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Improving Business Environment in China: Practices and Experiences
Copyright: United Nations Office for South-South Cooperation (UNOSSC)/ United Nations Development Programme (UNDP) United Nations Development Programme 304 East 45th Street New York, NY 10017 USA Disclaimer The views expressed in this publication are those of the authors and do not neces- sarily represent those of the United Nations, UNOSSC/UNDP or the United Nations Member States. The designations employed and the presentation of materials throughout this publication do not imply the expression of any opinion whatsoever on the part of the Secretariat of the United Nations or UNOSSC/UNDP concerning the legal status of any country, territory, city or area or its authorities, or concerning the delimitation of its frontiers or boundaries.
Improving Business Environment in China: Practices and Experiences
Table of
Content
Introduction
Abbreviations................................................6
Acknowledgments........................................ 7
Executive Summary......................................8
Page 9
A Brief Evolution Key Experiences
Introduction of China’s of China’s
to Business Business Practices
Environment Environment in Optimizing
Improvement the Business
Environment
Page 10 Page 12 Page 32
Conclusions
References...................................................39
Page 376 IMPROVING BUSINESS ENVIRONMENT IN CHINA: PRACTICES AND EXPERIENCES
Abbreviations
BRI Belt and Road Initiative
CICETE China International Centre for Economic and Technical Exchanges
CIKD Center for International Knowledge on Development
DCED Donor Committee for Enterprise Development
DESA Department of Economic and Social Affairs of the United Nations
DRC Development Research Center of the State Council, China
EGDI E-government Development Index
ICT Information and Communication Technology
ID Identification Card
SCIO State Council Information Office
SEZ Special Economic Zone
SPC Supreme People’s Court
UN United Nations
UNDP United Nations Development Programme
UNOSSC United Nations Office for South-South CooperationGLOBAL SOUTH-SOUTH DEVELOPMENT CENTER PROJECT 7 Acknowledgements This research paper was authored by Dr. Zhou Taidong, researcher at the Center for International Knowledge on Development (CIKD). He can be contacted at zhoupetrel@hotmail.com. The author is grateful for the support of the Global South-South Development Centre, espe- cially Ms. Zhang Wei, Ms. Song Bo and Ms. Liu Yang at the China International Center for Economic and Technical Exchanges (CICETE). The author appreciates valuable comments, inputs and suggestions from Dr. Ma Xiaobai, Researcher at the Development Research Centre of State Council (DRC), Mr. Zhao Jinping, Senior Researcher at DRC and Dr. Hany Besada, Senior Research and Programme Advisor, and Dr. Xiaojun Grace Wang, Deputy Director, United Nations Office for South-South Cooperation (UNOSSC).
8 IMPROVING BUSINESS ENVIRONMENT IN CHINA: PRACTICES AND EXPERIENCES
Executive
Summary
Business environment has been recognized as contain- The key findings regarding China’s experience and
ing critical elements that affect the performance of implications in optimizing the business environment
firms and entrepreneurs and one of the pre-requisites include:
for economic growth and poverty reduction in develop-
ing and transitioning economies. Improving the busi- 1. attention and leadership of top-level leaders;
ness environment has been an important part of China’s
40-year reform and opening up. Since 2013, China has 2. encouragement of local policy experimentation
taken business environment optimization as one of the and institutional reform;
main means to improve China’s economic competitive-
ness through continuously pushing forward nation- 3. strong enforcement of the reform agenda;
wide reforms, including further delegating power and
streamlining administration, simplifying approval 4. private sector participation and intensive use of
procedures and cutting taxes and fees. China’s prog- digital technologies and e-government services;
ress, measured by the Ease of Doing Business Project and
of the World Bank, has been particularly impressive
over the last several years when its ranking jumped 5. working with international organizations and
from 96 in 2014 to 31 in 2020. learning from global experience.
The objective of this report is to: (i) document China’s
business environment improvement in the different Given the increasingly important role of China in inter-
stages after the reform and opening up in 1978, with national development cooperation, it is believed
special attention to the reforms after 2013; (ii) analyze China’s experiences and practices in improving busi-
the key reform policies and measures, as well as the ness environment can not only inform the design and
institutional arrangements; and (iii) inform and inspire implementation of business environment strategies
other countries, especially the Southern economies in other Southern countries, but also be incorporated
that also aspire to improve the business environment. into China’s international development programmes
through policy dialogue, knowledge sharing and tech-
nical assistance.GLOBAL SOUTH-SOUTH DEVELOPMENT CENTER PROJECT 9
1
Introduction
Prevailing business environment constitutes an influ- over the last decade. However, the progress has been
ential and important condition in the operation of particularly impressive over the last several years, when
enterprises globally. A good business environment China’s ease of doing business ranking jumped from 96
helps accumulate various production factors such as in 2014 to 31 in 2020 (World Bank, 2020a). According to
capital, talents, and technology, stimulate the vital- the World Bank (2020a), China was recognized as one
ity of various market players, improve the quality and of the top 10 most improved economies worldwide for
speed of economic development, and reduce poverty. the ease of doing business for two years in a row and
Governments and enterprises of all countries attach the top 10 global reforms in 2019 and 2020, while also
great importance to the basic conditions of the busi- on the global forefront in specific areas, such as getting
ness environment. By identifying and conceptualizing electricity and contract enforcement.
a comprehensive approach that addresses procedural,
legal, institutional and regulatory barriers affecting all This report aims to review and analyze China’s efforts
phases of investment and business lifecycle, countries in improving the business environment during the
can establish a competitive business environment that different stages, with special attention to the reforms
can attract, retain, leverage and expand investments for after 2013 when the Chinese government intensively
business-led growth and in turn promote broad-based pushed forward focused reforms in optimizing busi-
sustainable economic development. ness environment. It intends to unravel and summarize
China’s specific practices and experiences in optimiz-
Over the past 40 years of reform and opening up, ing the business environment, with a view to providing
China has been committed to improving the business references to other Southern economies. The report
environment, resulting in attracting a large amount of consists of four parts. Following the introduction,
investment, especially foreign investment, and greatly the second section briefly discusses the concept of
contributing to China’s economic growth and poverty business environment. The third section documents
reduction. Since 2013, China has taken business envi- China’s business environment reform experience after
ronment optimization as one of the main means to the reform and opening up in 1978 and analyzes the key
improve China’s economic competitiveness through reform measures and the institutional arrangements.
