Finance concepts and applications

Finance

There are several key considerations to take into account when deciding whether or not to invest in China. The Chinese federal government and many provincial governments encourage foreign direct investment, which last year totaled $75 billion. A decision on approval to set up a wholly-owned subsidiary will be rendered within 90 days. One exception are the two principle trading cities of Guangdong Province, Guangzhou and Shenzhen, both located to the immediate north of Hong Kong.

China's economy depends on exports, so trade restrictions are relatively minimal. The country is a member of the World Trade Organization (WTO), which has resulted in the removal of most barriers. The country has a well-developed transportation infrastructure in order to get goods to Western markets. There are no export taxes. There are import taxes, however, if some raw material needs to be importer to our facility. In terms of taxation, the foreign enterprise will be subject to a VAT on the increased value of commodities at different stages of production. The amount of the VAT depends on the size of the firm and their accounting system.

With regards to foreign exchange, the yuan is loosely pegged to the dollar. A rigid pegging system was ended in 2005. The yuan is not considered to be a fully convertible currency; yuan is seldom taken outside China, and is not removed from the country on a large scale. Settlement of foreign exchange transactions is conducted through designated banks. Foreign firms are allowed to open the necessary accounts in order to conduct the necessary foreign exchange business. Acquisition of capital within China can be conducted through the domestic banking industry. China has a burgeoning investment banking industry to meet long-term capital needs; the domestic banking system can meet short-term lines of credit through any of a number of large banks. The China Merchant Bank offers several funding options for foreign firms and their suppliers. Because of the lack of convertibility of the yuan, firms will want to keep as much of their earnings in dollars.

China lacks strong labor laws. The weakest parts of Chinese labor law are implementation and enforcement, rather than the written law itself. Unionization is almost unheard of. China's economy has been built with over 200 million laborers that have moved from the countryside to the booming coastal cities. China is reducing the public payroll, which means the country is faced with the challenge of finding employment for millions of workers. This means that employers have the buying power. The result is that working conditions are often poor. There have been some strides made recently. For example, all workers now have contracts. As a result of new rules enacted earlier this year, costs have gone up along with worker's protections.