For years, investment opportunities in China seemed restricted to bustling coastal cities like Shanghai, Shenzhen, and Guangzhou. The Chinese hinterland—where the bulk of the world’s largest population resides—received comparatively little attention.
Over a decade into the 21st century, the situation in China has changed. Previously emerging markets on the east coast have become increasingly saturated, leading savvy investors to look elsewhere. Meanwhile, infrastructure investment and favourable economic incentives have transformed China’s vast hinterland, opening up opportunities in cities most investors previously never knew existed.
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Wuhan City Wujiashan Taiwan Development zone
Most investors know that inland China has tremendous economic potential. What most people don’t understand are the practical mechanics of accessing these increasingly vibrant engines of growth.
Wuhan —central China’s largest metropolis and a city at the nexus of China’s transport network. Once billed as the “Detroit” of China due to its massive auto manufacturing industry, Wuhan has reinvented itself for the 21st century as an environmentally-friendly venue for high-tech investment.
A Snapshot
Compared with similar size cities around the globe, Wuhan could seem awkward. Larger than London or New York, having over 1 million university and college students alone, yet with only three metro lines. Wuhan, as a city, started to exist only in 1926, when three ancient towns, Wuchang, Hangkou and Hanyang, were conjoined. Wuchang, by using its favorable position on the Yangtze River has always been a busy port. Nowadays, Wuhan’s position as a transportation hub is even stronger, as it lies on the two most important railway corridors in China, Shanghai-Chengdu and Beijing-Guangzhou and is the biggest inland port in the country. This has allowed the city to become a hub for major delivery and shipping companies.
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Today the city offers a lot more, besides good transportation links. Wuhan is the largest city in central China, with the population of 10.5 million, 5th largest in the country. The city has seen its GDP grow by 10-12% each year reaching 900 billion CNY ($144.3 billion) in 2013, the 9th highest in the country. According to reports, it is one of the fastest growing cities globally in terms of GDP. Wuhan is also a burgeoning high-tech city, with 3 Special Development Zones and a Pudong-style skyline in the planning stage. According to British government estimates, ¥3.9 trillion ($625 billion) will be invested in Wuhan’s infrastructure by 2030.
State-level special industrial zones could be considered as Wuhan’s economic backbone. Both foreign and domestic companies have been taking advantage of them for the last two decades.
Wuhan East Lake Hi-Tech Development Zone (EDZ) includes many opto-electronics, telecommunications, biotechnology, laser and engineering companies from China and abroad. Enterprises receive tax breaks, subsidies for exports, and priority in government procurement. All Wuhan registered companies can receive subsidies for hired experts and office space. From these industries its optical telecommunications that are the pride of the EDZ, as the largest fiber-optic cable manufacturer and the largest research institute in China are located in the zone.
The original Dongfeng Motors’ production site and headquarters are located in Wuhan Economic & Technological Development Zone (WEDZ) making it one of the most automotive industry-concentrated areas in China. Honda and Peugeot-Citroen cars are manufactured here, as well as various domestic brands. Another pillar of industry in the WEDZ is electronics manufacturing, as it is one of the main production sites for LCD monitors and air conditioners in China. The zone also has a packaging, biopharmaceuticals, food and resources & materials industrial cluster, as well as industry parks designated for French and Japanese enterprises.
The Citroen production line in Wuhan
The latest, Wuhan Wujianshan Economics and Technological Development Zone is mostly dedicated to Taiwanese-funded enterprises and is aimed to become the largest Taiwanese businesses’ cluster in Central China.
Wuhan loves all things French. According to Hubei government’s statistics, a third of the ¥144 billion ($23.2 billion) French FDI in China is invested in Wuhan. More than 80 French companies have a presence in the city; a rate higher than anywhere else in China. According to France’s Consul General in Wuhan, the partnerships started with the Peugeot-Dongfeng joint venture in the early 90s and intensified after Sarkozy’s visit to China in 2007. French companies are mostly focused on construction, waste processing, energy, transportation and retail industries. Prominent enterprises in Wuhan are Peugeot-Citroen, AXA, and TOTAL. GE as well as General Motors also have production facilities in the city.