continuously pushing forward nationwide reforms, The last section concludes and shares key lessons
including further delegating power and streamlining learned from China’s experience.
administration, simplifying approval procedures and
cutting taxes and fees. Such efforts have led to positive
progress and effects in improving the business envi-
ronment. According to the indexes of Ease of Doing
Business published by the World Bank, China has
improved across almost all Doing Business indicators10 IMPROVING BUSINESS ENVIRONMENT IN CHINA: PRACTICES AND EXPERIENCES
2
A Brief Introduction
to Business
Environment
Business environment has been recognized as contain- and market participants in economic activities” (State
ing critical elements that affect the performance of Council, 2019).
firms and entrepreneurs and one of the pre-requisites
for economic growth and poverty reduction in devel- The business environment constitutes the basis
oping and transition countries (White and Fortune, for market entities to survive, develop and innovate.
2015). Different stakeholders have defined the busi- It reflects the many location-specific factors such as
ness environment in different ways. In 2008, the Donor taxation, business registration, and access to utilities
Committee for Enterprise Development (DCED) defined and energy. These factors shape opportunities and
the business environment as “a complex of policy, incentives for firms to invest productively, create jobs
legal, institutional, and regulatory conditions that and expand. Reforms in these areas intend to promote
govern business activities”, aiming to reduce the costs the development of markets that encourage competi-
and risks of business activity by improving govern- tion and enhance the effectiveness and sustainability
ment policies, laws and regulations, and by stimulat- of other development interventions. A good business
ing competition through market entrants. The Doing environment requires relatively sound property rights
Business Project by the World Bank measures the cost protection system, which protects the production
of doing business and the quality of regulations and results of market entities, stimulates innovations and
institutions that impact the business environment. expands the wealth-creation effects of investment. It
The Project has been evolving over the years. The first requires cutting red tapes, streamlining procedures and
report was issued in 2004, covering 5 indicator sets and removing entry barriers to promote the free flow and
133 economies. By 2020, the report included 12 indica- agglomeration of resources and factors, reduce costs
tor sets and 190 economies, with ten areas included and increase benefits for businesses and to stimulate
in the ease of doing business score and ranking1. The the vitality of market entities. A good business envi-
Chinese government, in 2019, defines business envi- ronment also means less uncertainty and improved
ronment as “the factors and conditions in the nature predictability.
of systems and mechanisms related to enterprises
1 The ten areas include starting a business, dealing with construction permits, getting electricity, registering property, getting
credit, protecting minority investors, paying taxes, trading across borders, enforcing contracts, and resolving insolvency
(World Bank, 2020).GLOBAL SOUTH-SOUTH DEVELOPMENT CENTER PROJECT 11
The business environment is directly related to busi- respectively and investment rates accelerate by about
ness operations and outcomes and is a sign of core 0.6 percentage points in the subsequent year for both
competitiveness for economic and social develop- subsets of countries.
ment. An enabling environment for business to thrive
can have important implications for economic devel- For many years, China’s ease of doing business ranking
opment, fiscal revenues, employment and even social has been around 90. It is only after 2015 that China has
development. Through putting firms at the center of made steady improvements (See Table 1). In the Doing
the discussion, the business environment recognizes Business 2020 report, China ranked 31, jumped 59 and
that firms assess investment opportunities and related 47 places from 2015 and 2018 respectively. China has
government policies and behaviors as part of a package improved across most Doing Business indicators over
(World Bank, 2006). Studies have shown positive rela- the last several years. Notably, China ranked 12 world-
tionship between the quality of the business environ- wide in getting electricity and has also maintained its
ment and a country’s economic performance in terms leading position in contract enforcement, ranked 5th
of, among others, productivity, employment, startup globally (World Bank, 2020a). Though there are no
rates for new businesses, and cost of credit (Simeon et direct estimates of the potential impact of doing busi-
al., 2006; Eifert, 2009). For example, Eifert (2009), using ness reforms at the national level, Shanghai reported
a five-year panel of data on regulations and procedures that it attracted 6,168 new foreign investment projects in
from the World Bank’s Doing Business project, finds February-November 2019, an almost one-third increase
that relatively poor and relatively well-governed coun- over the same period a year before, with USD 17.8 billion
tries grow about 0.4 and 0.2 percentage points faster of new foreign investment in place, an increase by
in the year immediately following one or more reforms one-tenth versus the previous year (Xinhua, 2020a).
Table 1: China’s Ease of Doing Business Rankings (2006-2020)
Source: World Bank Doing Business Reports (2006-2020)2
100 96
93
91 90 91 91 90
86 87
84
80 78 78 78
60
46
40
31
20
0
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
2 There were no rankings in the 2004-2005 Doing Business Reports.12 IMPROVING BUSINESS ENVIRONMENT IN CHINA: PRACTICES AND EXPERIENCES
3
Evolution of China’s
Business Environment
Improvement
Improving business environment in China has been a government has made tremendous efforts in improving
gradual and continuous process. Since the open-door the external environment where enterprises operate,
policy in 1978 when the Chinese government began to including streamlining procedures, and reducing expen-
pursue economic growth through the active introduc- ditures and costs for enterprises. This report divides the
tion of foreign capital and technology as well as promo- evolutionary process of China’s modern market system
tion of foreign trade in targeted localities, the Chinese and business environment into four stages.
b 3.1
First stage (1979-1991): a partial breakthrough
of the business environment
In December 1978, the Third Plenary Session of the economic and technology development zones to
11th Central Committee decided to shift the work focus attract foreign investment. The establishment of these
to economic development and carry out reform and zones triggered massive inflows of foreign investment,
opening up. The policy shift was made in the context primarily from companies in Hong Kong and created
that China’s economy lost steam and was soon left laboratories for broader market-oriented reforms.
