China - country profile

China - country profile

China is the world’s most populous country and the third largest economy. For much of the population, living standards have improved dramatically, while personal freedom has expanded in some areas, although political controls remain tight.

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Real gross domestic product (GDP) growth is expected to slow down to 7.2 percent in 2014, having reached 7.7 percent in 2013. Between 2014–2018, annual GDP growth should average 6.6 percent, with continued rises in private consumption. However, investment growth is expected to decelerate steadily in the same period.

Key Considerations for China

Fiscal and monetary policy

China’s government is facing a challenge to rebalance the economy, which is dangerously dependent on high levels of investment. Over the next 5–10 years the government will pursue a number of policies: financial liberalization; a program to improve the productivity of state-owned enterprises; reform of local government financing; centralization of control over the judicial system; and reform of the household registration (hukou) system. The government has reaffirmed its previous commitment to liberalize exchange rates, interest rates and the capital account. It also continues to reduce reliance on investment and move towards a more consumption-oriented model for economic expansion, while maintaining its push to expand public welfare provision.

Competition policy

The first anti-monopoly law (August 2008) bans monopolistic arrangements and behavior. Although China continues to encourage mergers, merger and acquisition (M&A) of domestic enterprises by foreign investors may require approval, according to certain provisional rules. Approval is needed when at least one of the parties in the merger has annual sales of CNY1.5 billion (US$243 million) or more and holds 20 percent of the Chinese market; or when the Chinese partner is an industry leader. In 2012, China maintained price controls on natural gas, pharmaceuticals, tobacco and some telecommunications services.

Foreign direct investment (FDI) policy

Thanks to its thriving domestic market, China will continue to be one of the top destinations for inward investment, although low wages are becoming less of a motivating force as the country becomes wealthier. The government encourages FDI, but is less openly supportive of foreign involvement in its services sector. During 2014–2015, rising costs in China mean that foreign investors may start to locate operations in other countries, in order to benefit from low-cost, export-oriented manufacturing. Restrictions on FDI in the Shanghai free trade zone (FTZ) are expected to be liberalized. Between 2016–2018, central and western China should increase their share of the country’s FDI, due to ongoing policy incentives. The pilot to liberalize FDI regulations in Shanghai will be extended to other regions.

Foreign trade and exchange controls

China’s government continues to exclude foreign firms from a number of industries such as broadcasting and armaments. Opportunities for foreign investors are greatest in those sectors where domestic enterprises are weak, and underdeveloped markets are swiftly opening up. Chinese enterprises are also looking for joint-venture partners in natural resources and infrastructure. In 2014–2015, restrictions on two-way capital flows are expected to loosen, providing more openings for foreigners to invest in local securities. Domestic firms are encouraged to gain better access to overseas capital markets and acquisitions abroad. Between 2016–2018, capital account liberalization will continue steadily. If capital outflows accelerate too sharply, restrictions on outbound investments may be tightened temporarily.

Financing policy

During 2014–2015, private sector access to financing should improve, and corporate bond issuance is expected to increase. Problems may re-emerge in the state-owned banking sector, leading to renewed government intervention. Liberalization of interest rates may start to relieve some of the distortions in China’s financial markets.

Taxes

The standard rate of corporate income tax is 25 percent. High- and new-technology enterprises face a preferential 15 percent tax rate. A preferential 20 percent tax rate applies for small enterprises with modest profits, as long as they do not engage in economic activity prohibited or restricted by the authorities. China has a progressive income tax system, with marginal rates as high as 45 percent, but tax evasion is rife. Indirect tax is the main source of tax revenue, but the burden will increasingly be shifted to direct personal taxation — particularly for high earners. In 2014–2015, the government is expected to expand a pilot scheme to replace the business tax on services with a value-added tax, lightening the tax burden on firms in the services sector.

KPMG in China

KPMG in China has approximately 6,000 professionals and 16 offices.

 
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