Over the past two decades, China has become a focal point for many international businesses. The sheer size of the market, combined with the tax benefits, have made it not only an attractive market to enter but a pivotal one for companies with an ambitious global strategy. With many ups and downs, 2021 proved to be a phenomenal year for China’s recovery. Still, the foreign business community had mixed responses to the medium-term outlook of their operations in the country. After carefully observing the market and receiving some insight from business leaders, here are some of my insights on the business outlook in China for 2022.
LOOKING BACK ON 2021
THE NOTEWORTHY RECOVERY OF THE ECONOMY AND GDP GROWTH
2020 was a challenging year for businesses worldwide, and 2021 proved to be much of the same, with the spread of the new COVID-19 variants, sporadic lockdowns and increased control measures. However, it proved to be quite the opposite for many businesses in China.
With the virus under control in most parts of China and an increase in export demand, the first quarter of 2021 saw a phenomenal boom, according to official figures, with a GDP growth rate of 18% from the same time the previous year. While such a rate could not be sustained throughout the year, it set a positive outlook for businesses for the rest of the year.
With the 2021 economic statistics being released, we see that the Chinese economy grew by 8.1% from the previous year (accelerating from 2.2% GDP growth in 2020), which was the highest growth it had experienced in a decade. This growth rate far exceeded the 6% target set by the Chinese government for 2021. This was highly encouraging for foreign investors in the country, but despite this, several foreign enterprises still considered exiting the market.
SOME BUSINESSES CONSIDERED LEAVING CHINA
Considering such an impressive performance in 2021, the big question is why did some businesses consider leaving China?
While China has always presented a significant opportunity for investors, there has been a fair share of challenges that came along. The compromise between the pursuit of success in the Chinese market and the difficulty businesses face has been acknowledged but not very well understood. This has become even more apparent in the last two years.
Like for most countries in the world, 2020 was a particularly challenging year for China. The global outbreak of COVID-19, a tense political relationship with the US, and an increased negative perception from other foreign countries proved to be one of the more challenging years the country had experienced in recent history. Despite the economic success achieved early in 2021, many companies still found the regulatory and business environment challenging.
Passing through the bureaucratic hurdles has always been a significant challenge for foreign companies doing business in China. Midway through the year, we saw the overhaul of the $100 billion education tech sector, banning companies that teach a school curriculum for profits. Such companies could no longer receive foreign investment, nor were these firms allowed to raise capital through stock markets. This is one example of the regulatory changes that occurred, which had foreign companies thinking of whether to stay in and continue or exit the market while they are ahead.
Another of the more significant concerns was the expiration of the tax policies set to end on the 31st of December 2021. For companies who employ foreign employees, retaining these employees would become even more expensive, while for those employees, their net monthly incomes would see a drastic decrease. Many higher-level foreign employees started to consider leaving China and have already taken steps to map out their exit from the country.
MORE BUSINESSES CONSIDERED STAYING
While some individuals and businesses considered leaving, a closer look at businesses across China offered a different perspective. As opposed to many other parts of the world, business was not only able to remain operational but was in fact, thriving. The boom of Q1 reinstated confidence in the Chinese market and changed the medium to long term outlook of many business leaders.
The 2021 Sino Benelux Business Survey, which looks at the performance of SMEs in China and critical economic developments that impact them, revealed that business leaders believe that China is becoming an increasingly important place to conduct business. From the survey, we see more companies opting to set up their own entity (a Wholly Foreign Owned Entity) or enter through a Joint Venture instead of setting up a representative office.
LOOKING INTO 2022
The year 2021 was primarily positive for foreign businesses operating in China. However, heading into 2022 there is much speculation as to whether such growth will be sustained and whether there will be additional restrictions and challenges that may arise over the year. Let’s explore some key notions that need to be considered for 2022.
THE UPCOMING TWO-SESSIONS MEETING
The CCP’s “People’s Congress” and “CPPCC”, also known as the “two sessions”, will be held in Beijing on the 4th and 5th of March 2022. The purpose of the two sessions is to generally set out the economic growth plan and targets for the year.
At the top of the agenda for the upcoming two-sessions meeting is to ensure a stable external environment and minimize any risks. Another item of high priority is the decrease of urban unemployment. With this in mind, we will most likely see no major changes in policy that may have a negative impact on the outcome of these targets.
Combined with the impressive recovery from the impact of COVID, it is expected that there will be a more stable implementation and application of policy through the rest of the year and moving forward.
CHINA’S FOCUS ON EMPLOYMENT
THE EXTENSION OF THE TAX BENEFITS
The extension of the preferential income tax policies for foreign employees in China highlights the efforts the government is making to retain foreign talent in the country. The policy, which has been extended until the 31st of December 2023, encourages companies to continually employ foreign employees in China and foreign talent to stay in the local market. As we deal mainly with foreign SMEs in China, this was a major relief for most of our clients who employ foreign staff.
The policy on annual bonuses in China, which applies to both Chinese and foreign employees, has also been extended until the end of 2023 and was warmly welcomed by both employees and employers. The extension of this policy allows companies to restructure their payment packages, which is beneficial for both workers and employers. Recently, we have spent a great deal of time advising multinational companies and SMEs on how to maximize their interests and take advantage of these tax policies.
A TOUGH BUT UNDOUBTEDLY IMPORTANT MARKET
Although there have been some bureaucratic challenges businesses faced towards the end of last year, the enterprises in the country maintain a positive outlook for the future. With the growing spending power of the Chinese population and China still set to be the world’s leading exporter for the foreseeable future, businesses are correct in seeing and recognizing the opportunities in the market.
Be that as it may, it is prudent that foreign businesses understand the landscape and regulatory requirements, especially when setting up their companies, as it will have an impact on the future operations of the business.
With the access to data and technology, the authorities have placed the private sector under a microscope. As such, it is becoming crucial for companies to ensure they remain compliant with regulations, especially regarding their accounting, HR and payrolling practices.
Irrespective of the challenges many foreign businesses face in China, there is a consensus among many industries that China remains a key market for global strategy. Developed markets, like in Europe and the United States, remain competitive. However, in such markets, opportunities for rapid growth remain far less than in developing markets.
With tax incentives being extended and the benefits on offer in the free trade zones, companies may want to capitalize on this position over the course of this year. In 2021 we helped more companies set up than ever before, a trend we expect to see continue in 2022.
CLOSING THOUGHTS
Despite the unpredictable global economic environment from 2020, China has done well in its recovery and has managed to surpass its expected levels of growth throughout 2021. Looking into 2022, although we may not see the same levels of growth, we expect to see China maintain steady growth, continue to encourage investment and at the same time continue to make changes to its regulatory environment. Going forward, it is exceedingly important for foreign companies to ensure they stay up to date and in compliance with Chinese regulations in all aspects of the operation of their business.
ARE YOU CONSIDERING DOING BUSINESS IN CHINA?
After more than a decade in China, MSA has a comprehensive understanding of the Chinese market, regulations and processes. By working with us, you gain access to expertise across a range of fields in business administration, allowing you to focus on the growth of your business. Get in touch with us today for all your accounting, HR, tax advisory and company setup needs.
