Business Cooperation Between China and United States

By: Dr. Xiaoliang Men, Wuhan University,
Dr. Adrian J. Lottie, Ray Taylor and Associates,
Dr.Yichun Xie, The Institute for Geospatial Research and Education,
Jenny L. Zeng, attorney and business consultant with a J.D. from Washington University

With the development of China’s economy over the last few years, both challenges and opportunities arise from the current economic situations in both the United States and People’s Republic of China. Obviously, Chinese currency appreciation has many impacts on the investment environment in China. First of all, continued Chinese currency appreciation against the USD makes it more expensive for U.S. companies to acquire Chinese companies, but it also potentially creates more opportunities for U.S. exports to China. We also find that continued Chinese currency appreciation coupled with Chinese aspirations to be “international” further drive China’s outbound investment into the U.S., growing Chinese investment in the U.S. economy.

This article introduces several points for business cooperation between China and the U.S. in the present investing environment. It is focused on how small and medium-sized U.S. companies do business in China. Section II gives an overview of China and includes some numbers that may be of interest to U.S. business men and women.  In Section III, we describe several important points to consider if you want to establish your business in China. Section IV describes how to communicate with Chinese business representatives.  And, finally, Section V draws some conclusions.

China: Country Overview
People’s Republic of China was founded in October 1949. With just over 1.3 billion people (1,339,724,852 as of Nov. 1, 2010), China is the world’s most populous country. The geographic territory of China is 9.6 million square kilometers (roughly the size of the U.S.) and it is about 1/15th of the world’s total land mass. China has 23 provinces, five autonomous regions, four central administrative municipalities and two special administrative regions (Hong Kong and Macau). The national language is Putonghua (Mandarin). Figure 1 shows the geography and regional centers of development in China. Beijing, Shanghai and Guangdong province are the vertexes of the triangular regions which are the centers of economic development.
 
Figure 1. Geographic Overview and Regional Centers of Development in ChinaFollowing are some business related numbers that may be of interest:

• Number of Fortune 500 companies: 43

• Foreign direct investment in China: USD 92.4 billion in 2008

• China investment overseas: USD 55.9 billion in 2008

• China ranks 83rd out of 178 economies for ease of doing business, according to a 2008 World Bank study.

• Dealing with licenses, paying taxes and starting a business – respectively ranked 175th, 168th, and 135th – are some of the most challenging aspects of doing business in China.

Establishing Business in China
If you plan to establish a business in China, you should begin by checking the “Catalogue for the Guidance of Foreign Investment Industries”[1] that was promulgated by the former State Development Planning Commission and the Ministry of Commerce of China on March 30, 2004 and came into force as of December 1, 2007.

From the Guidance, you can find out whether or not the business that you want to establish in China is in the Catalogue of Encouraged Foreign Investment Industries, the Catalogue of Restricted Foreign Investment Industries, or the Catalogue of Prohibited Foreign Investment Industries.

The Chinese government has an official website, “Invest in China,”[2] which contains information about Opportunities, Economy, Investment Updates, Laws, Services, Investment Statistics, Company Search, National Development Zone, Investment Channel, and Outbound Investment.

If you want to set up an entity in China, there are three basic types of direct foreign investments:
 

1. Wholly Foreign-Owned Enterprise (WFOE or WOFE) or Foreign Invested      Commercial Enterprise (FICE)
2. Equity Joint Venture or Cooperative Joint Venture (JV)
3. Representative office

Increasing land prices and labor costs coupled with the RMB appreciation noted in the introduction, pose more challenges to U.S. companies who contemplate setting up a manufacturing operation in China. At the same time, the continuous improvement of China’s vast infrastructure and urbanization process creates tremendous investment opportunities in China for both Chinese and U.S. investors.

Before you decide to move your business to China, you may need to engage in extensive communication with your partners in China, the banks, and related government departments. Setting up operations and opening bank accounts in China require extensive documentation, multiple approvals and can be very time consuming as your key regulatory considerations. It is best to engage competent legal counsel with the expertise, experience and resources to effectively assist you in your efforts.

