The Emergence of China's Middleclass

For the past two decades, many foreign invested enterpirses (FIEs) have been aggressively pursuing development within China with the aim of capitalizing on the accumulating wealth of Chinese households, as they gradually mature into middleclass spenders. This new and opportunistic market seemed to promise alluring profits for those who successfully executed an early market penetration strategy. But have these entry methods paid off over the past ten years or is it only now that we begin to realize the true potential of this rapidly growing group of spenders, as China’s production side of the economy begins to give way to it’s ever growing consumer base?

China’s economy has been on the verge of this important transition, in which a shift in social classes will harbour a surge in consumer spending and ensure that China’s consumers take a place on the world stage. In 1985, 99 percent of China’s urban population had a household disposable income of less than RMB25,000 (USD$3,019) per year compared with 2005, whereby this number has dropped to less then 57% of the urban population. In recent years this increase in income is said to be growing at an annual rate of 8% per year, assuring investors that over the next 10 years China’s market place will certainly transform depending on certain government policies, which could accelerate or slow this growth process.

One of the main concerns is that this rapidly growing household wealth forms a sharp contrast against the slow development of needed wealth management services, which are still in the infancy stage. Currently 71% of wealthy Chinese keep cash outside of banking facilities compared to the world average of 34.6%. This clearly indicates deficiencies within the industry, due in part to a lack in public accessibility to branch locations and the low level of confidence people have in the banking industry as a whole. Foreign banks that have been granted limited access to these markets are focusing their marketing efforts on the top end of the market, catering their services to high net worth individuals with liquid capital. The banking industry, both domestic and foreign will need to embrace innovation, reaching consumers long considered unserviceable and opening up opportunities for profitable expansion.

China is poised for a consumer-products revolution. As government polices shift to encourage consumer spending, investors and entrepreneurs alike may finally be in the position to capitalize on this enormous untapped consumer market base. Certain industry sectors have already been witness to this fortuity, such as the manufacturers and services providers of the mobile phone industry. Recently, China surpassed the 550 million mark in terms of number of subscribers, establishing it as the single largest cell phone market in the world to date.

Although, great potential is prevalent, many underlying challenges exist for foreign investors looking to crack this market. Current trends of focusing on urban affluent customers will need to be re-evaluated with a greater emphasis on adjusting strategies to include the emerging general middle class, as the core customer segment in small cities across the country. A crucial effort will be needed to drive prices down in order to reach and build lasting relationships with today’s modest consumers, as tomorrow they evolve to become China’s new middle class.

Keep watching this space...

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TRADE

Hong Kong

Hong Kong Remains World's Freest Economy

Since 1970, Hong Kong has been ranked as the world's freest economy and this year it retains the position for economic freedom with a score of 8.9 out of 10, nudging over Singapore, New Zealand and Switzerland. The United States ties for fifth, along with Canada and Britain. The report, published by The Fraser Institute in conjunction with the Cato Institute and other think tanks around the world, ranks countries on their adherence to a set of policies that measure the degree of economic freedom. Read more...

Selected Goods from Hong Kong Receive Zero Tariff's Entering Shaghai

During the first five months of 2007, Shanghai’s customs verified that over 697 shipments from Hong Kong enjoyed zero-tariff’s under the Closer Economic Partnership Agreement (CEPA) set up between Hong Kong and the Mainland. This marks an increase of 22.8% over the same period in 2006, with the total value of shipments and tax concessions up by 26.81% and 31.18% to US$43.04 million and RMB33.54 million respectively. A large array of products consisting of pharmaceuticals, garment, coloring agent, polystyrene, aluminum alloy plates and polyurethane are eligible for zero tariff.
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Company Registrations Up 19% in Hong Kong

The first six months of 2007 has brought about a 19.12% increase in the number of companies registered under the Hong Kong Companies Ordinance over the same period as last year, bringing the total number of incorporated companies to over 622,300. Of these new incorporations, 316 were new overseas companies establishing their Asian presence in Hong Kong, further acknowledging Hong Kong as the gateway to China. Read more...

Hong Kong Seen as Safest Channel for Entering China

The heads of two overseas Chambers of Commerce are convinced that Hong Kong is the preferred platform and stepping-stone for foreign SME’s to enter the Chinese mainland. The head of Dresden Chamber of commerce and industry, Mr. Schnell commented, that his SME members are looking for strategic Asian locations that are “safe rather than cheap”. He goes on to say “Hong Kong is one of the safest places to enter China and Asian markets”. Read more...

