Foreign Investment Opportunities In Beijing’s Service Industry Sector

Ines Liu, Dezan Shira & Associates Beijing

Ines Liu is a Manager at Dezan Shira & Associates’ Beijing office and a member of the firms International Business Advisory team. She advises foreign investors on market entry strategy, corporate structuring, risk management issues, cross-border tax issues, and FDI-related legal and tax considerations in Northern China. Prior to joining Dezan Shira & Associates, Ines acquired extensive auditing and assurance experience working at PwC, and managed investor relations for China-based U.S. IPOs while working at Ogilvy Public Relations Worldwide. She has also practiced in specific areas of auditing, financial and corporate communications, and general accounting and management consulting.

Ines holds a Bachelor’s degree in economics and an MBA from Macquarie University Graduate School of Management in Australia.

China’s Service Sector At A Glance

China’s GDP is contributed too by three main sectors; agriculture as the primary industry, construction, and manufacturing as the secondary industry while the tertiary sector is the service sector.

In the past four decades China’s economic growth was dominantly driven by the manufacturing sector, which benefited from an enormous low-cost labor pool as the country opened to export markets. Now, as labor and land costs are growing and its workforce is increasingly well-educated, China has been transitioning to a manufacturing-heavy economic model to a services-led one.

According to 2013 data, China’s primary industry accounted for 10 percent of GDP, while secondary industry accounted for 44 percent, and the tertiary industry 46 percent. Looking at those same sectors in 2019, China government data shows us that today, it is the service sector as the main contributor to overall growth with 53.9 percent of the GDP; while, in 2020, the services sector’s share of the national economy grew to 54 percent of the GDP, and in the same year, contributed to 60 percent of China’s total economic growth.

The 14th Five-Year Plan (2021-2025) has promoted the development and access to the service sector as a general trend, which we believe is a positive indicator for foreign investors with intentions to invest in this area. In 2021, there is no doubt that the service sector will continue to be a priority area for innovation and growth for China, and careful monitoring of new developments within gives clues to where opportunities are. 

Beijing has been unveiling an all-encompassing plan for opening–up the service sector since 2015. In February 2017, Beijing launched financial incentives and investment to encourage high-value-added service exports, which have had a dramatic impact on the sector. With added value in services contributing 83.5% of GDP in 2019, Beijing has steadily developed a reputation as China’s service hub. In 2020, to optimize foreign investment environment and further upgrade market access, Beijing has released a work plan that laid out reform measures set to impact key services industries and we expect this to continue. Beijing is developing a more friendly business climate for foreign investors by meeting their investment needs and returns on their investments.

Specific Service Industries With Newly Relaxed Market Assess

Beijing is now playing a critical role in spearheading reform and generating new momentum for China’s future market reforms and will continue to give play to industrial advantages with key development polices. Several sectors which are or have undergone reforms for improved market access are as follows: 

1. Science and Technology Services

Beijing is the Unicorn capital of China, with 93 Unicorn companies by the end 2020, more than any other top tier city in China. Around 600 foreign companies have established research and development (R&D) centers in Beijing, including Apple, Tesla, Merck, and Mercedes-Benz as examples. The Chinese government also approved the set-up of the Beijing Free Trade Zone last year, which will feature a science and technology innovation center with global influence to support Beijing’s development as a high-tech, digital, services hub.

It is also worth noting that one of China’s core innovation tax incentives is designed for qualifying High & New Technology Enterprises (HNTE). Qualified HNTEs enjoy a preferential corporate income tax CIT rate of 15%, as opposed to the standard 25% statutory CIT rate. However, the approvals process in obtaining HNTE status has been challenging for foreign companies (the overall IP structure) and the application process often find burdensome with very high documentation requirements. To enhance international attraction, Beijing has stated they will simplify the HNTE status application process for companies in the Hi-Tech service industries, including integrated circuit, artificial intelligence, medicine, and critical materials sectors. On top of that, the ownership of IP is not required if the following three criteria are met:  

• Have operated in China for more than one year
• The designated size with annual turnover is more than RMB 20 million
• Have no less than 50% of total R&D expenses incurred in China

That being said, the current challenges still exist and HNTE criteria must still be fulfilled, although firms such as ours will be keeping an eye on when these are relaxed. However we do expect developments this year and we hope to see the easier HNTE implementation in 2021 and the subsequent attraction of more foreign investors in Beijing. Watch this space. 

2. The Digital Economy and Trade Sector

In 2019, China opened Virtual Private Networks (VPN) to foreign investment for the first time and lowered the barrier to market entry for elderly care institutions. Additional measures liberalizing China market access include allowing foreign telecom companies to own as much as 50 percent of Joint Ventures in providing virtual private networks (VPN) – which is seen as an important step to improving the cross-border flow of information.

Beijing also plans to build a comprehensive demonstration zone to fulfill China’s initiative to drive innovation-based development and further open up its services sector and digital economy.

China’s Work Plan to do this includes expanding existing industry clusters and parks and implements institutional and supply-side reform, while also promotes the expansion and opening of key industry parks to pull resources and centralize incentive for the accelerated growth of sectors the government deems to be priority. There is a pilot program to promote venture capital investment. For qualified Venture Capital corporations in Zhongguancun Science Park (Z-Park), a preferential income tax policy will be implemented, which will exempt investors from CIT on the profits attributable to individual shareholders. The corporations will be treated as a partnership for IIT purposes; therefore, individual shareholders will be only subject to IIT on dividends from the corporations.

The new pilot zone will be a testing ground for new innovative policies that can be replicated and scaled for the service industry opening-up at a national scale.

3. Financial Services

The Financial services sector has received the most attention with 26 newly announced policies — by far the most extensive number of measures introduced under a single industry.

From the perspective of widening market access, an important milestone has been reached: foreign companies can establish Wholly Foreign-Owned Enterprise (WFOE) finance companies in Beijing. Private Equity can launch asset management activities and conduct equity investment; Foreign banks can act as custodians of portfolio investment funds, can act as lead underwriter in the inter-bank bond market, and can obtain gold import licenses.

The Central Government has previously stated that it is imperative to promote the implementation of the pilot program of “separation of business licenses from operating permits” in the financial sector in Beijing, support private investors in setting up and leading the operation of RMB international investment funds in Beijing and support foreign investment institutions in participation in the pilot program of overseas investment made by qualified domestic limited partners.

4. Professional Services 

Beijing now is open to foreign rating agencies by inviting them to set up subsidiaries and allowing them to conduct rating business in the inter-bank bond market and exchange bond market.

Investment rules have also been liberalized in the culture, tourism, education, and healthcare sectors. Running parallel to these measures, Beijing will also grant preferential IIT treatment to qualified high-end foreign staff working in designated fields (probably Z-park), similar to IIT incentives in Hainan Free Trade Port (FTP) and the Greater Bay Area (GBA) in South China. These provide for a 15 percent IIT outcome, which is likely a good reference for the Beijing scheme.

Institutional Innovation and Supply Side Reform

The remainder of the measures introduced by the Work Plan fall under two broad camps:

• Institutional Innovation – denoting measures for restructuring the systems in which businesses currently operate; and
• Optimizing Supply Factors – referring to supportive measures to boost production factors such as labor, land, capital, and data.