China's Business Sector Reforms

As entry procedures for foreign invested enterprises (FIE) continue to improve, new levels of government reform have been introduced aimed at increasing reassurance by investors, and raising the level of accountability in regards to corporate governance.

Most recently there has been an aggressive push to unionize employees of foreign owned companies. The All-China Federation of Trade Unions has targeted to set up trade unions in more than 70 percent of foreign-funded enterprises by the end of 2007. The unionization of Wal-Mart employees has acted as a catalyst for the Federation who consider it a breakthrough hoping other multinationals will soon follow suit.

Although this may be seen as a disadvantage to some businesses, a survey conducted by the US Chamber of Commerce in Beijing earlier this year acknowledged that a rather high percentage of recently unionized companies have increased productivity. This has led some to consider the possible advantages of a unionized workforce. If enforced correctly and welcomed by all parties could in turn, increase profitability and job satisfaction with a minimal impact on operational costs.

China's Company Law amendments made January 1st 2006, have also played a major role in reforming the country's business practices. The law now allows courts to look beyond the principle of limited liability, grants shareholders the right to check the company's account books or meeting minutes, and also grants shareholders the right to file suit against directors and senior management, to name but a few. The amendments have also led to the launch of a website providing citizens an avenue to report on corruption, while remaining anonymous. Cash rewards are being distributed in the form of tax credits or a percentage of the penalty charged to the responsible parties for successful prosecutions.

These initiatives may be part of a wider range of plans by the Chinese government in attempts to comply with guidelines set forth by the WTO. Proposals to amalgamate foreign and domestic corporate tax rates in the near future, as well as changes made to China’s Value Added Tax (VAT), that cut refunds granted to less desirable industry sectors aimed at discouraging their growth, all send a message that China is serious about improving its corporate governance image and tightening controls to ensure a common playing field is enjoyed by all.

Many companies will need to fast-track their entry strategies in order to take advantage of some the current grace periods being offered to current and newly registered corporations. Although there might be a different set of advantages and disadvantages, depending on what side of the fence you sit, the end result seems to indicate a higher level of accountability and overall transparency by both government and corporate organizations.

With the Chinese New Year approaching and China continuing to gain momentum the question remains whether the current amendments are enough to reassure investors about the effectiveness and transparency of doing business in China, or is there still a considerable amount of reform yet to come?

Keep watching this space

Visit our website www.icstrust.com

Visit our website for more information on:
offshore jurisdictions,
China business structuring,
doing business in Hong Kong and
investment opportunities.

TRADE

Hong Kong

Hong Kong Dollar Beaten by the Yuan

On January 15th the value of the Chinese Renminbi overtook the HK dollar for the first time in 15 years. Economists predict the Yuan to remain above the HK dollar as China’s giant economy continues to expand. Hong Kong stands to benefit in a number of areas as mainland investors and consumers flock to the city in efforts to leverage the added value of their growing dollar. Although the retail and tourism industry will be the greatest beneficiaries, the financial sector also stands to profit. Foreign investors will see Hong Kong’s long list of listed mainland companies as an attractive investment. Read more...

Hong Kong Off and Running in 2007

Hong Kong has had an impressive year in 2006, with a number of first place international award rankings, record-breaking growth rates, and a more than favorable outlook for 2007. Hong Kong ended 06 ranked the "freest economy in the world" for the 12th consecutive year. It has also seen better then expected growth rates, achieving the title of second largest Foreign Direct Investment (FDI) designation in Asia next to China. The presence of overseas firms in Hong Kong reached a record high last year, and is now the chosen base for nearly 3,800 regional headquarters, capturing the title as the preferred location in Asia for foreign companies to oversee their regional operations.Read more...

WTO Gives Hong Kong a Favorable Report

In a report on Hong Kong's Trade Policy and Practices, the WTO recognized the city's improvements in both its economic performance and outlook for the past three years. It stated that Hong Kong's success was largely due to its openness to trade, level of foreign investments and a well-established services sector. The favorable impact of the Closer Economic Partnership Arrangement (CEPA) with China was also a determining factor for the growth rebound seen since 2002. The report also emphasized Hong Kong’s expected potential in future years as it continues its structural shift towards higher value-added services and more knowledge-based activities.Read more...

