In 2014, President Xi Jinping continued to push for the implementation of key economic, fiscal, and rule of law reforms called for in the Third and Fourth Plenums of the 18th Party Congress. As the economy slows, China’s leadership has publicly embraced the “new normal” GDP growth of seven percent. Meanwhile, President Xi’s historic anti-corruption campaign has had a notable impact on the way that business is conducted in China. Central, provincial, municipal officials—including those at state-owned enterprises—have adopted a more cautious approach to business.
While China became the world’s top destination for foreign direct investment (FDI) in 2014 (surpassing the United States as the world's top destination for annual FDI flows for the first time since 2003), broad sectors of the economy remain closed to foreign investors. China relies on an investment catalogue to encourage foreign investment in some sectors of the economy, while restricting or prohibiting it in many other industries. There are other ways that business in China can be challenging for foreign companies. For example, China rolled out several new policies in 2014 that appeared to be aimed at promoting domestic rather than foreign information technology (IT) products and services. Likewise, there were several high-profile investigations of foreign companies for alleged violations of China’s Anti-Monopoly Law. For these reasons and others, the mood has soured somewhat among the U.S. business community in China. AmCham China reports that half of their member companies feel that foreign businesses are less welcome in China than before, and almost 60 percent believe that foreign companies have been targeted in recent campaigns against monopolies, corruption, and product safety. Nevertheless, significant market potential exists for foreign companies, particularly those operating in industries where there is opportunity for collaboration and mutual benefit, such as energy efficiency, clean technology, healthcare, and e-commerce.
The depth and complexity of China’s proposed macroeconomic reforms bring with them significant challenges and pitfalls that will require skillful strategizing and implementation. The World Bank recently ranked China 90th (out of 189) in its 2015 Ease of Doing Business Report (an improvement of 3 points over the 2014 edition). However, China’s explosive economic growth of the last several decades is beginning to slow. In 2014, real GDP settled in at 7.4 percent, down from 7.7 percent in 2013 (down from 10.4 percent in as recently as 2010). This is the lowest China GDP growth has been in 25 years. The government has set public expectations to a seven percent growth target in 2015, which some economists consider achievable provided that China can boost consumption. U.S. companies operating in China report concerns of increasing labor costs, shortages of qualified employees, a lack of transparency, inconsistent regulatory interpretation, weak protection and enforcement of intellectual property rights, competition with Chinese companies, internet censorship, forced transfer of technology, and challenges in obtaining administrative licenses and approvals. Notably, perhaps due to President Xi’s anti-corruption campaign, U.S. companies are reporting concerns about corruption less frequently.
Despite these and other longstanding concerns, China remains an extremely attractive market for many U.S. companies. In general, U.S. companies are reporting that it is still possible to make a profit in China, but profit is tougher to come by and margins are shrinking. AmCham China reports that nearly one-third of companies now derive more than half of their revenues in China from locally designed, developed, or tailored products and services. Nearly half of respondents to a U.S.-China Business Council survey report double-digit revenue expansion – fewer than in prior years, but still impressive compared to other markets. Likewise, 70% of companies that responded to the USCBC survey are optimistic on domestic market growth. Furthermore, over the past year, the Chinese central government announced a series of reforms and pledges that could lead to limited improvements in the overall investment climate, both from a market access and a regulatory standpoint if they are implemented. At the end of 2014, China also announced the establishment of three new Free Trade Zones (FTZs) in Tianjin, Guangdong and Fujian. The FTZs are expected to expand an investment registration regime established in the Shanghai FTZ, which is simpler than the approval process required throughout most of China, and open some previously closed sectors to foreign investment. The United States and China continued to work towards narrowing differences and reaching agreement on the text of a high standard Bilateral Investment Treaty (BIT) that would enhance fairness, openness, and transparency in China.
As always, companies should consider their own resources, previous export or business experience abroad, and long-term business strategy before entering the China market. For many companies, representation in China by Chinese agent, distributor, or partner that can provide local knowledge and contacts will be critical for success. Intellectual Property rights holders should understand how to protect their IP under Chinese law before entering the China market, and should conduct thorough due diligence on potential partners or buyers before entering into any transaction. All companies, IP rights holders and otherwise, should consult closely with lawyers who have extensive experience with the China market, including lawyers based in the United States and China.
The U.S. Department of Commerce, United States Foreign Commercial Service (USFCS) offers customized solutions to help U.S. companies, including small- and medium-sized enterprises, succeed in the China market. USFCS stands ready to help U.S. companies develop comprehensive market entry or expansion plans, learn about export- and customs-related requirements, obtain export financing, and identify potential partners, agents, and distributors through business matchmaking programs, trade shows, and trade missions led by senior U.S. government officials. For U.S. companies that purchase our Gold Key Service, USFCS can facilitate one-on-one meetings with: pre-screened buyers; potential customers or end-users; experienced professional services providers; and key government officials. Furthermore, by engaging USFCS, U.S. companies can learn how to leverage the outcomes of high-level policy discussions, such as the U.S.-China Joint Commission on Commerce and Trade and the U.S.-China Strategic and Economic Dialogue, where senior U.S. officials have been successful in expanding market access and improving the business climate for U.S. companies in China. With these tools, explained in greater detail in this Country Commercial Guide, U.S. companies will be better positioned to take advantage of the many economic reforms that are being rolled out in the wake of the Third Plenum.
In addition, the U.S. Department of Agriculture’s Foreign Agricultural Service (FAS) provides equivalent-level trade services for U.S. companies interested in exporting agricultural, fishery, and forestry products through their Agricultural Trade Offices at no cost.
The U.S. Commercial Service has developed a toolkit to help exporters understand some of these challenges; our “Are You China Ready” assessment is available here.