China reviews foreign capital use
Updated: 2008-03-24 15:58
Overwhelmed by change
"The business environment has changed and the fleeing investors faced great challenges," said Kwang Jae Won, vice president of the Korea Trade Center (KTC) in Qingdao. The center is part of the Korea Trade-Investment Promotion Agency. Kwang noted that new Chinese labor and tax policies have had a large impact on these small enterprises.
For small and medium-sized, labor-intensive enterprises, the cost of labor is a key factor in their survival. But China's labor costs have been rising in recent years, despite its seemingly inexhaustible labor supply.
That pool of cheap workers was an almost unbeatable advantage when the country opened its doors to the outside world in the late 1970s. Chinese commodities were very cost-competitive and factories could depend on big profit margins.
However, Chinese workers' living standards lagged the country's rapid economic growth and huge domestic economic disparities developed. China's government has turned its attention to workers' demand for higher pay.
A labor contract law was brought into effect this year. Employers must contribute to workers' social security accounts and set wage standards for workers on probation and overtime. The KTC's Kwang estimated that the new law had driven up labor costs by 30 percent.
Separately, China has revamped its tax policies for foreign investors. In 2007, the enterprise income tax law was adopted, ending two decades of preferential tax treatment for foreign investors. The law established a uniform income tax rate for domestic and foreign companies of 25 percent. Previously, the effective income tax rate for Chinese companies was 25 percent, while that for foreign enterprises was 15 percent.
Also, in a bid to slow down its rapid export growth, which has caused trade friction, China adjusted its tax rebate policies last July, ending or cutting the rebate rates for some export products.
All these changes are parts of the policy of transforming the Chinese economy, but they have adversely affected many export-oriented enterprises.
Qingdao Sejung Musical Instruments Co Ltd is a case in point. As a large labor-intensive ROK-funded company, Sejung's products are mainly exported. General manger Nan Fanzhu said that his business clearly felt the impact of the new policies.
Nan said that due to the labor contract law, the company had to shrink its labor force from 5,000 to 2,000 to cut costs. Meanwhile, the unified tax law caused a 10 percent rise in foreign enterprises' tax liabilities.
Further, export tax rebates on labor-intensive products, including musical instruments, textiles and toys, have been reduced. Nan said that the rebate on pianos and guitars fell from 17 percent to 13 percent.
Due to these factors and the appreciation of the Chinese yuan, which has appreciated by 14 percent against the U.S. dollar since 2005, Sejung's profit margin plummeted from 10 percent in 2004 to 0.3 percent.
Nan said some small foreign companies must move to Vietnam or some other Southeast Asian country as they cannot adapt to changed environment.