far behind by Western as well as East Asian econo-
mies. The reform started in the rural areas, which This stage has the following features. First, there was
included increasing procurement prices for agricul- a breakthrough in ideology and concepts. As Deng
tural products, encouraging crop diversification and Xiaoping (1994, p.78) pointed out, “It is impossible to
specialization, relaxing restrictions on trade fairs and succeed in development with closed doors. China’s
exploring decentralized farm organization. To rebuild development cannot be separated from the world.”
its economy and society, the Chinese government also China’s development requires the introduction of
began to proactively improve the business environ- advanced experience, advanced science and funds
ment to attract foreign capital to support moderniza- from developed countries. The promotion of the social-
tion. Preferential policies were conferred on special ist market economy concept brought an entrepreneur-
economic zones (SEZs), open coastal cities, and the ial boom, resulting in the emergence of huge numbersGLOBAL SOUTH-SOUTH DEVELOPMENT CENTER PROJECT 13
of entrepreneurs and venture businesses within the Region of China, Macau, Special Administrative
country. Region of China, and Taiwan Province, attraction of
overseas Chinese capital, as well as relative distance
Second, China gave full play to its advantages in market to Beijing3. By 1984, the SEZ model was judged to be
size and cheap labor force and properly resolved the successful and then expanded to 14 coastal open
relationship between self-reliance and utilization of cities from Dalian to Beihai. By 1991, 60 SEZs were set
foreign investment. After the reform in 1978, China up in China, including 5 initial SEZs, 15 coastal port
departed from the economic self-sufficiency both cities, 8 river port cities, 19 inland cities, and 13 border
within its territory and in relation to its international cities (Rodrigue, 2020).
affairs. Nevertheless, China did not relinquish its capac-
ity for autonomous goal setting and decision-making Through the “don’t argue” policy4, China gave priority
and the Chinese basically remained the primary driv- to economic reform, avoided talking about political
ers over their own economic policies (Tisdell, 2013). ideologies, and allowed non-public economic sector
When using foreign capital, China maintained its place to prosper. Individual and private businesses grad-
in the driver’s seat and introduced advanced technol- ually developed. In June 1988, the Chinese govern-
ogies and useful things from developed countries in a ment promulgated the Interim Regulations on Private
planned and selective manner. Deng Xiaoping (1993, Enterprises, stipulating that private enterprises could
p.406) once claimed that self-reliance was China’s first adopt three forms, namely, sole proprietorship, coop-
experience. erative enterprise and limited company. By 1990, indi-
vidual and other types of enterprises accounted for
Third, China has followed the principle of equality and close to 10% among the total industrial output value.
mutual benefit. China not only opened to the North, but In the meantime, township and village enterprises
also Southern economies. While using foreign capi- (TVEs) continued to grow and develop. In 1991, TVEs
tal to obtain benefits with respect to employment and completed an export value of 7.89 million yuan, an
economic growth, technological innovation, manage- increase of nearly 200% over 1988, and their share of
ment knowhow, creation of a competitive market, and the country’s total export value increased from 15.2%
accelerated modernization, China also allowed foreign to 29.7% (Chen, 2020). Many of these TVEs were private
enterprises to gain profits. enterprises registered in the name of “collective” enter-
prises for the sake of government protection. The scale
Fourth, China took a gradual approach in opening of China’s actual utilization of foreign capital also
to the outside world. Reform started from pilot SEZs expanded significantly, from USD 920 million in 1983
such as Shenzhen, Zhuhai, Shantou and Xiamen due to USD 4.366 billion in 1991, an average annual increase
to their proximity to Hong Kong, Special Administrative of 22.6% (Wei, 1996).
Township and village enterprises
15.2% 29.7%
increase of country’s
total export value
in 1988 in 1991
3 The argument goes that since the four SEZs are far from Beijing, the capital, so even if they failed, there wouldn’t be serious
consequences.
4 To push for further market reform, Deng Xiaoping pointed out that “Don’t argue; try bold experiments and blaze new trails.
That is the way it was with rural reform, and that is the way it should be with urban reform”.14 IMPROVING BUSINESS ENVIRONMENT IN CHINA: PRACTICES AND EXPERIENCES
During this stage, China adopted the following key income tax of joint ventures was generally 33%, and the
measures to improve the business environment. The income tax was exempted for the first year and halved
first was to establish a legal framework for using foreign for the second. The Income Tax Law for Enterprises with
investment. Three laws concerning foreign investment Foreign Investment and Foreign Enterprises passed in
were promulgated. In order to formulate a sound joint 1991 stipulated that the income tax rate of foreign-in-
venture law, the drafting team referred to the relevant vested enterprises was 33% in general. However, for
laws of more than 30 countries and extensively solic- the foreign-invested enterprises located in SEZs and
ited opinions of domestic economic departments, the productive foreign-invested enterprises located in
research institutes and legal experts. China subse- economic and technological development zones, the
quently adopted the Law on Chinese-Foreign Equity income tax rate was 15%. For productive foreign-in-
Joint Ventures in 1979, the Law on Wholly Foreign-funded vested enterprises that have an operating period of
Enterprises in 1986 and the Law on Chinese-Foreign more than 10 years, the “two exemptions and three
Contractual Joint Ventures in 1988 (Li, 2019). A series of reductions” policy was implemented. That is, the
detailed rules for the implementation of the three laws corporate income tax would be exempted for the first
were also promulgated. The three laws on the foreign two years after gaining profitability and halved from
investment and their implementation regulations have the third year to the fifth year. In terms of consolidated
specifically prescribed the statutory examination and industrial and commercial taxes and tariffs, foreign-in-
approval procedures, the corresponding registration vested enterprises enjoyed tax reductions and exemp-
procedures as well as the relevant requirements for tions far higher than those of domestic enterprises.
establishing foreign-funded enterprises. They thereby They could also enjoy tax exemption when importing
constituted the foundation of China’s legal system on machinery, equipment, raw materials and exporting
using foreign investment, and were the upper-level products. In the meantime, China also granted foreign-
laws for all provisions on the examination and approval funded enterprises the right of self-management of
of investments by foreign investors5. foreign trade import and export, the right to declare
customs, and more operational autonomy.
