Opening a manufacturing company in China

Opening a manufacturing company in China

China is an extremely attractive jurisdiction for our Clients looking to setup a manufacturing company. For these Clients, Healy Consultants will assist with i) securing low cost office spaces and industrial spaces ii) hiring qualified local labour iii) locating suppliers for raw materials iv) building local logistic networks and v) securing the necessary government permits. For information about the Chinese manufacturing sector, refer to the information below.

  • Advantages of setting up manufacturing operations in China

    1. China is the world’s largest manufacturing and distribution hub because:
      • China derives 42% of its GDP from the manufacturing sector, which is valued at over US$4.4 trillion. In context of the global economy, Chinese manufacturing sector has grown from contributing 3% of the global manufacturing produce to nearly 25% of the global produce;
      • Over the last 3 decades, foreign companies have setup offices in China to take advantage of the low labour costs. Today, even though the average wages in China are rising, they are still lower than their Western counterparts;
      • China is the most populous country in the world. Furthermore, the country’s exponential growth rate since the mid-80s has led to burgeoning middle class, which is demanding more sophisticated goods and services. Consequently, our Clients should establish their companies in China to profit from this growing demand;
      • Our Clients will also benefit from China’s proximity to other budding Asian economies like India and Pakistan. Therefore, in addition to serving the Chinese population, our Clients will be able to serve the emerging middle class in these countries;
      • China is the world’s largest merchandise exporter, due to which the country has a well-developed distribution market which enables cheap transportation of goods. For instance, 7 of the 10 largest container ports in the world (by cargo volume) and 4 of the 20 largest airports (by cargo traffic) are in China;
      • With opening of RMB offshore clearing centres in 8 jurisdictions including Hong Kong, Singapore, Canada and London, RMB is increasingly being used in concluding international business deals. This will be beneficial to Chinese companies, which will be able to make international payments in RMB, rather than USD;
      • As result of the above, Deloitte has ranked China as the most competitive nation with regards to manufacturing operations in the 2016 Global Manufacturing Index.
    2. The Chinese Government offers several incentives to support manufacturing operations including:
      • Since the 1980s, the Chinese government has opened more than 200 national development zones including SEZs and coastal development areas. These zones offer incentives such i) access to low cost Chinese labour ii) ease in leasing land within the zone and iii) exemption from custom duties on goods imported into the zones;
      • Since 2012, the Chinese government has launched the free trade zone program in Shanghai, Tianjin, Guangdong and Fujian. In addition to the incentives mentioned above, these zones allow businesses to i) benefit from faster incorporation procedures ii) register without minimum share capital and physical office requirement iii) borrow RMB funds from overseas banks iv) list on the Hong Kong stock exchange v) issue RMB denominated bonds in the zone and vi) easily make outward RMB payments without government approval through specialized forex bank accounts;
      • All companies engaging in agriculture, forestry, animal-husbandry and fishery projects will be eligible for 50% corporate tax exemption for all years of operations. In some cases, it will be possible for the companies to secure complete tax exemption throughout the life of the projects;
      • Companies investing in infrastructure projects (including sewage treatment, seawater desalination and emission reduction projects) and environment protection projects will be eligible for i) complete tax exemption for the first 3 income generating years and ii) 50% tax exemption for the subsequent 3 years;
      • Tech companies involved with designing “Integrated Circuits” may apply for i) tax holidays for the first 2 years and ii) 50% tax exemption for the next 3 years. Furthermore, companies with investment in excess of US$1.2 billion may apply for tax holidays for 5 years and 50% corporate tax exemption for the next 5 years;
      • Similarly, software development companies will be eligible for i) complete tax exemption for the first 2 income generating years and ii) 50% tax exemption for the subsequent 3 years. Furthermore, income derived from technology transfers will be tax exempt up to US$750,000, over which the income will be 50% tax exempt;
      • Companies investing i) in underprivileged areas of Xinjiang province and ii) in high tech activities in Shenzhen, Hainan, Pudong and Shanghai will be eligible for complete tax exemption for the first 2 income generating years and 50% tax exemption for the subsequent 3 years;
      • Lastly, following tax incentives are also available: i) companies hiring handicapped employees will be refunded 100% of the wage amount ii) high-tech companies will only be taxed at 15% and iii) start-ups will be taxed at 20%.
  • Disadvantages of setting up manufacturing operations in China

