China's economy was once made up of separate provincial economies with little trade between them. While China still has regional economies, it is now divided into eight main economic regions based on statistical and non-statistical criteria such as GDP, population density, and infrastructure. Understanding the diversity between these regions is important for developing effective business strategies in China, such as determining where to focus investment or target markets.

1. DOING BUSINESS IN CHINA DOING BUSINESS IN CHINA DOING BUSINESS IN CHINA Said Cherkaoui, Ph.D.

2. The Eight Economic Regions of China: National Economy – Still a Misleading Integration? A decade ago, to talk about China’s national economy was seriously misleading. It was really a series of provincial economies, which traded little with each other, let alone the outside world. Everywhere had its own set of factories producing a similar set of goods – hence the hundreds of car plants, steel mills, cement works and so on across the country. The biggest reason for this was the centralization of the communist power in the Beijing and in the hands of the providers of financial means and the political support, respectively the Red Barons the local Communist Dukes located in the richest regions, the lack of transport infrastructure and the regionalization inherited from past foreign interventions and the growth of coastal regions to the detriment of the backyard provinces. Even today, China has fewer miles of railway than the US had at the time of its civil war in the 1860s. As such, the country is still basically a set of regional economies.

4. The Eight Economic Regions of China: Regional Economies

7. Population: (10,000s) 1999 11,348* YoY Growth: 1.4% 13,162 YoY Growth: 0.5% 10,621 YoY Growth: 0.4% 17,713 YoY Growth: 0.6% 35,529 YoY Growth: 0.7% 10,240 YoY Growth: -4.7% 2 4,239 YoY Growth: 0.9% Key: Regions are shaded according to year-on-year growth, the regions with the highest growth are shaded most heavily, and the regions with the lowest growth are shaded most lightly. 766 YoY Growth: 1.5% Source: For more recent data on all the indicators presented here and the following slides, please refer to China Statistical Yearbook * Excluding Hong Kong and Taiwan: Hong Kong’s population (in 10,000s) is 672 Taiwan’s population (in 10,000s) is 2,193

8. Population Density: (People Per Sq Mile) 1999 885 YoY Growth: 1.4% * 1,619 YoY Growth: 0.5% 342 YoY Growth: 0.4% 1,236 YoY Growth: 0.6% 10 YoY Growth: 1.5% 76 YoY Growth: -4.7% 458 YoY Growth: 0.9% * Excluding Hong Kong and Taiwan: Hong Kong’s population density (in people per sq mile) is 15,924 Taiwan’s population density (in people per sq mile) is 1,579 (1998) Key: Regions are shaded according to year-on-year growth, the regions with the highest growth are shaded most heavily, and the regions with the lowest growth are shaded most lightly. 897 YoY Growth: 0.7% Source: For more recent data on all the indicators presented here and the following slides, please refer to China Statistical Yearbook

9. GDP (100 million RMB) 1999 12,485* YoY Growth: 7% 17,098 YoY Growth: 8% 8,739 YoY Growth: 6% 18,140 YoY Growth: 4% 344 YoY Growth: 11% 5,099 YoY Growth: 7% 9,913 YoY Growth: 4% Note: Gross Domestic Product refers to the final products of all resident units in a country during the given period of time. Regions are shaded according to year-on-year growth, the regions with the highest growth are shaded most heavily, and the regions with the lowest growth are shaded most lightly. 15,855 YoY Growth: 7% Source: For more recent data on all the indicators presented here and the following slides, please refer to China Statistical Yearbook * Excluding Hong Kong and Taiwan: Hong Kong’s GDP (in 100 millions) is 13,180 RMB Taiwan’s GDP (in 100 millions) is 21,933 RMB (1998)

10. Per Capita GDP (RMB) 1999 11,002* YoY Growth: 5% 12,990 YoY Growth: 7% 8,228 YoY Growth: 5% 8,951 YoY Growth: 7% 5,106 YoY Growth: 3% 4,491 YoY Growth: 9% 4,979 YoY Growth: 12% 4,090 YoY Growth: 3% Note: Gross Domestic Product refers to the final products of all resident units in a country during the given period of time. Key: Regions are shaded according to year-on-year growth, the regions with the highest growth are shaded most heavily, and the regions with the lowest growth are shaded most lightly. Source: For more recent data on all the indicators presented here and the following slides, please refer to China Statistical Yearbook * Excluding Hong Kong and Taiwan: Hong Kong’s per capita GDP is 196,137 RMB Taiwan’s per capita GDP is 100,014 RMB (1998)

