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CHINA 2020: TOO BIG TO IGNORE Chinas investment environment / New era for foreign investment regime in China /. GLANCE AT SECTORS: A MARKET NOT JUST A FACTORY Healthy China: Chinas healthcare industry / Chinas auto industry: a country on intelligent wheels? /. INITIATIVES: CHINA DOUBLES DOWN ON GLOBALIZATION Great projects: Belt and Road Initiative / The Greater Bay Area01 Introduction 20 Chinas auto industry: A country on intelligent wheels? 07 New era for foreign investment regime in China 24 Technology: New opportunity for foreign investors? 34 Great projects: Belt and Road Initiative 09 Structuring your business in China 04 Chinas investment environment 22 Financial and capital market: Opportunities or challenges? 26 36 38 Education: A goldmine The Greater Bay Area Meet the team Last updated in June 2020 28 Cosmetics: Beauty in China 18 Healthy China: Chinas healthcare industry Doing Business in China 30 DigitalIn this publication, we explore the key questions being asked by clients looking to unlock investment opportunities in the Peoples Republic of China (China) such as: What are the best opportunities for investing in China? What are the challenges? How do other investors deal with the key issues? How do I deal with regulatory change? 2019-2020 have been challenging years for both China and the world. China has had to contend with both the fallout from the Covid-2019 pandemic as well as the trade conflict between China and the US. Chinas response has largely been to think BIG. Regulatory reform, rebalancing a transition to an innovative economy and embracing globalization. In addition China has shown it can still think BIG domestically with the Greater Bay Area initiative. In China the only constant is change! Chinas commitment to further open up its markets to foreign investors is providing new opportunities in the worlds most dynamic economy. A notable milestones was the Foreign Investment Law which was adopted in early 2019 and underscores this commitment to continue to open up industry sectors, level the playing field for foreign businesses and protect the IP of Chinese and international companies alike. The world is entering a challenging period. China may well be a rare source of growth in a bearish world. The greatest opportunities are for investors targeting the hottest sectors of the economy and where foreign investors have the most value to add. On the next page, we summarize the key questions investors and directors of companies in China should ask. China is uniquely crucial to our firm and we hope that this publication will demystify the China challenges but also the China opportunities. We hope that we can add value to your business in China and would be delighted to discuss opportunities with you further. Introduction Xu Ping Head of Corporate Practice Zhang Yi Chairman of China Management Committee 1 Doing Business in China / Funds transfer strategy Disclosure policy Systematic risk management 1 3 5 7 9 2 4 6 8 10 Assess the impact of regulatory change Due diligence on counterparties Crisis and public relations management Investors and directors will be well served by considering and asking the following questions: Is your companys China strategy based on evidence and data? Has your company done its homework? Evidence-based decision making Does your company have clear compliance policies relating to your China business that all relevant staff have been trained on? “Everyone else does it” is not a defence. Do executives check if there are risks in travelling to China before doing so, such as unresolved disputes with large Chinese companies? When facing these circumstances should they defer any non-essential travel? When did you last receive an update and how susceptible are your overseas revenues to regulatory developments in China? Does your company have a crisis management plan in place and a robust public and investor relations strategy that can be called upon when unexpected business disruption in China occurs? Does your company have a system in place to assess risks? Are risks elevated to and considered by the board in a timely manner? Is risk management part of your companys DNA? Does your company have a disclosure policy which includes regular and timely disclosure of material information relating to its China business? What communication should be made public when facing imperfect information and data? Regular briefings How often are you briefed on your companys China activities, strategy and risks? Before consummating a deal, hiring a new employee, or taking on a new Chinese supplier, does your company routinely check government records, consider litigation history, and undertake social media searches to understand the business practices of the Chinese company or individual you are dealing with? When did your company last review its inter-company agreements and strategy for funding its China business or repatriation of Chinese profits? Take compliance seriously