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8 - Staffing and personnel

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8.1 Staffing and personnel
8.2 China's financial environment
8.3 Financial rules for foreign companies in China


8.1 Staffing and personnel

Any foreign company, which successfully establishes itself in China, will not only have Chinese partners, but Chinese employees. This raises a number of cross-cultural issues around Western and Chinese styles of doing business, workplace management and mutual expectations between employees and employers.

Under Chinese law, employers entering the market are free to set the terms and conditions of employment in such matters as pay and other benefits, working hours and job descriptions/requirements. Employers can hire staff through a familiar range of means, including newspaper and other advertisements and through the growing numbers of specialist hr firms in the market. One very popular means of finding Chinese employees is through employment fairs, which take place frequently in China's major cities.

Foreign invested companies in the Chinese market have unique attractions to local workers. They usually offer higher pay, are regarded as more prestigious and offer a better platform for successful careers. Additionally, growing numbers of graduates, including many who have studied in the UK, US or Europe, provide foreign investors with a large labour pool from which to find suitable people.
Most companies venturing into China start by employing expatriates to head their projects. But as a general rule, foreign invested companies should seek to localise employment as far up the management chain as possible as soon as they can. Aside from demonstrating the necessary commitment to China, this also enables more effective management of the inevitable frictions that arise between Chinese and Western ways of doing business as well as getting round the language barrier. There are also cost advantages. Local compensation packages are increasing rapidly, but are not yet at the level of those required by expatriates.

Some companies choose to import overseas Chinese managers, often from Hong Kong, Singapore or Taiwan on the grounds that they will share the language and wider culture local staff and the market in general while being competent in English and grounded in Western business practices. However, overseas Chinese staff may have as little detailed knowledge of conditions in mainland China, and are sometimes perceived as arrogant or "too westernized" by local Chinese staff.

China itself is producing growing numbers of people with the skills and experience to take up management roles in foreign invested enterprises. What people in this category may lack is experience in Western business, and the key here is to look for people with experience in other foreign owned or invested firms.

In many respects, Chinese returnees offer the best option for local management. Returnees in this context are people who have studies and/or worked abroad for a limited period of time. At one time, a chance to study abroad was looked upon as a ticket to prosperity - and a one-way ticket at that. But with opportunities in China now burgeoning, the tendency is increasingly for Chinese students to graduate abroad and then return at the earliest opportunity. The appeal of Chinese graduates of foreign universities to employers lies in their mix of Western and Eastern skills and competencies. After a few years immersion in non-Chinese educational establishments they have experienced and adapted to the West as Chinese people, and so are well equipped to help others make the same adaptation.

While the number of highly qualified and experienced local staff is growing in China, demand still outstrips supply, with the result that wages are rising rapidly and many foreign invested companies find themselves with high employee turnover as staff "job hop" looking for the best terms and conditions.

Combatting this tendency requires more than just the right compensation package. It underlines the necessity of culturally aware management and on forging a good reputation amongst potential employees and in the community at large. Many companies in China affiliate to charities or support business in the community programmes offering training or providing services to disadvantaged groups. While the days when businesses offered their employees an "iron rice bowl" are now over, people in China are habituated into thinking of businesses as social as well as economic enterprises

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6.2 China's financial environment

The majority of financing necessary for investment into or trade with China comes from the foreign companies taking this path. Traditionally, they have provided most of the financing for joint ventures, for instance. And this money has in turn come from the companies themselves, as bank debt or from venture capital and similar sources. Even as China's market reforms gather pace, it is still almost impossible for foreign companies to raise money for their activities in China itself.

Under the unreformed communist system the banking structure was rudimentary, consisting of four state-owned banks - the Bank of China, the Agricultural Bank, the Industrial and Commercial Bank, and the Construction Bank. These were "policy banks", operating under political guidance, mostly using public money. At lower levels, banking decisions were - and are still, to some extent, responsible to the demands of local officials.

China began to reform the system in 1993, but progress has been comparatively slow because the financial system still retains political obligations. 70% of loans go to the state sector, which only produces 30% of output, and many of these loans are non-performing. The slowness of the reform is deliberate. It avoids the mass unemployment and social dislocation that happened after the former Soviet Union was subjected to "shock therapy" market reforms. However, it also threatens the integrity of the financial system as a whole and undermines attempts to create a modern social security network that would finally free the banks from their political obligations.

Nonetheless, China has encouraged the creation of many new banks at regional and local level, along with developing important non-banking financial services. Many foreign owned financial institutions already have a presence in the market in anticipation of further liberalization of the sector. Since joining the WTO, China has quickened the pace of reform across the financial sector, with the following stated aims in mind.

• to create a fully independent banking structure which can allocate capital in response to market needs.
• to encourage the growth of private banks and non-banking financial institutions and create diverse and mature capital markets.
• to allow the full participation of foreign banks and financial institutions in the Chinese market.

Many of these reforms will come on stream in the next few years, in accordance with China's WTO obligations. Once established, they will probably lead to the decision to make the Yuan fully convertible with foreign currencies. Foreign companies in China can look forward to a much wider range of financing options once these reforms begin to establish themselves on the ground.

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6.3 Financial rules for foreign companies in China

The tax system

Foreign enterprises have in the past been encouraged to come to China by the offer of preferential tax treatment, which is in the process of being phased out. Taxes payable by enterprises in China include the following:

VAT payable on two scales. "Small scale taxpayers" whose sales total less than 1.8 million yuan, and "general taxpayers", whose annual sales exceed this figure. Essential commodities are charged at a VAT rate of 13%. All other commodities are charged at 17%.

Consumption Tax is paid by companies involved in the production and sale of luxury and leisure commodities including cosmetics, cars and motor vehicles, cigarettes, and alcoholic drinks. It ranges from 3-45% of transaction value, depending on the product.

Business Tax is levied on the revenue generated from the provision of taxable services. These include communications, transport, finance, and entertainment. Business tax is also payable on property dealings and the transfer of intangible assets.

Income Tax is charged to foreign owned and invested enterprises on income derived from their business operations inside China.

Individual Income Tax is charged to all persons domiciled in China at progressive rates from 5-45% of individual income.

China also has a variety of property taxes, including a Land Appreciation Tax, Urban Real Estate Tax and Stamp Duty.

Foreign exchange

Foreign exchange receipts and payments are divided into current and capital accounts.
Current accounts cover trade and labour receipts and payments and one-way foreign exchange transfers. No controls are exercised on current account transactions, and repatriation of profits is allowed under this measure.

Capital accounts cover all forex investment capital in a business, together with loans and external profits from share issues. The capital account should be used as the conduit for all additional foreign investment capital that an enterprise receives. Forex loans are also repayable through the capital account.

The financial standards and procedures required by foreign enterprises in China are formulated in the Financial Principles for Enterprises, produced by the Ministry of Finance. These rules cover: revenue and expenditure, asset and cost management, approval procedures for expenditure, foreign currency management, and internal financial controls and audits.

For more details of all China's business related taxes, exemptions and regulations see: http://www.tdctrade.com/chinaguide/index_e.htm

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