Guangdong attempts to refocus as high-tech manufacturing base Guangdong attempts to refocus as high-tech manufacturing base

Guangdong attempts to refocus as high-tech manufacturing base
28 Sep 2018

In a bid to offset the impact of the worsening trade war with the US, South China’s Guangdong province announced a series of investment incentives and cost-cutting measures on 13 September.

The measures, outlined in its ‘Policy Measures for Expanding Opening-up and Using Foreign Investment’ document, consist of a 10-point plan to attract foreign investment by opening up market access, providing talent and land-use incentives, supporting research and development (R&D) and strengthening intellectual property (IP) protection.

Most notably, the plan allows foreign investors to set up wholly foreign-owned enterprises (WFOEs) to produce special-purpose and new energy vehicles (NEVs), drones, aircraft, and other high-tech products, which previously required joint ventures.

The plan is in response to a 31 July directive from the Chinese central government instructing regional governments to roll out measures to help open up markets and policies to maintain economic stability. But while the plan offers a variety of measures to bolster the economy, they primarily target organisations within strategic, high-tech industries rather than firms that might be most vulnerable to escalating US tariffs.

The aim here is to explore key aspects of Guangdong’s plan to promote foreign investment in the province via a combination of previously announced central government policies as well as region-specific incentives.

Opening up the market

Guangdong’s 10-point plan calls for the region to fully implement the 2018 update to the Foreign Investment Negative List, which came into effect on 28 July. The 2018 Negative List opens up market access for foreign investors by reducing the number of industry-specific restrictive measures from 63 to 48.

Moreover, the plan seeks to implement other measures to help open up markets, which were previously announced at the national level but have not yet been applied locally, such as allowing WFOEs to operate in the NEV manufacturing space. China’s central government announced in April that foreign investment limits on NEVs would be scrapped by the end of this year, but not every region has taken appropriate action.

A further aim of Guangdong’s plan is to open up its financial markets to foreign investors by cancelling the foreign equity limits previously imposed on Chinese banks and financial asset management companies. It also allows foreign banks to own 51% of a joint venture with a local organisation for the first time.

Offering financial incentives for foreign investors

The plan likewise includes financial incentives in order to attract investment. These incentives include cash rewards of up to RMB 100 million (US$14.59 million) for certain investment projects, and the same amount for foreign-invested enterprises (FIEs) that establish regional headquarters in the province. Dongguan, one of Guangdong’s major manufacturing hubs, announced similar incentives in June for organisations wanting to set up headquarters there.

Furthermore, major investment projects worth at least RMB 2 billion (US$291.18 million) can now be granted free use of land, while foreign-invested R&D institutions are able to apply for subsidies of up to RMB 10 million (US$1.46 million).

Qualified development zones and industrial parks are likewise permitted to offer incentives, such as reduced corporate income tax rates, based on the size and nature of the investment projects concerned.

Improving the business environment

Beyond financial incentives, the plan includes several measures intended to improve the province’s business environment by streamlining administrative procedures and offering incentives for top foreign talent.

These initiatives include the full implementation of the “One Window, One Form” policy to streamline business registration, and the establishment of a fast track option for qualified foreign investors, who should now be able to register their businesses within five working days.

In terms of specific talent incentives, senior managers of FIEs and other qualified personnel can now obtain work and residence permits that are valid for five years. They are also entitled to local housing, education, medical care, and pension benefits and can employ foreign domestic workers, among other things.

To allay foreign investors’ concerns over intellectual property, meanwhile, the province also intends to accelerate the development of the China (Guangdong) Intellectual Property Centre, which it pledged to do last year.

Other measures to facilitate foreign investment, such as fully implementing the Negative List system to manage foreign investment, reducing investment approval items and cutting the time it takes to make approvals by a quarter, are also listed in the plan.

Providing incentives to move Guangdong up the value chain

Apart from the 10-point plan, Guangdong has also come up with other measures to strengthen its local economy. In August, it announced that more than RMB 450 billion (US$65.65 billion) would be invested in strategic and emerging industries between 2018 and 2020. These industries include artificial intelligencegreen technology, high-end equipment, new materials and biomedical technology, among others.

On 10 September, the provincial authorities also announced cost-cutting measures that included reduced land use, electricity and social security rates, which are expected to shrink business costs by over RMB 200 (US$29.18 billion) billion over the same time period.

