Invest Asia Group in Timor Leste
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Cristo Rei in Dili, Timor Leste
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As of 2020, China is the world’s second largest economy, underpinned by rapid economic growth from a stagnating economy in the 1970s to a modern superpower only 40 years later. Initially, through a combination of reforms, opening-up and state-led capitalism, China attracted substantial foreign direct investment inflows by promoting attractive low-cost manufacturing.
However, from the mid-2000s onward, whilst exports still comprise a large proportion of gross domestic product (GDP), the Chinese consumer has experienced increased purchasing power with extra disposable income available. This has resulted in numerous investment opportunities becoming available for international investors.
However, from the mid-2000s onward, whilst exports still comprise a large proportion of gross domestic product (GDP), the Chinese consumer has experienced increased purchasing power with extra disposable income available. This has resulted in numerous investment opportunities becoming available for international investors.
Timor Leste: Overview
China is a very diverse country both geographically and economically with stark differences in living standards between the highly developed Coastal cities compared to the Central Regions and far Far West. The tiered city ranking, in combination with the hukou system implemented by the Chinese government provides a glimpse into the differences between locations throughout the country.
Whilst first tier cities offer the best talent pool of employees to choose from, the associated labour and fixed business costs are also substantially higher. Depending upon your proposed business type, we recommend a thorough analysis to determine the best location to establish within China. Local governments often also offer attractive benefits to encourage foreign direct investment to their cities.
Whilst first tier cities offer the best talent pool of employees to choose from, the associated labour and fixed business costs are also substantially higher. Depending upon your proposed business type, we recommend a thorough analysis to determine the best location to establish within China. Local governments often also offer attractive benefits to encourage foreign direct investment to their cities.
Tier 1 Cities
Canton Tower in Guangzhou
There are four traditional Tier 1 Cities in China, representing the most developed cities and local populace within the country.
These four traditional Tier 1 Cities are known colloquially as Bei-Shang-Guang-Shen (北上广深) and consumers living within these cities have the most disposable income and purchasing power across China.
- Beijing (北京市) – Population: 20.4 million - Home to the Great Wall of China, Tiananmen Square, Forbidden City and much more!
- Shanghai (上海市) – Population: 27 million - The Bund, Glistening Skyscrapers & French Concession Area are some of the highlights in this world-class city.
- Guangzhou (广州市) – Population: 13 million - Capital City of Guangdong Province, which is also known as the ‘world’s factory’ for its manufacturing factories.
- Shenzhen (深圳市) – Population: 12.3 million - Technologically advanced city located on the border of Hong Kong.
These four traditional Tier 1 Cities are known colloquially as Bei-Shang-Guang-Shen (北上广深) and consumers living within these cities have the most disposable income and purchasing power across China.
'New' Tier 1 Cities
Whilst the Tiered City system isn’t official, it’s commonly used by media outlets across China due to the fact that the entire country is so different and varied from city to city. The ‘new’ Tier 1 and Tier 2 cities in China are as follows:
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New Tier 1 Cities as follows:
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Forbidden City in Beijing
Tier 2 Cities
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Whilst the main cities of Beijing, Shanghai, Guangzhou and Shenzhen are known internationally, a large proportion of ‘New’ Tier 1 and Tier 2 Cities are unheard of to international investors. This is despite being home to a burgeoning middle class of consumers with savings and increasing disposable income, proving the Chinese market differs by city and offers a plethora of opportunities in both the international cities and lesser known cities.
Business Operations in China
Operating a business in China presents an array of opportunities as well as challenges. Aside from obvious business related risks, understanding and working within a foreign system presents numerous challenges to investors.
However, with a relevant strategy, professional advice and local team, these risks can be mitigated. Whilst details are quite complex, we’ve summarized accordingly so readers can gain an understanding of the different options and processes involved in operating a business in China.
However, with a relevant strategy, professional advice and local team, these risks can be mitigated. Whilst details are quite complex, we’ve summarized accordingly so readers can gain an understanding of the different options and processes involved in operating a business in China.
Forming a Company in China
The Bund in Shanghai
Establishing a company in Mainland China is not a simple process and depending upon your specific business objectives, there are alternative options to establishing a People’s Republic of China domiciled company. If it’s not absolutely necessary to form a separate legal entity in China, we often recommend forming a Hong Kong company to begin with as this process is more efficient and cost-effective.
