The Belt and Road Initiative (BRI), the Made In China 2025 plan (Mic2025) and the 13th Five Year Plan (13FYP) describe the future targets of the actual leadership and define the sectors where the resources will be concentrated. These plans contains several opportunities within which FOEs can leverage their competencies. Foreign Enterprises will be confronted with increasing competition from Chinese brands, but still remain a key component for China to realise the vision of economic transformation.
Belt and Road Initiative (BRI)
The initiative was unveiled by Xi Jinping in late 2013. The BRI is an immensely ambitious development campaign through which China wants to boost trade and stimulate economic growth across Asia and beyond. At a time when Donald Trump’s US looks to be stepping back from Asia, many believes it is all about making China the dominant country in the region.
The BRI envisions new roads, high-speed rail, power plants, pipelines, ports and airports and telecommunications links that would boost commerce between China and 60 countries in Asia, Europe, the Middle East and North Africa. It essentially consists in a series of overland corridors connecting China with Europe, via Central Asia and the Middle East (the Belt), and sea routes linking China’s southern coast to east Africa and the Mediterranean, and China to Europe via the Arctic Ocean (the Road).
China uses aid, trade, and foreign direct investment strategically to build goodwill, expand its political sway, and secure the natural resources it needs to grow. BRI is qthe most impressive example of this. It is an umbrella initiative of current and future infrastructure projects.
The amount of private investments to and from countries along the BRI are very much depending on the tax treaty they enter into with China respectively. The various double taxation agreements entered many years ago are currently revised to guarantee compatibility within the BRI.
The BRI is also not without risk for those companies that are investing in and working on BRI projects. Those risks include foreign investment restrictions, antitrust regulations, tax, local employment and environmental laws, as well as political risks in some jurisdictions.
Free Trade Zones (FTZ)
In 2013 China launched its first pilot Free Trade Zone (FTZ) in Shanghai, after two years followed the announcement of Fujian, Guangdong, and Tianjin FTZs. In 2016 other seven FTZs were unveiled and in April this year President Xi Jinping has announced plans to transform the entire southern island province of Hainan into a free trade zone (FTZ) and build a Hainan free trade port by 2025.
FTZs in China benefit from a number of incentives, such as reduced tax rates, expedited administrative procedures, and relaxed investment restrictions. Many FTZs also promote specific industries, allowing investors to benefit from cluster effects.
Even if the FTZs are not officially part of the BRI, they have the potential to synergize with it by target investments from specific regions, serve as nodes for China’s outward investment to countries along the BRI path and/or serve as logistics hubs for the trade generated by the BRI.
Made in China 2025 (MIC2025)
In May 2015 State Council issued the MIC2025 circular which analyzed the current situation and illustrated a comprehensive long term industrial strategy for China directed to transform the Chinese manufacturing sector from Large to Strong. It covers a period from 2016 to 2025 and is the first of a three-stage plan for establishing China as a leading world manufacturer by 2049.
MIC2025 includes ten key sectors that will receive special attention:
- Next generation IT
- High-end numerical control machinery and robotics
- Aerospace and aviation equipment
- Maritime engineering equipment and high-tech maritime vessel manufacturing
- Advanced rail equipment
- Energy-saving vehicles and NEVs
- Electrical equipment
- Agricultural machinery and equipment
- New materials
- Biopharmaceuticals and high-performance medical devices
In order to pursue the targets of the program the government identified several key policies, including forced technology transfers in exchange for market access and market restrictions, as well as financial policy, government-backed investment funds and other type of support from local governments. The Ministry of Finance set policies to make available tax incentives and tax reliefs to support high tech companies or firms with elevated technological development
The MIC2025 and subsequent Circulars confirm that foreign and domestic enterprises can both participate to reach the national targets and obtain support from central and regional governments. Of course, the priority of the government will always be to take the lead of any outcome of these cooperation and not the survival of whatsoever joint venture.
The central government recognize that the development of SMEs is a key factor to pursue the target of leading the market in specific sectors, and is supporting several pilot projects in order to develop a good environment for them. Nevertheless sometime SMEs that lack government connections may find themselves unable to access subsidies, while SOEs that provide a larger source of tax revenues for local governments are able to do so, regardless of their technological capacity.
The MIC2025 contains threats and opportunities for foreign enterprises and constitutes a key document to understand how the business environment will evolve in the next 10 years.
13th Five Year Plan, 2016-2020 (13FYP)
The 13FYP, approved in March 2016 and covering the period from 2016 to 2020, calls for a “new normal” phase of development. Growth for growth’s sake is not enough. China has vowed to take decisive steps to upgrade its manufacturing capabilities in line with the innovative and smart technologies that are expected to govern the future industrial production.
During this phase the Chinese government aims to bring all rural residents out of poverty, while also promising higher quality education, healthcare and public services for all citizens. Companies that invest in developing areas may enjoy tax incentives and tax rebates. The government also announced that social security will be extended to the entire elderly population.
In the document there are proposals relevant to environmental protection such as water management system, an emission permit system and an outright ban on commercial deforestation, and it emphasizes the need to modernize China’s agriculture in an environmentally friendly way.
On December 2016 was approved the first law law that establish an environment protection tax. The tax is proportional to the quantity of pollutant, increase the tax base for each pollutant unit and strength the application of the existing rules. The law, which went into effect on January 2018, allow different rates from province to province thus causing a migration of polluting agents to the more tax friendly provinces.
The 13FYP promises a national rollout of the negative list system for foreign investment, which will undoubtedly bring opportunities for companies in many sectors to access China’s market. However, foreign companies should not expect China to fully shake off its protectionist tendencies that continue to curtail full market access.
Foreign investors who can help advance China’s innovation capabilities stand to benefit. Opportunities exist in areas including energy, environmental protection, biotechnology, IT and high-end manufacturing, though domestic technologies will likely still be promoted in strategic or national security-related areas.
While the 13FYP is essentially a wish list and do not provide any guarantee on how and which extend the promises will be implemented, especially at local level, it is still an invaluable reference for multinationals as they seek to align with China’s policy direction, understand government motivations and develop business strategies.