German trade with China

In 2013, China replaced the USA as the world’s top exporting nation. China sees Germany as its window to Europe. Therefore, Germany is China’s most important international trading partner within the European Union. In parallel, China is Germany’s most important trading partner in Asia. Sino-German trade has increased exponentially in the last forty years. Increased political and cultural cooperation accompanies the rise in international trade.

A. Trade with China

In 2013, bilateral trade between Germany and China amounted to over €140 billion. Chinese exports to Germany totalled over €70bn, while German exports to China were worth over €60bn.

Germany counts as China’s top trading partner in the Europe Union and ranks sixth in terms of global trading partners. China is Germany’s top trading partner in Asia and third largest global trading partner.

China is the fifth largest destination for German exports. German goods exported to China include automobile and automobile parts, machines, data processing equipment, electrical and optical products, electrical equipment and chemical products.

Chinese imports rank second amongst the products imported by Germany. The main products imported include data processing equipment, electrical and optical products, textiles and clothes, electronic equipment, machines and metal products.

The recent increased purchasing power of the Chinese domestic market provides opportunities for German business.

B. Direct investment

1. German direct investment in China

German companies are becoming increasingly active in China. In 2013, German direct investments in China increased by almost 50% rising to just over $2bn. Over 5,000 companies are currently active in China.

Investments by foreign companies in China are governed by the ‘Catalogue for the Guidance of Foreign Investment Industries’. The catalogue lists all market sectors and sub-sectors in which foreign investments are either ‘encouraged’, ‘restricted’ or ‘prohibited’. Investment projects which are not listed in the catalogue are generally permitted. Investments in industrial sectors which are considered environmentally damaging or which concern raw materials are subject to additional limitations.

For an overview of the types of investment projects which are promoted, restricted or prohibited, view the table at the bottom of this page.

2. Creating certainty for foreign direct investment

While inward foreign direct investment in China is increasing, the framework for investment is not yet ideal. Many investors cite the lack of investment security; legal certainty and freedom to contract; and lack of equal access to the market and public procurement procedures as aspects which constrain investment potential.

Obtaining clear commercial and legal advice when intending to commit capital in the form of foreign investment in China will enable a calculated risk to be taken and for risks to be minimised.

3. Chinese direct investment globally and in Germany

The Chinese government’s ‘Going Out Strategy’ is a package of legislative measures designed to encourage Chinese companies to realise the potential of investing internationally. The programme started having its true impact in 2000 and has helped raise Chinese foreign direct investment from around $2bn to now over $80bn globally.

The aim of the foreign investment strategy is to create an outlet for the large sums of foreign currency reserves which amassed in China following its recent economic rise; to secure China’s hold on natural resources required to fuel a growing economy; and to globally promote China’s product range.

In 2013, Chinese direct investment in Germany amounted to around $2bn. Around 900 Chinese companies are active in Germany.

Chinese investments in Germany mainly cover areas such as mechanical engineering, electronics, consumer goods, regenerative energy and information communication technologies.

C. China (Shanghai) Pilot Free Trade Zone

In late 2013 China launched a new pilot scheme aimed at testing economic reform. The so-called ‘China (Shanghai) Pilot Free-Trade Zone is characterised by a relaxation of the rules on foreign investment, selected tax exemptions, an easing of restrictions on converting the Chinese currency into foreign currency and the introduction of market-based interest rates.

Under the free-trade zone structure, foreign direct investments no longer require authorisation, although they must be registered.

Investments in sectors entered on a ‘negative list’ are either subject to restrictions or are not permitted. The black list contains around 200 industry sectors. In particular, foreign investors are banned from investing in the cultural, sports and entertainment industries and investments in the telecommunication industries and the high-end property sector are restricted.

Joint ventures between Chinese and foreign companies will be permitted in industries such as shale gas and sea-bed natural gas exploration; automobile parts and aircraft maintenance; and railway construction and management.

The pilot free trade zone has been so successful that plans have been announced to set up additional free trade zones. China hopes that these zones will improve its position as an international trading partner. It is thought that new free trade zones could become specialised clusters which focus on certain industry sectors.

D. Legal framework for investment

1. Double taxation

A double taxation agreement between Germany and China has been in force since 1986. The agreement seeks to ensure the avoidance of double taxation on income and capital.

This means, for example, that if tax has already been levied on income or capital in China, that income or capital cannot then be taxed again in Germany.

In early 2014, Germany and China signed a new double taxation agreement which will replace the existing agreement once it has been ratified by both governments. The agreement foresees a reworked definition of “permanent establishment” meaning that building sites and construction, assembly or installation projects are only considered permanent if they last for more than 12 months. The provision of services is considered permanent if conducted for more than 183 days.

