CHINA

Introduction to Shanghai:

Shanghai is busily reclaiming its former role as the financial, commercial, and industrial center of China. Its redevelopment has been exceptionally rapid, and it now has received more foreign investment than any other city in the world. It also contains the second largest port in China, after Hong Kong. It is the original home of the huge Shanghai and Hong Kong Banking Corp., and the American insurance giant, AIG. The Chinese Communist Party was formed here in 1921, and in 1991 it was the site for China’s first stock market (excluding Hong Kong, which had not reverted to Chinese rule at that time).

Shanghai was opened to foreign investment in the early 1990’s, and it is taking the lead in opening sectors of the national economy that were formerly closed to foreign investors, such as trade and finance. The focus of Shanghai’s target to rebuild its traditional role in China’s economy has now become heavily centered on the development of financial and trading oriented zones in Pudong, a section of the city undergoing massive redevelopment across the river from the city’s long established commercial center. But there is a number of other SEZ’s in Shanghai that has been established longer still actively operating. Investment continues to crowd in with almost 2000 foreign direct investment projects being signed in the first 9 months of 2001.

Shanghai is China’s largest manufacturer of chips, tractors, automobiles, steel and steel products, and the third largest producer of motor vehicles. It is in the top 5 national producer level of: plastics, personal computers, chemical fibers, pig iron, and caustic soda. The city plans to set up 5 new industrial bases in the coming 5 years that will focus on: electronic information products, automotive manufacturing, petrochemicals, and rolled steel. So called “pillar” enterprises and high technology enterprises are projected to amount to 70% of Shanghai’s industrial output in 2002, these are: automobiles, telecomms, equipment, iron and steel, petrochemical products, and power station equipment. The service sector (including finance and trade) accounted for 50% of output in 2000.

The Shanghai area is only 6340 square kilometers with 16.7 million inhabitants. Its GDP was $43 billion in the first 9 months of 2001 (up over 10% year on year). Shanghai continues to be the leading location in China in economic terms: e.g. in per capita GDP $4163 (versus $1552 in Guangdong), telephone density, and per capita electricity consumption. In the first half of 2001, its urban residents experienced an average disposable income of $725.

There were more than 3000 financial institutions located in Shanghai by year-end 2000, which included more than 50 foreign bank branches. More than 20 foreign banks have gained the right to make Yuan (RMB) denominated loans to FIEs. With China’s entry to the WTO, such banks will also be able to make Yuan denominated loans to Chinese enterprises and customers. Approximately half of foreign banks’ total assets in China were located in Shanghai mid-2002.

At year-end 2000, Shanghai had almost 16,000 registered foreign enterprises. Its total exports for 2000 were almost $27 billion (up almost 35% from 1999) of which FIE’s accounted for $4.3 billion (up almost 38% from 1999); its total imports were just over $30 billion (up 52% over 1999) of which FIE’s accounted for $19 billion (up 55% over 1999).

In trade, the Shanghai area is second only to the whole Guangdong province. Guangdong with a population of 86.4 million, accounts for approximately 10% of the Chinese economy, and 33-40% of China’s total trade, had 2000 exports of $93.4 billion (up almost 19% over 1999) of which FIE’s accounted for almost $50 billion (up almost 28% over 1999), and 2000 imports at $82 billion (up 27% over 1999) of which FIE’s accounted for almost $43 billion (up 25% over 1999). There was a total of approximately 50,000 registered FIE’s in Guangdong province in 2000.

The following section is intended to provide an abbreviated introduction of the results and methodologies arising from the very intense development process that the Shanghai municipal government has been constructing and executing in the area of special economic zones, and the resulting economic growth, since the subject was first activated there in the 1980’s. This process has steadily grown bigger and bigger, and is now very impressive indeed, both in terms of its achievements to date, and the size and scope of the economic development work that is now underway there. The very impressive growth rates in Shanghai trade, and its position as the fast growing number 2 economic area in the country after an entire province (Guangdong), are due in no small part to this determined attention being paid to the establishment of fast economic development by strong financial stimulants arising from government controlled attractions provided by the Shanghai authorities.

Shanghai’s Economic and Technological Development Zones (“ETDZs”)

There were originally 3 state approved ETDZs established in the 1980’s by the Shanghai municipal government, located in the south-west and west of Shanghai: Hongqiao, Minhang, and Caohejing. These offered a preferential tax of 15% for manufacturing based FIE’s (c.f. normal rate of 30%), as well as a 2 year income tax exemption followed by a 3 year period with tax reduced 50%. There is also a number of other ETDZ’s and other locally sponsored zones around the city not mentioned here: e.g. Jiading, Kanqiao, Qingpu, Xinzhuang, Baoshan, Fengpu. Although developed to quite an extent, some of these areas have become somewhat overshadowed by the development of the huge Pudong New Area, and also in some cases are no longer as attractive cost wise or facilities wise. Some of them are resisting being labeled in this way and are fighting back with lower rents and land costs, with additional benefits form new infrastructure.