Hong Kong Attracts Mainland Businesses

More then 60 senior executives from privately owned enterprises in Guangdong participated in a seminar aimed at assisting Guangdong enterprises to go global. The seminar, held in Hong Kong on December 12, was part of a two-day investment environment study program. The executives were enthusiastic about the many investment opportunities Hong Kong has to offer, and were interested in how they could leverage these advantages to better position themselves to enter the world market. Mr. Rowse, from Invest Hong Kong outlined some of the unique features Hong Kong has to offer: "we have world-class infrastructure, a sound legal system, a large pool of business and professional service providers and a global business perspective."
Read more...

Foreign Watch Sales Not Discouraged by Tax Increase

Despite amendments made to China's consumption tax, aimed at increasing the amount of tax paid on luxury items, statistics show foreign-made top-grade watches are being imported at record high levels. Consumption tax was raised by 20% specifically on top-grade watches however this increase has done little to dampen consumer demand. Imports of watches in the last three quarters have undergone a dramatic growth in both quantity and quality, with more then half of the imports being top-grade watches. Sources state that although an increase to the consumption tax was made, there have been a considerable amount of reductions made to China's import tax, since it joined the WTO, possibly accounting for this new trend in the market. Read more...

China Anticipates More Growth in 2007

Economists are expecting China's healthy growth rate to continue well into 2007 at the 10% level. Li Xiao Chao from the National Bureau of Statistics states that with the continual improvements made to China’s infrastructure, the once problematic energy and transport bottlenecks are beginning to alleviate, creating a reliable supply system. The Chinese government, in an effort to boost domestic consumption, is considering spending more money to help the unemployed, lower-income families, and provide the poor with better medical care and education. Read more...

Manufacturing in the United Kingdom Hits Nine Month Low

The growth rate in the United Kingdom's manufacturing sector has fallen to its lowest rate in the past nine months. Economists were caught off guard as they had predicted an increase in performance over the rates released for October. RBS group's chief economist believes the reduction to be a normal trend as the industry saw surprisingly strong increases during the middle of 2006. Others blame the decrease in purchase ordering on the strong UK pound, as many likely purchasers are looking towards Asia in efforts to cut costs on low-quality goods. Read more...

Is a Resession on The Horizon for the U.S.

The US economy experienced a less then favorable finish in 2006 and its current outlook for 2007 does not appear to be any more promising. Economists are still ruling out the possibility of a full-blown recession, but with the home building and real estate markets already in recession, and the manufacturing sector looking as though it may follow suit, optimism looks bleak. David Berson of Fannie Mae mortgage financing is one of the believers that a recession is unlikely, but does admit the risks have risen. He estimates the chance of recession at 35 percent for 2007, up from a 25 to 30 percent chance a few months ago. Read more...

TAX

Hong Kong

Hong Kong Tax Cut Talks

Hong Kong's much-anticipated 07-08 budget will be released next month and is generating a considerable amount of interest with regard to the plans for the estimated HK $30 billion tax surplus. Many legislators are voicing their concerns and opinions on how to properly allocate the funds. Jeffrey Lam of the Liberal Party recommends the surplus be used to relieve the tax burden on middle-income earners and small to medium-sized enterprises (SME's) pushing rates back to the 02-03 level. The Financial Secretary states "the government is committed to promoting economic development, enhancing the competitive edge and improving the people’s livelihood." Read more...

China

China Clamps Down on Property Tax

China has announced it will begin collection of its land appreciation tax starting next month. The tax was first introduced in 1993 but has never been collected. It was designed as a control mechanism to combat overheated property markets. The tax is being re-introduced to target developers who hoard large pieces of land in attempts to profit from appreciation prices. Charles Zhang from Colliers International stated, "Tax changes will narrow the profit margins of developers" and has already sent property developers shares tumbling.Read more...

North America / Europe

United Kingdoms High Tax Rate Discourages Investors

Britain's Treasury is considering making amendments to its corporation tax on foreign dividend income as overseas multinational companies are beginning to favor countries with lenient corporate tax regimes. Britain's 30 percent tax rate on companies is not only discouraging foreign firms from entering, but is also forcing some of its domestic firms such as Burberry to relocate their factories to China in attempts to mitigate costs. Many European countries are facing similar concerns and are now being forced to re-evaluate the incentives they use to promote both foreign and domestic businesses, in risk of losing competitiveness over the emerging Asian economy.Read more...

New Rule May Increase U.S. Taxes

The US House of Representatives have voted to approve the use of the 'pay-go' rule, which require tax cuts to have corresponding cuts in government spending or increases in taxes elsewhere to counterbalance them. These same budget rules helped to produce record budget surpluses in 1990. Republican Paul Ryan opposes the ruling, as he believes it will simply pave the way for higher taxes and ignore Washington’s spending problem. Read more...