CHINA BRIEFINGA Practical Monthly Guide For Practical China Business January/February 2003

China Briefing Online: www.china-briefing.com

IN THIS ISSUE:

China TaxSpecial

Tax FilingObligations For

ForeignCompanies

Annual AuditRequirements

EstablishingA Sourcing

Office in China

IslamicBusiness

in the PRC

Just in CaseYou Get Sent to:

XI’AN

Happy New Year!!

Welcome to this expanded newlook edition of the January

2003 issue of "China Briefing" - thisissue covers both January and Feb-ruary - the next CB will be out at thevery beginning of March. We hope youlike the new look!

CHINA STRATEGIC LTD.

A restructuring ofDSMR & China Logistics Ltd.We have recently completed a mergerof these two companies which willnow be known as China Strategic Ltd.Both DSMR, in terms of market re-search, and China Logistics, in termsof infrastructure implementation, areessentially development businesses soa combination of both makes moresense to us. We found having two com-panies in this same 'research' field wasconfusing to our clients.So now we have, with China Strategic,one company dealing with ChinaDevelopment issues, while DezanShira & Associates provide technicalexpertise in the form of China law &tax structuring. Both research andlogistics functions have been foldedinto China Strategic, and their newwebsi te i s up and running a twww.chinastrategic.com. See theirarticles and adverts elsewhere forinformation about their services.

China BriefingMarketing ManagerA welcome to Laetitia Henon-Hilaire,who having completed an internshipwith us now joins us full time and willbe handling the on-going marketingand distribution matters for this verypublication. She joins us havingmajored in international relations fromthe University of Strasbourg.

Meetings withShanghai GovernmentContinuing our policy of maintaininggood Government relations, we wereinvited to dinner by the ShanghaiGovernment to celebrate the city ob-taining Expo 2010. We had meetingswith Shanghai Vice Mayor JiangSixian at which issues concerningsome of our clients investments inShanghai were brought to the table toget matters smoothed over and pro-gressing. It was a great evening andwith high spirits generated by the Expoissue went on until the small hours atNumber One Xintiandi. Thanks to theGovernment for the honour ofattending and we look forward toShanghai's growing prosperity overthe next decade. The city is in verygood hands.

Well Done to VolvoCongratulations to Volvo Aero Ser-vices, new Rep. Office in Shanghai,handled by Dezan Shira & AssociatesShanghai Office who also are retainedto take care of their tax filing andaccounting obligations. Volvo havebuilt up an interesting business in theaviation engine and components in-dustry with parts and maintenance alsobeing part of this. Good to see them inShanghai!For information about tax filing andaccounting issues please see the DezanS h i r a & A s s o c i a t e s s i t e a twww.dezshira.com or contact ourrelevant regional office to make anappointment.

Annual Conference in SanyaOperating some eight offices acrossthe country with two businesses,

The Practical Applicationof China Business

Meeting with Jiang SixianVice Mayor of Shanghai

Welcome to Laetitia Henon-Hilairenew China Briefing Marketing &Distribution Manager

Gong Xi Fa Cai in the (N) eweChinese Year of the Sheep!

Chris Devonshire-EllisManaging Director, China Strategic Ltd.

Senior Partner, Dezan Shira & Associates Ltd., and Publisher of "China Briefing"

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Chinese New YearFinally, a hearty "Gong Hei Fat Choi"(Long Life & Prosperity) to you allduring the Chinese New Year festi-vities as we welcome in the Year ofthe Sheep and look forward to a funand successful 2003.

Gong Xi Fa Cai!

(Dezan Shira & Associates, and ChinaStrategic) plenty of staff and a well-known publication is not easy when itcomes to keeping everyone on trackand unified. Every year we send all ofour personnel away for three daystraining, conference and fun, thisChristmas we were all off to Sanya,China's premier winter sun destinationin Hainan Island. With flights comingin from Beijing, Shanghai, Shenzhen& HongKong it was a pretty full hotelby the time we'd finished - but we hada good time and everyone enjoyedthemselves. It demonstrates ourcommitment to our staff and desire toprovide good service as well as beinga nice thank you to all our staff for their2002 efforts as well.

