By Thibaud Andre
I recently met with Dr. Stephane Grand, founder of the accounting and financial firm SJ Grand in China. Dr. Grand was recently invited to the European Commission to prepare for the visit of Xi Jinping, and he is one of the foremost experts on the economic and legislative evolution of China. In the following interview, translated from the original French, I spoke with him about opening perspectives for foreign investors in China. I spoke with him about the future for foreigners to do business in China and the evolution of the regulation toward opening new markets.
Andre: We are used to saying that China, in parallel to economic growth, would like to strengthen control of foreign business activity and put an end to negligence with grey area practices. What is the real situation?
Grand: I think there are two different trends currently. The first one sees Beijing strengthen control and regulation and avoid borderlines practices. Beijing aims to put an end to laxness with foreign investors who play outside of the rules.
The second trend favors opening, as the number of sectors in which foreign investment is permitted is steadily growing.
A: Then what is Beijing’s actual objective? In particular for tax purposes, what is the outlook for foreign companies?
G: It’s quite hard to say, because there is a strong willingness to keep foreign firm operations under control, but at the same time there is strong need to be a full part of the international trade landscape. In the long term, discouraging foreign investors from doing business in China is not sustainable.
Foreign companies and Chinese companies are regarded differently in China. There is a specific regulation for foreign companies and a specific regulation for Chinese companies.
The WFOE (wholly foreign-owned enterprise) structure is the only one that allows a consortium or a single foreign investor to own, hold, and control the entire capital of its enterprise in China.
Foreign companies have to face a domestic competition that does not pay taxes in some cases. They have to deal with different cost structures compared with Chinese firms.
There was for many years – between the middle of the 1990s and the end of the 2000s – a period of euphoria. Foreigners were willing to take many risks and to face regulations which were against their interests. This euphoria has kind of disappeared. Therefore, I think Beijing understands that there is a need to let foreign companies enter the Chinese market, for the national good of China’s economy, and to keep building a Chinese industry that is not dependent on manufacturing. They know it involves a change in the system. Thus, the system will change.
A: Could a scenario be envisaged, in case of economic difficulties in China, with trends toward protection of national businesses?
G: There could be some tightening in the near term, but I think that protectionism is unlikely to continue indefinitely. I think we may see some short-lived protectionist efforts, but in the 21st century, China needs to be an active member of the international trade community. They may have a specific tax policy for foreign companies, but I cannot imagine that this situation will last forever.
But, this is the basic truth: foreign companies are easy targets for the Chinese administration when the economic context is difficult.
A: In this context then, does every foreign company face the very same challenges? Or are there some differences between European, American, and Japanese companies?
G: Actually, there is mainly a difference between top Fortune 500 firms and other companies, in particular SMEs. This is Beijing’s ongoing dilemma. While they want strict regulation and control, at the same time they want to attract the biggest investors, simply because they desperately need it.
Thibaud Andre is a French consultant working at Chinese market research firm Daxue Consulting. He is passionate about Chinese culture and likes to share insights about the many emerging markets of the Middle Kingdom.