Travel 2 Doing Business in China / China 2020: Too big to ignoreChinas investment environment Since the 2008 global financial crisis, Chinas inflow of FDI continued to steadily grow. Between the years 2010 and 2019, Chinas inflow of foreign direct investments grew by 22%. China FDI Inflow in million $USD Source: UNCTAD 2010 2011 2012 2013 2014 2015 2017 2016 2018 2019 114.734 123.985 8.06% 121.08 -2.34% 123.911 2.34% 128.5 3.70% 135.61 5.53% 133.71 -1.40% 134.063 0.26% 139.043 3.71% 140 0.69% 145 140 135 130 125 120 115 110 105 100 10.00% 8.00% 6.00% 4.00% 2.00% 0.00% -2.00% -4.00% $USD Change in % In 2019, the total inflow of foreign direct investments to China was $140 billion. China ranked the worlds second largest FDI recipient after the United States. Even amidst trade tensions, China remained an attractive market for foreign investors. Over the years international investors have moved from viewing China as an economically attractive production site to a market too big to ignore. Domestic economic growth has led to ever increasing disposable income amongst upper- and middle-class consumers. 4 Doing Business in China / Big plans To this end China will launch great national schemes. Smart cities, autonomous cars, Greater Bay initiative, IoT manufacturing the list goes on. Both domestic and foreign enterprises will find opportunities to develop their business in cutting edge manufacturing. In the coming years if you are not competitive in China you may not be competitive in your home market. However, the interest will not be all one way traffic. China will look for international flair, experience and expertise in service sectors that support production activities, such as industrial design and innovation, project consulting and logistics. The 13th Five-Year Plan has ambitious plans to counter poverty and pollution, implement supply-side reforms to tackle overcapacity and build up the service-based economy to provide the majority of Chinas growth going forward. International investors will still have many opportunities in this new normal era of a China with a more sustainable economic growth. Middle class consumers The demand by Chinas middle class for foreign goods and services will likely return in the near future. Indeed, it is likely to continue to grow in line with the growing size of the Chinese middle class. Internet+ and further reforms targeted at increasing internet penetration among Chinas population will further increase the worlds greatest ecommerce marketplace. There will be continued growth in cross-border e-commerce (“CBEC”) platforms and this will be also fueled by the creation of 59 new e-commerce Pilot Zones that were established at the end of 2019. Cross border ecommerce does face increasing regulation with the implementation of the E-Commerce Law and the new CBEC policies. However, few international companies will be able to resist the opportunities offered by the worlds largest marketplace. Realizing the China dream innovation | sustainability China and the world are facing strong headwinds. However, every crisis does bring with it opportunity. Accordingly, while many clients are finding China challenging there are also great opportunities. Many of the greatest opportunities for international investors target Chinese consumers. A push by consumers towards a more sustainable and better quality of life has created new opportunities in education, health and wellness, creative, elderly care and green industries. The global pandemic has also resulted in greater interest in the digital sector. This increased opportunity has been coupled with a China that is becoming easier to do business with. According to World Bank Groups Doing Business 2020 study China showed the greatest improvement in ease of doing business by a world top 10 economy. China improved its rank to 31st up from 46th a year earlier. Chinas 13th Five-Year Plan (2016-2020) (the “Five Year Plan”) targets a 6.5% average annual GDP growth rate to drive the development of a moderately prosperous society. It was clear that the frenetic growth of the last 30 years had run its course and now was time for more thoughtful reform. The pandemic has meant that growth may need to be adjusted further downwards. However, the course for the coming years will not change - we expect to see reforms focused on nation building and inclusive, sustainable development rather than a headlong drive for growth. 