Chris Devonshire-EllisDezan Shira Group Chairman

Well done to Volvo Aero -new office in Shanghai. Volvo'sStephen Glessman pictured here withDezan Shira's Julia Ni.

Dezan Shira & Associates and ChinaStrategic Senior staff enjoy themselvesat the Group resort and annualconference in Sanya, Hainan Island.

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The China Briefing Archives:

The past three years issues are all archived on the site including:• Profits Maximisation Strategies• Recovering Group Costs From Your China Operations• Reducing Your Product Sourcing Overheads• Individual Income Tax for Expat Staff• Setting Up Representative Offices• Importing & Selling Spare Parts in China

Plus much much more - click on the Archives section then 'directory'to access the complete China Briefing library

New China Briefing LookThanks here to our old friends Impact Productions & Design-Beijing,handling the new look for this publication (we hope you all approve) andalso to Network Sense who handle China Briefing online. Impact can becontacted at (86-10) 6581 8460 - speak to Eric Roldan, while NetworkSense can be reached at (86-21) 6467 7726, talk to Jennifer Ho.

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Tax Filing Obligations for RepresentativeOffices & Wholly Foreign Owned Enterprises

W ith different investmentstructures available to run

businesses in China, the puzzled fo-reign entrepreneur is continuouslyfaced with a variety of tax implicationsand scenarios. Let us have a brief lookat the main tax filing requirements andthe implications for the different setups:

1. Representative Offices (RO)Generally speaking, the tax structurein a RO is quite straightforward; bothmonthly and quarterly tax filings arerequired:

Monthly Filings:Individual Income Tax (IIT). With anofficial position in the RO, both chiefrepresentative, other representativeand local employees should file IITaccordingly. Rates to be found on ourarchive section at www.china-briefing.com - July 2002 issue.Business Tax (BT). If your holdingcompany operations do not qualifyyour RO for tax-exemption, you wouldneed to file BT based on the monthlyofficially declared expenditures.

Quarterly Filings:Foreign Enterprise Income Tax(FEIT). Without the tax exemptionstatus, ROs need to file FEIT based on

the quarterly expenditures. These mustbasically include all the expenses su-pported by official invoices such as:chief representative and employeesalary, office rent, management fees,telephone bills, traveling expenses,and so on.

Combined BT & FEIT amounts varyregionally, here are some examples ofthe combined amounts against yourtotal declared overheads:• Shenzhen : 7.65%• Shanghai : 9.76 %• Beijing : 9.76%So budget for this on top of yourmonthly declared overheads.

Tax ExemptionIf your holding company qualifieseither as a manufacturing entity or candemonstrate purchasing capabilitiesfrom China, the RO can apply for BTand FEIT tax exemption at the relatedtax bureau; once approval is obtained,the RO can file zero for BT and FEITaccordingly.Finally do budget for annual audit feesand monthly FESCO fees as thesewould also affect your operationalexpenses.

2. Wholly Foreign OwnedEnterprises (WFOE)

If you are running a manufacturingWFOE in China, the required taxobligations are :

Monthly Filings:Individual Income TaxThis applies to expatriates and localsholding official positions within theWFOE structure. If expatriates areworking in the WFOE as part of a

project during a tax year for less than183 days and their salaries are paidoverseas, then the WFOE does nothave to file IIT on these expatriates'salary.

VATFor all those manufacturing enterprisesinvolved in export activities, the VATrefund could be an issue of long-termreceivables. In China generally, theVAT refund process could take up to18 months so plan this out carefully inyour cash flow projections!

Stamp DutyThe stamp duty tax ratio is relativelysmall at 0.03% to 0.05% of any con-tract value. Since this is a smallamount, it is commonly ignored andfilings are not done timely and pro-perly and in some cases are not doneat all! Please be careful here as the finefor late filings will be at least 3 timesthe outstanding tax amount due so itcould add up to quite a substantialfigure.

