Impact of Coronavirus on Foreign Investment in China

Categories: Business In China, Foreign Direct Investments | By Peter Pang

On March 11, 2020, the Chinese government announced that the number of new novel coronavirus (COVID-19) cases in the country were falling for the first time since the virus was first identified last year in Wuhan, the capital of Hubei province. China’s aggressive public health policies to prevent the spread of the virus — the extension of the Lunar New Year holiday, lockdown of provinces, social distancing, large-scale mobility restrictions, and a 14-day quarantine period — appear to have turned out well, at least in the short term. Be that as it may, the delay in restarting the economy due to those stringent policies has already taken its toll on China’s economic growth.

The novel coronavirus disease has inevitably resulted in immense disruption in both the domestic economy and international supply chains. According to Reuters, a global financial news organization, the violent outbreak and spread of coronavirus likely halved China’s economic growth in Q1 2020 compared with the previous three months — the first time since records began in 1992.

I. The Fall of Foreign Investment in the World’s Second-Largest Economy.

Foreign Direct Investment (FDI) flows have also been severely affected by the pandemic. Data from the Ministry of Commerce of the People’s Republic of China (MOFCOM) shows that influenced by the novel coronavirus outbreak, foreign direct investment into this country tumbled 10.8 per cent year on year in the first three months of 2020 to 216.19 billion yuan (about 30.7 billion U.S. dollars). In March alone, foreign investment dropped 14.1 per cent compared with a year earlier.

“The rapid spread of the coronavirus overseas has caused new negative impact on our efforts to attract foreign capital and the business resumptions of foreign invested firms,” Zong Changqing, director of the foreign investments department at the Ministry of Commerce.

II. China’s Effort to Offset the Economic Shock.

China’s central and local governments are working strenuously to restore confidence among foreign investors, boosting foreign investment and tackling the sharp economic downturn brought about by the novel coronavirus pandemic.

The Ministry of Commerce has rolled out a comprehensive package of fiscal, monetary, financial and trade policies to support foreign invested enterprises (FIEs) in the country in resuming normal operations following the social and economic disruption caused by the novel coronavirus disease. While some of these policies may seem vague or redundant, they do give a clear picture of the government’s priorities in assisting foreign businesses to resume operations and resolve the practical issues they are grappling with due to the worst outbreak of the century.

For example, on February 10, the Ministry of Commerce released the Circular on Further Deepening the Reform regarding Foreign Investment Projects to Respond to Epidemic Situations, which called for national-level economic development zones to take swift and strong actions to deal with the novel coronavirus pandemic and address foreign businesses’ problems in investment, production and business operations. For the most part, these zones revved up efforts to ensure that foreign invested enterprises can gain equal access to the government’s preferential schemes and help balance major industry and supply chains. Yet another circular issued on March 4, 2020, proposed a raft of policies to pave the way for business resumptions across the country and lift extreme management and control initiatives for both key personnel and complex logistics.

III. A Shorter “Negative List.”

To facilitate foreign investment into the country, the Ministry of Commerce said in a statement that it would also cut down the number of sectors in the “negative list” this year. The negative list sets out the industries in which foreign investment is banned or kept within limits, e.g., industries related to auto production or rare earth mining.

The new revision will further widen the access of foreign investment in the services, manufacturing, and agricultural sectors in China and improve the country’s business environment.

IV. China’s plan to attract foreign investments with tax cuts.

To facilitate further foreign investment into Mainland China, Chinese government has announced a series of tax benefits to help foreign invested enterprises resume their regular production and local operations in China. On March 30, 2020, for example, the State Taxation Administration of the People’s Republic of China (STA) issued a circular that extended the deadline for tax declaration from April 20, 2020, to April 24, 2020.

Earlier, the State Taxation Administration had graciously extended the tax filing deadline in February and March in order to ease foreign businesses’ tax compliance burden following the novel coronavirus outbreak.

On top of that, taxpayers who still find it hard to declare their taxes within the new extended deadline due to the serious impact of the novel coronavirus pandemic can request for longer extensions from the relevant tax authorities.

Considering that April is the tax filing period for the first quarter since the novel coronavirus outbreak, the circular issued by the State Taxation Administration will undoubtedly benefit both the taxpayers who file monthly and those who file quarterly tax returns.

Conclusion

Promoting work resumption of foreign-invested enterprises has bolstered the stability of foreign investment in China. This has further prevented large-scale exodus of foreign-invested firms out of China, despite the glacial impact of the spread and violent outbreak of the novel coronavirus they suffered or have to suffer.

Both the central and state governments will likely introduce similar supportive policies for foreign-funded firms and projects in the form of stimulus and other schemes in the second quarter to offset the coronavirus impact on the national economy. However, the importance that Mr. Xi Jinping’s administration has placed on reviving the confidence of foreign investors in China implies that their social and economic concerns are being heard by China. It also implies that the Chinese government will continue to offer their support to these foreign firms in the weeks and months to come.

Peter C. Pang* is Chairman and Managing Partner of IPO PANG XINGPU LAW FIRM., His expertise includes corporate law and formation, franchising – inbound and outbound, mergers and acquisitions, real estate acquisitions, private placement, technology transfer, joint venture formation and business alliances, and trade secrets and intellectual property protection. Mr. Pang’s over 35 years of law practice in the People’s Republic of China and the United States places him amongst a handful of US-China lawyers with Asian International Expertise and in-depth appreciation for both the Western and Asian cultural and business differences and sensitivities. Mr. Pang is an attorney who “not only knows, but knows how” to close a deal, litigate vigorously and represent clients zealously. We don’t sell time, we sell solutions.
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