The second was to grant preferential tax treatment to
foreign investment. In order to alleviate foreign busi- The third was to decentralize approval authority. From
nessmen’s concerns about China’s foreign investment 1979 to 1983, the control of foreign investment projects
policy after the reform and opening up, China adopted a was very strict. In the first two years, all projects had to
preferential policy of “super-national treatment” and the be submitted to the Foreign Investment Management
preferential level was quite high. From 1979 to 1983, the Committee for approval. The approval authority of local
China’s utilization of foreign capital
from to annual increase
USD 920 USD 4.366
million billion
+ 22.6%
in 1983 in 1991
5 They had been invalidated by the Foreign Investment Law of the People’s Republic of China, issued on 03-15-2019 and effective
on 01-01-2020, please see https://www.jonesday.com/zh-hans/insights/2020/02/chinas-new-foreign-investment-lawGLOBAL SOUTH-SOUTH DEVELOPMENT CENTER PROJECT 15
governments was very limited. After several adjust- take the lead in reforms in land use, labor relations,
ments in 1983, 1985, and 1988, the State Council grad- and foreign exchanges. For example, foreign investors
ually expanded the autonomy of local governments to could obtain land use right in accordance with the law
approve foreign investment. For productive projects and be granted land use certificates; all employees of
that the state encouraged, no national subsidies were the SEZs were subject to the contract system and the
required in construction, production, operation and enterprises could make their own decisions in recruit-
foreign exchanges, and no quotas or licenses were ing, probating and dismissing; enterprises were also
involved, the local governments of Beijing, Hebei, allowed to keep part of their own foreign exchange;
Fujian, and other coastal provinces as well as the economic management system such as tendering and
four SEZs could approve investment projects of less bidding were first introduced in the SEZs; other prefer-
than USD30 million, while ministries and other places ences were also granted to the SEZs, including increas-
could approve projects of less than USD10 million ing the scale of bank credit funds, relaxing restrictions
(State Council, 1988). While gradually decentralizing on special zone loans and borrowing foreign debt, and
foreign investment approval authority, foreign invest- implementing a contract system for fiscal revenue and
ment approval procedures have also been simplified. expenditure.
Various localities tried to improve the soft environ-
ment for absorbing foreign investment. Some estab- The fifth was to break through and reform the admin-
lished joint office approval agencies and implemented istrative system of the highly centralized planned
the “one window” policy to increase efficiency. Many economy period. After reform and opening up, the
places also set up institutions such as foreign-invested shortcomings of the administrative system, such as
enterprise associations, and service centers to help over control, and non-separation of government and
coordinate and resolve difficulties in production and enterprises became prominent and restricted the
operation of foreign enterprises. development of productive forces. In his speech on
“Reform of the Party and State Leadership System”
in August 1980, Deng Xiaoping pointed out that the
reform of the administrative system must follow three
principles. The first is to increase vitality and avoid
rigidness; the second is to improve efficiency, and
decentralizing the third is to give full play to initiatives of the people
foreign investment and all walks of life. Substantial institutional reforms
approval authority then followed, with the focus of streamlining organiza-
tions, reducing the number of cadres, and transform-
ing government functions.
The fourth was to pilot first and then scale up. China
allowed SEZs to implement special policies in
economic activities and practice special systems in
economic management. Through such measures as
tax relief, financial subsidies, credit incentives, China
tried to improve the business environment in SEZs and
economic and technological development zones. SEZs
were authorized to be equivalent to provincial-level in
economic management authority. They could formulate
individual economic regulations according to specific
conditions and actual needs, to be implemented in their
respective jurisdictions. China also provided preferen-
tial policies to foreign investors who invest in the zones,
including 15% corporate income tax, and simplified
entry and exit procedures. SEZs were also allowed to16 IMPROVING BUSINESS ENVIRONMENT IN CHINA: PRACTICES AND EXPERIENCES
b 3.2
Second stage (1992-2001): market-oriented reform
of the business environment
This stage was marked by Deng Xiaoping’s southern China promulgated the Company Law in 1993 to regu-
tour in 1992 and the decision to establish a socialist late companies. Following the direction of establishing
market economic system. In the late 1980s, heated a modern enterprise system, China implemented the
debates emerged about “capitalism” or “socialism” “grasping the big and letting go of the small” reform
in China and there were hesitations in opening up to to invigorate small state-owned enterprises through
the outside world. In 1992, Deng Xiaoping, during his merging, leasing, contracting and selling. As a result,
tour to the Southern part of China, pointed out that the private sector also rapidly developed.
“the standards of judgment should mainly be based
on whether it is conducive to developing the produc- The second was to continuously improve laws and
tive forces, whether it is conducive to enhancing the regulations on foreign investment and create an
comprehensive strength, and whether it is conducive enabling environment for foreign investors. To actively
to improving the people’s living standards” (Deng, attract foreign investment and accelerate economic
1993). The “socialist market economy”, where public development, China issued a series of laws and poli-
ownership coexists alongside a diverse range of cies to reduce restrictions on foreign investment
non-public forms of ownership, was coined so that since 1992, involving the use of BOT in infrastructure
China could learn lessons from advanced capitalist construction, the establishment of joint stock compa-
countries without needing to discuss if the reforms are nies, the liquidation of foreign-invested enterprises,
“socialist” or “capitalist”. This helped remove the ideo- equity change, foreign investment company estab-
logical barriers and increase confidence of different lishment, as well as merger and division of foreign
market players in investing and starting a business. It investment enterprises. In 1995, China promulgated
also provided directions in further improving the busi- the Foreign Investment Enterprise Holding Company
ness environment. Law and Interim Regulations on Foreign Investment
in the Establishment of Investment Companies, allow-
The first effort was to build the institutional frame- ing foreign investors to establish investment hold-
work of the macroeconomic management system. ing companies (umbrella companies) and paving the
China focused on the reform goal of establishing a way for multinational companies to integrate their
socialist market economy and put forward plans for investment in China. In 1997, China promulgated the
systematic reforms in fiscal and taxation, finance, Catalogue for the Guidance of Foreign Investment
foreign exchange, planning, investment and financ- Industries. China also explored BOT and joint-stock
ing systems. In the field of finance and taxation, China cooperation to improve the level of foreign investment.