The most aggressively pursued special economic zone (“SEZ”) development is however now centered on the Pudong new area, extending over 522 square kilometers area on the eastern bank of the Huangpu River across from the traditional commercial center of Shanghai. This development is very strongly backed: centrally by the national government and locally by the municipal government. To maximize its attractiveness to foreign investment, Pudong has established a number of purpose specialized zones with local preferential policies, including grants and subsidies that are normally provided in the form of attractive tax treatment of resident FIE’s.

A number of zones, generally oriented to specific industry sectors, has been established in the Pudong New Area. Several pilot projects in sectors previously closed to FIE’s are also located here. Prominent among the Pudong New Area zones are the following:

· Lujiazui zone: dedicated to financial services operations;
· Zhangjiang High Technology Industry Park;
· Jingqiao zone: manufacturing and export processing;
· Waigaoqiao free trade zone;
· Xinghuo zone;

The Waigaoqiao Free Trade Zone

The following discussion of this important Pudong Free Area zone, the range of benefits it offers to qualified investors and foreign companies, and how to become established in it are the main subjects of this brochure.

As the Waigaoqiao bonded zone this was the first zone of its kind to be permitted in China. It was also the first to permit Sino-foreign trading firms, and later wholly foreign owned trading firms. Such firms are engaged in sourcing finished items overseas and distributing them throughout China without going through the normal Chinese import-export corporations, and as such are highly interesting to foreign investors and entrepreneurs. Some investors become middlemen between domestic and/or foreign owned operations located elsewhere in the country.

The lower threshold for required investment of a foreign owned trading company is US$200,000, which is much lower than is to be found outside this specific zone. While the zone’s regulations encourage companies to include some degree of manufacturing in their operation in the zone, in practice many are simply registered there. Many companies have established warehouses, distribution centers, and after sales service operations in the zone.

One of the zone’s prime target industries is semiconductors, and the zone wishes to establish an entire industry based here with a minimum of 10 foundries by 2005, which will also spawn a range of important supporting sub-industries, such as IC design, and maintenance. A massive $6 billion, 6 phased plan, is well underway by a new consortium of serious investors in a new company called SMIC to progressively develop a range of operations there. A significant amount of this operation’s planned production is expected to be exported. SMIC is also investing a large amount in housing, schools, medical clinics, shopping areas, etc., to ensure that their large development is adequately supported with the living facilities needed by its large staff. Intel opened a $200 million chip fabrication plant here in 1998, and extended it with another $300 million investment in 1991.

Many other established (and new) companies coming from a wide range of industries have located operations in this zone, which include: Lacoste, Xerox, Siemens, Lucent Technologies, Polaroid, Ricoh, Bosch, HP, JVC, Pioneer, Philips, Itochu, Shell, AT&T, GE, GM, Canon. Mannesmann, Sumitomo, Nisshin. The following gives a breakdown of the types of operations in the zone:
· Manufacturing and processing: more than 400 such enterprises
· Trading: more than 2800 such enterprises
· Warehousing & distribution: more than 100 such enterprises
· Bonded logistics & transportation: more than 20 such enterprises

The Waigaoqiao zone has its own deepwater port facilities. In 2001 this port function handled 1.2 million teu, or about 10% of Shanghai’s exports. This port facility is a powerful inducement to many foreign companies and investors.

The next section will summarize the principal benefits of operating with a base in Waigaoqiao.

Benefits of operations in Waigaoqiao

Wider Scope of Business Operations Permitted:

1. Wholly Foreign Owned (WFOE) or Joint Venture (JV) trading companies are permitted to be set up in this area. There will be no restrictions on the types of goods traded, and such trading companies in this zone may engage in any or all of the following functions: import, export, entrepot trade, trade agency, consultation services, etc.
2. Bonded manufacturing may be conducted in this Zone, regardless of whether the finished product is for the domestic or overseas markets.
3. In this Zone, without violating environment protection laws, any enterprise in the Zone may make their own independent decisions regarding the types of products manufactured and the production levels of such manufacture, and thus make timely market oriented production changes. (Note: In non-favored areas outside this Zone, the government retains strict controls over investments in, and production levels of, such items as jewelry, tobacco, and durable electrical household products.)
4. In addition to their own manufactured products, manufacturers or processors within the Zone have the right to trade in manufactured products produced by other companies, whether they are relevant or irrelevant to their own manufactured products.
5. A company established in the Zone may also conduct the following operations: bonded warehousing, distribution operations, after-sales service, personnel training.

