China's Investment Environment Becoming More Demanding
Due to the continued pressure on RMB appreciation and increased production costs, China's advantage in the export trade weakened. With the pressure for industrial structure adjustment becoming more acute, the economic development of China is now gradually moving into the next stage. Over the past twenty years foreign companies have gradually shifted their manufacturing centers to China drawn by the lower production costs and China's policy of attracting foreign investments through more lax environment standards. These have increasingly strengthened the economic and trade relationships between the two countries. The Enterprise Income Tax Law, the Personal Income Tax Law, and Labor Contract Law passed by China in 2007 however have increased management and taxation costs, eroding away some of the business profits. The Catalog and Rule on Pollution Control of Electronic Information Products show that environmental protection requirements will become increasingly more stringent as well. Enterprises must deal with the implications of these legislative developments as soon as possible and continue to study the feasibility of continuing to invest in China or diversify their risks.
Enterprise Seeking Ways to Diversify Investment Risks
The adjustments to the personal and enterprise tax laws, the passing of the Labor Contract Law, and stricter enforcement by the authorities means that in the future it will become increasingly difficult for foreign companies to evade taxes by exploiting the absence of tax agreements between Taiwan and China or tax havens. Legal tax reduction planning will be needed for these companies. Additionally, if China does carry out strict personal income tax audits in the future, the demand of business management and the desire to avoid double taxation may stimulate companies to use local employees. To reduce the impact on operating costs caused by the new Chinese measures, foreign enterprise are considering diversifying their operations to nearby regions such as the ASEAN (Association of South East Asian Nations) countries and India.
Investments in Process Improvements and Environmental Protection to Rise
China's rapid economic development not only created many employment opportunities and increased average incomes but also resulted in high pollution and high energy consumption. Electronic information products produce waste emissions and wastewater during manufacturing as well as waste electronic products. As the factory of the world, if China does not deal effectively with the pollution they cause then as production volumes increase, the pollution will only become worse. China's continued economic growth has also seen its demand for energy become more acute, making it one of the world's key energy consumers. This means increased oil consumption, higher energy prices, and worse global warming. In order to change international perceptions to improve its international status and influence as well as reduce the damage to domestic natural resources from pollution are now given priority, China has drawn relevant laws and policies as well as higher energy conservation and environmental protection standards.
China has now set its sights on high technology, non-energy intensive industries. Incentives will therefore be gradually reduced or abolished for industries that do not conform to the Catalogue for the Guidance for Foreign Investment Industries. Coastal cities in China have begun cracking down on industrial effluent and emissions as well and high pollution industries are now being ordered to move into special polluting industry zones. Existing factories or new constructions and expansion projects in the future will now have to conform to environmental standards. Foreign companies operating in the coastal region will soon come under pressure to reduce energy consumption and waste emissions in their production process. Demand for production process improvements and environmental protection equipment to meet environmental standards will inevitably increase the costs of investment.
China to Focus On Expanding Domestic Market Demand
China's long-term strategy for economic growth will focus on the economic development of the inland regions and on the expansion of domestic demand Future Chinese legislation for enterprises will therefore focus on narrowing the gap between the city and countryside and the gap between the rich and the poor. Other measures aimed at moderating social tensions between the rich and the poor through strict enforcement of tax laws and labor contracts will also play an important role in the Chinese government's future policies. With the gap between the rich and the poor reducing, consumers that previously had low buying power will now have more disposable income to spend on household goods. Enterprises will make more investment in brand development and marketing to build up brand awareness at the base of the pyramid. Additionally, the countryside is becoming an increasingly important market as well. The importance of marketing point deployment will be increasing; adjustment of marketing techniques in accordance with the differences in consumer behavior between the city and countryside will also be crucial.
As the domestic market continues to develop, transportation infrastructure will continue to improve. Average incomes in second- and thirdier cities in the inland regions will gradually increase as well. Due to a large area of land and different consumer behavior in the inland regions, selection of dealers and distributors will become important factors for the future development of enterprises contemplating a move into these places.