Explaining the rationale

These incentives are partly intended to help Guangdong withstand China’s escalating trade war with the US. As China’s manufacturing heartland, Guangdong’s economy is highly export-oriented, accounting for nearly a third of China’s total exports, which makes it more vulnerable to tariffs. In fact, according to the government’s purchasing managers index (PMI), the manufacturing sector contracted in August for the first time in 29 months, falling to 49.3.

But although the timing of the measures may be in response to the trade war, they largely address structural changes to the nature of Guangdong’s economy. After years of rapidly rising land and labour costs in the region, many low-value manufacturers have been relocating to lower-cost locations such as inland ChinaVietnam and India.

Before the trade war officially started, Guangdong’s economy was already showing symptoms of structural pressure. For example, in the first half of the year – before US tariffs on Chinese products went into effect – exports had already fallen by 3.3% year-on-year.

In addition, the provincial government and firms that have remained in the area are embracing strategies to move up the value chain by promoting R&D in the high-tech sector, which includes investing in robotics and automation.

Taken together, many of Guangdong’s new incentives are not necessarily designed to lessen the burden on the small, low-value manufacturers that are most vulnerable to a trade war. Instead they are trying to expedite Guangdong’s transformation into a high-tech manufacturing base by promoting the development of the industries of the future and attracting world-class talent.

This means that the measures outlined are only serving to accelerate pre-existing dynamics. In other words, they are promoting investment in strategic emerging industries, while leaving those most vulnerable to the trade war exposed, potentially facing relocation and suffering a range of other financial stresses and strains. 

By Alexander Chipman Koty, editor, Dezan Shira.

This article was first published on China Briefing

 

Since its establishment in 1992, Dezan Shira & Associates has been guiding foreign clients through Asia’s complex regulatory environment and assisting them with all aspects of legal, accounting, tax, internal control, HR, payroll and audit matters. As a full-service consultancy with operational offices across China, Hong Kong, India and ASEAN, we are your reliable partner for business expansion in this region and beyond. For inquiries, please email us at info@dezshira.com. Further information about our firm can be found at: www.dezshira.com.

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In a bid to offset the impact of the worsening trade war with the US, South China’s Guangdong province announced a series of investment incentives and cost-cutting measures on 13 September.

The measures, outlined in its ‘Policy Measures for Expanding Opening-up and Using Foreign Investment’ document, consist of a 10-point plan to attract foreign investment by opening up market access, providing talent and land-use incentives, supporting research and development (R&D) and strengthening intellectual property (IP) protection.

Most notably, the plan allows foreign investors to set up wholly foreign-owned enterprises (WFOEs) to produce special-purpose and new energy vehicles (NEVs), drones, aircraft, and other high-tech products, which previously required joint ventures.

The plan is in response to a 31 July directive from the Chinese central government instructing regional governments to roll out measures to help open up markets and policies to maintain economic stability. But while the plan offers a variety of measures to bolster the economy, they primarily target organisations within strategic, high-tech industries rather than firms that might be most vulnerable to escalating US tariffs.

The aim here is to explore key aspects of Guangdong’s plan to promote foreign investment in the province via a combination of previously announced central government policies as well as region-specific incentives.

Opening up the market

Guangdong’s 10-point plan calls for the region to fully implement the 2018 update to the Foreign Investment Negative List, which came into effect on 28 July. The 2018 Negative List opens up market access for foreign investors by reducing the number of industry-specific restrictive measures from 63 to 48.

Moreover, the plan seeks to implement other measures to help open up markets, which were previously announced at the national level but have not yet been applied locally, such as allowing WFOEs to operate in the NEV manufacturing space. China’s central government announced in April that foreign investment limits on NEVs would be scrapped by the end of this year, but not every region has taken appropriate action.

A further aim of Guangdong’s plan is to open up its financial markets to foreign investors by cancelling the foreign equity limits previously imposed on Chinese banks and financial asset management companies. It also allows foreign banks to own 51% of a joint venture with a local organisation for the first time.

Offering financial incentives for foreign investors

The plan likewise includes financial incentives in order to attract investment. These incentives include cash rewards of up to RMB 100 million (US$14.59 million) for certain investment projects, and the same amount for foreign-invested enterprises (FIEs) that establish regional headquarters in the province. Dongguan, one of Guangdong’s major manufacturing hubs, announced similar incentives in June for organisations wanting to set up headquarters there.

