are unable to compete with larger rivals due to financial incapacity to adapt to clean energy. As a result, the firms that manage to survive and adapt to the new environmental regulations and successfully switch to clean energy will significantly benefit in the medium run as they gain the market share previously held by smaller firms.

The shutting down of small and medium scale firms has also resulted in greater consolidation among surviving firms in many industries like iron and steel, resulting in a steep increase in global prices.

The business impact of the anti-pollution drive has been particularly harsh in the north as well as Beijing-Tianjin-Hebei region. It is expected that these measures may reduce GDP growth by up to two percent in the short run due to disruption in manufacturing and supply chains across industries coupled with increased costs of compliance and technological upgrading.

However, experts opine that the anti-pollution drive will have minimal macro-economic impact in the long run and, if successful, will have huge health benefits for the country’s 1.4 billion citizens. Pollution and related health and safety issues are consistently among the top concerns of Chinese people, and addressing these issues would also boost China’s international reputation as an authority in green technology and climate change leadership.

 

Dezan Shira & Associates provide business intelligence, due diligence, legal, tax and advisory services throughout the Vietnam and the Asian region.

 

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

China’s Electric Vehicle Battery Producers Need To Overcome These Hurdles To Supersede Global Giants

The electric vehicle (EV) industry is just one priority area of the country’s ‘Made in China 2025’ industrial strategy, which aims to transform China from a low-end manufacturer to a high-end one. Yet, the government’s goals for the industry are staggering: its target is to have five million electric vehicles on its roads by 2020, up from one million today.

The battery industry’s success is closely tied to the EV industry’s success – a battery currently accounts for up to half an EV’s cost of production. Given the close relationship of the EV industry and battery industry, the government has picked domestic champions that it is promoting to lead the way in China’s domination of the global battery industry.

Fierce global competition in this industry is already under way as producers vie for their share of the what is predicted to be a US$25 billion global industry by 2020.

The competitive landscape

In previous decades, Japanese and South Korean producers, such as Japan’s Panasonic and South Korea’s LG Chem, dominated the battery industry. Panasonic is still the world’s largest supplier of EV batteries globally; it is currently building the so-called Gigafactory in Nevada, US, with US-based EV producer Tesla.

However, Chinese champions Build Your Dreams (BYD) and Contemporary Amperex Technology Co. Limited (CATL) have nearly caught up and are now two of the world’s top-five lithium battery makers. BYD, which is based in Shenzhen, is also a big player in the EV industry and is able to take advantage of the benefits of this vertical integration.

CATL, based in Ningde, is China’s fastest growing battery producer and had the capacity to produce 7.6 gigawatt hours (GWh) of batteries in 2016. Due to China’s big push, it is predicted that CATL will surpass Tesla’s ‘Gigafactory’ by 2020. Tesla has a target to produce at a capacity of 35 GWh by 2020, compared to 50 GWh for CATL and 12 GWh for BYD.

Other Chinese producers are also competitive. Lishen, based in Tianjin, has a target to produce 20 GWh by 2020. As well as expanding production domestically, CATL is also expanding its production abroad so that it is strategically located to do more business with foreign EV producers.

With large capital investments by battery producers, global battery production capacity has more than doubled to 125 GWh over the last three years. Analysts predict this figure to double again to over 250 GWh by 2020.

As Chinese battery producers, including CATL, BYD, and Lishen, continue their rise, and battery production shifts from Japan and South Korea to China, analysts expect China to go from currently producing 55 percent of global lithium batteries to 65 percent by 2021. It is quite clear that China recognizes the opportunities in the rapidly growing battery industry and does not plan to miss out on these opportunities.

Challenges for the domestic industry

While the battery industry has strong growth potential, it faces a number of challenges. Solutions and technologies to overcome these challenges will need to be developed if the industry is to be sustainable both in China and globally – this is a space where foreign manufacturers, suppliers, and consultants can collaborate.