11. Total GDP Growth: (%) 1991-1999 565* 587 377 479 412 340** 352 364 Note: Gross Domestic Product refers to the final products of all resident units in a country during the given period of time. Key: Regions are shaded according to growth, the regions with the highest growth are shaded most heavily, and the regions with the lowest growth are shaded most lightly. Source: For more recent data on all the indicators presented here and the following slides, please refer to China Statistical Yearbook * Excluding Hong Kong and Taiwan ** Excluding Tibet

12. Per Capita Disposable Income of Urban Residents (RMB) 1999 4,696 YoY Growth: 9% 5,440 YoY Growth: 12% 5,597 YoY Growth: 6% 4,981 YoY Growth: 8% 5,982 YoY Growth: 7% 4,686 YoY Growth: 7% 7,673 YoY Growth: 11% 8,209* YoY Growth: 4% * Excluding Hong Kong and Taiwan Note: Disposable Income of Urban Residents refers to the income of households which can be used for daily expenses, i.e. total income minus taxes and other current transfers. Key: Regions are shaded according to year-on-year growth, the regions with the highest growth are shaded most heavily, and the regions with the lowest growth are shaded most lightly. Source: For more recent data on all the indicators presented here and the following slides, please refer to China Statistical Yearbook

13. FDI (100 million RMB) 1999 * Excluding Hong Kong and Taiwan ** Excluding Tibet Note: Foreign Direct Investment refers to the investments inside China made by foreign enterprises, economic organizations and individuals (including overseas Chinese, Hong Kong Chinese and Chinese enterprises registered abroad) for the establishment of WFOE’s, JV’s and COE’s. Key: Regions are shaded according to year-on-year growth, the regions with the highest growth are shaded most heavily, and the regions with the lowest growth are shaded most lightly. 842 YoY Growth: -12% 584 YoY Growth: -11% 1,342* YoY Growth: -5% 117 YoY Growth: -25% 0.5** YoY Growth: N/A 254 YoY Growth: -10% 35 YoY Growth: -10% 140 YoY Growth: -46% Source: For more recent data on all the indicators presented here and the following slides, please refer to China Statistical Yearbook

14. Per Capita FDI (RMB) 1999 Note: Foreign Direct Investment refers to the investments inside China made by foreign enterprises, economic organisations and individuals (including overseas Chinese, Hong Kong Chinese and Chinese enterprises registered abroad) for the establishment of WFOE’s, JV’s and COE’s. Key: Regions are shaded according to year-on-year growth, the regions with the highest growth are shaded most heavily, and the regions with the lowest growth are shaded most lightly. 131 YoY Growth: -47% 640 YoY Growth: -13% 330 YoY Growth: -12% 1,182* YoY Growth: -6% 48 YoY Growth: -26% 7** YoY Growth: N/A 72 YoY Growth: -10% 34 YoY Growth: -6% * Excluding Hong Kong and Taiwan ** Excluding Tibet Source: For more recent data on all the indicators presented here and the following slides, please refer to China Statistical Yearbook

15. Value of Import and Export (100 million RMB) 1999 481 YoY Growth: 11% 23 YoY Growth: 16% 634 YoY Growth: -2% 965 YoY Growth: 6% 5,794 YoY Growth: 13% 1,505 YoY Growth: 11% 7,319 YoY Growth: 22% 13,212* YoY Growth: 7% * Excluding Hong Kong and Taiwan: Hong Kong’s trade value (in 100 millions) is 29,554 Taiwan’s trade value (in 100 millions) is 17,928 (1998) Note: Value of imports and exports is measured by location of Foreign Trade Managing Units. This refers to the actual value of imports and exports carried out by corporations which have been registered by the local custom house and are vested with the right to run trade businesses. Key: Regions are shaded according to year-on-year growth, the regions with the highest growth are shaded most heavily, and the regions with the lowest growth are shaded most lightly. Source: For more recent data on all the indicators presented here and the following slides, please refer to China Statistical Yearbook

16. Per Capita Value of Import and Export (RMB) 1999 469 YoY Growth: 16% 297 YoY Growth: 14% 262 YoY Growth: -3% 272 YoY Growth: 5% 3,271 YoY Growth: 12% 1,417 YoY Growth: 10% 5,561 YoY Growth: 21% 11,642* YoY Growth: 6% * Excluding Hong Kong and Taiwan: Hong Kong’s per capita trade value is 439,785 RMB Taiwan’s per capita trade value is 90,483 RMB (1998) Note: Value of imports and exports is measured by location of Foreign Trade Managing Units. This refers to the actual value of imports and exports carried out by corporations which have been registered by the local custom house and are vested with the right to run trade businesses. Key: Regions are shaded according to year-on-year growth, the regions with the highest growth are shaded most heavily, and the regions with the lowest growth are shaded most lightly. Source: For more recent data on all the indicators presented here and the following slides, please refer to China Statistical Yearbook

