China Opens with More Market Access & Tax Holidays

Posted by Wang, Yi on July 28, 2020

Continuous trade liberalization and deregulation of foreign investment by China’s clear-minded decision-makers and at major municipalities deepens, despite of inward-looking noises and maneuvers across the Pacific.

1. Executive Summary

The continuity of conflicts, on national security and various regulatory regimes and on technology leadership races, continues to fluctuate, reminding the existence and renewal of deep-rooted non-market behaviors as legacies from planned economy.  Yet it also strengthens the legislative and executive urgency and momentum within China to solidify opening up its economy while building up self-sufficiency. 

In late June, China announced further trade and investment deregulation at national level and at FTZ-level, to grant, for the first time, 100% foreign ownership market access for foreign investors, along corporate income tax reductions at selected free trade zones (FTZs), e.g., Shanghai, and for selected sectors with industrial clusters.

2. Analysis

The opened / further liberalized sectors range widely from auto manufacturing (for commercial vehicle, new energy vehicles (e.g., Tesla) and special-purpose vehicles) to financial services (e.g., asset management, securities investment, futures, insurance and brokerage, etc.). Under the annually updated negative list, sectors outside the negative lists must be open for foreign investment. Regulatory focuses shifts from red tape toward “substance over form” from market access, trade regulation and national security standpoints.

Openness of these “big” sectors have been contentious issues under WTO compliance scrutiny by trading partners, especially including Japan, EU and US, over the past 18 years.  These “negative lists” re-affirm preferential treatments under FTAs (free trade agreements) with HK/Macau.  Meanwhile, Shanghai FTZ, particularly Lingang Area, also for the first time, secures the empowerment from the central government with significant tax holidays for qualified MNCs and startups.  Shanghai government has released workable and nuanced implementation rules with 15% corporate income tax holidays for MNCs as well as startups qualified in prioritized manufacturing sectors from ICT to medical devices, along with various incentives from exemption of personal income tax to vehicle purchase. 

3. Outlook

Business activities with access to the critical infrastructure and data concerning Chinese citizens or of economic significance remain within the “negative lists.” For example, “market research,” remains subject to joint venture requirement, however.  Nevertheless, new tax incentives, actually constitute quiet but revamping “twists” to the 2008 tax reform that phased out most tax holidays for foreign invested enterprises.

The continuity of the prospering of these China-based industrial clusters are not only important to homegrown revenue and job creation for China,, but also to home markets of many MNCs.  This is because the industrial clusters built on Western technology and Chinese diligence and engineer-ship, are not simply portable, and physical isolated factories and assembly lines.  Rather, these industrial clusters built since China’s opening after 1840s are critical fronts for MNCs and wise policy makers for generations to not only penetrate the Chinese/APAC markets, but also to capture technological breakthroughs and creation of new customer needs, at cluster-level unavailable elsewhere.

Such clusters in China also have strengthened the proliferation of the “export” of Western culture of compliance championship on the top and spill-over of continued innovation in the West.  In that sense, the latest round of “voluntary” market opening and tax cuts by China is rather constructive and profound, despite of anti-trade head winds in both sides of the Pacific.  It accelerates China’s own market reform and strengthens innovation/integrity-based technology leadership of the MNCs.

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Yi Wang, trade and business attorney with public and private sector experience to tackle with regulatory/business challenges. He was one of the two defense counsels to MOFCOM in first Sino-US WTO dispute on semiconductors in 04′, and thereafter, counseled and managed cross-border transactions, regulatory clearance for transactions and trade/FCPA litigation at leading law firms in US/China from 02′ to 14′, and further served with GE Plastics/SABIC from 14′ to 17′. From 17′ to present, he is co-founder of Mind Realizing Law advising international businesses and institutions in operational excellence and private equity transactions with robust anti-corruption / trade compliance perspectives.

(This briefing first appeared at China Big Idea founded by Dr. Shirley Yu. For more information or subscription, please visit https://chinabigidea.substack.com/)