China
Financing innovation in China
Author: Xun Wang, Peking University
China’s economic development and financial opening are now at a crucial turning point.
External downside risks now dominate due to the COVID-19 pandemic and trade tensions, and domestic markets urgently need upgrading to lift technological innovation. The recently drafted 14th Five Year Plan emphasises an innovation-oriented development strategy. Although many measures have been adopted, how to effectively finance innovation remains one of China’s primary challenges.
Research and development (R&D) expenditure is a common measure of investment in innovation. Innovation investment is usually long term and tends to run down firms’ internal funds. The availability of external finance is critical for firms trying to innovate.
According to the World Bank, China’s expenditure on R&D as a percentage of GDP experienced steady growth between 1996–2017, rising from 0.56 per cent to 2.12 per cent. Compared to leading industrial countries in 2017, China’s R&D ratio was 0.7 percentage points less than that of the United States and 1.1 percentage points less than that of Japan. More resources have been allocated to capital expenditure over the past few decades.
The key question in coming decades is how China’s financial system can better support innovation investment. Evidence shows that better access to equity market financing leads to substantially higher long-run R&D investment and better innovation performance. Credit market development has a positive impact on fixed investment but zero or negative impact on R&D.
Recent evidence suggests that credit market development has a positive effect on incremental innovation, which are proxied by the count and citation of utility model patents. But it has a negative effect on substantive innovation, proxied by the count and citation of patents of inventions. Equity market development leads to higher substantive innovations but is unimportant for incremental innovations.
China’s financial market is still dominated by the banking sector, especially state-owned banks. The market for direct financing is less developed. The share of bank financing — including bank credit, trust loans, entrusted loans and banker’s acceptances — in the country’s total social financing declined from 87.2 per cent in 2002 to 70 per cent in 2019.
The proportion of direct finance, including corporate bonds and equity financing, in the country’s total social financing increased from 5 per cent in 2002 to 12.3 per cent in 2019. But the role of the stock market has not risen in line with China’s rapid economic growth, probably due to stringent financial regulations. According to PBOC’s statistics, the share of financing through the stock market dropped from 4.6 per cent in 2002 to 2.9 per cent in 2019.
Capital account liberalisation might play an important role in innovation, by facilitating external finance, promoting competition and enhancing corporate governance. Since 2019, China has adopted several measures to ease restrictions on ownership and licenses to foreign financial institutions. This financial opening-up has led to a significant increase in the number of wholly or majority foreign-owned financial institutions operating in China. But these foreign financial institutions still face operational problems such as uncertainty about capital outflow, inflexibility of the renminbi exchange rate and the segmentation of bond markets.
The evidence also shows that the innovation-enhancing effects of capital account liberalisation might be affected by country-specific characteristics such as financial development and institutional quality. This means that countries would have to reach a certain threshold of financial and institutional development before they can expect to benefit from financial openness.
Looking forward, improving access to external finance will play a crucial role in fostering innovation in China.
China should steadily open domestic financial markets more widely to both foreign and domestic private capital. This includes completing interest rate liberalisation, achieving a clean floating exchange rate, facilitating cross-border capital movements and lowering entry barriers for both private and foreign financial institutions.
China also needs to restructure its financial system by enhancing the role of direct financing. It should eliminate restrictions in equity markets and promote the development of multilayered equity markets. Equity markets, including stock markets as well as venture capital and private equity markets,…
China
China Implements New Policies to Boost Foreign Investment in Science and Technology Companies
China’s Ministry of Commerce announced new policy measures on April 19, 2023, to encourage foreign investment in the technology sector. The measures include facilitating bond issuance, improving the investment environment, and simplifying procedures for foreign institutions to access the Chinese market.
On April 19, 2023, China’s Ministry of Commerce (MOFCOM) along with nine other departments announced a new set of policy measures (hereinafter, “new measures”) aimed at encouraging foreign investment in its technology sector.
Among the new measures, China intends to facilitate the issuance of RMB bonds by eligible overseas institutions and encourage both domestic and foreign-invested tech companies to raise funds through bond issuance.
In this article, we offer an overview of the new measures and their broader significance in fostering international investment and driving innovation-driven growth, underscoring China’s efforts to instill confidence among foreign investors.
The new measures contain a total of sixteen points aimed at facilitating foreign investment in China’s technology sector and improving the overall investment environment.
Divided into four main chapters, the new measures address key aspects including:
Firstly, China aims to expedite the approval process for QFII and RQFII, ensuring efficient access to the Chinese market. Moreover, the government promises to simplify procedures, facilitating operational activities and fund management for foreign institutions.
This article is republished from China Briefing. Read the rest of the original article.
China Briefing is written and produced by Dezan Shira & Associates. The practice assists foreign investors into China and has done since 1992 through offices in Beijing, Tianjin, Dalian, Qingdao, Shanghai, Hangzhou, Ningbo, Suzhou, Guangzhou, Dongguan, Zhongshan, Shenzhen, and Hong Kong. Please contact the firm for assistance in China at china@dezshira.com.