18. China – Economic Indicators Population: 1.266 bn Area: 9.600.000 km Nominal GDP: USD bn 1170 (2001E) GDP: USD 923 per capita (2001E) GDP Growth: 8.0 (2000) 7.5 (2001E) 7.6 (2002F) Inflation: 0.4 (2000) 0.8 (2001E) 1.5 (2002F) Rate of unemployment: 3.5% (2001E) (annual average) 4.0% (2000F) Foreign Direct Investment: USD bn 62,4 (2000) Foreign Direct Investment: USD bn 40.7 (2000) (realised) Foreign Exchange Reserve: USD bn 185.0 (2001E; the second largest in the world) Export: USD bn 249,2 (2000) Export destination: USA 19%, Japan 17%, EU 14%, Hong Kong 23% Export structure: Machines & transport equipment 27%, Textiles / clothes 23% Import: USD bn 225,1 (2000) Import Origin: Japan 20%, USA 12%, Taiwan 12%, South Korea 10% Import structure: Electrical machinery 21,3%, Machinery 16,8%, Plastic 7% E = Estimated F = Forecast Source: F.A.Z. Länderdienste, MOFTEC

19. A swelling middle class: 120 million – who now have a disposable income of up to US$8,000 per year; will see their purchasing power grow to a half a billion by 2010. China in Figures Source: EIU Country Forecast& Morgan Stanley

20. While Economies are Growing Faster, China is Speeding In the best of times, the developed world takes 25 years to double. China’s economy doubles every 7 years. Source: Jim Brock Taken from presentation “China: Risks and Opportunities for Global Investors”, Jing Ulrich 5/05 Most of the world’s economies double every 35 years.

21. Source: EIU Employment by Industry in % of GDP (2005) China is highly based on Manufacturing . 40% Tertiary Sector 48.1% Secondary Sector 11.9% Primary Sector

22. Source: EIU Foreign Direct Investment by country or territory Jan.-Feb.,2007 Unit:USD 10 00 Foreign Direct Investment by country or territory Jan.-Feb.,2007 Unit:USD 10 00 Foreign Direct Investment by country or territory Jan.-Feb.,2007 Unit: USD 10 00 Source: China Statistical Data, 448350 432 USA 51690 110 Canada 9300 12 Sweden 125390 70 United Kingdom 4620 4 Belgium 59910 34 Netherlands 43470 58 Italy 52490 31 France 104940 82 Germany 612010 528 Republic of Korea 701080 329 Japan 510510 171 Singapore 4580 13 Thailand 212980 529 Taiwan 103060 113 Macao 2952630 2287 Hong Kong 9709300 5716 Total Used Value Number of Projects Country /Territory 448350 432 USA

23. China's Foreign Direct Investment in 2007 China received $74.7 billion of overseas investment last year, official data released in Beijing on Saturday ( 2008-01-20) during national commerce work conference . Foreign trade volume increased from $620.8 billion in 2002 to $2.17 trillion in 2007. Custom tariffs reached 758.5 billion yuan ($104.5 billion) in 2007 compared with 259.1 billion yuan in 2002. Foreign-funded enterprises paid 990 billion yuan in taxes last year, representing about 20 percent of national tax revenues. To date, the number of overseas Chinese-funded enterprises is about 120,000, which is the doubled of the ones registered during 2002. China's foreign direct investment is forecasted to reach $20 billion in 2007, a seven-fold increase from $2.5 billion in 2002.

24. China's Exports 2004 (in million US$) Source: WTO 17,800 Others 593,329 Total exports 27,812 South Korea 73,510 Japan 100,870 Hong Kong S.A.R. 107,254 EU-25 125,150 United States

25. China Topographic Map (Including Provinces and Capitals)

26. China Dialects Map (Including Dialect Groups)

27. China Railways Map (Including Train Numbers)

28. Hong Kong Ningbo Fuzhou Xiamen Dalian Tianjin Kaohsiung To Nagasaki To Yokohama To Vladivostok To Manila, Sydney…. To Singapore, Jakarta, Bangkok… Zhanjiang Huang He (Yellow River) Chang Jiang (Yangtze River) Lancang Jiang (Mekong River) Yarlung Zangbo Jiang (Brahmaputra River) Zhu Jiang (Pearl River) China Waterways Map (Including Navigable Rivers, Ports and Sea Routes) Da Yunhe (Grand Canal) Hangzhou Beijing Heilong Jiang (Black Dragon River) Yantai Qingdao Shanghai