Despite growing demand from the EV industry, there are production capacity concerns in China’s battery industry. As producers race to increase capacity and seize upon the opportunities presented by the EV market, there are overproduction concerns with 25 KWh batteries; the low-end segment of the market.

However, at the same time, there are underproduction concerns with the 75 KWh and 100 KWh batteries – the high-end segment of the market. Premium electric vehicles, such as Tesla vehicles, require the high-end batteries. High-end battery producers in the domestic market are in a strong position because they are faced with a high demand for their batteries.

To allow electric cars to go farther on a single charge, a critical factor for batteries is their energy density. For now, China lags behind South Korean producers in terms of the capabilities and technology to provide greater energy density, according to Bernstein analysts. The frontrunners in the market are LG Chem, Samsung SDI, SK Innovation, and Panasonic, with Chinese suppliers playing catch-up, the report says.

Many observers feel Chinese producers need to develop their technology and capabilities if they are to get the full attention of EV producers, especially foreign EV producers.

Separately, as the cost of the battery makes up a significant part of the cost of an EV, it is important to reduce the cost of the battery to make the EV industry competitive compared to conventional internal combustion engine (ICE) vehicles.

Due to advances in battery efficiency gained from developments in technology, significant progress has already been made by the industry, with global battery prices falling by roughly 80 percent (from US$1,000/KWh to US$227/KWh) between 2010 and 2016. Even at US$227/KWh, a 60 KWh battery is a US$13,620 component of a car. A 60 KWh battery is the typical sized battery used in an EV.

However, further reductions in battery prices will be required and the Chinese government is aware of this. A target to halve battery costs is among national 2020 targets. Based on current projections, battery prices could fall below US$100 KWh by 2030, which will mean some EV and ICE models will have price parity. That could be the start of a ‘tipping point’ for EV sales.

Even if EV models do have price parity with ICE models, there will be other obstacles that could prevent consumers from switching from ICE vehicles to EVs. These obstacles include the lack of EV charging infrastructure, the time taken to charge a battery, and the relatively low power density of batteries.

Moreover, the existing power density of batteries is about half of what is needed to sustain driving ranges of 400 kilometers, which many consumers want. One of the Chinese government’s targets is to improve energy by two-thirds by 2020.

China’s ambitious plans for both the EV industry and the EV battery industry mean that there are opportunities in China’s EV battery industry. However, if these opportunities are to come to fruition, and the industry is to be sustainable, the industry must overcome the challenges that it faces.

For China, the development of new technologies and the ability to produce high-end batteries will be of critical importance if it is to realize its ambitions to dominate the global EV battery market. It is in these areas where China can benefit the most from foreign investment.

 

Dezan Shira & Associates provide business intelligence, due diligence, legal, tax and advisory services throughout the Vietnam and the Asian region.

 

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

Catch-22 In The South China Sea: China’s Provocations And ASEAN’s Impotence

Despite upcoming talks, Manila’s deferential stance to Beijing, and wider ASEAN disunity, mean no end in sight for China’s island-building in the South China Sea. Yet those islands will destroy the coral reefs they are built on, and the very fish stocks China wants to control in the first place.

China’s provocations and ASEAN’s impotence

Chinese and Filipino diplomats are still deciding when and where to pick up talks on the South China Sea in 2018, but in terms of substance, the two sides are already on the same page. Li Keqiang of China and Rodrigo Duterte of the Philippines spent the 31st ASEAN summit in October jointly insisting a “code of conduct” could stabilise tensions in the South China Sea – but failed to mask the lack of real progress.

The current state of affairs already represents a major diplomatic victory for Beijing. The Philippines, host of this year’s ASEAN summit, has effectively abandoned an unequivocal 2016 ruling in its favour from the Permanent Court of Arbitration (PCA) over China’sconstruction of artificial islands in disputed waters.