However Wuhan`s greatest draw is Education, the city has over 1 million students, more than any other in China, enrolled in more than 80 higher education institutions. Furthermore, Wuhan University, Wuhan University of Technology and Huazhong University of Science and Technology (HUST) constantly appear in Chinese and Asian universities’ leagues tables’ top positions. Finally, there are plenty of national research centers and laboratories, most of which closely work with private enterprises in the city.
Wuhan is planning to seriously change its skyline and become the Shanghai of Central China. The development projects are just stunning. When it comes to super-tall skyscrapers (over 300 meters), there are 4 being built at the moment, and more than 10 proposed to be built, not to mention countless skyscrapers under 300 meters. The most noticeable one is Greenland Centre, a 636-meters tall multifunctional building, which eventually should become China’s third tallest building. It is estimated to cost around ¥30 billion ($4.8 billion) and to cover the area of 300 thousand square meters. Another project is Riverview Plaza (Wuhan Tiandi A1), a 460 meters skyscraper in Yongqing area. The whole Tiandi project is also estimated to cost about ¥30 billion, but cover a larger area of 1.5 million square meters. Shanghai’s Xintiandi reconstruction was done by the same developer – Shui On Land, with some of the same architects working on the project. Wuhan Center will be part of Wuhan’s CBD district, the 438-meter super-tall will be the first to be built among Wuhan’s skyscrapers and be the first building in the city to break 400 meter mark. To service these buildings the Metro will see a further extensions of the current lines, 4 new ones currently being under construction (to be completed in 2017 and another 6 in the planning phase.
The proposed CDB area development
Wuhan’s expansion plans are very ambitious and the city wants to compete with the likes of Shenzhen or even Shanghai and Wuhan might just become one of those global cities due to its strategic geographic location: a 2-hour or shorter flight time from all other major Chinese cities to Tianhe International Airport and its shear audacity in its ambition.
Due to its large volume of University graduates both the municipality and provincial governments are determined to provide as many jobs as there are graduates to further fuel growth.. This can only contribute to the growing investment of foreign enterprises looking for a relatively cheap and skilled workforce.
However although the ambitions to build skyscrapers are high, the majority of them are still at the proposal stage, which makes any development plans susceptible to a slowdown in the economy. Moreover, there is no clear, public data on occupancy rates of recently built and under construction buildings.
As with many developing cities a major problem is pollution: a few weeks ago “water panic” erupted in the city, as the public water supply was cut due to an excess of chemicals in the supply as well as the ever prevalent API figure.
Government Policy and Investment Incentives
The Wuhan municipal government offers certain incentives to both wholly-owned foreign enterprises and Sino-foreign joint ventures invested in the city. These incentives, once limited to export-heavy industries, have expanded to include a wider variety of industries in the years following China’s accession to the World Trade Organisation.
Wuhan has tied incentives into industries that establish themselves inside one of the city’s economic development zones. These development zones, of which the two largest are the Wuhan East Lake High- Tech Development Zone and the Wuhan Economic and Technological Development Zone, offer additional advantages to firms that include proximity to transport modes and access to a large pool of qualified university graduates.
In general, most investment-incentives accorded to firms operating in Wuhan come in the form of tax relief. According to the Wuhan municipal government, the following incentives are available to foreign invested enterprises:
1 Full exemption from 30 percent corporate income taxes, 20 percent withholding tax, and 3 percent local corporate income taxes
1.1 A permanent corporate income tax holiday is available to foreign financial institutions for interests on loans to the Chinese government and to China’s National Bank- these are available for profits derived from royalties on technologies deemed to be advanced
1.2 A five-year corporate income tax holiday is available for the first five profitable years of Sino-foreign joint ventures in energy, transport, and infrastructure with an operating term of at least 15 years. The holiday is also available for the first five profitable years of approved integrated circuit manufacturers with an operating term of at least 15 years.
1.3 A two-year corporate income tax holiday is available for the first two profitable years of investment for high-tech industries located in Wuhan’s development zone. It’s available for the first two profitable years of approved integrated circuit and software enterprises.