established a new fiscal framework based on tax-shar- In order to meet the WTO’s rules and requirements,
ing and a turnover tax system based on value-added China amended the Law on Chinese-Foreign Equity
tax. In the financial sector, China separated commercial Joint Ventures, Law on Chinese-Foreign Contractual
and policy finance and initially established a capital Joint Ventures, and Law on Wholly Foreign-funded
market and financial supervision system. With regards Enterprises and removed requirements in terms of local
to foreign exchanges, China established a market- content, trade balance, export performance, foreign
based and managed floating exchange rate regime exchange and domestic sales. During this stage, the
and a unified foreign exchange market, and realized the scale of foreign direct investment grew significantly in
convertibility of the RMB under current account. A proj- China. From 1992 to 2001, China’s actual use of foreign
ect legal person system was established to distinguish investment increased from USD 11.01 billion to USD
competitive projects, basic projects and social welfare 46.88 billion, an average annual increase of 17.5% (Liu,
projects. Different management methods applied to 2019).
different types of projects.GLOBAL SOUTH-SOUTH DEVELOPMENT CENTER PROJECT 17
The third was to promote the application of the unified The fourth was to scale up the experience in Shenzhen
tax system and exchange system for domestic and and other SEZs and roll out the opening-up and foreign
foreign-funded enterprises in due course. Since the attraction policies to the whole country. The develop-
1990s, the Chinese government adopted a series of ment achievements of pilot cities such as Shenzhen
measures to continuously adjust the national treatment have provided motivation and model for other local
for foreign investment, phased out the tax reduction governments. China developed and opened up
and exemption policies for foreign-invested enter- Shanghai’s Pudong New Area, and rapidly expanded
prises, and gradually unified the tax system, in order the National Economic and Technological Development
to improve the development environment for domes- Zones, the bonded areas, and border economic coop-
tic and foreign enterprises. The 1992 Law on the eration zones. The Chinese government also issued
Administration of Tax Collection unified the collection a series of measures involving investment fields and
and management of domestic and foreign taxation, tax incentives to encourage foreign investment in the
and basically realized the unification of domestic and central and western regions.
foreign tax laws. The taxation legal system for foreign
investors was greatly improved. The comprehensive The fifth was to standardize management of govern-
tax reform implemented in 1994 enabled domes- ment affairs. China conducted administrative system
tic and foreign-funded enterprises to apply uniform reforms in 1993 and 1998. The reform centered around
regulations on value added tax, consumption tax and three aspects. The first was to speed up the separation
business tax. In 1996, China incorporated the foreign of government and enterprises and transform govern-
exchange receipts and payments of foreign-invested ment functions. China pushed forward the reform of
enterprises into the bank’s foreign exchange settle- the management system of the macroeconomic and
ment and sales system, which realized the convertibility specialized economic departments and the govern-
of RMB under the current account of foreign-invested ment no longer directly managed enterprises. There
enterprises, creating a relaxed environment and favor- was also big merge and cut of industrial management
able conditions for foreign-invested enterprises. In institutions. The second was to reduce administrative
response to the impact of the Asian Financial Crisis, examination and approval matters. The functions that
the Chinese government issued the Notice on Adjusting belonged to the enterprises and social intermediary
Tax Policies for Imported Equipment in 1997, restoring organizations were handed over to the enterprises
the exemption of tariffs and import value-added tax and social organizations. The third was to reasonably
on equipment imported for self-use within the total divide the responsibilities of the functional depart-
investment of projects encouraged by foreign invest- ments and sort out the relationship between the upper
ment. In 1999, the Chinese government further adopted and lower-level governments.
new import tax policies and exempted import duties for
foreign enterprises that satisfied certain conditions.
China’s use of foreign investment
from to annual increase
USD 11.01 USD 46.88
billion billion
+ 17.5%
in 1992 in 200118 IMPROVING BUSINESS ENVIRONMENT IN CHINA: PRACTICES AND EXPERIENCES
b 3.3
Third Stage (2002-2012): international rules-guided
reform of the business environment
Marked by its accession to the World Trade Second, China reformed foreign investment manage-
Organization (WTO), China accelerated its pace in ment system. China continuously simplified the
aligning with the international norms in terms of market approval procedures and delegated the approval
rules, operating mechanisms and legal systems. In authority in examination and approval of foreign
accordance with WTO rules and opening-up commit- investment. China decentralized the approval author-
ments, China needed to adjust domestic laws and ity for foreign investment in advertising, leasing,
regulations. Before and after China’s accession to the freight forwarding, distribution, non-vessel operat-
WTO, to align with international rules, China reviewed ing common carrier (NVOCC), printing, construction,
and improved more than 3000 inappropriate poli- road transportation, urban planning, international
cies and regulations related to trade in goods, trade shipping agency, CD duplication, certification and
in services, property rights, and investment such as training and other service trade fields to commerce
the Law on Chinese-Foreign Equity Joint Ventures, authorities at the provincial level or national-level
Law on Chinese-Foreign Contractual Joint Ventures, economic and technological development zones.