China rejected the validity of both the ruling and the PCA’s authority, but the Philippines and its ASEAN partners also failed to stand by the decision. Among member states, only Vietnam has come out in direct support of the PCA decision. China already ignores a 2002 declaration of conduct applying to the South China Sea. There is no indication any new code would be more binding.

This is unfortunate, because the PCA ruling addressed some of the most urgent ramifications of China’s actions in the region. It was particularly scathing in regard to environmental violations, stating “China had caused severe harm to the coral reef environment and violated its obligation to preserve and protect fragile ecosystems and the habitat of depleted, threatened, or endangered species.”

The inherent irony of the dispute is that dredging the sea floor to construct artificial islands endangers the very fisheries Beijing seeks to control. China’s own territorial waters are dead zones as a result of overfishing and industrial pollution, one of the main drivers for China’s claims in the South China Sea. Despite this, China marked the end of the summit (and last month’s visit from Donald Trump) by launching its new “magic island-maker” in a clear sign the island-building campaign is far from over.

Not that China is solely responsible. The failure of ASEAN to present a united front puts the resource-rich waters and the millions who rely on their declining fishing stocks for food and employment at risk. By leaving member states to fend for themselves against China, the bloc is undermining its own commitments to support environmental conservation and sustainability as well as international law.

Political concerns trump environmental imperatives

Preserving fish stocks and the ecological balance of the region as a whole requires concerted multilateral action of the sort current tensions render impractical. As early as 1992, scientists were proposing that the Spratley islands be designated as an international ecological marine park. At that point, the islands were not much more than atolls and rocks incapable of sustaining human habitation.

Since then, attempts at preservation have largely been unilateral and confined to respective Exclusive Economic Zones. As of late 2016, the Philippines intended to declare a marine sanctuary and no-fishing zone in the area that it claimed as its own, in spite of competing Chinese claims.

Worse, the destruction is not exclusive to China. Malaysia, Vietnam, the Philippines and even Taiwan have built airstrips and artificial islands on atolls in the South China Sea, destroying coral reefs in the process. Through its “Island Tracker,” the Centre for Strategic and International Studies (CSIS) has attributed ten such reclamation projects and 120 acres of reclaimed land to Vietnam alone – although it does consider Vietnam’s methods less destructive than China’s.

Even so, the overall ecological costs are substantial. Destroying atolls means destroying natural habitats for over 6,000 species of fish. Thanks to overfishing and environmental degradation, fish stocks in the region have plummeted: overall decline since the 1950s falls somewhere between 70% to 95%. In the 1970s, a Filipino fisher could count on an average daily catch of 20kg. Today, that number stands at less than 5kg.

Coral destruction only aggravates the impact of illegal, unreported and unregulated (IUU) fishing, which CSIS calls “a direct and indirect national security threat” in a report released this month with support and collaboration from the Philip Stephenson Foundation.Chinese fishers have to go farther afield to make a living. Accusations of IUU fishing have followed them, not just in the South China Sea but also in West Africa and South America.

These economic concerns could have serious political ramifications. In an era ofincreasing socio-economic inequality, Beijing obviously seeks to sustain its fishers’ livelihoods. The Chinese fishing industry directly employs between 7-9 million Chinese (in and beyond the South China Sea) and contributes as much as $279 billion USD to the national economy on a yearly basis.

ASEAN fishers are just as vulnerable to the threat of unemployment. The South China Sea may be the conduit for $5.3 trillion in annual international trade, but its struggling fisheries also employ at least 3.7 million people across littoral countries. Duterte’s deference to Beijing may partially be a bid to win concessions for Filipino fishers kept away from key fishing grounds by Chinese encroachment. That strategy has secured at least some successes, such as reopening the Scarborough Shoal to Filipino fishing boats.

Ways forward for preservation

With political and diplomatic avenues coming up short, other parts of the globe may offer alternative ideas on how to proceed. In the less geopolitically sensitive Caribbean, governments and international organisations work with non-governmental organisations (NGOs) to identify and implement proactive solutions.

