Devonshire-Ellis: China Business Will Be Harder Next Year

December 4, 2014 Posted by China Briefing Reading Time: 7 minutes

Chris Devonshire-Ellis, currently in Shanghai attending the Dezan Shira & Associates Group annual meetings, warned that whilst 2014 has been a satisfactory year for foreign investors in China, 2015 poses a number of difficulties.

“China is facing economic pressures and, when this occurs, the government tends to point the finger at foreign influences,” he said. “In foreign investment terms, this will manifest itself in stricter interpretation of rules and the imposition of fines and penalties on foreign corporations considered in breach of laws. Grey areas will become an increasing concern for foreign investors looking to stay clean. However, many will inevitably face unprecedented pressures from Chinese authorities next year. This, coupled with a continued favouritism to domestic companies, will force foreign investors competing with domestic brands to become more innovative in their efforts to sell to the Chinese market.”

This perspective has been echoed by White Papers issued by both the European and American Chambers of Commerce in China. Dezan Shira & Associates are long term members of both, with Alberto Vettoretti, Dezan Shira’s China Managing Partner, Chairman of Eurocham’s South China board.

In addition to a tougher China regulatory environment, the U.S. Foreign Account Tax Compliance Act (FATCA), has impacted on American investment into China via Hong Kong. Hong Kong banks have been denying U.S. citizens the ability to open corporate bank accounts in the city, which has wider implications for foreign investment into China. “We have had several US clients cancel China investments as they could not open accounts in Hong Kong” says Devonshire-Ellis. “They eventually gave up on their China plans. This compliance issue needs to be addressed between Hong Kong’s banks and the US threat of prosecution over money-laundering, which is now catching bona fide businessmen in its nets in an unintended side effect of this legislation”.

“Dezan Shira & Associates met its set growth targets in 2014, and we have enjoyed a productive 12 months”, explained Devonshire-Ellis. “However, we view 2015 as being a tougher environment than 2014. In order to maintain our growth position, we have to come up with innovative solutions to deal with a harder market. The concern for all businesses in China is that, if no operational or strategic changes are made for the new year, growth levels will inevitably be negatively affected.”

“China is not yet realising its potential as a fast growing consumer market,” says Devonshire-Ellis. “It is still concentrating on exports.” In terms of compliance, Devonshire-Ellis said 2015 will be a busy year for legal services in China. “There will be an increase in the number of cases brought against foreign investors for multiple infringements; everything from scope of business issues to tax avoidance. In fact, China’s rules are specifically constructed to make full compliance almost impossible, as much is open to interpretation.

This is now being exploited by the government as a means to score political points at home, and consequently acts as a barrier to foreign investors competing with domestic companies. Law firms able to provide professional advice on China’s policies may find opportunities to act as a negotiator and go-between their clients in China and the Chinese Government.”

Devonshire-Ellis added that the foreign legal profession itself in China is facing serious restructuring challenges. “Foreign law firm Representative Offices are being discouraged, and we have seen a number of foreign law firms completely exit China over the past year. Firms are being pushed to establish joint-ventures with local practices, and pressure to do this will become more intense.”

He also said that the consulting business is changing: “Consultants are nearly dead in China. Next year will see the demise of many smaller foreign invested names. They are being priced out of the China market by local competitors. The only way for smaller firms to survive is to invest in IT and offer software based administration solutions. The days of accounting being conducted by hundreds of local Chinese staff in an office are long gone. Services such as payroll and treasury functions will become more prevalent. Consultants merely offering basic set ups and trademark applications will die off unless they can provide real added value, including compliance, and that has to be supported by a strong IT platform.”

While China based businesses will have to adapt, Devonshire-Ellis did note that there are some positives to take into the coming year: “The 2015 AEC Compliance will be a boost for Vietnam as the China-ASEAN Free Trade Agreement makes Vietnamese products able to enter the China market at close to zero duty. Due to its lower operating costs, light manufacturing industries will increasingly start to relocate to Vietnam. We are bullish on Vietnam-China trade, as we are through China trade with much of ASEAN.”

This view has been borne out by recent trade statistics. China-ASEAN trade has being growing at high rates of between 7-11% per annum for the past three years, and is expected to reach USD500 billion in 2015. To put that into perspective, China-ASEAN trade now exceeds that of China-US trade, which has been in decline for the past twelve months. The China-ASEAN FTA has reduced tariffs on 90% of all traded products between the two to zero.

“A key challenge posed to foreign investors in China is how to integrate the emerging ASEAN supply chain into their China and global businesses”, says Devonshire-Ellis. “ASEAN will be the big story of next year.”

He was also cautiously optimistic about India. “The country remains a tough destination for many foreign investors”, he said. “However, the worker age demographics are beginning to resemble that of China in the early 1990’s. If the Modi Government can match that demographic dividend with some well-planned tax and structural reforms designed to attract investment, then you’ll really start to see India move.”

Dezan Shira & Associates also announced some changes in personnel. Richard Cant, the firm’s Regional Tax Director in Shanghai, is relocating to join the firm’s office in Boston, United States. His position in Shanghai is being filled by American attorney Chet Scheltema, who currently acts as the manager for the International Business Advisory team in Beijing. Charles Small joins the practice in the Dezan Shira & Associates Ho Chi Minh City office in Vietnam, while Tarun Manik has been promoted to Corporate Accounting Services Manager in Mumbai. Adam Pitman also joins Dezan Shira & Associates from Control Risks in India, and is now a manager in Dezan Shira & Associates’ International Business Advisory team in New Delhi.

Moving Around: Dezan Shira & Associates personnel Richard Cant (Boston), Chris Devonshire-Ellis (Singapore), Alberto Vettoretti (Hong Kong), Charles Small (Ho Chi Minh City) Tarun Manik (Mumbai), Chet Scheltema (Shanghai)

“We are continuing to grow our team across Asia”, says Devonshire-Ellis. “The opportunities are there for young professionals to gain experience in multiple countries throughout Asia, and those that do will both have a great time and later add significant value to their CV’s. I would particularly encourage young executives to break out of the China mould and go get experience in countries such as Vietnam, Indonesia, and the Philippines. There will be a great demand for multi-Asian experience in the next two to three years as the reality of the China-ASEAN free trade agreement kicks in.”

“Future investment growth into China will be driven by the U.S. However, foreign investment into China now requires Asian sensibilities. Businesses that have both multiple presences in Asia and a strong IT platform will survive and prosper. China’s future growth depends strongly upon its trade routes with Asia and it is crucial that foreign investors understand these dynamics.”

Chris Devonshire-Ellis is the Founding Partner and Chairman of Dezan Shira & Associates, and the Publisher of Asia Briefing. He began the Dezan Shira & Associates practice from a single office in Shenzhen in 1992. Today it is a multinational firm with 28 offices throughout China, India and ASEAN employing several hundred staff, advising foreign investors on their strategic planning, legal and tax advisory across Asia. He is now based from the firms Singapore office. For further information, please email chris@dezshira.com or visit www.dezshira.com.

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