Law on Wholly Foreign-funded Enterprises and Law China also decentralized the approval of changes to
on Foreign Trade (Li, 2019). China also established foreign-invested enterprises and the approval of joint
legitimacy review mechanism concerning adminis- stock companies, venture capital enterprises, and
trative normative documents to increase transparency investment companies and abolished the approval
and public participation (Li, 2019). In the meantime, of establishing domestic branches and changes to
China adopted further measures to improve business names, investors, and legal addresses of foreign enter-
environment. prises. In 2004, the Chinese central government issued
the Decision of the State Council on the Reform of the
First, China continuously improved existing laws and Investment System, which defined that local govern-
regulations. The 2002 “Catalogue for the Guidance ments had the approval authority for encouraged and
of Foreign Investment Industries”6 further relaxed the permitted projects less than USD 100 million in total
restrictions on the proportion of foreign investment, investment (including capital increase) and restricted
abolished the taxation and exchange rate differences projects less than USD 50 million in the Catalogue for
between sole proprietorship and joint ventures, and Guidance of Foreign Investment Industries. In 2010, the
further relaxed restrictions on sole proprietorship. State Council issued the “Several Opinions on Better
In 2005, China revised the Company Law and made Utilizing Foreign Investment”, proposing to “create a
amendments to issues such as suitability of sharehold- more open and optimized investment environment to
ers, the form of company organization, the paid-in and comprehensively improve the level of utilizing foreign
subscribed system of registered capital, and orga- investment”, and further decentralized the approval
nization. For example, the amended law recognized authority of projects of encouraged and permitted
one-person companies other than wholly state-owned types under the Catalogue for Guidance of Foreign
companies and wholly foreign-owned companies, Investment Industries of less than USD 300 million to
made new stipulations concerning the installment of relevant departments of local governments. During this
the company’s registered capital. Such efforts aligned stage, China’s foreign investment maintained a steady
the Company Law with the three laws on foreign invest- growth. China’s actual use of foreign capital increased
ment and promoted consistence. from USD 55.01 billion in 2002 to USD 111.2 billion in
6 China’s State Council first issued the Catalogue for the Guidance of Foreign Investment Industries in 1995. The Catalogue,
updated every 2-4 years, provides interpretations and detailed implementation rules regarding the directions of foreign
investors. It lists out industries that are “encouraged”, “restricted” and “forbidden” by the Chinese government for foreign
investment.GLOBAL SOUTH-SOUTH DEVELOPMENT CENTER PROJECT 19
2012, with the compound annual growth rate of 7.8% and gradually opened up the access to areas such as
and the average annual use of foreign capital amount- finance, petroleum, power, railway, resource devel-
ing to USD 80.08 billion (Liu, 2019). opment, public utilities and medical care, pensions,
education and culture. China also relaxed market
Third, China unified the taxation of domestic and access for the non-public sector of the economy and
foreign enterprises. The Corporate Income Tax Law allowed non-state capital to enter sectors such as
that came into effect in January 2008 stipulated that infrastructure and public utilities. During this period,
the same tax rate applied to the corporate income tax of the private sector developed rapidly.
foreign-invested enterprises and domestic enterprises.
The income tax thereby was integrated, with the tax rate Fifth, China improved government service efficiency.
adjusted to 25% and the collection and management The Chinese government continued to push forward
of income tax for domestic and foreign enterprises the reform of government functions and institutions,
unified and standardized. In 2010, the State Council making it clear that government functions were macro-
issued the Notice on Unifying the Urban Maintenance economic regulation and control, market regulation,
and Construction Tax and the Educational Surcharge social management and public service. In 2008, China
System for Domestic and Foreign Enterprises, stipulat- restructured central ministries and merged organiza-
ing that “regulations, rules and policies issued by the tions with similar functions and overlapping respon-
State Council and the Finance and Taxation Authorities sibilities. China was also committed to improving the
concerning urban maintenance and construction investment environment and investment services,
taxes and educational surcharge system shall also making it easier for investors to handle approval
apply to foreign-invested enterprises, foreign enter- procedures. Many local governments also provided
prises and foreign individuals”. Since then, foreign-in- “one-stop approval” through setting up foreign invest-
vested enterprises have no longer enjoyed special tax ment service centers or promotion centers. China
incentives and the tax policies applicable to domestic also established investment promotion and attrac-
and foreign-funded enterprises were basically unified. tion institutions to guide investment promotion, orga-
nize and implement domestic and foreign investment
Fourth, China reformed the monopoly industries. promotion activities and strengthen connections with
China reformed and reorganized industries such as overseas counterparts.
telecommunications, electricity and civil aviation,
China’s use of foreign capital
from to annual increase
USD 55.01 USD 111.2
billion billion
+ 7.8%
in 2002 in 201220 IMPROVING BUSINESS ENVIRONMENT IN CHINA: PRACTICES AND EXPERIENCES
b 3.4
Fourth Stage (2013 to present): systematic reform of the business
environment by implementing “Fang Guan Fu”
By 2013, China’s market economy further developed The reform also led to a wave of entrepreneurship and
and the market was playing a decisive role in resource innovation and contributed more than 2/3 of the total
allocation. Nevertheless, the market rules needed to be newly-increased employment, amounting to 44 million
continuously improved. For example, at the beginning from 2013 to 2017 (Li, 2018). Trade and investment facil-
of 2013 when the new term government was estab- itation were also promoted, especially through first
lished, there were still more than 1,700 administra- piloting many of the reform measures, such as the
tive items (such as qualifications for vehicle sellers, negative list management system in the newly-estab-
licenses for price assessor and property manager, and lished free trade zones.
certification for business human resource strategist)
that needed to be approved by the State Council or its
ministries and agencies, with complicated procedures.
In this context, the central government initiated the from 2013 101+ million to 2018
“Fang Guan Fu” reform as key measures to change the
role of the government, improve the business environ-
ment and revitalize market activities. The “Fang Guan market entities
Fu” aims to redefine the relationship between the
government and market through deregulation, stream-
lined administrative procedures and improved public
services, so as to remove the institutional barriers for
a better business environment and sustain economic First step: launching the “Fang
development. “Fang” refers to reducing regulation and Guan Fu” national reform initiative
micro-management by the government, and effectively to delegate power, streamline
lowering market entry barriers; “Guan” means reform-
ing regulation system to promote fair competition; “Fu”
administration and optimize
includes better services responding to the real needs government services.
of the business.