With a ‘parent’ company structure established in Hong Kong, investors have the option to enter China with distribution agreements or representative offices. The below detailed options do have considerable limitations (namely the ability to trade and receive payments in CNY) so it ultimately depends upon specific goals and objectives for entering the China market.
With a ‘parent’ company structure established in Hong Kong, investors have the option to enter China with distribution agreements or representative offices. The below detailed options do have considerable limitations (namely the ability to trade and receive payments in CNY) so it ultimately depends upon specific goals and objectives for entering the China market.
- Representative Office
- Umbrella Corporation
- Distribution Agreements
- WFOE (Wholly Foreign Owned Entity) in China
- WFOE (Wholly Foreign Owned Entity) in Shanghai
- Joint-Venture Partnership
- FIPE (Foreign Invested Partnership Enterprise)
Company Formation Procedure
- Choose a consulting firm or legal agency to engage during the formation of company.
- Choose business scope to operate in – is this business scope encouraged, restricted or prohibited to foreign investors?
- Ensure all foreign investors have received approval by the PRC government to own shares in the Chinese entity. This is normally a formality but needs to be undertaken.
- Prepare all required documents to receive approval to operate company by the PRC government.
- Apply for approval by specific departments – MOFCOM/COFTEC/BOFCOM and SAIC
- Apply for and receive a business license
- Open Entity bank account and deposit registered capital amount
Aside from the above standard procedures to form a company, there are also additional steps required including local PSB approval, tax and foreign exchange bureau registrations, accounting standards as well as industry specific requirements.
Invest Asia Group strongly advises investors to engage either an experienced local consulting company or an international law firm to navigate these processes.
International Investors
Whilst there are certain restrictions, international investors/companies can operate businesses in Mainland China. Moreover with ongoing reforms, the number of restricted industries that foreign investors are able to operate is continually being reduced on an annual basis.
Corporate Taxes
There are a number of different corporate taxes within Mainland China as outlined below:
- Corporate Income Tax at 25%. This is a tax on gross profits. However, depending upon the sector and if it’s an ‘encouraged’ industry, corporate income tax can be reduced to 15%.
- Transaction Tax. This varies depending upon the industry and is typically between 3 – 5% but can be higher if businesses operate in the ‘entertainment’ sector (between 5 – 20%).
- Value Added Tax (VAT) at 17%. This tax is a consumption based tax meaning this can be passed on.
- Customs Duties – imports and exports are taxed via customs duties depending upon the product. There are ways to get reductions or exemptions for both imports and exports, depending upon the product/industry.
- Individual Income Tax – ranges between 3% to 45%
- Withholding Income Tax on payments to non-residents – a concessionary 10% rate is applicable to rental royalty, interest as well as other passive income.
Where to establish
This depends upon your business type and goals for doing business in China. Tier 1 cities (outlined above) offer the best labour force but with much higher competition, resulting in higher costs. Please advise your business type and specific goals for China when contacting our team.
Tax-Friendly Policies
Yes – a number of tax-friendly investment policies exist to encourage investment within specific sectors and industries. Further details can be provided, depending upon your specific inquiry.
Financial Markets in China
China’s stock markets are relatively young, compared to their international peers and were first opened in 1990 to assist in the reform and opening up of the Chinese economy. There are two exchanges operating – the Shanghai Stock Exchange and Shenzhen Stock exchange, with each bourse operating a little differently. A brief overview of each stock exchange is outlined below
Shanghai Stock Exchange
The Shanghai Stock Exchange is China’s largest and most famous bourse with a market cap of approximately USD $5 trillion (fluctuating depending upon CNY exchange rate). In comparison to Shenzhen, the Shanghai Stock Exchange is more balanced across various different sectors with financial & manufacturing stocks equally represented.
Investors are predominantly pension funds, institutions and banks. The SSE Composite is a market made up of all the A-Shares and B-Shares that trade on the Shanghai Stock Exchange
Investors are predominantly pension funds, institutions and banks. The SSE Composite is a market made up of all the A-Shares and B-Shares that trade on the Shanghai Stock Exchange
Shenzhen Stock Exchange
The Shenzhen Stock Exchange is located in Southern China in the city of Shenzhen, overlooking Hong Kong. With a market cap of approximately USD $3.5 trillion (fluctuating depending upon CNY exchange rate), the Shenzhen Stock Exchange is a smaller bourse primarily lists manufacturing companies and smaller, more innovative and entrepreneurial companies. Retail investors make up a large component of the Shenzhen Stock Exchange.