Tax on dividends can be levied in the State in which the company receiving the dividend is located. However, a tax on dividends may also be deducted at source, i.e. in the country in which the company paying the dividend is located. The tax rate in this case, has been lowered in the new agreement to 5%, provided the beneficiary owns at least 25% of the company paying the dividend. This means it is no longer necessary for German companies to create holding companies in Hong Kong or Singapore.

Capital gains from the sale of property are taxed in the country in which the seller is resident.

2. Investment protection

A bilateral investment protection agreement between Germany and China has been in force since 2005.

The agreement seeks to encourage bilateral investments by assuring that investments made in the other country are protected from discriminatory or arbitrary treatment. Correspondingly, investments made by nationals of the other country must be afforded ‘fair and equitable’ and ‘no less favourable’ treatment. Also, the authorities of each state are required to give ‘sympathetic consideration’ to investors’ applications for visas and work permits.

Any expropriations or nationalisations of the property belonging to investors from the other country may take place only if they serve the public benefit and if compensation equal to the value of the investment is paid. With respect to expropriations, the principle of most-favoured-nation treatment applies.

Under the agreement, the parties agree to guarantee the transfer of investment amounts and returns (including amounts needed to maintain or increase investment), proceeds of sale, and individuals’ earnings.

In November 2013 the European Union and China announced the launch of negotiations on an investment protection agreement. When it is adopted, this agreement will replace the current patchwork of bilateral investment protection agreements that currently exist between China and member states of the European Union.

E. Establishing a company in China

1. Choosing company or partnership forms

When investing in China, it is important to have a basic overview of legal framework relating to types of companies. It is also crucial to remember that the administrative process can be burdensome and lengthy.

Investments in some branches in China are subject to obligatory joint venture projects with Chinese partners. Otherwise, businesses looking to make a long-term investment in China generally opt to found a ‘wholly foreign-owned enterprise’ (WFOE). This enterprise can take the form of a limited company and allows the investor to act independently from Chinese partners.

Alternatively, to benefit from local know-how and contacts, foreign investors also regularly choose equity joint ventures for their investment. These can also take the form of limited companies and require the foreign investor to contribute at least 25% of the share capital.

It is also possible for foreign investors and companies to enter into partnership. Under a Foreign Invested Partnership, a limited partnership or limited liability partnership is formed. They are distinguished by the fact that at least one partner in a limited partnership is fully and personally liable for the debts of the partnership; whereas the liability of the other partner is limited to the agreed amount. Partnerships of this kind benefit from a streamlined registration procedure and there is no minimum capital requirement.

Due to high capital requirements and a complex legal framework, it is unusual for an initial investment in China to be in the form of a public limited company (Foreign Invested Company Limited by Shares). A later conversion from a Wholly Foreign-Owned Enterprise is generally the preferred route.

Representative offices are dependent offices of the foreign parent company. They can be a useful tool for investors to gain an orientation on the Chinese market. Representative offices act as a gateway to the Chinese market and can conduct market research, advertising and business partner searches. They cannot carry out commercial activities.

2. Choosing a market sector

In addition to the above, foreign investors must also ensure they choose the correct market segment in which their later company is to act. Here, the Chinese authorities differentiate between manufacturing, services and commercial enterprises. All three can be founded on the basis of WFOE or joint ventures.

Production enterprises are only permitted to manufacture, distribute and export their own products. Foreign Invested Commercial Enterprises can undertake sale, wholesale, import and export, as well as delivery, maintenance and repair of products. Service enterprises can cover consultancy activities in various areas and maintenance activities. They cannot trade in goods or conduct import or export.

3. Relaxed requirements in China (Shanghai) Pilot Free Trade Zone

China (Shanghai) Pilot Free Trade Zone has seen a dramatic rise in the number of domestic and foreign enterprises being registered. The zone boasts relaxed legislative requirements complimented by more efficient approval procedures.

For example, a minimum capital of RMB 30,000 is no longer required when setting up a limited liability company. The investment climate has been made more welcoming to foreign investors who are no longer required to invest 15% of the start capital within three months and the full capital amount within two years.

Furthermore, to make it easier and more efficient to set up a company, the Pilot Free Trade Zone has a one-stop shop for applications. Potential investors simply submit all the necessary documents to the Industry and Commerce Authority and they are passed internally to the various relevant government departments issuing.

F. Cooperation

1. Strategic economic cooperation

In 2009, Germany ceased approving financial aid for China in the traditional development aid sense. Instead, the relationship between the two countries now focuses on strategic cooperation from which both economies should significantly benefit.