    1. Despite all the success stories, it can still be difficult and expensive to operate a manufacturing enterprise in China because:
      • Foreign entrepreneurs will need to navigate through “ridiculous” levels of bureaucracy in China. Furthermore, with all the official documents published in Chinese, our Clients will need to spend money to hire a local translator right away to avoid any issues;
      • Companies outside the free zones will find it difficult to raise capital in China. Due to this issue, China was negatively ranked as 79th best jurisdiction in the world for “Getting Credit” metric in the Doing Business Survey, 2016;
      • Our Clients may also find it difficult to find quality suppliers for raw materials and intermediary goods in China. So, our Clients will need to be careful when signing contracts with local suppliers;
      • Our Clients will pay higher tariffs for industrial electricity usage in China as compared to their counterparts in the United States. Also, according to the World Bank, it can be a time consuming process to secure electricity connection in China;
      • In 2008, the Chinese Government revamped the existing tax incentive structure in the SEZs by abolishing the reduced corporate tax regime of 15% and withholding tax of 0%. The new regime raised corporate tax rate to 25% and withholding tax rate on dividend payments to foreign shareholders to 10%;
      • Currency remittance can be a cumbersome process due to the strict government controls. Consequently, our Clients will need to provide i) proof of tax payment ii) annual audit report and iii) company’s forex registration certificate in order to secure government permission for repatriation of their profits.
    2. Over the coming years, China is likely to lose its labour related advantages because:
      • While labour in China is cheaper than in the west, it is also less productive. According to a recently published Bloomberg article, productivity adjusted costs in the United States are 14% lower than the costs in China;
      • Labour costs in China have risen over the recent years. As a result, some Clients may wish to consider setting up their manufacturing operations in other Asian countries like Philippines, Vietnam and Indonesia to take advantage of the low cost labour;
      • The number of labour strikes and protests is increasing in China. According to the Financial Times, the aggregate number of protests has increased more than 20% in the first six months of 2016, compared to the first six months of 2015;
      • To add on, the English speaking population in China continues to be extremely low (less than 1%). Consequently, our Clients may find it difficult to communicate with the local labour, especially the unskilled labour.
  • China Labour Considerations

    • The average weekly working hours in China are 44, with no more than 8 hours a day. Individuals working beyond the official work hours will be paid 150% of the normal wages. Individuals working on holidays will be paid 300% of the normal wages;
    • In China, workers can be hired on fixed-term contracts, open term contracts or seasonal contracts. It is mandatory for the employers to provide written contracts to their employees within 1 month from the date of hiring;
    • The hourly minimum wage in China varies between different cities and ranges between US$1.3 and US$2.8. Currently, Shanghai and Beijing mandate the highest minimum wages in the country;
    • All employers are required to withhold income taxes on their employee’s income on a monthly basis. The collected amount will be remitted to the state authorities by the 15th of the following month, along with a tax return;
    • All employers will be required to contribute, on their employee’s behalf, to the medical insurance fund, pension fund, maternity insurance, unemployment insurance and work-related insurance. The contribution rates will vary from one province to another and are generally between 30% and 50% of the employee’s monthly salary.
  • China Import/Export Considerations

    • All Chinese companies, wishing to engage in import and export of goods will need to be registered with i) the Chinese Ministry of Commerce (MOCO) and ii) Chinese General Administration of Customs (GAC). Once registered, the company will be granted a trade registration certificate and customs registration certificate;
    • Chinese registered companies will also need to apply for a license based on the products they wish to import/export. Most import goods are classified as “permitted goods“, for which the license may or may not be required. Goods which are imported to be used for further processing or re-exports will not require licenses;
    • Certain goods are categorized as “restricted” (wool, cotton and aerosol containers) or “prohibited” (toxins). Such goods may either be subject to tariffs or quotas or may be permanently banned from being imported into China. Similarly, certain export goods like beef, cotton and crude oil may be subject to quotas or licenses. In China, import licenses are generally valid for 1 year, while export licenses are valid for up to 6 months;
    • Once goods are imported into China, they will be subject to inspection and certification from the General Administration of Quality Supervision (GAQSIQ). Goods being sold in the Chinese markets may need certification from both GAQSIQ and Certification and Accreditation Administration (CAA);
    • Trading companies will also be required to register for VAT after company incorporation. All goods imported into China will be subject to VAT of 17%, with reduced rates of 11% and 6% applicable to some goods. The VAT payment will be made within 15 days from the issuance of the payment certificate;
    • Companies importing luxury items including watches, cars, motor cycles will pay an additional consumption tax. The consumption tax applies to 14 categories of goods and may be as high as 50%. Similar to VAT payments, consumption tax payments will also be made within 15 days from the issuance of the payment certificate;
    • Lastly, import and export goods will also be subject to custom duties. The Chinese government currently levies duties on more than 8,000 items. The average tariff rate on imported goods was 9.8% in 2015.
  • China provinces comparison

