Business in China - Which Country Has the World's Fastest Growing Economy?

Which country has the world's fastest growing economy? You'd be right if you guessed China.

China now has the highest annual economic growth rate of 10 percent, among other developing countries. GDP is four times bigger than the one in 1978s. Measured on a purchasing power parity basis, in 2003 China stood as the second-largest economy in the world after the USA. China offers a mix of opportunities no other nation can match: low labor costs, an enormous domestic market, rapid growth, good infrastructure, a well-trained workforce and a business-friendly government. So, it's no wonder foreign companies worldwide are scrambling for a piece of the pie. Being the largest recipient of foreign direct investment, China received in 2003 $57 billion of foreign investments. By the end of the year 2010 China took over America and Germany as the world's biggest exporter.

In short, there are plenty of good reasons to have a manufacturing presence in China. The move however does carry some risks and the western companies striving to solve the Chinese puzzle need to consider the various different pieces. Many of these can be avoided by getting sound advice from people who are experienced in dealing with Chinese authorities and can truly represent the foreign company's interests.

Much of the potential trouble springs from the fact that China's capitalist system is still a work in progress. Foreign firms are welcome, but they still need government approval to operate. Rules and regulations are changing and are not always consistent. Protecting intellectual property (IP) rights can be difficult in China's courts, which are just starting to build the sort of legal framework that businesses take for granted in the United States.

Making money in China is one thing. Getting it out is another matter. China's currency, the Renminbi (Rmb), is not fully convertible and is being controlled at a fixed rate to the U.S. dollar by restricting the outflow of funds. Or in other words, every time you move money in and out of China, you need approval.

Another thing that foreign investors need to keep in mind is that there are minimum capital requirements for different types of companies in different industries. Also, it is recommended to capitalize the company using debt rather than equity. In China it is generally simpler to repatriate money through debt repayment than to pull out profits from an enterprise you own.

Foreign investors should plan their exit before their entry. The licenses, royalties, loans and other aspects of an investment in China should be structured from the start with an eye toward repatriation of funds. Moreover, the relevant contracts with the authorities must be registered.

Taxes can also trap the unwary in several ways. First, they can vary widely, with various provinces offering breaks such as tax-free incentive zones or subsidies. One danger is that a U.S. company will miss out on one of these deals and needlessly pay the highest tax rate. Or a local official might offer the company a break that's not allowed under national law. The company might also get a great legal tax break and still get a bad deal overall.

Taxes are just one aspect of operating costs. What's gained from lower taxes or subsidies that could be eaten up by other expenses in the area? Foreign investors should look at the operational logistics, the convenience and the total operating costs before considering the tax incentives.

China's march to economic freedom hasn't been matched on the political side. That fact is of concern to the whole world, not just businesses. What kind of country will this giant ultimately become? If it becomes a democracy, will the transformation be peaceful? And will it remain at peace with the rest of the world? These are all questions that businesses need to consider.

The Chinese government is getting its house in order; meaning it is doing a better job of collecting and sharing data and being more candid at home and abroad. China's leaders have realized that they must play by global rules. They sort of learned a big lesson in the sense that, if you want to join the world economy, you have to join the economy on every issue. The coming years will tell if they've truly taken such lessons to heart, and if the foreign companies now going to China will have a long and happy future there.

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