Chengdu to Become China's International Air Hub of the West

On the 26th of August 2007, US based 3E Airlines launched direct international Cargo services from Chengdu to the US and Europe. No direct international airfreight service was available from Chengdu prior to the launch of Korean air route Seoul-Chengdu-Delhi-Brussels on 6th March 07. In the past, cargo from the region incurred high logistic costs and significant time constraints from transferring through Beijing, Shanghai, Guangzhou and Hong Kong. The enhanced new routes will provide time and cost efficient air cargo transport from Chengdu to Europe and the US, further upgrading Chengdu’s logistics capabilities and capturing favorable attention from foreign investments. Read more...

Forestry Firms to Enjoy Tax Exemptions

Forestry and agricultural products will enjoy reductions and possibly exemptions of income tax and Value Added Tax (VAT), in a recent push to nurture the development and sustainability of China’s dwindling forest reserves. Plans for lengthened loans and other financial services tailored for the forestry industry are also being employed to help further the push. Read more...

China to Beat Japan in US Imports

China has been the fastest-growing export destination and is now set to overtake Japan’s ranking as the third largest export market for the US. Recent bilateral trade between China and US has reached over $260USD billion, more than 100 times higher than in 1979. This fast-paced trade expansion has brought noteworthy benefits to both countries. For many, these benefits maybe hard to establish, though US’s GDP has grown 0.7% and has pushed prices down by 0.8% as a direct result of the increased trade, thereby increasing the level of disposable income. Read more...

China Cuts Tariffs on 5,375 ASEAN Commodities

In a drive to further enhance bilateral trade within the region, China has cut or scrapped tariffs on 5,375 commodities from the Association of Southeast Asian Nations (ASEAN). With the average tariff being reduced from 9.9% to 5.8%, all products have been said to enjoy a zero tariff rating by 2010 when the free trade guidelines have been clearly established. Read more...

Yuan Alone Cannot Rebalance Economy

As China continues to face escalating trade frictions with the US and other trade partners, new methods aimed at boosting domestic consumption will be introduced to assist with the rebalancing of it’s economy and ensure that the Yuan does not continue to rise at such remarkable levels. Beijing will use an assortment of tools such as; “strengthening domestic demand, further opening the country’s market, increasing imports, encouraging outbound investment and promoting urbanization,” tells a government official. Read more...

Anti-Monopoly Law Passed In Beijing

Beijing, in a drive to protect National Economic Security, will force foreign investors to apply for approval from the Ministry of Commerce when they set out to purchase domestic companies, which have close ties to economic security. The law also ensures stringent measures to restrict monopolies from using their dominant status in the market to curb competition, fix prices, enforce package sales, and refuse or enforce trade. Read more...

China Steps Up Regulations On Process Trade.

In an attempt to regulate the management of process trade, the Chinese government has decided to annually update the list of "restrained" products in the process trade sector, to establish a transparent regulatory system and address its trade imbalance. With their ongoing efforts to curb the development of the process trade in labour-intensive industries, the policy targets high-polluting and high energy consuming industries in the eastern region. Companies engaged in this sector will be required to lodge guarantee deposits in the Bank of China, while registering process trade contracts with the customs agency. Read more...

US Unhappy With Canadian Implementation of Softwood Lumber Agreement

The United States will initiate arbitration proceedings under the 2006 Softwood Lumber Agreement (SLA) and is taking extra measures to monitor Canada’s compliance with the SLA. The agreement was designed to settle a longstanding and acrimonious dispute regarding the import of Canadian softwood lumber, but since then has run into troubled waters with multiple concerns having been raised in the US regarding Canada’s compliance with the agreement. Read more...

US Firms Yield High Returns On China Investments

Developing sound and stable Sino-U.S. economic and trade relations constitute an important part of the bilateral relationship, as US companies have yielded good returns from their investments in China, amounting to approximately US$80 billion in sales revenues for 2006. Thanks to joint efforts by both sides, China-U.S. economic and trade relations have maintained a momentum of rapid development. By the year end in 2006 over 50,000 enterprises from the U.S. have made the leap to the Mainland. Read more...

US Cargo Security Bill Aiming For 100% Scanning on All Shipments

The National Industrial Transportation League is closely monitoring discussions between the House and the Senate staff, concerning the implementation of 100% scanning of all cargo moving by air or ocean into the US. With the Automated Manifest System already in place, the Department of Homeland Security considers this step as an additional measure towards enforcing transportation security. Many are concerned that 100% monitoring will create a substantial bottleneck on inward bound logistics and ensure higher costs associated with the process. Read more...