Quarterly Filings:FEITManufacturing enterprises with scopeof operations of more than 10 yearsare generally given a tax holidayperiod of 2 years of total FEIT exemp-tion and three years of 50% FEITreduction starting from the first profit-making year.

Interesting to note here is that whetheryou have a profitable year or notsometimes does not only depend onyour own internal bookkeepingarrangements. After the financial yearends, a CPA firm (as part of the

By Emily Zeng and Alberto Vettoretti, Dezan Shira & Associates, Shenzhen Office

All expenses should be declared

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compulsory annual audit procedure)will visit your company and audit thebookkeeping system and the relatedfigures. The CPA firm will report tothe tax bureau for the annual inspec-tion and the auditors will eventuallybase their final computations andassessments according to the relatedtax law guidelines and would in somecases adjust the costs and profitaccordingly. For example: fines orpenalties incurred during the year indealings with different governmentdepartments (such as customs or taxbureaus) and other over-budgetedentertainment expenses would not betreated as legitimate costs to reduce theprofit basis. So be careful about doingyour bookkeeping and make sure youdeclare figures according to the localtax regulations so as not to havesurprises later on!

VAT Refund Filing:For VAT monthly filings and VATrefund filings, your accountant needsto prepare a complete set documentsand match the figures in the VAT filingforms with the financial statement. Asa result, the accounting departmentwould have to finish the previousmonth bookkeeping on time before the10th of each following month (VATfilings are due then). Make sure thatyou have enough time in order torespect the deadline for the filings.The quarterly VAT filing for refundswill also require an updated foreigncurrency clearing situation with therelated custom papers in order and willhave to be monitored on a weekly oreven daily basis as not to rush on youraccounts by the 15th of each quarterwhen the filing is due.

Annual Filings:Property Tax. If you have built yourown premises and buildings in Chinayou are required to file for property

tax annually. As an example, inGuangdong province, WFOEs can beexempted from property tax for 5 yearsfrom the completion of the buildingitself and the issuance of the WFOEbusiness license. As you are basicallygiven a tax-free period, please becareful after this expires and start topay this tax timely. As calculations canbe quite complex please call our re-gional offices for an assessment.Car and Truck Tax (Vehicles Tax).Without this tax timely paid yourWFOE cars and trucks will not passthe annual inspection as is legallycompulsory.

Business TaxIf your WFOE is involved in theservices industry, it will be subject toBusiness tax instead of VAT. Varyingaccording to different businesses, theratio for general services like consul-ting or restaurants is 5% on the invoiceamount. Call our regional offices ifyou need an assessment of the exactBT applicable to your business.

Income (Profits) TaxIn order to repatriate your profits backhome you need to file and pay IncomeTax on your China operations. Na-tionally this is at 33%, although re-gional variations apply in Free Tradeand Special Economic Zones where itcan be as low as 15%. Tax holidaysalso kick in, making the situation verymuch a bespoke affair. The proceduresfor paying Income Tax are relativelystraightforward (all tax bureau makepayment easy!) but there is a me-chanism to go through to complete allpayment, registration, transfer of RMBto foreign currency, and transfer fromChina to Overseas procedures to gothrough. Please see the March 2001issue of "China Briefing" for furtherdetails or contact our regional officesfor assistance with maximizing this.

Repatriation should not be a problem

To conclude, advise from us:file your taxes on time! It isincreasingly difficult to negotiatefines for late payments with taxbureau officers. The tax collec-tion system at most tax bureaushas now been fully computerizedand late filings and other non-compliance issues will beimmediately spotted by the offi-cials assigned to the supervisionof your WFOE or RO.

During 2002, new tax collectionadministration laws were issuedand are particularly harsh indealing with late and incorrectfilings. Non-compliance is con-sidered to be a offence by the taxbureau officials and the penaltiesfor late payment can be up to fivetimes the amount due, plus theoriginal tax figure. Ouch!

