Where Should You Locate Your Business in China?

Published on this site: November 29th, 2006 - See more articles from this month

Factors that may influence your choice of location include local infrastructure, land prices and availability, human resources, local government policies and attitudes, location of your joint venture partner (if any), proximity to suppliers, and proximity to your target market (if you plan to sell your products domestically).

Perhaps even more importantly, however, it is crucial that you locate your company within a designated special investment zone in order to take advantage of significant preferential tax rates, benefits and policies available to foreign investors located in these areas (although these are being phased out over the next few years in line with China's WTO commitments, it remains unclear whether China will raise FIE tax rates, lower general tax rates, or simply use nationality-neutral standards that will nevertheless disproportionately benefit FIEs).

There are several types of special economic areas:

Special Economic Zones: Shenzhen, Zhuhai, Xiamen, Hainan and Shantou were designated as Special Economic Zones in the 1980s in order to give local authorities the ability to offer policy and tax incentives to foreign investors. With the rapid progress of economic liberalization throughout China, these zones have gradually lost their competitive advantages, although Shenzhen (next to Hong Kong) remains a popular investment destination.

Export Processing Zones: Goods in these zones may be imported for processing without customs declarations or duties as long as the processed products are then exported.

Free Trade Zones (bonded areas): These areas are treated as outside the customs territory of China, meaning that imported goods are exempt from customs duty and Value Added Tax until they are transferred to an area within China's customs territory.

Economic and Technological Development Zones: These zones offer tax incentives to technology-intensive enterprises.

Hi-Tech Development Zones: These zones also target technology-intensive investments.

Looking to China's Hinterlands

Central and western China have been starved of foreign investment compared to the relatively well-fed coastal areas. In recent years many of these localities have responded by offering incentive packages that are in some cases quite a bit more generous than incentives offered to foreign investors 'back east'. Beijing is now actively encouraging investors to pour money into these areas in order to distribute wealth more evenly throughout the country and stem the flow of economic migrants to the coast. The natural advantages of these areas include low land and labor costs, ready availability of power (in some areas), large labor pools, and proximity to giant markets (in some areas). Pitfalls to watch out for in some of these areas include insufficient infrastructure, local corruption, and a shortage of educated employees (many of these areas, however, can boast large educated workforces and surpluses of skilled labor).

David Carnes - is licensed to practice law in California. He speaks and reads Mandarin Chinese and has several years experience working with Chinese law firms and Sino-American joint ventures. His website, China Breezes, is at
http://www.lunaticwisdom.com/blog1.