The Eyes on China Monthly

August 2009

Editor´s Note

Welcome to Eyes on China´s first newsletter. The aim of our newsletter will be to shed some light on business and regulatory issues in China. I hope it will offer useful insights, practical advice and of course that it will provide reading pleasure. Our first issue is concerned with tax developments in China but also focuses on China and the environment. Eyes on China is in the process of establishing a “green” chamber of commerce aimed at creating synergies and creating exchange between environmentally conscious companies operating in China.

At the same time, the global financial crisis has affected every niche of the global business environment. From a demand perspective, consumer spending has slowed significantly, a phenomenon which is expected to continue for the foreseeable future, particularly when taking into account shrinking pensions. So too in China.

Yet there are signs of an upswing in several notable sectors. Domestic migration is slowly resuming and shifts can be seen in the China´s 130 million migrant workers. This movement could reflect significant boosts to factories and production sites catering towards the export market, which in turn highlights that global demand for certain goods seems to be picking up again.

In any case, these are interesting times for producers and consumers alike, especially when considering the rather unexpected environmental policies by the Chinese government. It remains to be seen to what extent the global economic, as well as domestic policy changes will affect the business landscape and how that will impact operations in China.

                                                                                                                      Marco van der Putten, Managing Director, COO

1. Current Tax Regulation Changes in China
2. Transparency in Accounting
3. Eyes on China and China Go Green
4. Upcoming Events

1. Current Tax Regulation Changes in China

Fresh Debate about Adjustment in Income Tax

In this current environment of financial turmoil affecting almost every sector throughout the world´s economies, China is starting to feel the pinch also. Several countermeasures have been suggested by the government in order to protect the country´s economic growth. A major recent development in this regard is a newly emerged discussion to increase the threshold for the minimum monthly taxable income above RMB2000 to RMB3000 ($438, €311, £268). Analysts predict that the government is expecting to discover the most effective means of boosting consumers’ disposable income. As a consequence, the government´s fiscal deficit is expected to increase owing to falling government revenues as a further result of the abolition of several taxes.

Export and Shipping Tax Rebates

In order to strengthen China´s ailing export market, the government has promised tax rebates on hundreds of goods, ranging from electrical appliances via toys to furniture. Analysts increasingly advise investors to shift away from companies selling goods overseas and concentrate on those selling to the domestic Chinese market. The government aims to rebate the VAT for input materials that are utilised in the production of export materials. China´s export growth has been declining steadily month-on-month since November 2008. The global financial crisis has heavily impacted China´s export market, which is reliant on high US and European demand. Hence, the government is required to intervene to stimulate exports nonetheless.

By the same token, the government of Shanghai, in its move to push the city to one of the most important shipping hubs, has introduced a policy to exempt ships registered overseas from tax for a further two years until June 2011. What is more, the Yangshan Port will abolish the business tax levied on international shipments for companies, domestic or foreign, who are registered there.

2. Transparency in Accounting

In a call to maintain increased transparency in the accounting of US companies worldwide, the Public Company Accounting Reform and Investor Protection Act of 2002, also known as Sarbanes-Oxley, applies to subsidiaries of US companies, even if these are located abroad. The main implication and challenge of the former is that US companies must now make an increased effort to preserve a standard of transparency in accounting procedures in Chinese subsidiaries in a country where rules and regulations concerning reporting processes change at a fast pace due to the system being in its early stages of development.

Companies considering an entry into the Chinese market should therefore be aware that Chinese accountants often do not have the required skills to see over these complex reporting processes, hence such a control mechanism is of equal importance to the legal composition of the organisation. Keeping this in mind is vital to a successful market entry, coupled with an organisational structure which paves the way for a gradual implementation of a transparent control system, which is also in harmony with Chinese law.

3. Eyes on China and China Go Green

On June 9th 2009, the popular radio show City Beyond on the English service of China Service International invited guest speakers from several influential organisations to discuss matters concerning corporate social responsibility, corporate governance and foreign direct investment.

The Managing Director at Eyes on China, Marco van der Putten, featured on the show and highlighted matters on CSR, particularly environmental aspects. The discussion centred on the establishment of a new organisation called Green in China (www.greeninchina.com), which at the moment of its inception will be the first “green” chamber of commerce in the country.

More specifically, Mr van der Putten shed light on the entry criteria to the association and the crucial issue of respecting the rules regarding emissions and upholding standards. The association will employ a quantified set of criteria required for accession, which will be monitored. Furthermore, at the member site, mid-level office managers and engineers will implement the rules and regulations in order to ensure that organisations become accustomed to these and to warrant consistency.

The Eyes on China Group is deeply committed to this cause and is eager to create awareness in China about pollution to the environment.

China and the Environment

Studies have suggested that it is safe to assume that every river in China is currently polluted, at least to some extent. Yet the Chinese government has recently made a series of environmentally conscious decisions, most prevalently the ban of handing out plastic bags for free in supermarkets in 2008. In June 2009, China expressed its serious wish to join the “green race” and pledged to match European standards of utilising solar and wind-powered energy by 2020. Furthermore, a significant portion of China´s $590bn stimulus package will flow into renewable energies and green technologies. The government has furthermore given subsidies to 13 cities in the country to implement clean energy vehicles in public transportation. China has implemented 23% of the world´s wind power machines in 2008, which places the country as second just after the USA. No doubt is this sudden “green” consciousness an effort to be less reliant on foreign energy in the future. Most importantly however, it remains to be seen to what extent the government can maintain this spending policy.