One of the most important questions you may ask is how to deal with “money-in” and “money out” problems. The answer lies in becoming familiar with the Foreign Exchange Control Regulations that are used in China and in getting help from Chinese banks. The “Big 5” banks in China are:

• Agricultural Bank of China

• Bank of China

• Bank of Communications

• China Construction Bank

• Industrial and Commercial Bank of China

The banks may provide choices of account types with some having functions very similar to U.S. accounts.  The “Big 5” formerly used the same “national clearing systems” for more than ten years. Under this old system, foreign banks would appoint the Big 5 Banks as their RMB clearing agents. Now, the banks all use the China National Advanced Payment System (CNAPS) which contains the High Value Payment System (HVPS) launched in 2003 and the Bulk Electronic Payment System (BEPS) launched in 2006 for amounts that are less than RMB 20,000.

Today, foreign banks have begun to operate in China. JPMorgan Chase is the first foreign bank to set up a Locally Incorporated Bank (LIB) headquartered in Beijing. The LIB currently has five branches in China. They are located in Beijing, Shanghai, Guangzhou, Tianjing and Chengdu. As a U.S. bank, it is a popular choice for many U.S. business leaders.

Another good question about doing business in China is “what role does the Chinese government play?” There is no clear answer for this question. Most people think that the market itself directs the required course of action. However, Chinese policy makers usually play very important roles in your business. Experience dictates that good communication with local government officials is one of the most important things you need to do.

To help promotes investment by foreign companies, nearly every local government in China sends delegations to foreign countries to participate in meetings and conferences. The Chinese representatives hope to get investment and advanced technology from others. For instance, Wuhan city in China is famous for its automobile industry, so the government and the companies in Wuhan are always interested in attending big events in Detroit because it is also famous for its automobile industry.

The Chinese government will often provide some benefits to foreign companies if they invest in China such as waiving or reducing some types of taxation. This usually depends on the location and type of business you will pursue in China. During your business tenure in China, you will find that you will always need to communicate with the local government. In general, keeping good communication channels with local governments is helpful.

In addition, U.S. companies need to make sure that they draft effective and enforceable contracts with their Chinese counterparts. The best contract is one that both parties will adhere to without the involvement of courts or arbitration. For that purpose, U.S. companies need to understand the Mandatory Provisions of Chinese law. They should also have any and all special considerations clearly spelled out in every technology transfer agreement as well as in any exclusive distributorship agreement.

Regardless of the location or type of business, it is imperative that the U.S. company works scrupulously with its legal advisor to ensure that all contracts are clear.

Communication with Chinese Parties
As mentioned previously, communication with all Chinese parties–whether companies or local governments–is very important.  In fact, most cooperative businesses in China are placed into a development zone that commands close cooperation.

One region where there are business opportunities in China is the Optical Valley of China (OVC). Located in the East Lake High-tech Development Zone, the OVC is a well-known and very good example of one of China’s best investing environments.

There are ten great competitive industry clusters including four industries in the OVC; i.e., Optical Communication, Mobile Communication, Modern Equipment Manufacturing, Energy and Environmental Protection and other industries. Each of the four has an industrial scale in excess of RMB 10 billion (Chinese currency) Yuan. To give you a sense of exchange rates, the Yuan RMB has been roughly 6.4 to 6.7 per dollar in recent months; however these values may fluctuate somewhat throughout each year and from year to year.

Below is a graph of recent exchange rates from x-rates .com  [Cny= Chinese Yuan

Below are some examples of industries from the OVC:

 
Optoelectronic:
The company boasts 45 optical communication production enterprises with total revenue of RMB 10.5 billion in 2007. For optical fibers/cables, the production scale is second in the world, its share in the domestic market has reached 50% and its share in the international market is 12%. For optical devices, the company’s domestic market share is 40% and its share in the international market has reached 6%.

Mobile Communications:
There are 30 mobile communications equipment, terminals and related product manufacturing enterprises with 2007 total revenue of 10 billion.

Semiconductor Industry:
There are 10 IC design units, 14 backbone enterprises for chip manufacturing. packaging and products application. SMIC will commence the production of 12-inch, 90nm products in its IC production lines in April, 2008.

In 2007, the company successfully packaged the ultra-high-power LED light (1500 Watt) which is presently the highest power artificial light.

Consuming Optoelectronic:
So far, there are 19 enterprises with 2007 total revenue of 3.5 billion. Foxconn Company will begin to produce in April 2008. The first with Independent Intellectual Property Rights of China owns 49 patents.

Laser Industry:
There are 53 enterprises, 2007 total revenue of 2 billion. The share of High-tech Zone laser products has maintained at more than 50% in China’s domestic market.