5 Doing Business in China / Health The Healthy China initiative has created a new market for private investors seeking to capitalize on the Chinese governments desire to increase both the reach and quality of its domestic healthcare system. Foreign investment is welcomed as China recognizes the need to bring international best practices and innovations in medical research and online healthcare platforms. A global champion of globalization As much of the world retreats from trade China has continued to promote trade liberalization both regionally and globally. China has done this by its growing Free Trade Agreement (“FTA”) network and perhaps more ambitiously the Belt and Road initiative. China has continued to side firmly with international trade promotion over protectionism. Chinas pro-trade position and growing domestic market may see China develop into an ever more attractive investment option for international business starved of growth elsewhere. Relaxed restrictions on foreign investment The new Foreign Investment Law and the introduction of a negative list (2020) for investment sees a relaxation on restrictions on foreign investment in various sectors. The PRC National Development and Reform Commission (“NDRC”) have indicated that all restrictions on foreign investors beyond the negative list will be cancelled. Domestically, China has continued to grow its web of Free Trade Pilot Zones, particularly in central and western regions. These inland investment hubs will allow foreign investors to capitalize on the rapid growth of Chinas lesser-developed areas as the costs of doing business rise in Tier 1 and 2 cities. Some hubs will be able to offer a lower corporate income tax rate of 15% compared to the regular rate of 25%. Innovative economy An innovative economy needs to protect intellectual property (“IP”) rights. China has made great progress in many aspects of IP protection with newly revised Trademark Law, Regulations on Patent Agency, a new E-commerce Law and the new Foreign Investment Law all improving the IP protection system. However, Chinas efforts have gone beyond just passing laws and regulations. The administrative enforcement of IP protection has been improved. Like so many things, the improvement of IP enforcement has involved a digital aspect. The authorities have explored ways to set up IP courts to improve the efficiency and allow for specialization of IP courts. The IP protection environment has greatly improved and the enforcement mechanisms are increasingly sophisticated and foreign investors enjoy better protection of their IP . Cyber-security National security is a fundamental part of the Five-Year Plan. To this end Chinas new Cyber Security Law and the impending Measures on Security Assessment of Cross-border Transfer of Personal Data will regulate more strictly the transmission of personal information and data outside of China. China is seeking to balance the internet as a means to encourage growth and enable innovation in the digital industry but on the other hand ensuring that individuals protect their privacy and personal information. 6 Doing Business in China / New era for foreign investment regime in China Negative list - The negative list consists of industry sectors in which foreign investment is prohibited (the “Prohibited Sectors”) or restricted (the “Restricted Sectors”). Foreign investment is banned in Prohibited Sectors. Examples include the manufacture of nuclear fuel or compulsory education. If the investment falls within a Restricted Sector then it will be subject to restrictions on shareholding or investment form. If a sector is not included in the Negative List, then foreign investors are entitled to the same treatment as domestic investors. The latest version of the Negative List was issued on 23 June 2020. This was also significantly shorter than the first one issued in 2013. In the latest Negative List, foreign shareholding restrictions on financial companies such as securities companies and life insurance companies are lifted, one year earlier than expected and as a result, there is no foreign investment restriction in the financial sector. Further streamlining is expected. Examples of restricted areas being opened up include the lifting in 2022 of restrictions on the foreign shareholding in a passenger vehicle joint venture and number of such joint ventures. The Negative List reflects Chinas approach to continue to liberalize foreign investment. It is worth noting that, even if an investment falls within the category of the Restricted Sector, the competent authorities will only review the transaction to determine if the restrictions are complied with and no additional approval or license is required in such respect. It has been forty years since China promulgated its first law on foreign direct investment. Over the past decades, China has established a detailed legal framework for foreign investment. In 2019 the most significant legislative move in this area was the Foreign Investment Law of the PRC (the “FIL”) approved by the National Peoples Congress and the Implementing Regulations for the Foreign Investment Law of the PRC (the “FIL Implementing Regulation”) approved by the State Council. These laws unify the fragmented laws and regulations related to foreign-invested enterprises (the “FIEs”). Both pieces of legislation came into force on 1 January 2020 and they will play a significant role in reshaping how the foreign investment regime in China works. The previous case-by-case approval/filing system that exis
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