29. 1. The political system is stable . But, although the state looks powerful from the outside, it looks less so from within  social tensions due to Chinas shift to market economy,  increasing unemployment rates,  significant difference in the increase of income rates between the cities and the countryside 2. The communist party (CCP) is in transition . They now allows business people, or “capitalists”, to become members. But if the CCP want to keep power, it is going to have to sacrifice Marxism and communism. 3. The legal system is subordinate to the CCP  Rule by man not rule by Law . Judges are appointed and promoted by the local party committee and government elite, not by the Ministry of Justice. 4. The current leadership : Hu Jintao embarks on new reforms and fight against corruption as well as a foreign policy diversified in reach and content, diplomacy and business became the twin objectives and means for China as it seeks stable suppliers of energy, natural resources and demand for its production. Hu Jintao’s Administration is also gearing toward to establish a presence in the global market space as well as in the domination of the space outer. 5. China is ranked 5th largest exporter of merchandise and is characterized by a huge domestic consumption and is going to be the host of the 2008 Olympic Games. Political Risk Analysis

30. Potential Business Risk Exposure Export Representation Companies  default of payments  no close customer relations  wrong choice of agents  over estimating the market  loss of know-how  insufficient planning  staff and language barrier  judicial problems  lack of payments by clients  legal uncertainties and copyright infringements  political risks  hidden cost  lack of direct communication  Delivery of wrong products  Tainted food products and lack of total quality management General Risks Specific Risks

31. 0 20 40 payment behavior of clients other market characteristics than expected performance level of local contractors distribution structure corruption 34 13 38 local employees 47 42 highly problematic Local Methods of Payments 32 Companies main problems  Time allowed for payments up to 180 days possible  Cash in advance  Debt receivable management

32. Investment Environment – Outlook (1) “ The Fortune 501-1000 medium-sized companies will move to China. The Fortune 1-500 are already here” (Guy Bouchet, AT Kearney China) Source: Amcham 2001 survey & FMC Survey 2001 Successful Companies: Break Even Point Achieved After… 12% 18% 35% 35% 48 months or over 36-47 months 24-35 months 12-23 months Under 12 months 0%

33. © Fiducia 2002 E. & O.E. Business Filing ALTERNATIVES Equity Joint Venture (EJV) Co-operative Joint Venture(CJV) Wholly Foreign Owned Enterprise (WFOE) Legal Form Legal entity with Limited Liability May be set up as a legal entity or as an enterprise having no separate legal person status Legal entity with Limited Liability Foreign Partner’s Equity Normally cannot be less than 25% No strict requirement. Depends on contract 100% Contract Required Required Not Required Articles of Association Required Required Required Standards for Investment Benefits to the China national economy, Export-oriented or utilize Advanced technologies Export-oriented or utilize Advanced technologies Benefits to the China national economy MOFTEC Approval Required Required Required Project Proposal Required Required Required Feasibility Study Required Required Required SAIC registration Required Required if there are changes in the statutory items (industrial/ commercial and tax registrations) Required Capital Contribution Cash, Capital goods, Industrial Property rights Cash, material objects, land-use rights, industrial property rights, unpatented technology and other property rights Cash, capital goods, industrial property rights, know-how, land use rights Foreign : Advanced technology and equipments must truly suited to the needs of China Chinese: Land use right Board of Directors Required. Decided under contract Either a Board of Director or a Joint Management Committee is needed Not necessary Export requirement No minimum export required No minimum export required No minimum export required Accounting Accounting as separate entity required. Account book must be kept in China Account book must be established and kept in China Accounting as separate entity required. Account book must be kept in China Profit/ Loss Distribution Profit and loss shared according to the ratio in registered capital Profit and loss shared according to contract terms After deduction of necessary fees and tax, profit can be repatriated overseas Tax Corporate Income Tax Corporate Income Tax Corporate Income Tax Investment Term Depends on industry; usually decided by contract Specified in the contract Submit at time of registration Early Termination Permitted Permitted Permitted Governing Law PRC Law PRC Law PRC Law

34. Macro statistics should be treated with caution and stock markets do not necessarily reflect economic production. Further helpful advice for making the most of these China Analysis, contact us: [email_address] Office contact: East Bay Center for International Trade Development Berkeley City College, Berkeley, California WHAT'S YOUR NEXT MOVE?

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