Software and Software Outsourcing:
There are more than 600 enterprises with 2007 total revenue of 9.6 billion. Optical Valley Software Park has built 220,000 square meters in its first phase, gathering 55 enterprises. It is currently promoting the second phase comprised of a nine square kilometers project.

Software outsourcing enterprises like IBM Microsoft, and EDS have begun their operations. The Phase I Animation Creative Industry Base has 20 resident enterprises. The Incubation Center of Optical Valley Creative Industry Base has been established and Optical Valley International Creative Industry Park is in construction as the result of efforts by both the industries and the Singapore Media Authority.

Green energy:
There are 42 enterprises with 2007 total revenue of 14 billion.

Biomedical and high-tech agriculture:
There are 137 R & D and producing enterprises with 2007 total revenue of 6 billion.

Modern equipment manufacturing industry:
There are 85 enterprises with 2007 total revenue of 16 billion.

Besides the great competitive industry clusters in Wuhan, there are many universities that can supply talent for the OVC. The most famous universities in Wuhan are:

• Wuhan University (Ranked 7th in China)
• Huazhong University of Science and Technology (Ranked 8th in China)
• Wuhan University of Technology
• Central China Normal University
• Huazhong Agriculture University
• China University of Geosciences
• Zhongnan University of Economics and Law

Dr. Xiaoliang Meng, who is from the Joint International Center for Resource Management and Digital Technologies at Wuhan University, has experience in the areas mentioned above including mobile communications, the semiconductor industry, software and software outsourcing.

Dr. Jenny. L. Zeng, attorney-at-law, holds a J.D. from Washington University Law School and a New York State Bar license. She is a partner of Dr. Meng and runs a legal consultancy service. She also has experience with government offices, especially the foreign affairs office of Hubei province where Wuhan is located.

Both work in the OVC zone.

Although the Optical Valley of China (OVC) is not the only choice for U.S. business men and women, it is a good idea to work with local representatives if you want to do business there.

Conclusions
China is an exceptional country in terms of the speed of its economic growth. More recently, some traditional concerns have been magnified by the rapid expansion of economic activity[3]. It indeed means both bigger challenges and opportunities arising from the current economic situation in the United States and People’s Republic of China. There is no better time to start your business in China, however, any time is good if you can find the right opportunities.

Team Members
Dr. Xiaoliang Meng Lecturer (tenure), Wuhan University, holds a Ph. D in Photogrammetry and Remote Sensing at Wuhan University, China.
Email: meng.emu@gmail.com
Phone: +86 1-597-217-2758

Dr. Adrian J. Lottie is a consultant, investor, and president of Adrian J. Lottie Ph.D. LLC and a Senior Consulting Associate at Ray Taylor and Associates Ann Arbor. An economist and political scientist, he holds a Masters in Economics and Finance and a Ph.D. in Political Science from Wayne State University and has been in business in the U.S. for 40 years. He is a professor in the Public Administration section of the Department of Political Science at Eastern Michigan University.
Email: AdrianLottie@aol.com
Phone: 313-231-4114

Dr.Yichun Xie
Director, the Institute for Geospatial Research and Education, and Professor of Geography and Geology Department at Eastern Michigan University, holds a Ph.D. in Geography/Geographic Information Systems from the National Center for Geographic Information and Analysis (NCGIA) at the State University of New York at Buffalo.
Email:   yyyxie2000yyyxie2000@yahoo.com

Jenny L. Zeng is an attorney and business consultant with a J.D. from Washington University.

If you are interested in doing business in China or with Chinese businesses, you may contact us at the above e-mail addresses or phone numbers.

NOTE – REFERENCE 4 LISTED BELOW HAS NOT CITATION IN THE PAPER.

REFERENCES
[1] Ministry of Commerce of the People’s Republic of China, “The Catalogue for the Guidance of Foreign Investment Industries,” 2007, http://www.fdi.gov.cn/pub/FDI_EN/Laws/default_new.jsp
[2] Ministry of Commerce of the People’s Republic of China, “Invest in China,” http://www.fdi.gov.cn/pub/FDI_EN/default.htm
[3] Stephen Yeaple, “Facts and Fallacies about U.S. FDI in China: Comment,” 2008, www.nber.org/books_in_progress/china07/yeaple7-29-08comment.pdf
[4] X-rates.com, 2011: http://www.x-rates.com/d/CNY/USD/graph120.html