To celebrate this occasion, we hereby share more information about this most important holiday in Chinese culture, but also discuss several relevant business and policy developments for China to pay attention to in 2021.
The Chinese New Year
According to Chinese mythology, the Jade Emperor intended to select 12 animals as his palace guards, and the first 12 to adhere to his call to come to the Heavenly gate would become his personal guards.
The Ox was the second to arrive after the Rat and thus is the second animal of the Chinese zodiac. Oxen traditionally denote hard work, positivity, and honesty. In comparison with the Year of the Rat, the Year of the Ox should be calmer, more passive and introduce a time of stability.
In the past, the arrival of the Chinese New Year would be the signal for over three billion trips to commence during the Spring Festival season, with over 200 million people travelling back to their hometowns to spend time with friends and family. However, this year local governments in China are restricting the world’s largest human migration, as China is battling against renewed domestic outbreaks of COVID throughout January of 2021. China’s National Health Commission (NHC) imposes its citizens to present negative COVID tests prior to any travel with additional potential quarantine requirements, and several companies and local governments actively trying to dissuade people to travel and visit relatives.
Topics to watch in 2021
Taking this extraordinary background into consideration, we examine some of the most important topics to consider for the upcoming Year of the Ox for foreign businesses active in China:
COVID-19
Despite the outbreak of COVID-19, China managed a moderate annual growth in GDP (+2.3% y-o-y), making it the only major economy in the world to report positive GDP growth in 2020. Despite these positive developments, we must note that the year 2020 marks the worst GPD growth rate since 1976 and the Chinese authorities have thus far refrained from establishing a GDP growth target for the period from 2021-2026.
One of the key takeaways of the pandemic and the economic year 2020, was the substantial increase of online retail. China has been at the forefront of digitalization, but the outbreak of COVID-19 further amplified this market shift to online business. In 2021, an expected increase in physical retail would support the continued recovery of the Chinese economy further.
Unfortunately, COVID-19 will continue to play an important role in 2021. At this moment, China is experiencing the largest local outbreaks of COVID-19 since the start of the pandemic and local authorities are again imposing restrictions before the start of the Chinese New Year. The current outbreak in combination with lower economic activity around the world and pressure on global supply chains will undoubtedly have an influence, but its full impact remains to be observed.
US-China Relations
The introduction of USD 34 billion in tariffs on imported Chinese goods marked the start of the ongoing economic conflict between the United States and China known as the US-China Trade War. Although on January 15th, 2020, the two countries signed a Phase One Trade Deal both economic and political tensions have remained high following the outbreak of COVID-19 and its economic consequences.
The change in the US administration under President Biden will mark a significant shift in US foreign policy and will impact US-China relations as well. Nevertheless, the Biden administration will not likely implement any immediate changes to its China policy until the completion of a full review and it is expected that the new administration will use current trade barriers to negotiate a long-term deal with China. However, the continued economic and social impact of the COVID-19 pandemic will necessitate an initial focus on domestic policy, primarily for the US administration.
In its turn, in an effort to improve its international trade relations, China recently entered into the Regional Comprehensive Economic Partnership (RCEP), a Free Trade Agreement with 15 Asian countries. Furthermore, in December of last year China and the European Union signed the Comprehensive Agreement on Investment (CAI) to reduce market access restrictions, stimulate the creation of jobs and provide incentives for further cooperation between the EU and China.
14th Five-Year Plan
The year 2021 marks the 100th anniversary of the Chinese Communist Party and the release of the 14th Five-Year Plan. Since the release of the first Five-Year Plan in 1953, the plans provide guidelines for economic and social policy for the subsequent five years.
The main themes expected to be covered in the 14th Five-Year Plan (which expected release is in March 2021) will come into effect in the period from 2021-2026:
- A shift from high-speed growth to high-quality growth of the economy:
o Aim to realize a GDP per capita equal to USD 30.000 by 2035, equal to the level of ‘moderate developed nations’ (UN definition, currently China’s GDP per capita is approximately equal to USD 10.000).
- Further implementation of the Dual Circulation Strategy:
o Increase reliance on Chinese domestic demand and realize stable growth of export markets, while China simultaneously will remain open for foreign investment.
- Focus on modernization and technological innovations:
o Including increased Intellectual Property Rights protection.
- Improve market access and increase financial reforms:
o Reducing the Negative List for Foreign Investment and further development of Free Trade Zones.
o Promoting the development of intelligent green production, 5G, big data, AI integration, and the overall digital industry.
- Combatting climate change:
o China targets carbon neutrality by 2060 and realize a decrease of carbon emissions by 2030.
Legislative Development
China’s legislative framework is ever changing, and several of the legislative developments expected in 2021 are of interest to foreign investors. Firstly, the National People’s Congress drafted a new Data Security Law for review in July 2020 and its implementation can be expected in 2021. China recognizes the increasing importance of personal data protection and the implementation of this law should enable Chinese citizens will have the ability for legal recourse if personal data is used against their will. At the same time, the outbreak of COVID-19 halted the further implementation of the Chinese Corporate Social Credit System in 2020, but its further implementation is anticipated in the upcoming year.
In addition, China’s Individual Income Tax (IIT) Law currently allows expatriates to claim a portion of their salary via tax-free allowances, the so-called Expatriate Allowances, until the end of 2021. Unless this arrangement is extended, expatriates will only be eligible to claim the same deductions as Chinese nationals, which is expected to significantly increase their tax burden. Considering the substantial impact this would pose on attracting and maintaining foreign talent, in combination with the economic impact of COVID-19, there is a reasonable chance the current exemptions would be extended. We are expecting the Chinese authorities to release further information about Expatriate Allowances by the third quarter of 2021.
Currently, foreigners working in Shanghai and their employers are exempt from making contributions to Chinese Social Securities and the Housing Fund. However, as of January 1st, 2021, residents from Hong Kong, Macau and Taiwan who are employed in Shanghai, must start to make social security contributions. This further aligns the treatment of residents from the Special Administrative Regions to those of Chinese nationals. Future equal treatment of other foreign residents in the future cannot be excluded.
Our Thoughts for the Year of the Ox
It is essential for foreign-invested enterprises in China to understand the country’s economic, legislative, and other developments as well as challenges and opportunities that arise as a consequence. China’s continued growth and particularly its changing consumption patterns give rise to opportunities for both foreign companies and their Chinese domestic counterparts. Furthermore, the anticipated market access reforms as a consequence of the EU-China Comprehensive Agreement on Investment, reduction of the
Negative list and implementation of other legislation increases specifically opportunities for foreign-invested enterprises to expand their presence in the Chinese market.
Although the past year was characterized by COVID-19 and its economic consequences, we at Moore - MS Advisory look forward with confidence towards the new year in China and expect great opportunities for both our clients and foreign businesses in China. If you have any questions about the topics raised in this article, or require support with accounting, taxation and compliance in China, please do not hesitate to contact us at info@msadvisory.com.