US, Canada And Mexico Conclude Successful NAFTA Meeting

The North American Free Trade Agreement (NAFTA) eliminated the majority of tariffs between products traded among the United States, Canada and Mexico, and will gradually phase out a number of other tariffs over a 15-year period. As a treaty under international law, NAFTA’s trade representatives emphasized the importance to look for new and creative ways of further promoting trade and new business activities. Read more...

EU Growth Slows in Second Quarter to 2.5%

Growth in the 13 EU-member nations narrowed to 2.5% over one year in the second quarter of 2007, due in part to lower demand in the building sector representing the slowest rate of growth. Europe's manufacturing and service industries also slowed as the pace of orders cooled, indicating turmoil in world credit markets may be starting to weigh on the economy. However, smaller fast-growing eastern European nations managed to keep up their rapid momentum since the beginning of 2007.
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China’s Tax Regime Under Examination by WTO

After a meeting of the World Trade Organization’s Dispute Resolution Panel, it has announced the forming of a panel to investigate complaints by US and Mexico that a number of China tax breaks and subsidies are in breach of the WTO rules and regulations. The US claimed that China, through subsidizing exports to the US and denying US exporters a fair opportunity to compete in China, is unfairly impacting US manufacturing. Read more...

TAX

China

Tax Net To Cover More People.

At the beginning of this year, China tightened it's control on personal income tax. Everyone who earned more than RMB120,000 a year in China was required to declare their incomes before March of 2007. By April, there were more than 1.6 million people who declared their incomes, contributing to a year-on-year growth of 28% in personal tax revenue. Firms in high-income sectors and those that declare less tax for their employees compared to their counterparts are now the target of a new move by the tax administration. Read more...

North America / Europe

A Third Of UK’s Largest Firms Pay No Corporate Tax.

Only 7% of the 700 largest companies in the UK, mainly concentrating in banking, insurance, oil and gas, contributed two-thirds towards the $24.4 billion GBP paid in corporate tax in 2005/6 financial year. The majority of reasons cited are low profits in certain industries, but the likelihood that many of these companies could be offsetting the cost of borrowing against their taxable income, to all but eliminate their corporate tax bills, cannot be ruled out. Read more...

New Doggett Law Could Drastically Raise Taxes On Multinationals

Pressure is growing in Washington to force a tax, known as the "Doggett law", as a legitimate crackdown on corporate tax avoidance, on foreign companies with subsidiaries in the United States who move funds back to their parent countries, which are subject to favorable tax rates. However, business groups are saying the measure could deter firms from investing in the United States. The vast majority of foreign multinationals would not be affected because they are organized in developed countries with which the United States have tax treaties with. The offset is focused on multinationals organized in non-treaty countries that have little or no income tax and who avoid U.S. taxation on their actual earnings by siphoning off revenues though payments to parent corporations in tax haven hideaways. Read more...

AIM Investors Face Potential GBP1.4Bn Tax Hit.

Investors with shares listed on the London Stock Exchange's Alternative Investment Market (AIM) could face a potential storm coming their way in the guise of huge losses even if the smallest changes are made to Business Asset Taper Relief. Business Asset Taper Relief is still being scrutinized by a parliamentary committee, following claims by trade unions and some MPs that it is misused by some private equity investors to reduce their tax bill. Read more...

Danish Tax Cut 2007

Under the proposed reforms, announced by the government, the income ceiling for the middle and top income tax brackets will be raised to DKK353,000 per year from DKK304,100, and to DKK381,300 per year from DKK365,000, respectively in a bid to stimulate the labor market and improve incentives to work.
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Bill To Be Raised Taxing All Investment.

Senator Charles Schumer is drafting a bill that would raise taxes on all partnership performance fees from the capital-gains rate, currently 15%, to ordinary income-tax rates, which are as high as 35%. If successful, this measure could lead to the elimination of the capital-gains tax rate for everyone, replacing it with much higher personal rates. The bill that will tax carried interest earned by all investment partnerships, not just private equity and hedge firms, as ordinary income, is currently being proposed in the Senate. Read more...

Offshore

OECD Removes Marshall Islands Off Tax Blacklist

The Marshall Islands, which was recently blacklisted by the Organization for Economic Co-operation and Development (OECD) as being an uncooperative tax haven, has recently been removed from the list by committing to improve transparency and establishing an effective exchange of information in regards to tax matters. Read more...