Customs Administration:

Customs restrictions and regulations are significantly lightened for enterprises operating in this Zone. Major customs benefits include:

1. Enterprises operating in the zone may purchase and import duty free capital equipment, building materials, office equipment (excluding automobiles) for their on use. After 5 years reporting on the use of such items, the enterprises may sell the capital and office equipment to domestic buyers with no import duty payment required.
2. Foreign invested maintenance operations are permitted in the Zone to serve their domestic clients. Customs operations within the Zone will permit such maintenance operations to make a periodic customs clearance and lump sum payment on the import of spare parts and components related to such maintenance operations.
3. Manufacturing and processing operations within the Zone shall only pay import duty on the base of imported components or raw materials when they sell related finished products to the domestic market.
4. Manufacturing and processing operations within the Zone shall pay no import duty on the base of imported components or raw materials if they are to re-export the finished products. Customs formalities are very simple.
5. Manufacturing and processing operations within the Zone shall only pay import duty on the base of imported components or raw materials when they sell related finished products to the domestic market.
6. Manufacturing and processing operations within the Zone may subcontract part of their production to enterprises outside the zone. The sub-contractee (outside the Zone) does not need to pay a deposit on bonded raw material or components that it is to use in its contracted efforts for the Zone-based enterprise, provided that the Zone based manufacturer or processor contractor provides a guarantee.

Taxation:

At present, enterprises in state level special Zones can enjoy total income tax holidays for the first 2 profitable years (0 tax), half tax holidays for the following 3 years (7.5% tax), and a lowered rate of 15% from the 6th profitable year onwards. Enterprises in this Zone can enjoy the following additional benefits:

1. Manufacturers in the Zone are exempt from VAT if they re-export their products produced in the zone.
2. 25% of VAT imposed (17% of the added value) can be refunded for products sold to the domestic market by year-end 2000. Profit repatriation tax (10% of repatriated profit) is exempted if the enterprise remits the profit abroad.
3. High technology enterprises and new material fabrication enterprises recognized by the government will enjoy more preferential treatment.

Foreign Exchange:

China now has the second largest foreign reserves globally (after Japan), but it still maintains rigid control over its foreign exchange as its currency (the RMB) is not convertible. Government control policies include compulsory conversion to RMB of foreign earnings by enterprises in China; exclusive RMB settlement of domestic trade; application to and verification by foreign currency administrative department for all foreign collection and payment. However, as a special administrative area, the Zone is able to adopt a free foreign exchange policy, which includes:

1. Foreign capital and foreign earnings of enterprises in the Zone do not need to be converted to RMB. They are permitted to keep current accounts of foreign currencies at any branch of a domestic or foreign invested bank in China.
2. Enterprises in the Zone can make payment or collection in foreign exchange without verification.
3. Both manufacturing and distribution enterprises in the Zone are able to convert RMB and foreign currencies in any bank within the Zone. They are permitted to freely convert RMB into foreign currencies according to the annual quota approved by the State Administration of Foreign Exchange, Shanghai Branch,

NACS’ Major Chinese Business Development Services

Wholly Foreign Owned Enterprise

NACS Operations in China:

Since 1997, NACS has been carefully and diligently investigating and analyzing the Chinese business environment and developing its own capabilities to provide a growing range of business start-up and development services in China - particularly to small to medium sized international business operations and operators. Generally its services are required in setting up Rep Offices, but there is also an increasing level of international interest by medium sized companies, as well as larger operations, seeking assistance in setting up a wholly foreign owned enterprise there. NACS can significantly assist its clients to set up, initiate, and improve, their operations in this unique and highly important tax free zone.

Dependable professional expertise and experience are the two major elements the foreign client is seeking when he contracts for assistance from NACS in analyzing, determining, and setting up the right type and level of operations in China, and in the right location. Once the prospective client has familiarized himself with the summary information presented in this brochure, he should be ready to commence discussions and negotiations with NACS leading rapidly to the detailed step by step implementation of NACS’s carefully considered work plan for the client.

NACS can also provide its clients with significant assistance in determining the level and nature of PRC operations a client should aim at. NACS can provide its clients with analysis, PRC business plan development, and certain implementation support efforts through a combination of its own experienced professional internal staff in its offices in China and Hong Kong, its network of highly PRC experienced professionals, generally located in major Chinese cities, and its own international network of professionals and business advisers to cover the following critically important areas:

· Chinese government regulatory procedures and
· Chinese government (national and local) decision-making staff involved in approving foreign business operations in China. Chinese law
· Assistance with project plans, feasibility reports, other project specific documentation
· Chinese taxation
· Chinese staffing
· Chinese resident visas
· Chinese banking and customs operations
· Chinese market research and marketing assistance.

NACS is very pleased at the high level of experience, professionalism, and connections that its expert PRC advisors have achieved and maintain in their various professional functional fields and in the cities where they are located in China. A summary of the services NACS can provide to clients seeking to set up a Rep Office follows.