1.4 Exemptions from a 20 percent standard withholding tax are available for: foreign investors’ gains secured by the right to share profits by proportion of investment, stock rights, or other non-creditor rights business; for interest on loans by international financial institutions to the Chinese government and China’s National Bank; for interest at preferential rates on loans to China’s National Bank by foreign banks; and for gains from chartered rights and use fees acquired by providing special approved technology for scientific research, energy exploitation, and transportation development.
1.5 Exemptions from a 3 percent local corporate income tax are available for all investments which qualify for federal corporate income tax exemptions or reductions.
2 Concessionary Tax Rates
2.1 A six year 7.5 percent tax rate is available for profitable years six through eleven of high-tech industries located in Wuhan’s development zones.
2.2 A five-year 7.5 percent tax rate is available for profitable years six through ten of approved integrated circuit manufacturers with an operating term of at least 15 years and is available for years six through then of infrastructure construction projects.
2.3 A one-year renewable 10 percent tax rate is available in Wuhan’s development zones for profitable years after the tax holiday and reduced rates have expired for companies exporting more than 40 percent of total production in any given year. The rate is also available in the development zones for profitable years after the tax holiday and reduced rate have expired, and for companies exporting more than 70 percent of total production in any given year.
2.4 A continuous 10 percent tax rate is available for profits derived from royalties on technical knowledge from scientific research, exploitation of energy resources, development of the communications industry, agricultural, forestry, and animal husbandry production. The rate is also available to software companies deemed to be key enterprises by the state, regardless of their location, when other preferential tax rates no longer apply.
2.5 A continuous 15 percent tax rate is available for investments in manufacturing located outside of the special zones for companies engaged in high-tech projects, energy, communications, and port construction, or having a value of more than USD 30m with a long investment payback period. The rate is also available for high-tech investments in the development zones after the initial tax holiday and reduction periods expire, and for approved integrated circuit manufacturers, regardless of location, that do not qualify for other preferential tax rates.
2.6 A continuous 24 percent tax rate is available for foreign investments in manufacturing not listed above that have an operating term of over 10 years.
3 Income Tax Deductions, Allowances, and Credits
3.1 Income tax losses can offset the following year’s gains. A ‘carry forward’ of any unused portion is permitted for up to five additional consecutive years.
3.2 Accelerated depreciation is available for software and for machinery and equipment of approved manufacturers of integrated circuits.
3.3 Software and approved integrated circuit enterprises may be eligible for a tax deduction of 50 percent of research and development expenses incurred during a single year, provided that those expenses exceed the previous year’s research and development (R&D) expenses by not less than 10 percent
3.4 Foreign investors reinvesting their share of profits in the same investments or in new businesses that employ advanced technologies, with an operating term of at least five years, may receive a refund of 100 percent of the income tax already levied on the reinvested amount
3.5 Foreign investors reinvesting their share of profits in the same investments or in new businesses not employing advanced technologies, with an operating term of at least five years, may receive a refund of 40 percent of the income tax already levied on the reinvested amount.
4 Non-income Taxes
4.1 Exemptions from the Value-Added Tax (VAT) are available for imported goods used in the processing of export products and to approved integrated circuit manufacturers and software enterprises for the import of raw materials for production and consumption goods for their own use, and for the import of technology and special equipment necessary to production.
4.2 Rebate of a portion of the 17 percent VAT paid by software manufacturers: the amount of VAT in excess of 6 percent charged to integrated circuit manufacturers for the sale of IC products may be rebated until the end of 2010, provided the differential is used for research and development or expanded production of software products. The rebated amount may be treated as tax-exempt income for income tax products
4.3 Rebate of a portion of the 17 percent VAT paid by software manufacturers: the amount of VAT in excess of 3 percent charged to software manufacturers for the sale of software products may be rebated until the end of 2010, provided the differential is used for R&D or expanded production of software products.The rebated amount may be treated as tax-exempt income for income tax purposes
5 Visas and Work Permits
5.1 Employees engaged in major high-tech projects, and employees and senior managers of large-scale investments may receive multiple-entrance visas.
5.2 Employees engaged in major high-tech projects, and employees and senior managers of large-scale investments may receive residency permits of a duration lasting from 3 to 5 years.
Wuhan Municipal Government website (Chinese): http://www.wuhan.gov.cn
And its English version: http://english.wh.gov.cn