Furthermore, major investment projects worth at least RMB 2 billion (US$291.18 million) can now be granted free use of land, while foreign-invested R&D institutions are able to apply for subsidies of up to RMB 10 million (US$1.46 million).

Qualified development zones and industrial parks are likewise permitted to offer incentives, such as reduced corporate income tax rates, based on the size and nature of the investment projects concerned.

Improving the business environment

Beyond financial incentives, the plan includes several measures intended to improve the province’s business environment by streamlining administrative procedures and offering incentives for top foreign talent.

These initiatives include the full implementation of the “One Window, One Form” policy to streamline business registration, and the establishment of a fast track option for qualified foreign investors, who should now be able to register their businesses within five working days.

In terms of specific talent incentives, senior managers of FIEs and other qualified personnel can now obtain work and residence permits that are valid for five years. They are also entitled to local housing, education, medical care, and pension benefits and can employ foreign domestic workers, among other things.

To allay foreign investors’ concerns over intellectual property, meanwhile, the province also intends to accelerate the development of the China (Guangdong) Intellectual Property Centre, which it pledged to do last year.

Other measures to facilitate foreign investment, such as fully implementing the Negative List system to manage foreign investment, reducing investment approval items and cutting the time it takes to make approvals by a quarter, are also listed in the plan.

Providing incentives to move Guangdong up the value chain

Apart from the 10-point plan, Guangdong has also come up with other measures to strengthen its local economy. In August, it announced that more than RMB 450 billion (US$65.65 billion) would be invested in strategic and emerging industries between 2018 and 2020. These industries include artificial intelligencegreen technology, high-end equipment, new materials and biomedical technology, among others.

On 10 September, the provincial authorities also announced cost-cutting measures that included reduced land use, electricity and social security rates, which are expected to shrink business costs by over RMB 200 (US$29.18 billion) billion over the same time period.

Explaining the rationale

These incentives are partly intended to help Guangdong withstand China’s escalating trade war with the US. As China’s manufacturing heartland, Guangdong’s economy is highly export-oriented, accounting for nearly a third of China’s total exports, which makes it more vulnerable to tariffs. In fact, according to the government’s purchasing managers index (PMI), the manufacturing sector contracted in August for the first time in 29 months, falling to 49.3.

But although the timing of the measures may be in response to the trade war, they largely address structural changes to the nature of Guangdong’s economy. After years of rapidly rising land and labour costs in the region, many low-value manufacturers have been relocating to lower-cost locations such as inland ChinaVietnam and India.

Before the trade war officially started, Guangdong’s economy was already showing symptoms of structural pressure. For example, in the first half of the year – before US tariffs on Chinese products went into effect – exports had already fallen by 3.3% year-on-year.

In addition, the provincial government and firms that have remained in the area are embracing strategies to move up the value chain by promoting R&D in the high-tech sector, which includes investing in robotics and automation.

Taken together, many of Guangdong’s new incentives are not necessarily designed to lessen the burden on the small, low-value manufacturers that are most vulnerable to a trade war. Instead they are trying to expedite Guangdong’s transformation into a high-tech manufacturing base by promoting the development of the industries of the future and attracting world-class talent.

This means that the measures outlined are only serving to accelerate pre-existing dynamics. In other words, they are promoting investment in strategic emerging industries, while leaving those most vulnerable to the trade war exposed, potentially facing relocation and suffering a range of other financial stresses and strains. 

By Alexander Chipman Koty, editor, Dezan Shira.

This article was first published on China Briefing

 

Since its establishment in 1992, Dezan Shira & Associates has been guiding foreign clients through Asia’s complex regulatory environment and assisting them with all aspects of legal, accounting, tax, internal control, HR, payroll and audit matters. As a full-service consultancy with operational offices across China, Hong Kong, India and ASEAN, we are your reliable partner for business expansion in this region and beyond. For inquiries, please email us at info@dezshira.com. Further information about our firm can be found at: www.dezshira.com.

OTHER ARTICLES THAT MAY INTEREST YOU

Expats in China: Deciphering the rules on individual income tax

China takes steps to crack down on tax evasion

Understanding marriage leave in China

 

 

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