Examples include Dr. Sylvia Earle’s Mission Blue, a project aiming to create a “worldwide network of marine protected areas.” Together with the Philip Stephenson Foundation, Mission Blue president recently hosted a gathering on the Caribbean island of Petit St. Vincent that promoted the goal of making 30% of the world’s oceans “fully protected” by 2030.

The choice of venue is significant, as these and several other NGOs (including CLEAR Caribbean and the Nature Conservancy) are also involved in coral planting there. Thanks to their political neutrality, environmental NGOs may offer a mutually acceptable path to ecological solutions in the South China Sea.

ASEAN and the Philippines have demonstrated their inability to stand by the PCA ruling. Non-state actors could have an easier time fostering initiatives to save coral reefs and the region’s fisheries. If successful, those projects could constitute the first steps to addressing the legal and geopolitical tensions bedeviling ASEAN governments.

 

 

Nicholas Leong is currently a trainee advocate & solicitor for Messrs Lai Mun Onn & Co in Singapore. As originally appears at: https://globalriskinsights.com/2017/12/south-china-sea-environment-fishery/

 

A China-US Trade War: Good News For Asia

An editorial in the South China Morning Post this week has discussed the potential for a looming trade war between the China and the US. In the editorial, Scott Kennedy, a deputy director at the Freeman Chair in China Studies and director of the Project on Chinese Business and Political Economy at the Center for Strategic and International Studies, lays out how the US may be preparing itself to battle with China over what Washington DC and President Donald Trump have labelled “unfair practices”. Kennedy writes that the US is in the process of building regulatory mechanisms to support the US in the event of a major trade conflict.

This comes as China has removed Skype from the Chinese app stores, citing security and legal concerns. To be fair, given what we’ve learned over the past few years concerning US surveillance, that should hardly come as a surprise: if the US spies on its own citizens, it is sure to have infiltrated software used in global communications. Isolating American influence is a strategy increasingly being played out by both China and Russia, with Russia also about to block Facebook. LinkedIn is already restricted in both countries.

The isolation of America continues via trade, and some of it not necessarily inflicted upon it by either Beijing or Moscow. The pull back from the Trans-Pacific Partnership by the Trump administration was an ill-thought out and inaccurate reaction to a perceived loss of American jobs. Yet those jobs – unless American workers really want to be engaged at Bangladeshi wage levels making garments – are never coming back. Economies constantly need to adapt and evolve. Denying the wage differences between Asia and the United States is fool-hardy – products will simply cost the American consumer more to have them carry a “Made in the USA” label and an entire supply chain industry will be damaged.

The TPP, meanwhile, has been reinvented as the Comprehensive and Progressive Trans-Pacific Partnership (CPTPP), excluding the US, and will benefit other Asia Pacific nations, Vietnam among them. What should have secured basic, cheap imported products from Asia, which US manufacturers could have added value to in terms of design, innovation and completion, will now be the remit of high-end Japanese, South Korean and Australian businesses instead.

Washington DC’s rhetoric as regards the potential for a trade war, therefore, alarmingly fits in with the new American isolationism. But as the West is starting to learn from imposing sanctions upon Russia, a trade war between the US and China will only strengthen Chinese capabilities to secure trade and supply routes elsewhere. It will be to Asia and Eurasia’s benefit, in fact, if this does happen. China has a free trade agreement with ASEAN that has been expanding in volume by just under 20 percent per annum and is expected to reach US$1 trillion by 2020. China runs a trade surplus with ASEAN by a considerable margin; a China engaged in a trade war with the US would see that imbalance partially removed as it would seek to buy more from ASEAN members.

Other countries likely to benefit would be India, whose China trade has a long way to go to reach true potential, and would receive a large boost from a China on the hunt for new supply chains. Russia too, and especially in light of the upcoming China-EAEU Free Trade Agreement being signed can also be expected to receive a boost in bilateral trade. The China-Russian corridor has been growing at over 30 percent this year, partially because Western sanctions have motivated Russia to look east for trading partners.