China Stock Types
There are different classes of shares available in China, each with different fees, regulations and procedures. Details of these different classes of shares are summarized below:
- China A-Shares
- China B-Shares
- China H-Shares
- Red Chip Stocks
- P-Chip Stocks
Other ways to get exposure to Mainland China Stocks
Aside from the aforementioned ways to gain exposure to Mainland China companies, investors also have options to invest in Index Funds and Chinese stocks listing in US markets. There are a number of different China related Exchange Traded Funds (ETFs) and some of the larger individual Chinese stocks listing on American stock exchanges include Alibaba, Tencent and Baidu.
Most brokers will offer access to China exposure ETFs and individual stocks listed on the US bourses.
Despite an array of different challenges, China’s growth should continue to outpace the developed economies and offer a number of attractive investment options.
Most brokers will offer access to China exposure ETFs and individual stocks listed on the US bourses.
Despite an array of different challenges, China’s growth should continue to outpace the developed economies and offer a number of attractive investment options.
Foreign Exchange
Since 1994, the Chinese Yuan (CNY) also known as the Renminbi (RMB) has fixed its currency to the United States Dollar (USD). Nowadays, the currency is semi-pegged whereby on a daily basis the People’s Bank of China (PBOC), which is China’s central bank, sets a ‘mid-point’ rate for the currency permitting it to only deviate up to 1% either side of this midpoint.
This policy ensures Chinese exports are attractive on a global basis and has helped drive the economic growth experienced by China over the past 30 years through keeping the currency artificially low.
Aside from the Chinese Yuan fixed onshore rate, there is also an offshore Chinese Yuan market which is priced by foreign exchange market factors. The USDCNH prices this particular market of what the ‘offshore’ Yuan is valued at and there is commonly deviation from the onshore market.
With the CNY/RMB not being a freely convertible currency, there are a number of capital controls within China controlled by the State Administration of Foreign Exchange (SAFE). These foreign currency related rules are regularly changed but overall individuals are only permitted to remit a maximum of USD $50,000 in outflows to foreign countries per calendar year. There are also restrictions on inflows into China. Alternatively, Hong Kong has no capital controls and Mainland citizens often utilize cross border remittance services for both inflows and outflows.
This policy ensures Chinese exports are attractive on a global basis and has helped drive the economic growth experienced by China over the past 30 years through keeping the currency artificially low.
Aside from the Chinese Yuan fixed onshore rate, there is also an offshore Chinese Yuan market which is priced by foreign exchange market factors. The USDCNH prices this particular market of what the ‘offshore’ Yuan is valued at and there is commonly deviation from the onshore market.
With the CNY/RMB not being a freely convertible currency, there are a number of capital controls within China controlled by the State Administration of Foreign Exchange (SAFE). These foreign currency related rules are regularly changed but overall individuals are only permitted to remit a maximum of USD $50,000 in outflows to foreign countries per calendar year. There are also restrictions on inflows into China. Alternatively, Hong Kong has no capital controls and Mainland citizens often utilize cross border remittance services for both inflows and outflows.
Commodities
Being the world’s second largest economy, China imports and exports a number of different commodities ranging from base metals to agriculture and dominates many of the world’s commodity markets.
The economic growth over the past few decades has lead to an infrastructure boom across all of China with high demand in particular for infrastructure related commodities (energy and metals).
Some of the top commodities China imports include:
The Iron Ore commodity market is dominated by predominantly Australia (62%) and Brazil (21%) exports of this raw materials. South Africa and Brazil contribute a very small proportion of exports in comparison. The controversial Simandou Iron Ore mine in Guinea is currently under development as a State Owned Joint Venture and with forecasts to produce up to 95 MT per annum of ore, this will impact the aforementioned iron ore suppliers.
China is also the world’s dominant producer of the 17 Rare Earth Elements/Metals with an increased demand for rare earth metals leading to likely commodity price rises. China is also the world’s top gold producer and third top silver producer.