It makes sense then to ensure youare in compliance and remain thatway.

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Please contact Dezan Shira &Associates at info@dezshira.com if inneed of tax filing support, book-keeping or tax solutions.

Website: www.dezshira.com

Annual Audit Requirements

U nder current legislation, allForeign Invested Enterprises

(FIE) such as Wholly Foreign OwnedEnterprises (WFOE), Joint Ventures(JV), and Representative Offices (RO),are required to be audited on an annualbasis. This statutory requirement hasto be met prior to business license re-newal every year.

The deadline for the filing of annualaudits is by the end of April of thefollowing year (ie: your 2002 auditedaccounts must be filed latest by April2003). FIEs can only distribute andrepatriate their profits back to theirhome country after the annual auditand settlement of their relevant incometax liabilities.

Annual audit of FIE statutory accountsmust be conducted by a firm ofCertified Public Accountants re-gistered in the PRC under PRCregulations. Previously, only localChinese CPA firms were permitted toperform the audit function, andinternational accounting firms werenot allowed to enter Chinese audit fielddirectly. Since 1992 internationalaccounting firms were given per-mission to establish joint-ventureaccounting firms with local prac-titioners.

Key Areas of Annual AuditsWhen a CPA performs an annual audit,in deciding on the appropriate auditprocedures for income statement andbalance sheet accounts, the auditorshould assess the risk of error and

fraud in those accounts. What are thekey areas they are most concernedabout? We can divide this into threeareas:

1. Profit Should Not BeUnder-Stated.

The sales figure is a critical part of areview. Usually the following issuesare the control objectives: Sales cut-off check ensures that all valid salesare shipped, recorded and properlybilled; customer contracts are properlysetup, approved, invoiced, priced andexecuted; pricing is accurate, updatedand monitored by management; andgross margin is appropriate on all salestransactions.

2. Cost Should Not BeOver-Stated.

Cost of sales/revenues should re-present all transactions for productsshipped or services provided duringthe year and be properly recorded. Thisrequires a thorough costing systemreview. Since this is a complex issue,please contact us over this matter ifyou are experiencing difficulties.

3. Revenue & Cost AccrualsExpense / cost is not recognized on acash flow basis, but at the time of itscontribution to revenue. A cut-off testis often employed to check if revenueand cost are properly accrued at theyear end.

These concerns are based on oneimportant accounting principle-prudence. Recently, there is a de-

veloping trend of FIEs, instead ofrecording profits, reporting a loss.With this growing, the tax bureau andgovernment are devoting more effortin auditing FIEs. As a result, if acompany reports profits below theindustry average or is in deficit inconsecutive years, the auditors willmonitor the possibility of any potentialattempt to conceal profit to evade taxesand will evaluate transfer pricingissues within related party tran-sactions.

Another issue that needs to be cateredfor, especially for 2003 audits is thatin line with China WTO agreements,the PRC Central Government pro-mulgated its "Revised UniformAccounting System" and "BasicAccounting Standard for ForeignInvestment Enterprises" at thebeginning of 2002, which effectivelybrought a new accounting system into

By Alice Wei and Sabrina Zhang, Dezan Shira & Associates, Beijing Office

Dear Prudence

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China. Companies should adjust theiraccounts when there is a conflict withthe new standard. For further infor-mation, please contact our pertinentregional office for detailed advice.

Annual Audit PreparationConducting a sound internal reviewprior to annual audit is a good idea.Make sure your bank reconciliationreport is completed for bank accounts,that petty cash has no major discre-pancies, and conduct a completecheck of accounts receivables andaccounts payables. An overall in-ventory stock take at the year-end isalso a must for manufacturing entities.

The company should review its fi-nancial policies, such as depreciationmethod, costing system, pricing po-licy, not only for the purpose of annualaudit, but also for good future internalmanagement.