2. Science and technology

Germany and China have cooperated in the area of science and technology for over 30 years. The foundation of cooperation between the two countries in this area is the 1978 Intergovernmental Agreement on Cooperation in Science and Technology. The cooperation has been given emphasis by two subsequent inter-governmental consultations.

At the second government consultation in August 2012, the Chinese and German governments expressed their intention to strengthen research cooperation in the areas of LED technologies, water, and marine and polar research. Institutions and centres including the Sino-German Centre for the Research Promotion in Peking, the Sino-German Mobile Communication Institute in Berlin demonstrate the emphasis placed on cooperation in this area.

In 2014, the German and Chinese governments took a further step to deepening cooperation in the area of science and technology by deciding to create a Sino-German Innovation Centre for “Clean Water”. The centre will act as a point of contact in China for German companies.

Research and development policy is guided in China by the roadmap “Technological Revolution and China’s Future – Innovation 2050”. The strategy encompasses areas such as energy, environment, health, space, IT, modern raw materials, production technologies, nanotechnologies and security.

3. Environment

One of the main areas of discussion at recent Sino-German government consultations was the energy and the environment.

China is experiencing rash growth. The pressure of urban development, high air pollution and poor water availability and quality has led the Chinese Government to shift focus to targeted sustainable development.

Germany is in an ideal position to exploit its experience of promoting renewable energy sources and improving energy efficiency to help China move towards a ‘green economy’.

G. Overview of Chinese foreign direct investment guidance

Catalogue of Guidance on Foreign Investment in China – Promoted Investments
  Category Sub-category Investment project
PROMOTED
Mining and quarrying Joints ventures for the development and application of new technologies for prospecting and exploitation of petroleum, including geophysical prospecting, well drilling, well-logging and downhole operation
Manufacturing Chemical raw materials and products manufacturing Production of environment-friendly printing ink and environment-friendly Arene oil
Manufacturing Metal products Research, development and manufacturing of new lightweight and environment-friendly materials for aviation, aerospace, automobiles and motorcycles
Manufacturing Special equipment manufacturing Manufacturing of equipment for the remanufacturing of waste mechanical and electrical products
Manufacturing Communication and transportation equipment Manufacturing of complete automobiles [foreign investments shall not exceed 50%]
Manufacturing Electric machinery and equipment manufacturing Manufacturing new energy equipment for electricity power generation including: photovoltaic, geothermal, tidal power, wave power, waste, methane and wind
Manufacturing Communication, computer and other electronic equipment manufacturing Manufacturing of flat panel display such as TFT-LCD, PDP and OLED, and materials of flat panel display
Communication and Transportation Equipment Equipment for railway transportation [limited to equity joint ventures or contractual joint ventures]
Scientific research, technology service and geological exploration Development and services of energy-saving technology
Water, environment and public facility management industry Construction and management of treatment plants for sewage, garbage and dangerous wastes; and environment pollution treatment facilities

 

Catalogue of Guidance on Foreign Investment in China – Restricted Investments
  Category Sub-category Investment project
RESTRICTED
Manufacturing Chemical Raw Material Products Manufacturing Sodium hydroxide and potash production
Manufacturing Medical and Pharmaceutical Products Production of penicillin G [and other listed drugs]
Production and supply of power, gas and water Construction and management of conventional coal-fired power of condensing steam plants [subject to certain conditions]
Communication and transportation Railway freight transportation companies
Wholesale and retail trade Wholesale, retail and logistic distribution of grain, cotton, vegetable oil, sugar, medicines, tobaccos, automobiles, crude oil, capital goods for agricultural production [subject to certain conditions]
Real estate Development of pieces of land [limited to equity joint ventures or contractual joint ventures]
Catalogue of Guidance on Foreign Investment in China – Prohibited Investments
  Category Sub-category Investment project
PROHIBITED
Manufacturing Special Equipment Manufacture of weapons and ammunition
Manufacturing Other manufacturing  Ivory carving
Communication and transportation  Air traffic control; postal services
Scientific research Development and application of human stem cells and gene diagnosis therapy technology
Art, sports, entertainment Publishing, producing, master issuing, and importing books, newspapers and periodicals

German trade with China

If your German business would like to trade with China, or if you have a Chinese company seeking to enter the German and European market, call our specialist team on +49 (0) 221 / 951 563 0 or user our contact form.


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Christian Solmecke is a partner at the law firm WILDE BEUGER SOLMECKE. He is the author of numerous legal publications in the area of internet and IT law. He is also an associate lecturer for social media law at the Cologne University of Applied Sciences.

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