To do business in China, foreign investors must also consider tax, the banking system, and securities. The first section of this chapter discusses the taxation system in China, focusing on those taxes that are most relevant to foreign investors. The second section briefly introduces China's banking system, the foreign banking institutions operating in China, and China's administration of foreign exchange related to foreign investors. The final section analyzes China's security market, focusing on the administration system, security offering and trading, the B-share and the qualified foreign institutional investors (QFII) scheme that are most relevant to foreign investors.
Foreign investors should pay, as investors in other parts of the world, a variety of taxes in China. Along with the economic reform, the Chinese taxation system has become more and more complicated, with a total of 29 categories of taxes being levied to date, of which 17 are applicable to foreign investors. Foreign investors should study carefully both China's taxation law and regulations, consider the taxes they have to pay, work out what preferential tax treatments they may enjoy, and analyze the relative costs and benefits before they make a decision to invest in China.
In the pre-reform period, China's economic structure was simplified with the abolition of foreign-owned enterprises and the rapid decline of domestic private enterprises. By the late 1970s, state-owned enterprises and collective-owned enterprises had become the predominant components of the economy, accounting for about 99 percent of the output of the Chinese economy. Accordingly, China's taxation system was also simplified over the pre-reform period. Until 1978, China levied only 13 categories of taxes, including industrial and commerce tax, industrial and commerce income tax, agriculture tax and tariff. As the Chinese people earned little income, they did not pay any income tax. Chinese government's revenue came mainly from the profits earned by state-owned enterprises, not from these taxes. 1