Please have all these following avai-lable for the auditor before they arrive:Accounting Vouchers, Account Books,Warehouse Records, Financial State-ments, Tax Filing Records, Bank

Statements, Invoices, Contracts, Ven-dor Statements, and other relatingdocument and reports. If you cancheck some of these items yourselvesprior to audit, you may well pre-identify some problems themselves.

Representative OfficesAll representative offices (exceptingthose that have tax exempt status)should be audited by a Chinese CPAeach year.Because ROs taxable income is deter-mined by three methods: the cost-plusmethod, the actual revenue basis, andthe deemed commission method, thesedifferent areas will be monitored bythe auditors for the purposes ofadjusting the taxable income of therepresentative offices as follows:

1) The Cost-Plus MethodThe Cost-plus method is popularlyused to calculate the deemed taxableincome. All expenses incurred by orrelated to the representative officemust be included in the office expensesto calculate the deemed taxablerevenue (deemed taxable revenue =office expenses / 85%). The expensesinclude the rental, transportation,telephone, salary, office purchases,entertainment, etc, regardless whetherthey are paid from the RO or directlyfrom its head office. Our clients oftenput forward questions such as "If theoffice rental or salary of the expatriateis paid by the head office, should theybe recorded as the expenses of the re-presentative office?" Undoubtedly,they are the expenses of the repre-sentative office. Another notable pointare salaries paid to resident ChiefRepresentatives - instead of payingpart offshore and part in China, theentire salary of the Chief Repre-

sentative or Representative should beincluded in the representative office'sexpenses, regardless whether he hastraveled to China.

2) The Actual Revenue BasisDetailed contracts signed between thehead office and its affiliate companyshowing the commission rate ordetailed service fee amounts and otherdocuments should be provided to theauditors. The auditors will also inves-tigate any undisclosed transactions todetermine if there is further taxableincome.

3) The Deemed CommissionMethod

All the contracts relating to the agencyservices performed in China should beprovided. If the commission is notstated in the contracts, 3% deemedcommission will apply.

Based on the adjustment of the taxableincome in the audit report, the annualBusiness Tax ("BT") and ForeignEnterprise Income Tax ("FEIT") filingshould be completed within fourmonths after the end of the tax year.The Chinese tax year is a calendaryear, i.e. from 1st January to 31stDecember. Please note in the event ofdelinquent of annual FEIT and BTfiling and payment, a surcharge foroverdue tax payment equivalent to0.05% per day on the overdue taxeswill be imposed.

After the tax authorities review theaudit report and the annual filingreturns, the tax authorities will issue anotice that either the representativeoffices should pay additional tax, iscorrect in it's calculations or is entitledto tax refunds.

Stock taking is a must

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In the process of annual audit, theauditors not only pay attention to theCorporate taxes, i.e. BT and FEIT, butalso other tax issues such like Indi-vidual Income Tax and Stamp Duty,etc. These amounts may on occasiononly be small - but significant penalties(up to five times the amount due) awaitthe unwary or naïve. It pays to ensureyou are in compliance.

Choosing An AuditorMost small to medium FIEs are preferhaving accounts audited by a reputableaccounting firm with internationalstandards, while at the same time, costand benefit factor are also issues toconsider.In addition, in view of the complexityof the China tax regulations, it is re-

commended that foreign investorsshould keep themselves abreast of anynew rules and the constant changes tothese regulations. Your AccountingFirm should demonstrate a com-mitment and depth of knowledge toyou as well as showing they are ca-pable of understanding internationalbusiness.

China TaxAccountingand Audits

DEZAN SHIRA & ASSOCIATES

Tax planning. accounting, bookkeepingtrouble-shooting, filing and auditsacross China

Beijing: (86-10) 6513 2164Shanghai: (86-21) 6279 8658Shenzhen: (86-755) 8366 4120Hong Kong: (852) 2376 0339Email: info@dezshira.com

www.dezshira.com

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Please contact our relevant regional office or email to info@dezshira.com if inneed of audit support or filing services.

