FDI regulations and setting up a subsidiary company in China

Foreign Direct Investment Regulations

Despite challenging regulations and bureaucratic red tape China, as the world’s largest market, is clearly an attractive country in which to invest. In 2016, 61% of FDI went into services and 31% to manufacturing. FDI in manufacturing dropped in 2015, primarily due to rising labor costs, which is severely impacting the seafood processing sector in Dalian and Qingdao. Other main areas of investment include wholesale and retail trade. In 2015, China led the world as the recipient of foreign direct investment with investments totaling US$ 136 billion (UNCTAD).  Since the 1980’s China has entered into 145 bilateral investment treaties. A number of these treaties are with lesser developed, resource rich countries which are unlikely to invest in China, but these countries are likely to benefit significantly from Chinese investments in key industries (to build trade ties with China). Top countries investing in China (2015) included: Hong Kong SAR (73.4%), Singapore (5.5%) and Taiwan (3.5%), while the United States investment represents 2% of the total. The leading European investors in China were Germany (1.2%) and France (0.9%), followed by the United Kingdom, Italy and the Netherlands. European investments were dominated by the automotive and chemical sectors. Greenfield projects contributed 56.6 billion. China is encouraging investment in high technology and greener industries, while investments in established industries are not encouraged. For fish and seafood, encouraged investment includes: “Breeding of aquatic fingerlings (except for rare varieties peculiar to China)” and “Breeding of aquatic products, cage culture in deep water, large-scale breeding of aquatic products, and breeding and ecological mariculture” (Invest in China, Ministry of Commerce People’s Republic of China, p 35). In the processing sector, aquatic feed investments and aquatic products processing investments are encouraged. Within the catalogue of Prohibited Foreign Investment Industries for investment are the following: R&D, breeding and production of relevant breeding materials (aquaculture); GMO research (aquatic larvae) and fishing in Chinese waters (MOFCOM Invest in China). An example of current seafood sector FDI would be the joint venture between the Chinese Feed company Tongwei Co. Ltd. and the Danish feed company Biomar Group.

Setting up a subsidiary company

In China, a subsidiary is referred to as a Foreign Invested Enterprise (FIE) with a minimum foreign investment of 25%. There are four types of FIEs: wholly foreign owned enterprises (WFOE); Sino-foreign equity joint venture (EJV); Sino-foreign contractual joint venture (CJV) and Sino-foreign joint stock company limited. These FIEs are limited liability companies. The choice between a WFOE and a JV depends upon the degree of support needed in China. A foreign investor is able to leverage its investment in China by teaming up with a well established and successful Chinese company. A Chinese company dramatically reduces the learning curve for the foreign investor with all aspects related to the seafood business in China. Both the foreign investor and Chinese company benefit by combining their strengths and not having to ‘re-invent the wheel’. Investors are advised to be mindful of the scope of their business activities when choosing between a WFOE and a JV. The question to ask is: can you do it on your own, or is there a suitable potential partner that can make up for the shortcomings of your organization? The primary downfall of a JV is a bad ‘marriage’. As in all business partnerships, the right partner makes all the difference. WFOE are the most common FIE. The following are the basic steps to set up a WFOE subsidiary in China: File the business name, translate all necessary documents into Chinese, apply for a business license with Ministry of Commerce (MOFCOM) and the Administration for Industry and Commerce (AIC), register for taxes with the State and local tax bureau, register at the required 12 different authorities (e.g. State Administration and Foreign Exchange), set-up an RMB bank account and foreign currency bank account. For more information consult the FDI – Invest in China website.