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Business Climate Survey

New Era For Investment

Amid the complicated business environment and political uncertainties under the new US administration, Chinese companies continue to be optimistic about investing in the US market

By NewsChina Updated Jul.1

The China General Chamber of Commerce-USA (CGCC), the organization representing over 1,500 Chinese enterprises investing and operating in the US, has released a new business climate survey of members. The study found that the complexity of China-US relations has replaced high labor costs as the top challenge for Chinese companies in the US at a time of administration transition. 

But Chinese companies surveyed said they felt the US regulatory and business environment had become fairer and more transparent. Most of them have maintained their market share in the US for the past year, and plan to increase their investment and hire more local staff, which showed that Chinese companies have become more competitive and confident in the US market. 

This year was the fourth time CGCC have run the survey. The companies surveyed have invested in a broad range of industries including manufacturing, the wholesale trade, real estate, finance, transportation and energy. 

Balance Sheet 

The US is one of the favorite destinations for Chinese investors for its high revenue returns, long-term political stability and business efficiency. The CGCC survey results showed that Chinese companies in the US have generally undergone rapid growth over the past several years.  

Half of Chinese companies surveyed witnessed a revenue increase in each of the four years from 2013 to 2016, and 86 percent believe their revenue will grow in the upcoming three to five years. What’s more, 87 percent of companies surveyed maintained or increased their profit margins in 2016. At least 53 percent of companies maintained their market share and 61 percent increased their business activities. 

Statistics from China’s Ministry of Commerce showed that Chinese investors made direct investments in 7,961 enterprises in 164 countries and regions around the world in 2016, with a combined non-financial investment of over US$170 billion, seeing a growth of 44.1 percent year on year.  

According to a report jointly released by the National Committee on US-China Relations and the Rhodium Group in May 2017, Chinese companies invested a record US$46 billion in the US in 2016 thanks to the growing number of mega acquisition deals, up from US$15 billion in 2015. It was a tenfold increase compared to five years ago, creating more than 140,000 jobs in the US.

By the end of 2016, all 50 US states and 98 percent of congressional districts hosted Chinese-owned companies. 

In 2015, China Railway Rolling Stock Corporation (CRRC), one of the world’s largest suppliers of rail transit equipment, broke ground to establish an assembly line in Springfield, Massachusetts.

In April, 2017, 33 employees from the Springfield-based rail car builder of CRRC Massachusetts traveled to China for three months of technical training at CRRC Changchun Railway Vehicles Co Ltd in northeastern China’s Jilin Province. 

Mark Smith, general manager of CRRC Massachusetts, said after the factory starts production, it is expected to create approximately 200 jobs for Americans and if the business expands, more workers will be employed. “We all hope the city can be revitalized,” he told NewsChina. He said investment from CRRC was a great “new start” for the old industrial city, once famed for the Springfield Armory. 

In the opinion of Zhang Shuyu, a finance researcher with the University of International Business and Economics, many Chinese enterprises used to ignore local employees when they started operations abroad, preferring to hire Chinese staff before deploying them overseas, which has become a major problem. He said foreign-owned enterprises are doing a better job when they operate in China by hiring more local employees to save costs, better promote the company image and reputation. 

“Hiring more locals will help to foster a stronger relationship with the local market which will contribute to learning and adapting to the local culture and policies,” he told NewsChina. “In addition to the complicated political and legal environment overseas, cultural conflicts have become a major challenge for outbound Chinese companies. The good news is that many companies have realized the cultural differences and attached growing importance to customer relations.” 

Xu Chen, president of the Bank of China USA and chairman of CGCC-USA, said customer relations have exceeded price competition as the top priority of most Chinese companies in the new CGCC survey. This shift of business priority from pricing to customer relationship reflects that Chinese companies are moving along the product value chain, turning from “basic manufacturing to more high-tech and R&D-concentrated areas.”   

According to the CGCC survey, 73 percent of Chinese companies consider the US market as one of their top three markets globally, and 94 percent said innovation is very important to their business considerations in the US. Approximately 30 percent of surveyed companies have intensive R&D projects in the US. 

“Chinese companies are increasing their R&D spending in the US, and better respecting intellectual property rights,” he said. 

Tax Debates 

The tariffs and corporate tax levied on overseas investors have been an issue of concern among Chinese companies over the years since they ventured into the US market heavily. According to the CGCC survey, 47 percent of Chinese companies considered that levying high tariffs on Chinese imports would pose additional challenges. Meanwhile, reducing corporate tax rates proposed by the Trump Administration is viewed favorably by Chinese investors. In April, 2017, US President Donald Trump unveiled the guidelines of the long-awaited tax reform plan, which, if it passes Congress and the Senate – a long and complicated process where the plan is highly unlikely to survive in its current form – would cut the corporate income tax rate from 35 to 15 percent. 

Although 33 percent of Chinese companies surveyed considered the tax burden in the US to be heavier than that in China, the percentage of the companies holding the view, however, has continued to decrease since 2014. In addition, most of the respondents considered the US federal tax law to be more reasonable than the tax rules in China.  

The debates on tax rates of the two countries has been an untiring topic recently. In early 2017, the words of Chinese auto-glass tycoon Cao Dewang sparked a heated discussion across China in both academia and the industrial circle. He claimed that his recent US$600 million investment in the US was largely driven by China’s high taxes which are 35 percent higher for manufacturers than that in the US. “Tax cuts are key for companies [in China] to make profits,” Cao, a member of the Chinese People’s Political Consultative Conference, said during the two Sessions in March 2017. 

