China has a population of more than 1.3 billion and covers an area of 9.6 million square kilometres. It is divided into 23 provinces, 5 autonomous regions (Tibet and others), 4 Central Government municipalities and two Special Administrative Regions (Hong Kong and Macau). Taiwan remains an independent and separate nation. Hong Kong and Macau are self-governing entities with a very high degree of autonomy which includes autonomy over their own legal systems, currencies, immigration controls, passports, taxation and international treaties.
The China coastline is 18 thousand kilometres long with many commercial harbours. As a result of government policy, early foreign investments focused on the coastal provinces but the advantages of other provinces and inland cities have now been discovered. The six Special Economic Zones – Hainan, Zuhai, Shenzhen, Shantou, Xiamen and Pudong are situated on the coast.
China is not a homogeneous country and there are significant cultural and linguistic differences between the north and the south. There is also an east-west divide since economic growth has been strongest in the coastal areas while interior provinces lagged behind.
In China there are often four layers of government – National, Provincial, City and Municipal. There are different rules and regulations and taxes in each place and also there are industry-specific regulations which are enforced.
China's economic growth has been spectacular since the late seventies when economic reforms began.
The Chinese currency the Renminbi (“RMB”) or Yuan is not yet fully convertible although it is expected to become so in the future. In past years the currency has been closely aligned to the US Dollar although recently the Chinese government has allowed more flexibility.
Many Chinese companies are listed on the Hong Kong, New York and London stock exchanges and on the secondary markets. In China there are stock exchanges in Shanghai and Shenzhen. Companies listed in China have two classes of shares “A” and “B”. “A” shares are quoted in RMB and are mainly restricted to local investors although some foreign investment funds can buy them. “B” shares are quoted in US dollars and are available to foreigners.
There are plans to eventually abolish the distinction. Several investment managers operate funds dedicated to Chinese stocks from Hong Kong and other financial centres and this would be the recommended channel for investors wishing exposure.
Over the past twenty years China has become a major manufacturing and exporting country. Shanghai and the north is predominant in heavy industry – steel, automobiles, ships and petrochemicals with the south concentrating on electronics, garments, toys and consumer goods.
Many companies source goods from China without having any permanent presence in the country.
Often middlemen or trading companies are involved in the process. Although they will earn fees for their services they generally perform a useful function. Detailed, western-style contracts are rare and Zetland believes it is important for the following elements to be clearly agreed before a business relationship commences.
Quality control is critical and there are a number of quality assurance companies operating in China who will undertake product inspection during production and pre shipment and factory verification for overall quality standards, compliance with labour regulations, etc.
Chinese manufacturers will generally not be in a position to extend significant credit and will require payment by means of letter of credit or similar upon shipment.
Many companies sourcing goods in China will use a Hong Kong company to reinvoice the sales to the buyer. The goods may be shipped directly from China but the Hong Kong company can take a margin on everything sold. Properly structured no tax is payable in Hong Kong since there is no taxable source in the territory. Each situation is different and Zetland will be pleased to advise on what is possible (see Zetland’s Guides to Offshore Operations and Hong Kong companies for further information).
Some buyers feel that conducting business through a Hong Kong company will also enhance credibility in China and may lead to more favourable business terms being negotiated. Hong Kong and China have also entered into a series of agreements called the Closer Economic Partnership Arrangements (CEPA) which give Hong Kong companies some advantages in certain industries in China. To avoid your company having to rent an office or employ staff in Hong Kong, Zetland Fiduciary Group can cost—effectively manage all functions of your Hong Kong holding company by providing incorporation and subsequent outsourcing services such as accounting, Tax , financial reporting and corporate compliance.
For more details regarding business in China, please see Zetland's Guide to Doing Business In China.