Within China, there are commodity exchanges, however, they’re still in a development stage. Over the years ahead, a greater variety of commodities are expected to be added with greater liquidity. The three biggest commodity exchanges in China are:
The economic growth over the past few decades has lead to an infrastructure boom across all of China with high demand in particular for infrastructure related commodities (energy and metals).
Some of the top commodities China imports include:
- Oil
- Iron Ore
- Copper & Copper Ore
- Oil Seeds (e.g. Canola)
- Coal
The Iron Ore commodity market is dominated by predominantly Australia (62%) and Brazil (21%) exports of this raw materials. South Africa and Brazil contribute a very small proportion of exports in comparison. The controversial Simandou Iron Ore mine in Guinea is currently under development as a State Owned Joint Venture and with forecasts to produce up to 95 MT per annum of ore, this will impact the aforementioned iron ore suppliers.
China is also the world’s dominant producer of the 17 Rare Earth Elements/Metals with an increased demand for rare earth metals leading to likely commodity price rises. China is also the world’s top gold producer and third top silver producer.
Within China, there are commodity exchanges, however, they’re still in a development stage. Over the years ahead, a greater variety of commodities are expected to be added with greater liquidity. The three biggest commodity exchanges in China are:
- Shanghai Futures Exchange (ShFE) – predominantly base metals
- Dalian Commodity Exchange (DCE) – iron ore futures
- Zhengzhou Commodity Exchange (ZCE) – sugar, cotton, wheat etc.
Cryptocurrency in China
In September 2017, China banned all ICO (Initial Coin Offerings) from operating in the China Market followed by the closure of all cryptocurrency exchanges located in China. Further crackdowns on domestic dealers engaging foreign exchanges and China based financial institutions in dealing in cryptocurrency have effectively ended all institutional support. However, cryptocurrency is still popular among a segment of the Chinese population who circumvent the restrictions via Hong Kong and access other international exchanges. There are no restrictions on cryptocurrency trading in Hong Kong.
Digital Yuan (DCEP)
The People’s Bank of China (PBOC) has adopted a digitized Yuan (named DCEP), which as of June 2020 is being trialled in four cities within China. Unlike decentralized cryptocurrencies such as Bitcoin or Ethereum, the Blockchain-based Service Network (BSN) adopted by China is a centralized cryptocurrency, to ensure control whilst innovating the next generation of technology. Aside from the geopolitical ramifications of a centralized country adopted cryptocurrency, the question remains – how effective will this be for international payments with capital controls?
Digital Yuan (DCEP)
The People’s Bank of China (PBOC) has adopted a digitized Yuan (named DCEP), which as of June 2020 is being trialled in four cities within China. Unlike decentralized cryptocurrencies such as Bitcoin or Ethereum, the Blockchain-based Service Network (BSN) adopted by China is a centralized cryptocurrency, to ensure control whilst innovating the next generation of technology. Aside from the geopolitical ramifications of a centralized country adopted cryptocurrency, the question remains – how effective will this be for international payments with capital controls?
Property in China
Like most industries within China over the past three decades, the property market has experienced high growth across all tiers of cities with particular emphasis on the Tier 1 cities of Beijing, Shanghai, Guangzhou and Shenzhen. Despite no private land ownership permitted within China, fixed land-grant terms are applied, leading to private ownership of apartments for a fixed period. Typically, for residential use in urban areas, a land lease is granted for 70 years. These land-use rights can usually be transferred, allowing a burgeoning property market.
Due to the size of the country and differences in development across regions, the property market within China substantially differs between cities and provinces. Therefore, the best way to analyse the property market is on a local level as opposed to country-wide analysis.
Due to the size of the country and differences in development across regions, the property market within China substantially differs between cities and provinces. Therefore, the best way to analyse the property market is on a local level as opposed to country-wide analysis.
International Investors & Chinese Property
Yes and no. China has very strict property ownership laws (if they can even be called ownership) and because of this, Invest Asia Group doesn’t recommend purchasing property/apartments in Mainland China. As outlined above, it’s not possible to own freehold land but instead receive a ‘land lease’, which is granted for a maximum of 70 years.
Combined with the fact that foreigners are only allowed to purchase a maximum of one property and need to have lived in China for at least 12 months (in Tier 1 cities, further restrictions also apply). In addition, foreigners are unable to rent out the property/apartment as it’s only to be used for living purposes.