In the opinion of Zhou Tianyong, a professor at the Institute of International Strategic Studies of the Party School of the Central Committee of CPC, an irking problem facing Chinese manufacturing enterprises is the combined taxation burden – nearly 37 percent in 2015, up from 16.5 percent in 1995, 21 percent in 2000, and 26 percent in 2005. “China’s manufacturing industry has been attacked from all sides by the tax burden, high costs and rocketing real estate price,” he said during an annual meeting held by the China Business Times in December 2016. 

Li Weiguang, a professor of Tianjin University of Finance and Economics, echoed Zhou. In his recent studies on the relationship between tax and enterprise performance, Li found that enterprises would be on the verge of bankruptcy if they paid all the taxes required by law, which he described as “fatal taxes.” He said government reform of the corporate tax system is urgent, but he also indicated that opposition to cutting taxes would be strong. 

The public outcry on corporate tax has aroused the attention of the central government recently. It is already one year since China expanded the implementation of value-added tax reform to all industries and as of the end of April 2017, total tax cuts under the reform are expected to reach 680 billion yuan (US$100 billion), according to the country’s top tax authority.  
The State Council, China’s cabinet, also introduced a string of measures in April 2017 to reduce the corporate tax burden, including simplifying the VAT rate system and lowering the rates for agricultural products, natural gas and some other industries. These measures are expected to reduce the tax burden of enterprises by about 380 billion yuan (US$55 billion). 

Liu Yuanchun, vice president of Renmin University of China, however, claimed that the outbound investment of Chinese enterprises was driven by a number of factors including market fluctuations, economic globalization as well as entrepreneurial mindset. For him, it is not appropriate to see China’s outbound investment only through the lens of tax rates. 

“The glass industry in which Cao Dewang was operating is actually a typical industry suffering from over-production in China. It needs both supply-side reform and the overseas market,” he told Xinhua News Agency. 

Challenges Ahead 

Another conspicuous factor in the survey this year was that 48 percent of Chinese companies consider that complex China-US relations have become a top concern and challenge for Chinese companies in the US, replacing high labor costs which were their top concern for the previous three years. What’s more, unfavorable federal government policies, visa and immigration barriers, and unfavorable State or local government policies are also major challenges for Chinese companies, reflecting their anxiety over the potential negative effects that the new administration might bring to the China-US economic and trade ties. 

Some Chinese companies were worried about more stringent government oversight, and 35 percent of Chinese companies surveyed believed that the “Buy American, Hire American” initiative proposed by the new US president might create more operational challenges, and 83 percent of companies, however, claimed that they will not change their current investment plan and strategies, showing their faith in the business prospects in the US. 

“We are especially excited about the prospects of additional deregulation by the new administration. However, I am also concerned about the pace of deregulation implementation, particularly in regard to the foreign banking operations in the US,” said Xu Chen. 

Xu added that complying with regulations is of utmost importance, but at the same time, there needs to be more of a balance between business promotion and examination. Given today’s extremely intensive examinations, Xu said, much of “our time and energy has been spent on regulatory cooperation, rather than facilitating investment to create more jobs for American people.”  

Economists also claimed that the US$1 trillion infrastructure plan for the upcoming 10 years proposed by Donald Trump could potentially provide more opportunities for Chinese enterprises if it passes. Tempted by the infrastructure spending plan, 41 percent of surveyed Chinese companies view the proposal positively as an opportunity to expand their businesses and at least 24 percent of them are planning to increase investment in the US to benefit from the policy change. 

According to data from the National Development and Reform Commission, China’s top economic planner, China ranked first worldwide in the mileage of high-speed rails, expressways and urban transit systems by the end of 2016. Statistics from the National Bureau of Statistics also showed that the investment on infrastructure in China hit 10.6 trillion yuan (US$1.54 trillion) during the first 11 months of 2016, an increase of 18.9 percent year on year.  

While US infrastructure received the least investment from China of all sectors from 2000 to 2015, it became the second largest sector for Chinese investors in 2016, according to the recent Rhodium report. China’s record and speed in building massive infrastructure projects in recent years have been widely recognized and the two countries have great potential to strengthen cooperation on infrastructure, but challenges remain abound. 

Li Wei, a researcher with the National Academy of Development and Strategy, Renmin University of China, said China is skillful in lower-cost infrastructure construction, adding that China’s traditional way of outbound investment overseas in the area of infrastructure, however, was driven by the mode of exporting capital, technology and labor force in a bundle, which makes it difficult to increase local employment and is expected to meet serious barriers under the Trump administration.  

“Trump welcomes China’s capital and technology rather than Chinese facilities, raw material and labor force,” he told NewsChina.  

Zhang Shuyu believed that it is unavoidable for Chinese enterprises to encounter plenty of skepticism in the US, just like Japanese companies a couple of decades ago, and Chinese investments are likely to fail if they don’t research the market carefully. 

“Even though the US has a good investment environment, a sound legal system as well as favorable policies, many Chinese enterprises ended up making a loss in the US market,” Zhang told our reporter. “In cross-boundary investment, investors face very different challenges to China.” 

“President Donald Trump’s pro-business policies including tax reform, deregulation and his infrastructure plan are a boon for Chinese enterprises. It is crucial to identify areas where the benefits of both countries could meet and where the two countries could work together,” he continued.