In May 2015, the Chinese government convened
In general, reforms during this stage took “three steps”. the “National Teleconference on Streamlining
The first step focused on “Fang Guan Fu” and pilot- Administration, Delegating Power, Strengthening
ing; the second step was to index and standardize the Regulation and Improving Services to Deepen
reform while also emphasizing the importance of local Administrative Reform and Transform Government
contexts; and the third step focused on institutional- Functions”, marking the initiation of a series of reforms.
ization based on previous experience and lessons. The meeting emphasized that “deepening administra-
Through this reform process, there have been great tive reform and transforming government functions are
improvements and outcomes in China’s business strong driving forces behind, and an important guaran-
environment, measured by the World Bank’s Doing tee for, development” (State Council, 2015). Through
Business indicators. China, for instance, is now ranked streamlining administration and delegating power,
among the global leaders in terms of getting electricity combining power delegation with effective oversight
and contract enforcement, ranked the 12th and the 5th and improving service all in a coordinated manner, the
place respectively worldwide. The reform has stimu- reforms aim to cultivate a law-based, innovative, clean
lated market vitality. For example, the number of various and service-oriented government at a faster pace,
market entities had more than doubled from 2013 to encourage mass entrepreneurship and innovation,
2018, exceeding 101 million, including 76 million indi- and give full play to the initiatives of governments at
vidual industrial and commercial households (Li, 2019). the central and local levels.GLOBAL SOUTH-SOUTH DEVELOPMENT CENTER PROJECT 21
Delegating power and streamlining administration projects was shortened to less than 120 working days
from more than one year (Li, 2020). Reform of “combin-
The first was to reform the business registration system ing multiple business credentials”, which integrates
and advance the pilots on “separation of operation items related to information collection, record and
permits and business licenses”7. As early in December publicity, management for future inspection into the
2015, the State Council agreed to implement the pilot business license, also enables the market entity to carry
reform of “separation of operation permits and busi- out general business operations with the business
ness licenses” in Shanghai Pudong New Area. The license alone and achieve a lot of marketing activities
reforms include, among others, a new mode of regis- using “only one certificate and one barcode”.
tration for business license (to register business license
for general business and operation, and then to apply The second was to deepen the reform of the adminis-
for related permits of particular business); simplifica- tration examination and approval system and to reduce
tion of permits (direct cancellation of approval, replac- unnecessary constraints on enterprises. In November
ing approval with filing for record, and simplification 2013, with regard to examination and approval of invest-
of authorization); and consummation of services for ment, China proposed to explore the management
permits (notification-to-commitment for one-time appli- mode of “pre-admission national treatment + nega-
cation-to-approval onsite, procedure optimized and tive list” for foreign investment8, unify laws and regu-
working days decreased). The purposes are to substan- lations on domestic and foreign investment, speed up
tially reduce institutional transaction costs for enter- the negotiation and signing of investment agreements,
prises, bring the market’s vitality into full play and speed reform approval system for foreign-related investment,
up the work on administration streamlining. Compared expand investment access, build the Shanghai Pilot
with 2016, in 2017, the number of new enterprises in the Free Trade Zone9, and expand opening up of inland
Pudong New Area increased by 29 percent as the time and bordering areas. These measures constitute the
and procedures for registration were greatly cut, and top-level design for the use of foreign funds in the new
the application and approval for licenses and permits era. In May 2015, the Chinese government issued the
for construction companies, which now could be made “Several Opinions on Building a New System for an
online, increased by 144 percent (Miu, 2018). In 2017, Open Economy”, making comprehensive arrangements
the State Council expanded the reform to a larger scale, for the innovation of foreign investment management
replicating the pilot policy in Shanghai Pudong to 10 system. In October 2015, the State Council issued the
other free trade zones in Tianjin, Liaoning, Zhejiang, “Opinions on Implementing the Negative List System
Fujian, Henan, Hubei, Guangdong, Sichuan, Chongqing for Market Access” and decided to accelerate the
and Shaanxi. In 2018, the State Council pressed for the implementation of the negative list system. In March
reform nationwide. Through such reforms, more market 2016, Tianjin, Shanghai, Fujian, and Guangdong were
entities were able to operate when they obtained the selected as pilots for implementing the negative list
license, solving the problem of “being allowed to access system. The 12 free trade zones also actively explored
but not allowed to operate”. The time for opening busi- innovation on foreign investment management. The
ness was reduced to less than 5 days. The duration for Shanghai Free Trade Zone issued the first negative list
examining and approving engineering construction for foreign investment in 2013 in China. By 2018, the list
7 The business license is a legislative document issued to market entities on the premise of meeting certain requirements and
fulfilling verification of business capacity in accordance with related regulations and legal proceedings; the operation permit is
a credential issued to specific market entities whose business operations call for attainment for both the business permit and
license.
8 The Negative List means that any company can operate business activities that do not appear on the negative list and foreign
investors will be treated no less favorably than domestic investors by registering enterprises, going through the formalities
of approval and filing, obtaining industry permits, etc. The negative list system is formulated and issued by the State Council,
following the principles of rule of law, security, gradualism, and openness. Different authorities with the responsibilities of
granting market access first propose the list of activities that are prohibited or require prior government approval to the
National Development and Reform Commission and Ministry of Commerce, which will then review, integrate and submit for
approval of the State Council.
9 For a snapshot of the comparison among different development zones in China, please referred to Swiss Business Hub China
(2016), available at www.iberchina.org/files/2016/development-zones-china.pdf22 IMPROVING BUSINESS ENVIRONMENT IN CHINA: PRACTICES AND EXPERIENCES
was revised for four times and the items were reduced of Finance and the State Administration of Taxation,
from 190 to 45. The negative list management mode of the cumulative tax cut in one year amounted to nearly
pilot free trade zones was promoted nationwide. 700 billion RMB (about USD 100 billion) (Xinhua, 2017).