Combined with the fact that foreigners are only allowed to purchase a maximum of one property and need to have lived in China for at least 12 months (in Tier 1 cities, further restrictions also apply). In addition, foreigners are unable to rent out the property/apartment as it’s only to be used for living purposes.
Property Taxes
The property market in China is one of the causes of wealth disparity within the economy. Despite discussions at government level over almost 10 years, a property tax hasn’t yet (as at June 2020) been implemented. Originally, tax rates were going to be implemented at a local level as opposed to national level due to the segmented and polarized market. An apartment in central Beijing is priced substantially higher per square meter than a property in Far Western China.
When purchasing a residential apartment in China there are a number of fees associated in doing so.
As at June 2020, no national or provincial property tax law has yet been introduced.
When purchasing a residential apartment in China there are a number of fees associated in doing so.
- Deed Tax (between 3 to 5% depending on location)
- Transfer Tax (0.5 % - imposed by local real estate bureau)
- Stamp Tax (0.05% - imposed on both buyer and seller)
- Real Estate Agency Fees (negotiable)
As at June 2020, no national or provincial property tax law has yet been introduced.
Best Locations to Purchase Property
During the early 2000s, the property values in the Tier 1 cities increased substantially. With the combination of better employment prospects, earnings opportunities and hukou benefits, there should always be an underlying demand for Tier 1 city properties – Beijing, Shanghai, Guangzhou and Shenzhen. The ‘new’ Tier 1 cities have also significant demand and understanding future 5 – 10 year government policies are a good indicator for future opportunities. In more recent years, property values have been driven by the lower tiered cities (Tier 2 and Tier 3 cities).
Overall, many analysts view China’s apartment market as having a large surplus of empty apartments whilst speculative investing is also rampant due to the limited stable options available to Chinese investors (outside of the housing market). The overall market is deeply segmented between cities, provinces and regions.
Overall, many analysts view China’s apartment market as having a large surplus of empty apartments whilst speculative investing is also rampant due to the limited stable options available to Chinese investors (outside of the housing market). The overall market is deeply segmented between cities, provinces and regions.
Additional Property Information
Within China, it’s the responsibility of the seller or the property developer to provide the following certificates when conducting a property transaction:
- State Land Usage Certificate (国有土地使用权证)
- Construction Land Planning Certificate (建设用地规划许可证)
- Construction Project Planning Certificate (建设工程规划许可证)
- Construction Project Commencement Certificate (建设工程开工证)
- Sales Certificate (销售许可证)
Venture Capital/Private Equity in China
Venture Capital started to become available in China from 2003 onwards as overseas funds began to open offices throughout the country. This further compounded as a number of Chinese entrepreneurs became wealthy from their companies initial public offerings. These first generation of China’s tech titans included Jack Ma, Pony Ma and Lei Jun, among others. Prior to COVID-19, China became the second largest market in the world for Venture Capital, however in the year prior (2019) this dipped due to a number of factors including the trade war and economic slowdown after peaking in 2018.
Some of the most successful VC investments in Chinese companies include:
The China Venture Capital and Private Equity Association is the earliest trade organization promoting development of VC and PE throughout China.
Invest Asia Group operates across China providing a range of investment and consulting services. East Asia is home to some of the largest and richest countries in Asia and provides diverse opportunities for savvy investors seeking to profit from this region.
Some of the most successful VC investments in Chinese companies include:
- UCWeb (Morningside Ventures & Ceyuan Ventures)
- Alibaba (Softbank)
- JD.com (Capital Today)
- Semiconductor Manufacturing International (New Enterprise Associates)
- Meitu (Sinovation Ventures & Qiming Venture Partners)
- Qudian (BlueRun)
- Ucar (Warburg Pincus & Legend Holdings)
- NIO (Tencent)
- Meituan Dianping (Sequoia Capital China)
- Xiaomi (Morningside Ventures)
- Pinduoduo (Tencent & Sequoia Capital China)
- Ele.me (Tencent)
The China Venture Capital and Private Equity Association is the earliest trade organization promoting development of VC and PE throughout China.
Invest Asia Group operates across China providing a range of investment and consulting services. East Asia is home to some of the largest and richest countries in Asia and provides diverse opportunities for savvy investors seeking to profit from this region.
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