7 reasons why foreign businesses should think twice when investing in China

Last week, Wall Street Journal published an interesting piece claiming that Americans who flocked to China for better opportunities are slowly calling it quits and flying home.

15 years ago, China was dubbed as the place of opportunities to start businesses thanks to China’s vibrant and dynamic economy back then. A number of entrepreneurs seeking greener pastures travelled to China and put up businesses, learned Mandarin, got married and eventually settled within Chinese borders.

However, times and economic landscapes have changed and the skyrocketing prices and stricter regulations are thwarting the American dream made in China.

TD dug the reasons why foreign businesses, especially North Americans, should think twice before investing in China.

New tax laws

Starting 1 January 2019, The Chinese government will impose rigorous taxation laws, including on foreigners living in China. The newly-passed individual income tax (IIT) law is set to reform the tax treatment to foreigners as it imposes a more stringent test with a lower threshold period as to when a foreigner will be regarded as a tax resident.

Under the new law, an individual who resides in China for 183-days or more will be considered a tax resident and be liable to PRC IIT on their global income. The 183-day-rule is a tax residency threshold commonly adopted by many countries across the world, such as in the US, the UK, Australia, France, and New Zealand. The amendments are set to have a substantial impact on foreigners living in China.

There are speculations on the motivation behind these reforms like the ongoing trade wars and crackdown on illegal immigrants. However, a lot of people are convinced that China wants to collect taxes to fuel the economy that is slowing down.

Soaring costs

Prices have gone up, not only in China but worldwide. A WSJ article pointed out that costs in China saw a sixfold rise since 2003. The high operational costs leave little room for profit.

A lot of companies, especially the small and medium enterprises, are struggling to keep up and are facing closure. Others are seeking opportunities elsewhere where the business climate is more favourable.

Tightened political control

WSJ reported earlier this year that American and European companies involved in joint ventures with state-owned Chinese firms have been asked by the Communist Party to have an explicit role in decision-making.

Executives and business groups say that it was a worrying demand. It puts the businesses in a difficult position to put politics before profits. Moreover, businesses are contemplating whether they have to consider the interest of the party in every business decision they make. It suggests that foreign companies are no longer exempt from President Xi Jinping’s overarching vision of complete control.

Trade wars

The impact of the US-China trade war is considerably felt by firms operating on the opposite shores. Survey reveals that 70% of US manufacturing firms doing business in China are considering moving all or part of their production out of the country, while 60% said they would move supply chains out of the US long-term, due to the trade war.

The trade war also delays or cancels investment in the US and in China. US firms were much more likely to cut investment in China than other foreign firms.

Crackdown on illegal foreigners

As the US government tracks down illegal immigrants within its shores, China is reportedly doing the same for foreigners overstaying their welcome. Illegal immigration in China is a major problem, particularly with North Korean refugees and defectors fleeing their country.

If the US President Donald Trump plans to build a wall, China is building a security barrier along its border with North Korea to prevent the defectors or refugees from North Korea. To encourage people to report foreigners living illegally in China, the police are giving a CNY 100 (USD 15) reward to whistleblowers whose information successfully leads to expulsion.

Meng Wanzhou’s arrest

Recently in the news, Meng Wanzhou or Sabrina Meng is the CFO of telecom giant Huawei. On 1 December 2018, Meng was arrested in Canada at the request of the United States for allegedly defrauding multiple financial institutions in breach of US-imposed bans on dealing with Iran.

This did not sit well with the Chinese government who viewed it as a racial attack against China. The arrest applies pressure on the increasingly strained diplomatic ties between the US and China. CNBC reported that American execs in China fear retaliation following the arrest of Meng. They also are mindful of China’s ability to monitor the things they say and do.

Chinese philosophy views revenge as just. A popular Chinese saying reads, “有仇不报非君子” which means whoever not taking revenge for the hurt received is not a gentleman or a good man. This is similar to the Bible Old Testament teaching of “An eye for an eye and a tooth for a tooth.”

Better opportunities in SEA

Adding up all of the reasons mentioned above, the business climate in various Southeast Asian countries looks far more attractive. WSJ reported that some companies are seeking opportunities in other countries hoping to produce more profit.

Each country in the region has a different specialty. For example, Thailand has a strong automotive sector; Vietnam is strong in areas such as textiles and electronic components; Taiwan is strong in manufacturing; and the Philippines is a location for business processes outsourcing.