Sweeping policy reforms have made foreign direct investment in China increasingly attractive over recent decades. It is, however, important to structure your investments effectively in consultation with your professional advisors to avoid tax, legal and financial pitfalls, say Rupert Gerald, commercial director and head of Intertrust Group’s APAC Sales Desk, Donald Tsang, executive director and head of Corporate Services Greater China, and Jack Yan, general manager at Intertrust Group Shanghai.
Since the end of the 1970s, China’s GDP growth rate has averaged at 9.25%, reaching an all-time high of 18.3% in the first quarter of 2021. It has become the world’s second-largest economy and a global business powerhouse.
Over the past three years the country has faced challenges relating to lockdown measures and restrictions on travel, which dampened economic growth. However, the government is now determined to open its borders and encourage foreign direct investment (FDI) into China.
In January 2023, quarantine restrictions for visitors were dropped in a bid to make the country more accessible. The government has also introduced reforms aimed at encouraging FDI and trade, and supporting inbound corporate expansion.
China received USD 163bn of FDI in 2020, up from USD 140bn the previous year, making it the single largest inbound destination for FDI in the world. China’s National Bureau of Statistics (NBS) published figures in January 2023 showing that GDP grew 3% year-on-year in 2022 to CNY 121tn.
The country offers huge potential: the number of middle-income households is currently estimated at 400 million. Over the next three years, it is expected that China will add 71 million upper-middle- and high-income households.
Figures from the NBS show China’s innovation index reached 264.6 in 2021, an increase of 8% over the previous year.
What areas have sparked interest in FDI in China?
Foreign investors have capitalised on opportunities across a broad number of industries. The following are examples of areas in which we have seen our foreign clients continue to grow in the last few years:
- Data centres: There is strong growth in e-commerce and digitalisation in China, and this has led to high demands for digital and data infrastructure. Revenue in the data centre market is projected to reach USD 69bn in 2023 at an annual growth rate of 5.7%, which would lead to a market volume of USD 86.2bn by 2027. Infrastructure is required to satisfy demand and there is significant investment from large domestic players such as Alibaba, Baidu, Tencent, and China Mobile. The recently launched “Eastern Data, Western Computing” project is also expected to continue to drive growth.
- Biotech: Pharmaceuticals, biotech, and the medical technology industry have seen a lot of successful market entrants into China, including high-growth US startups looking to capitalise on the breadth of opportunity that China has to offer across research, development, clinical trialling, and product commercialisation. China is the largest FDI market for research and clinical trials, and its largest outbound market is the US.
- Real estate: China’s real estate industry is a long-term economic driver. One example of recent growth is the explosion of e-commerce, which has opened up a new wave of real estate investment opportunities for investors in industrial parks and logistics facilities that provide the infrastructures to support the growth of online shopping.
- Consumer goods and services: The rapid growth in the Chinese middle class has continued to drive spending habits in e-commerce, vehicles, tourism, and food and beverages.
Entity types for investment in China
The first key decision when investing in China is to decide in consultation with your professional advisors which entity type is most appropriate for your business. There are generally three primary options:
WFOE (Wholly foreign-owned enterprise): the most popular form of China market entry for foreign owners, offering 100% foreign ownership.
Joint venture: in China this requires a local partner who takes a controlling share (more than 50%).
Representative office: in China this is used to represent the activities of an overseas legal entity. One drawback is that a representative office cannot raise invoices or hire employees.
A WFOE is attractive for FDI in China because it provides much more freedom in business activities. It can hire employees, is fully owned by the investors and enables them to repatriate profits overseas.
However, it is important that the incorporation process is carefully planned and executed in consultation with professional advisors to ensure the WFOE is fully compliant with local laws and regulations during its lifetime.
Regulatory requirements and business best practices are constantly evolving in China. The importance of seeking operational efficiency and effectiveness has never been greater.
As a result, the way in which investors need to approach WFOE maintenance is also changing. It is beneficial to work with a partner who can help you maintain best practices, provide services to help navigate the local administrative landscape, enhance your local governance, risk and compliance, and achieve success.
Why Intertrust Group?
- CSC completed its acquisition of Intertrust Group in November 2022. Together we offer a global solution for subsidiary governance, fund strategies, and capital markets transactions, to help you navigate the ever-changing compliance and regulatory environment that our clients face. With capabilities in more than 140 jurisdictions, we are able to do business wherever our clients are—and we accomplish that by employing experts in every business we serve.
- We provide expert service and technology solutions for every phase of the business and investment life cycle, helping to form entities, maintain compliance, execute secured transaction work and support real estate, M&A and other corporate transactions.
- We provide tailored administration and strategic outsourcing solutions to support the complex world of alternative asset managers across jurisdictions and asset types, while adhering to global regulations and compliance.
- Our focus on bespoke corporate services, fund, capital market and private client services supports our clients initiatives to invest, grow and thrive anywhere in the world.
This document is provided by Intertrust for information purposes only and does not constitute an offer, invitation or inducement to contract. The information herein does not constitute legal, tax, regulatory, accounting or other professional advice and therefore one should seek appropriate professional advice before considering a transaction as described in this document. No liability is accepted whatsoever for any direct or consequential loss arising from the use of this document.
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