China fulfilled the expected goal of reducing and not
In addition, China took measures to clean up and stan- increasing the tax burden of all industries. In 2017, the
dardize investment project approval matters, downsize State Council launched six tax reduction measures,
professional qualifications and certification matters, including expanding the scope of small and low-profit
reduce industrial product production licenses, and enterprises that enjoy corporate income tax conces-
reform the approval system for engineering proj- sions and, increasing the pre-tax deduction of R&D
ects. For example, in 2016, the Chinese government expenses for small and medium-sized technology
released the “Catalogue for Investment Projects to enterprises. According to estimates by the Ministry of
be Approved by Government (2016 Edition)”, making Finance, the new tax cuts in 2017 exceeded 380 billion
it clear that projects not included in the Catalogue RMB (about USD 54 billion). China reduced the VAT
need just to be filed for record. The Ministry of Human rate from 17%-11% to 16%-10% in 2018 and further to
Resources and Social Security (2017) has cancelled 13%-9% in 2019. Starting from January 2018, the State
434 vocational qualification permits and certifications Tax Administration implemented a preferential treat-
in seven batches, reducing the proportion by 70%. The ment on the corporate income tax rate for Small and
latest “National Vocational Qualification Catalogue Thin-profit Enterprises (STEs). STEs meeting certain
List” published in September 2017, with a total number criteria would have their annual taxable income cut by
of 140 items, requires that no additional occupa- 50% and be subject to a corporate income tax rate of
tional license and certification items outside the list 20% (State Tax Administration of China, 2019).
should be set up, reducing the burden on talents
and institutional costs. China also piloted reform of Other measures were also taken to reduce burden of
approval system for construction projects in 15 cities enterprises and individuals. From April 2017, China
and Zhejiang Province, with the goal of reducing the cancelled 41 central administrative fees, 35 of which
approval time from the current average of more than are related to fees levied on enterprises. According
240 working days to 120 working days. Such goal was to data from the National Development and Reform
achieved in 2019 nationwide. Commission (2018), China reduced the burden of
enterprises amounting to 500 billion RMB (about USD
The third was to release the dividends of tax reduc- 70 billion) from 2015 to 2017. According to data from
tion policies. China continued to implement the reform the Ministry of Human Resources and Social Security
of “cutting taxes and administrative fees” to reduce (2018), China reduced the social insurance premium
the cost of enterprise production and operation. In rate four times since 2015. The overall social insurance
May 2016, the State Council decided to implement the premium rate dropped from 41% to 37.25% from 2015
reform of “replacing business tax with value-added tax to 2018, reducing costs about 315 billion RMB (USD 45
(VAT)”. According to rough calculations by the Ministry billion) for enterprises.
China’s tax cut
new tax cuts
17%-11% 16%-10% 13%-9%
USD 54
billion
in 2017 in 2018 in 2019GLOBAL SOUTH-SOUTH DEVELOPMENT CENTER PROJECT 23
Innovating supervision participation in supervision, forming a forceful mech-
anism for consumers to “vote with their feet”, creating
China introduced an oversight model of random conditions to encourage consumers to actively report
inspection and public release across the board (the illegal business activities, and makes full use of new
so-called “double random and one release”10) and media and other means to collect major issues and
made operational and post-operational oversight opinions in a timely manner. For example, the State
more effective. In order to regulate behaviors of market Administration for Market Regulation has established
players and effectively address such issues as willful the National Enterprise Credit Information Publicity
inspections, disturbs by law enforcers and unfair law System and the National Platform of Consumer Dispute
enforcement in some areas, the Chinese government resolution to enable the public to understand cred-
promoted random inspection and regulated the interim ibility of enterprises and report illegal behaviors. In
and ex-post supervision starting from 2015. It put 2018, market regulation authorities received more
forward requirements from four aspects: formulating than 11.2 million complaints and recovered economic
a list of matters for random inspections, establishing losses of more than 3 billion RMB for consumers (State
a “double random” checking mechanism, reason- Administration for Market Regulation, 2018).
ably determining the ratio and frequency of random
inspections, and improving the use of inspection China has also given full play to the role of technology
results. In 2016, the State Administration for Industry in regulation. In 2015, the Chinese government issued
and Commerce required that all inspections and “Several Opinions on Using Big Data to Strengthen
checks shall be conducted through “double random” Services and Supervision of Market Entities”, propos-
to reduce disruptions. With the strong promotion of the ing to fully use the concept, techniques and resources
central government, “double random, one release” has of big data to strengthen the supervision of market
become a routine inspection model. Different depart- entities for the entire life cycle. For example, big data
ments such as the National Development and Reform supervision model has been established to conduct
Commission, the Ministry of Transportation, Ministry of correlation analysis, understand behaviors, patterns
Ecology and Environment have all adopted implemen- and features of market entities, discover violations of
tation methods and the list of administrative matters. laws and regulations, and improve the government’s
This has resulted in improved efficacy of supervision, decision-making and risk-prediction capabilities. A
including expanding coverage, increasing precision credit blacklisting system was also set up to penal-
and transparency, as well as strengthening credibility. ize firms that misbehave, in effect recruiting auto-
mated agents of the state to enforce their judgments.
China also combines top-down and bottom-up
measures and uses new methods to improve supervi-
sion capabilities. In order to further improve supervision
effects and reduce transaction costs for enterprises, Size of digital economy
the Chinese government explored a supervision model
that combines law enforcement with social forces and
proposed to deploy law enforcement in accordance
with the principles of reducing bureaucracy, integrat- from to
ing teams, and improving efficiency. In terms of social
supervision, the Chinese government, one the one 20% 33%
hand, promotes industry self-discipline and leverages
on the roles of industry associations and chambers in
of GDP of GDP
rights protection, certification, dispute settlement, and
punishment dishonesty. On the other hand, the govern-
ment also improves the incentive mechanism for public in 2011 in 2017
10 The model comprises inspections of randomly selected entities by randomly selected inspectors and the public release of
inspection results.You can also read
