Investing in the Jewellery Industry in China
Thanks to her large market size, huge population (offering dual gain in terms of cheap labour and quantum of demand), a workforce adept in low-skill manufacturing and infrastructure and preferential government policies, China has managed to attract huge foreign investment since the days of reforms and opening up the started in the late 1980s, overtaking the US as the largest recipient of FDI in 2002, a position she maintained in the next year. Investment, rather than trade, which is affected by various tariff and non-tariff barriers, has become an attractive proposition for FDI in many sectors. Jewellery processing is an area, which is encouraged by the government.
China enjoys certain advantages in this sector in terms of natural resources, and skill of the workforce. For an Indian enterprise, the choice of a Chinese production base can be due to a high level of protection granted to finished jewellery products here, as also the need to cater to specialized demands from Chinese consumers. A thorough knowledge of the investment conditions in China is an essential prerequisite for this. This chapter will include information relating to investment like:
- Categories of foreign investment allowed
- Different modes of foreign investment
- Tips for negotiation with Chinese partners in case of JVs
- Post-entry strategies of marketing
- Taxation of foreign enterprises
Investment Climate in China
After China’s WTO accession, in order to streamline the process of approval for foreign direct investment into China, and to clarify the country’s social and economic priorities, the central government promulgated a set of new Regulations for Guiding the Direction of Foreign Investment in 2002, to replace the Provisional Regulations for Guiding the Direction of Foreign Investment (1995). The new Regulations assign the responsibility for regularly publishing a Foreign Investment Catalogue to the National Development & Reforms Commission (NRDC), the Ministry of Foreign Trade and Economic Cooperation – renamed as Ministry of Commerce (MOFCOM) in March 2003, and the State Economic and Trade Commission (now absorbed in the restructured MOFCOM). This catalogue guides the examination and approval of foreign investment projects.
Under the Regulations, foreign investment projects fall into four categories: Encouraged, Restricted, Prohibited and Permitted. Projects in the first three categories are defined in the Catalogue in detail, while permitted projects are all those outside the purview of the first three. There is some flexibility within the Catalogue; for instance, projects in the ‘Permitted’ category will be deemed ‘Encouraged’ if they export 100% of their output. The category to which a project belongs has implications in terms of investment approval and the extent of tax exemptions.
Encouraged foreign investments include the following:
- Projects related to new agricultural technology, construction of energy sources, transportation and raw materials for the industry
- Projects using new or advanced technology, including projects that can increase product quality, save energy and raw materials, raise economic efficiency and alleviate shortages in the domestic market.
- Projects that meet international market demand, enhance product quality, open up new markets and increase exports
- Projects that involve integrated use of China’s resources or use of renewable resources, involving new technology or equipment for preventing and controlling environmental pollution.
- Projects that can develop the manpower and resources of central and western China.
Restricted categories of foreign investment include the following:
- Projects already developed in China, where the technology has already been imported and where capacity can meet market demand
- Projects with an adverse effect on the environment and energy conservation
- Projects involving exploring for and/or extracting rare or precious mineral resources, and
- Projects in industries requiring central planning by the state
Prohibited foreign investments include the following:
- Projects that endanger state security or harm public interest
- Projects that pollute the environment or endanger human health
- Projects that occupy large tracts of farmland or endanger the security or efficient use of military resources
- Projects that use manufacturing techniques or technologies unique to China, and
- Other projects prohibited under state laws and administrative regulations
In more concrete terms, the catalog does not enumerate gems and jewellery manufacturing among the encouraged, restricted or prohibited categories; thus, it is a permitted category. Thus, if an Indian gems and jewellery manufacturer exports 100% of its produce, it can qualify as an encouraged category in terms of investment approval. Exploration and mining of precious metals (gold, silver and platinum etc.) and precious non-metallic ores (like diamond), on the other hand, are included in the restricted category.
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