China attempts to encourage investments from foreign residents. The following are among the reasons that foreign investors are attracted to China:
- Extremely low labor costs.
- A tremendous buyers' market in China itself with a population of 1.3 billion.
- An expectation of a sharp increase in the buying power of Chinese residents, a fact that is influenced by the annual GDP of over 8% per annum and the low rates of inflation.
- In recent years, Chinese laws concerning foreign investments have been significantly eased.
The total FDI in China for 2010 totaled 105.7 billion Dollars.
Sales to the local market are permitted and foreign investment is also allowed in sectors other than industry and hi-tech, such as banking, insurance, financial services, etc.
As a result of joining the WTO, China is expected to standardize specific benefits that were previously granted only to overseas investors or only to Chinese companies.
- As a general rule, industries in China that are open to foreign investments are divided into 3 categories, an encouraged investment, a restricted investment and a prohibited investment.
Foreign investors cannot invest in projects that are connected with the military and defense industries in China.
There are also restrictions on 100% control of foreign investors over transport, the automobile industry and power stations.
Benefits for Foreign Investors-Special Economic Zones (SEZ) and Development Zones
- Benefits that China grants to foreign investors are not given in the form of grants.
Most benefits are in the form of a tax benefit, including value added tax, customs and income tax benefits in putting the emphasis on an investment in a Special Economic Zone (SEZ) or in special sectors and areas.
The benefits granted are as previously approved according to the nature of the foreign investment.
- Special Economic Zones (SEZ)
There are 5 SEZ's in China in the south of the country, the main tax benefits are:
- Corporate tax of 15%.
- A benefit of "2 + 3 years" which means an exemption from tax for the first two years and tax at the rate of 12.5% for the next three years.
- For certain projects in basic infrastructure, environment protection and energy there is a "3+3" years tax holiday.
- Under certain terms enterprises investing in integrated circuits production can get a "5+5" years tax holiday.
- Pudong Zone (Shanghai)
In the Pudong zone there are 5 development zones specializing in hi-tech, financial services, agriculture and more.
The benefits are similar to those granted to investors in an SEZ.