China
Q1 2024 Brief on Transfer Pricing in Asia
Indonesia’s Ministry of Finance released Regulation No. 172 of 2023 on transfer pricing, consolidating various guidelines. The Directorate General of Taxes focuses on compliance, expanded arm’s length principle, and substance checks. Singapore’s Budget 2024 addresses economic challenges, operational costs, and sustainability, implementing global tax reforms like the Income Inclusion Rule and Domestic Top-up Tax.
Indonesia’s Ministry of Finance (MoF) has released Regulation No. 172 of 2023 (“PMK-172”), which prevails as a unified transfer pricing guideline. PMK-172 consolidates various transfer pricing matters that were previously covered under separate regulations, including the application of the arm’s length principle, transfer pricing documentation requirements, transfer pricing adjustments, Mutual Agreement Procedure (“MAP”), and Advance Pricing Agreements (“APA”).
The Indonesian Directorate General of Taxes (DGT) has continued to focus on compliance with the ex-ante principle, the expanded scope of transactions subject to the arm’s length principle, and the reinforcement of substance checks as part of the preliminary stage, indicating the DGT’s expectation of meticulous and well-supported transfer pricing analyses conducted by taxpayers.
In conclusion, PMK-172 reflects the Indonesian government’s commitment to addressing some of the most controversial transfer pricing issues and promoting clarity and certainty. While it brings new opportunities, it also presents challenges. Taxpayers are strongly advised to evaluate the implications of these new guidelines on their businesses in Indonesia to navigate this transformative regulatory landscape successfully.
In a significant move to bolster economic resilience and sustainability, Singapore’s Deputy Prime Minister and Minister for Finance, Mr. Lawrence Wong, unveiled the ambitious Singapore Budget 2024 on February 16, 2024. Amidst global economic fluctuations and a pressing climate crisis, the Budget strategically addresses the dual challenges of rising operational costs and the imperative for sustainable development, marking a pivotal step towards fortifying Singapore’s position as a competitive and green economy.
In anticipation of global tax reforms, Singapore’s proactive steps to implement the Income Inclusion Rule (IIR) and Domestic Top-up Tax (DTT) under the BEPS 2.0 framework demonstrate a forward-looking approach to ensure tax compliance and fairness. These measures reaffirm Singapore’s commitment to international tax standards while safeguarding its economic interests.
Transfer pricing highlights from the Singapore Budget 2024 include:
This article is republished from China Briefing. Read the rest of the original article.
China Briefing is written and produced by Dezan Shira & Associates. The practice assists foreign investors into China and has done since 1992 through offices in Beijing, Tianjin, Dalian, Qingdao, Shanghai, Hangzhou, Ningbo, Suzhou, Guangzhou, Dongguan, Zhongshan, Shenzhen, and Hong Kong. Please contact the firm for assistance in China at china@dezshira.com.
China
New Report from Dezan Shira & Associates: China Takes the Lead in Emerging Asia Manufacturing Index 2024
China has been the world’s largest manufacturer for 14 years, producing one-third of global manufacturing output. In the Emerging Asia Manufacturing Index 2024, China ranks highest among eight emerging countries in the region. Challenges for these countries include global demand disparities affecting industrial output and export orders.
Known as the “World’s Factory”, China has held the title of the world’s largest manufacturer for 14 consecutive years, starting from 2010. Its factories churn out approximately one-third of the global manufacturing output, a testament to its industrial might and capacity.
China’s dominant role as the world’s sole manufacturing power is reaffirmed in Dezan Shira & Associates’ Emerging Asia Manufacturing Index 2024 report (“EAMI 2024”), in which China secures the top spot among eight emerging countries in the Asia-Pacific region. The other seven economies are India, Indonesia, Malaysia, the Philippines, Thailand, Vietnam, and Bangladesh.
The EAMI 2024 aims to assess the potential of these eight economies, navigate the risks, and pinpoint specific factors affecting the manufacturing landscape.
In this article, we delve into the key findings of the EAMI 2024 report and navigate China’s advantages and disadvantages in the manufacturing sector, placing them within the Asia-Pacific comparative context.
Emerging Asia countries face various challenges, especially in the current phase of increased volatility, uncertainty, complexity, and ambiguity (VUCA). One notable challenge is the impact of global demand disparities on the manufacturing sector, affecting industrial output and export orders.
This article is republished from China Briefing. Read the rest of the original article.
China Briefing is written and produced by Dezan Shira & Associates. The practice assists foreign investors into China and has done since 1992 through offices in Beijing, Tianjin, Dalian, Qingdao, Shanghai, Hangzhou, Ningbo, Suzhou, Guangzhou, Dongguan, Zhongshan, Shenzhen, and Hong Kong. Please contact the firm for assistance in China at china@dezshira.com.
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- New Report from Dezan Shira & Associates: China Takes the Lead in Emerging Asia Manufacturing Index 2024
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