Liberalization presents investment opportunities, challenges
China’s measured approach to liberalizing its investment environment is steadily providing greater opportunity for foreign enterprises in the world’s biggest consumer market.
However, high costs in some areas, complex regulations, and tight financial controls continue to pose challenges, a China expert from PwC China said.
Scott Qian, the Shanghai-based director of PwC (PricewaterhouseCoopers) China and a tax and business advisory specialist in the country, told delegates to the Manila Times business forum this week China has been the “world’s biggest market transformation story.”
“Important economic aims being pursued by the government include reducing state investment in enterprises, implementing structural reforms in banking and business regulation, and making entry to China easier for foreign investment,” Qian told the more than 200 business delegates present at the Philippines-China business forum dubbed ‘Business as Usual in Unusual Times,’ held at the Dusit Thani hotel in Makati City on Wednesday.
Qian noted that the overall goal of the government was to maintain GDP growth of about 7.5 percent while reforms were being gradually implemented.
“The approach of the government has been gradual,” Qian said. “What is being done is to roll out reforms on a ‘pilot’ basis in one area, then expand it from there after it is seen that it is successful.”
He described the Shanghai Pilot Free Trade Zone (PFTZ), actually four separate areas in and around Shanghai spanning about 29 kilometers, as one example of the pilot approach.
Some of the incentives being provided to businesses setting up in the PFTZ include faster approval processes for setting up banks and other financial services businesses, relaxation of some customs regulations and procedures, easing of some administrative regulations applied to foreign businesses in other parts of the country, and some tax incentives for exporters, professionals in high-demand occupations, and non-monetary capital asset investments in existing businesses.
“This approach is being applied not only in certain geographic areas, but also in certain business sectors as well,” he added.
Clipping state ownership
One business area that Qian described as providing greater investment opportunities is in the reduction of state ownership of enterprises through “mixture ownership,” wherein fully state-owned businesses are transformed by combining different ownership structures.
“For example, an enterprise might go from being 100 percent state-owned to only 25 percent state-owned, with the rest divided among public shares, private investment, and joint venture or other types of foreign investment,” Qian explained.
Rising operating costs
Qian did acknowledge that there are several obstacles to investment in China that must be overcome, in particular high labor and operating costs in some areas, restrictions or outright prohibitions on foreign equity in some business sectors, and strict controls on currency movement.
“China is gradually working towards reform in some of these areas,” he said. “The list of restricted businesses is being updated quite frequently, with more sectors being opened to at least some foreign investment, and changes in the law have recently made it easier to repatriate profits through related-party transactions.”
In terms of increasing labor costs, which has become one of the biggest criticisms of China’s investment environment, Qian agreed with other forum speakers that this should be an incentive for investors to explore cities and regions outside the popular and expensive areas of Shanghai, Beijing, and other cities in China’s densely-populated east.
An infographic Qian provided for his audience showed that much like the Philippines, minimum and average wages in China vary from region to region. Although not comprehensive, Qian’s data indicated that minimum wages in China are generally lower than those in the Philippines, while average wages are significantly higher.
“China is not an easy country to invest in, but there are many opportunities for investment, and they are growing all the time,” Qian said. “Understanding the market and developing the right business plan and structure are keys to being successful.”