The importance of thinking regionally in China
With 1.4 Billion inhabitants, China is the world’s biggest country by population. Putting this into context, China has twice the population of the whole of Continental Europe and over four times the population of the United States.
China spans a huge land mass of 9.3 million square kilometres, making it the world’s 4th biggest country by size.
China also has a marked diversity, spanning Shanghai’s ultra-futuristic urban skyscrapers, to the agricultural heartland employing some 300 million people, to the old historic China characterised in and around Beijing’s Forbidden City.
Describing China as a single country is therefore misleading. In this article we look at the key regional differences within China, and how these differences can impact the way western businesses engage with China.
Regional differences
There are many regional differences in China, for instance, the weather is generally colder in the North of China compared to the South, culinary preferences differ from region to region, and even the physical traits of its inhabitants vary, with citizens of Beijing generally being taller than their Shanghainese counterparts.
We focus here on the most impactful regional differences that businesses need to consider.
i) Wealth
China’s economy has enjoyed 30 years of explosive growth, making it the world’s largest. In 2017, China’s GDP reached US$ 1.137 trillion, which is three times the world’s third largest in Japan. In the last 10 years, China’s per capita GDP has increased by 2.7 times, and the world rankings have made great progress.
As China grows, so does the earnings gap between the city and the country. In 2017, urban residents in China had an average per capita income of RMB 36,396 – 2.71 times higher than that of people in rural areas. Wealth difference is further concentrated in the top tier cities in China with the lowest incomes concentrated in outlying regions such as Tibet. In 2017, the provincial cities with China’s per capita GDP higher than the world’s average level include Beijing US$ 19,105, which is 4.5 times higher than the last ranking Gansu province US$ 4,245, and next are Shanghai US$ 18,455 and Tianjin US$ 17,461.
Figure 1 – Chinese GDP by Province, 2017 Source: wikipedia.com
ii) Consumption Environment
A number of factors combine to create regional variations in China’s consumption environment:
1. Property rental
Of the top 10 most expensive places to rent an office in the world, Chinese cities make up half. Hong Kong’s central district at US$ 323 per square foot is the world’s priciest office location. In fourth place, after New York’s Midtown and London’s West End – is Beijing’s Finance Street, according to JLL’s Premium Office Rent Tracker. Beijing’s CBD, Shenzhen, and Shanghai’s Pudong come in at seventh, eighth and tenth place, respectively, highlighting the high costs of rent in Chinese cities. Rental costs in tier 2 cities such as Nanjing and Hangzhou can be half of the rent expected to be paid in Shanghai and Beijing, making these cities attractive to companies wishing to set-up in China.
2. Transport
Given the vastness of China, transport networks are a key consideration for businesses considering operating in China. Tier 1 cities are served by best in class international airports connecting these cities to the major financial and trading centres around the world. Beijing’s Capital Airport is not only the largest airport in China, but it is the second largest airport in the world, servicing 90 million passengers every year.
China also has one of the most extensive rail networks in the world, penetrating every province and China also leads the way in high speed rail travel. Beijing and Shanghai are at the heart of recent high-speed rail travel developments with distances being shortened between the two cities to 4.5 hours and between Beijing to Guangzhou to 8 hours.
Clearly some cities benefit more than others by their proximity to the coast. Shanghai is strategically located in the heart of the Yangtze River Delta and lays claim as the busiest container port in China. Shanghai’s location is perfect for businesses that are resource-intensive, such as real estate and retail, two of the city’s biggest sectors.
3. Labour Costs
Resource costs vary wildly in China between the country and the city, and within the tiered cities. For instance, within tier 1 cities, we can see in Figure 2 that salaries are highest in Beijing and Shanghai with Guangzhou being the cheapest.
4. Financial environment
Whilst online payment now covers 80% of tier 1-3 Chinese cities, cash is still the majority payment method of rural areas. In urban areas, making purchases through smartphones and QR codes is now very common. The two most popular payment services being Alipay and WeChat Pay, which is run by Tencent.
According to the Nikkei Asian Review, making mobile payments can be difficult for short-term visitors to China because, in the main, using Alipay and other payment apps requires a bank account in the country. Visitors also need to have a Chinese mobile phone number to use text messaging services. They are also required to provide detailed personal information, including passport numbers, to increase their initial credit limit of RMB 1,000 (US$145).
iii) Regulation
Whilst China is ruled by a common law, there are regional differences when it comes to setting up and doing business in China, making certain cities more open to doing business. We look at the cities most considered open to commerce.
1. Beijing
Beijing is a very business-friendly city. Its innovation hub at Zhongguancun, for example, is home to nearly 9000 high tech firms and is a focus for China’s aim to become a global tech powerhouse.
Source: China Briefing
Business & Property Registration
In March 2018, the authorities in Beijing significantly expedited the process required to start-up businesses. The entire registration process can now be completed within one week, compared to three weeks previously.
Visa, Residency Regulation
In a drive to attract talent from overseas, Beijing has announced new policies related to visas, residency, and foreign investment. Those who qualify will benefit from longer visa terms, permanent residency, freer cross-border travel, and the ability to enrol their children in local schools.
Beijing, like almost anywhere in China, has relaxed regulations for foreign investment in industries such as banking, the automotive and heavy industries, and in agriculture.
2. Shanghai
Relying on the port economy and international development background, Shanghai is also business-friendly, especially for foreign-funded enterprises landing and international trade.
Free Trade Zone
One distinct reason why investors are interested in setting up in Shanghai is the Shanghai Free trade Zone (SFTZ).
The SFTZ is essentially a protected environment for businesses, where capital outlay requirements, tax and other regulatory requirements are often less restrictive than elsewhere in China. This makes the SFTZ a feasible pilot option for many businesses wishing to start in China. The city’s government has pledged to open-up 18 service industry sectors to foreign investment including shipping, law, and engineering. Even video game consoles are now allowed to be sold in the region, previously banned in China since 2000.
3. Shenzhen
Located just 20 miles from Hong Kong, Shenzhen is another of China’s leading economic hubs. Hosting industry leaders such as tech giant Tencent, smart-phone manufacturer Huawei, and drone technology innovator DJI, Shenzhen is often referred to as known as the ‘Silicon Valley of Hardware’.
Much like Shanghai, Shenzhen has created a special economic zone to help incentivise certain industries. The Qian Hai Zone provides lower labour costs, lower rental costs, a closer proximity to mainland China manufacturing, lower corporate taxes and other financial incentives.
The sectors benefitting the most here are Finance, IT, Logistics, Science, and Technology.
In Summary
We have seen in this article how there are marked differences in China regionally in terms of wealth, regulations, openness to doing business and consumption environment. The size and diversity of China makes it a country like no other. To successfully navigate through the regional differences, especially for small and medium-size companies, it is important to have the right partner in China such as Melchers.
With over 150 years’ experience of doing business in China across various industries, Melchers knows by heart that each company requires a customized solution for its approach to the Chinese market. By leveraging the competencies gained from collaborating with numerous international companies in China, Melchers provides a comprehensive range of service solutions across all functional areas and the entire value chain.
To learn more, please contact us at [email protected].