Washington DC needs to think very carefully about engaging with a trade war with China. Such a move would be tantamount to a temporary burst of sanctions and tit-for-tat retaliation. Under such circumstances, China will fast track its Belt & Road infrastructure development reach to secure alternative supplies, and boost its trade with Asia.

Notably, China’s new Administrative Measures for Outbound Investment by Enterprises,  which was released on August 4 this year, already specify encouraged areas. These include:

This signals that China is also prepared for a trade war with the US should it come to pass. With alternative supply chains, free trade agreements, and nearby Asian nations keen to close their trade gap with China all in place, any resulting conflict would be a huge boost for the Asian and Eurasian regions, and potentially spell disaster for the US economy. The way out for American manufacturers? Set up alternative production facilities in Asia, and fast.

 

Dezan Shira & Associates provide business intelligence, due diligence, legal, tax and advisory services throughout the Vietnam and the Asian region.

 

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

These 4 Chinese Fintech Stocks Are Tanking After New Regulatory Crackdown On Online Lending

The Troubled Ones

With China (FXI)(MCHI) tightening its regulations, shares of some listed fintech companies are suddenly under fire. As a result, a handful of the country’s largest fintech startups are also eyeing initial public offerings (IPOS) overseas. The country’s regulators have now stopped all approvals for online lending companies in an effort to tighten controls around Internet finance.

New regulations by the Chinese government direct local governments to halt approval of licenses to companies that provide online lending services, as well as forbidding these lenders to operate outside the province where they are registered. In the past, online lenders have faced scrutiny for providing loans without adequate due diligence, further burdening China’s bad debt issues. Most of these lenders charge high rates of interest. Even though existing companies will continue to operate, they will likely be subject to heavy regulations. “[Regulators] are very scared that a lot of these firms have very little internal control and serious oversight as to who they are lending money,” said Christopher Balding, a professor at Peking University’s HSBC Business School.

In the recent years, fintech companies that provide online lending and investment products have mushroomed in China, pushing the need for stricter regulations in this space. According to government sources, there are currently nearly 2,700 online lenders in China that service nearly 10 million customers. The country does not have a standard credit rating system currently, making it difficult for small borrowers to get access to loans. This has led to the fast growth of online lenders and also the need for tighter scrutiny after cases of fraud.

However, these regulations sparked a sell-off in shares of these fintechs, including several that have recently listed in New York.

Stocks affected

In the past few years, investors have shown a large appetite for fintech companies as they have gained hefty valuations in listings in New York and Hong Kong. The announcement regarding stricter regulations and curbs on new licenses sparked a sharp fall in Chinese listed fintechs.

Companies including Zhongan (6060.HK), Qudian (QD), Ppdai (PPDF) and Jianpu Technology (JT) have listed their shares in the past few months. Further, Chinese companies like Xiangyuan Culture Group, a Shanghai-listed entertainment and leisure company, and Renhe Pharmacy Group, a Shenzhen-listed firm have also laid out plans to spin off their micro lending units.

Shares of online insurer ZhongAn, that listed in September in Hong Kong dropped nearly 4%. The company’s shares have returned 17% since its $1.8 billion IPO. This was also Asia’s largest Fintech IPO in 2017. 

Comparatively, New York-listed shares of Alibaba (BABA) backed Chinese online microlender Qudian tumbled nearly 16% on November 22. The company’s shares have returned -33% since its IPO. The company raised $900 million in October in one of the largest Chinese IPOs in the United States in 2017 so far.

Meanwhile, shares of fintech companies Ppdai Group and Jianpu Technology that listed this month tanked 24% and 13% following the news.

Ppdai Group is an online microlender that raised $221 million in a public issue earlier in November on the NASDAQ exchange.

Jianpu Technology raised $190 million by listing 22.5 million ADRs on November 16. The company operates an open source platform for financial products in China.