    Chinese ProvincesShanghai (Municipality)Beijing (Municipality)GuangdongZhejiangTianjin (Municipality)Sichuan
    Preferred city for incorporation of the company?ShanghaiBeijingShenzhenHangzhouTianjinChengdu
    Business output market size? (in US$ billions)3813461,098467259456
    Local purchasing power (GDP per capita)?US$13,701US$14,252US$8,859US$10,360US$15,074US$4,911
    Most popular business sector?FinanceServicesManufacturingLight industriesLogisticAgriculture
    English Penetration (% of population)15%15%10%6%10%8%
    Specific attractive Government incentives available?YesYesYesYesYesYes
    Time zone? (ahead of GMT)+8 hours+8 hours+8 hours+8 hours+8 hours+8 hours
    Hub for the headquarters of multi-national firms?YesYesYesNoNoNo
    City airport with flights to Europe, Australia and America?YesYesYesNoNoNo
    Logistical considerations
    Attractive State for a manufacturing business?NoNoYesYesYesYes
    Attractive State for a e-business?YesYesYesNoYesNo
    Attractive State for an export-oriented service business?YesNoYesNoYesNo
    CBD monthly office rental per sq m?US$68US$84US$46US$22US$19US$24
    Average monthly warehouse rental per sq m?US$20US$22US$7US$5US$5US$6
    Average monthly electricity prices? (per Kwh)US$0.034US$0.04US$0.05US$0.04US$0.04US$0.04
    Proximity of sea port to the main city?25 km160 km27 km25 km55km1,333 km
    Proximity of airport in kilometres to the main city?33 km32 km32 km30 km24 km20 km
    Proximity of rail in kilometres to the main city?17 km32 km18 km39 km22km20 km
    Number of international tourists? (in million)11.637.9241.36.411.444.1
    Average annual inflation rate?2.2%3.6%1.6%1.4%2.5%2.4%
    Average unemployment rate?4.1%1.3%2.4%3.0%3.5%4.2%
    Quality of internet broadband and Wi-Fi?GoodGoodGoodSatisfactorySatisfactorySatisfactory
    Corporate Banking and Finance considerations
    Is the main city a financial services hub?YesYesYesNoNoNo
    How many global banks are based in the state?2725176714
    How many Chinese banks with local branches?232320212019
    Recommended Bank for corporate banking?HSBCSCBCitibankHSBCBank of ChinaCitibank
    Client must travel for account opening?NoNoNoNoNoNo
    Quality of bank customer services?GoodSatisfactorySatisfactoryGoodGoodSatisfactory
    Quality of online banking services?GoodGoodSatisfactoryGoodGoodSatisfactory
    English e-banking platform available?YesYesYesYesYesYes
    Does the State have a reputable financial district?YesYesYesNoYesNo
    Does the State have a local Stock Exchange?YesYesYesNoNoNo
    Are there Private Equity Funds/VCs in the State?YesYesYesYesYesYes
    Employment considerations
    Average monthly salary for local employees?US$1,250US$1,280US$746US$782US$913US$659
    Average skilled labour monthly salary?US$2,000US$2,000US$1,500US$1,630US$1,650US$1,250
    Average unskilled labour monthly salary?US$800US$875US$500US$520US$610US$460
    Minimum monthly wage for local employees?US$330US$260US$285US$280US$278US$226
    Is there a large expatriate community in the main city?YesYesYesNoNoNo
    International schools for children of expatriate employees?YesYesYesYesYesYes
    General availability of bars and restaurants?YesYesYesYesYesYes
    Will I find European F&B products in the supermarkets?YesYesYesYesYesYes
    Mercer Survey Ranking for global cities?101118119Not rankedNot ranked136
    Is the main city of the State safe for expatriates?YesYesYesYesYesYes
    Literacy rate? (% of population)97%98%97%94%98%93%
    Computer literacy rate? (% of population)60%65%40%35%45%30%
    Accounting and tax considerations
    Monthly and quarterly tax filing required?YesYesYesYesYesYes
    Business incentives offered by the state government?YesYesYesYesYesYes
    Deed tax payable on transfer of property rights?3%4%3%3%3%4%
    How many FTZs and EPZs available?105210
    Average customs duty of export products?10%10%10%10%10%10%
    Average customs duty for imported products?15%15%15%15%15%15%
    Local VAT rate?17%17%17%17%17%17%
    Corporation tax rate?25%25%25%25%25%25%
    Withholding tax on dividends to overseas shareholders?10%10%10%10%10%10%
    Average pension and insurance benefits (% of salary)?20%20%20%20%20%20%
    Mandatory labour unions?NoNoNoNoNoNo
    Minimum notice to dismiss employees?1 month1 month1 month1 month1 month1 month
    Minimum redundancy indemnity? (for tenure of 1 year)1 month1 month1 month1 month1 month1 month

Contact us

For additional information on our manufacturing company registration services in China, please email us at Alternatively please contact our in-house country expert, Ms. Chrissi Zamora, directly:
client relationship officer - Chrissi
  • Ms. Chrissi Zamora
  • +86 1084057444
  • chrissi@healyconsultants.comor
  • Fill out a contact form
  • Room 304, #12 Office Building Hepingli, Dongcheng District, Beijing;
    Suite C, Floor 21 No. 889 Ling Ling Road Cross Region Plaza, Shanghai China 400030;
    Room 321, Jing Quan Plaza, Beijing Xi Lu, Guangzhou Dadao, Guangzhou, China;
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