Considerations for Budget Planning in China

March 22, 2022
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Considerations for Budget Planning in China

Budget planning for your China operation shouldn’t be fundamentally different from budget planning in any other country. However, when it comes to China, the future is often less predictable than what one would speculate. Therefore, when working on budget planning for a China operation, CFOs are advised to be mindful that surprises will most likely occur, as well as address the following parameters while forming the financial and business plans:

Cost of first year of operation in China

Obvioulsly, the market penetration cost varies between companies, industries, and the adopted China market entry model by said company. But our experience has taught us, that a lean approach to market entry with one individual hired to setup and establish the company within the market requires an amount of about $200,000 to cover salary costs and operating budget in the first year. For companies that opt to enter the Chinese market through the e-commerce services in China, this estimate can finance the first six months of operation in an online “umbrella store” that sells products from different brands. If you prefer opening a Flagship Store, the price would roughly triple.

Hiring costs in China

Salary: Chinese employees expect an annual salary raise, especially in recent years due to the steep rise of the price index in China, and they won’t hesitate to issue an ultimatum if they feel they are not receiving what they’re due. In addition to the regular monthly salary, Chinese employees expect to receive a 13th salary at the end of the year as a bonus. While this is not a legal requirement, it is an example of how social norms affect hiring costs and payroll management in China.

Special addition: Sometimes, companies are compelled to offer a salary increase for specific roles who have personal legal responsibility attached to them, such as the company’s legal representative in China, or even the company’s social media manager.

Social insurances and reimbursement of medical expenses: The Chinese law requires employers (yes, even in foreign-owned companies) to contribute to their employees’ social insurances payments, and fund medical examinations when needed. Foreign-owned companies in competitive industries in China tend to offer various levels of insurances as an incentive to attract skilled workers.

Hiring foreign employees in China: In 2024, a new tax reform will take effect, eliminating the Individual Income tax benefits foreigners in China currently enjoy. This policy will lead to a significant increase in the hiring costs of foreigners in China, as many companies will have to bear the costs to not weaken the position’s attractiveness.

Supply Chain Management

Over the last two years, international companies selling in China have had to deal with a meteoric cost increase of supply chain management in China, from container and shipping prices to storage costs in the event of port closures. It is difficult to predict what lies ahead, but assuming the crisis will not be over in the foreseeable future, we recommend considering moving part of the manufacturing or assembly processes into China, to save costs and reduce risks that may result from future supply chain disruptions. Moving part of the assembly or manufacturing process into China will open the door to government tenders and benefits currently available for local manufacturing in China. Learn more about assembly and manufacturing services in China.

Financing Your China Business

Some companies finance their activities in the Chinese market by injecting foreign currency into China. However, when the dollar is weak, converting foreign currency into local currency is more expensive. Therefore, we recommend using as much of the locally generated profits as possible to cover local expenses to avoid losing on the exchange rate differentials and save on tax payments.

Financing Your China Business

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If you have a company registered in China, or if you are planning on China company registration, here are some additional parameters that may affect budget planning:

Tax benefits and financial incentives

During the Covid-19 crisis, companies doing business in China have been given discounts and tax reliefs, in order to assist their financial recovery. Now it’s time to check whether the benefits relevant to your business have been extended or expired. We will be happy to review and check with you if there’s been a return to the old rates of taxation for your respective business or if you can continue to enjoy discounted rates or even tax exemption, such as with the VAT exemption benefit for small businesses, which has been extended through to 2022. Tax benefits in China are also based on location and industry – Reach out to us to check what tax benefits your business in China is entitled to in 2022.

Regulation compliance and operational audits in China

In recent years, enforcement in China has been tightened in accordance with the expansion of the local regulatory system. Some notable examples from the past year are the Personal Information Protection Law, the Data Security Law, and new regulations across the field of digital marketing. Against this backdrop, we recommend that companies allocate a budget for a thorough Operational Audit in China (a periodic review conducted by an objective third-party), to ensure that the company complies with all regulations as required. Other than the cost of the audit itself, its conclusions may generate additional expenses, such as changing the company’s server systems, obtaining missing licenses, appointing a data security officer, and even structural changes required by the Foreign Investment Law. An operational audit in China does involve investment but in many cases, it ends up saving companies unnecessary complications and a lot of money that would emerge in the future.

If you have not yet registered a company in China, you are probably operating in the Chinese market with a local service provider.

In this case, ask your service provider for an annual budget estimation, and bear in mind that regulations and business conditions in China frequently change, which may be reflected in your budget. The essential rule in budget planning for your China operation is to keep sufficient reserves. The challenges in financial management in China are complex, so making the calculation of an all-inclusive planning is vital, taking into account the expected and unexpected components.

We provide professional services for employment management and recruitment in China, financial services in China, logistics services in China, digital marketing, and administration for dozens of international companies. We will be happy to be at your service.

Good luck in your Chinese adventure,

PTL Group team

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