Xi'an is the capital of ShaanxiProvince in China's North West

and is an ancient city with a fascinatinghistory and culture. It was, dependingon your point of view, either the startor the end of the Silk Road, and wasChina's capital (then known asChang'An) for two thousand years.Today it is best known for it's Terra-cotta Warriors, however the city itselfis historic with massive city wallsstretching some 12 miles around thecentre (Xi'an has what Beijing has lost)and several important sites of interestwith a variety of Pagodas, towers andtemples all well preserved.

It is very much a forward looking cityand has made huge strides in thedevelopment of its engineering and hi-tech industries, also boasting some ofChina's finest education facilities.Strategically located and possessinggreat infrastructure, this is very defi-nitely a key city to consider if lookingto manufacture and sell in China'sNorthern and Western markets.

Places to stay include the HyattRegency (029) 723 1234, Shangri-LaGolden Flower (029) 323 2981, andSheraton (029) 426 1888, all in the citycentre. The local Bell Tower Hotel(029) 727 9200 is also well worth amention and is less expensive and withwelcoming staff.

The Warriors themselves are about anhour’s drive out of the city, a vast sitestill only partially excavated. The drabgrey clay is not in fact how theyappeared - excavated they are paintedin garish and bright colours - exposedto sunlight these fade and the Chineseare working on technology to preservethe ancient paints used. In most casesmany of the discoveries have been

carefully re-buried for the time beingto preserve their original state until asolution can be found to permit per-manent display without damagingthem.

Bars of note in the city centre are basedalong Dong Dajie, several nightclubsalong here, the best of which is "1 to1", while "The Old Gun Club" and"The Ferryman" feature live musicevery evening. A "Lap Dancing Bar"(ahem) exists along Heping Lu justaround the corner from the Hyatt. Weof course have conducted research intothis and can advise this is a form of"Shaanxi" rather than Californiandancing, and is ethnic rather thanerotic. But make sure you take the billsout of your trouser pockets before yougo home - you don't want to get intounnecessary trouble with the spouseas the chits have "Lap Dancing Bar"written on them! The "Royal Opera"club, again just close to the Hyatt isalso a busy joint and good fun, whileChaplin's in the Bell Tower Hotel getsa variety of expats checking in as well.

Food-wise, Xi'an has a sizable Muslimpopulation (from the old Silk Roadtrading days) which offer some greatrestaurants and belly dancing styleactivities and music in the Muslimquarter itself - you can tell the Muslimrestaurants as they're the ones withblue, rather than red, lanterns hangingoutside.

There is also a trendy Portugese andFrench restaurant in the Northern endof town - close to the Bell Tower Hotel.

Xi'an as mentioned is a key businesslocation as well as being a greatweekend away - enjoy the history,culture and have a good time!

Xi'an is one of China's fewremaining walled cities

City Wall Watch Tower

Despite Centuries of Practice, theynever quite managed to learn thecommand "Stand At Ease"

Just in Case You Get Sent to:

XI’AN

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China may seem the ideal place foryou to procure component parts

for overseas final assembly or evenfinished goods for overseas sales.Although you know (and probablyyour boss knows) that China is defi-nitely the place to be, your board ofdirectors are requiring that you are ableto justify this gut feeling with tangiblebottom line figures.

In China, obtaining this informationcan be difficult. Sometimes it mayappear like a chicken and egg scenario.How can I obtain the informationwithout jumping in head first? Thesolution is basically a multi step pro-cess, involving opening a series of"doors" one at a time.

Corporations typically can easilyjustify spending a few thousands ofdollars in exploring the China option.Particularly, if you can deliver somereasonable figures in advance beforeheading off on what may be perceivedto be an all expense paid "jolly" to theFar East by some of your HO staff. Youneed to ensure that you are deliveringdetailed answers when you reportback.

The next step of the process involvesthe development of a procurementoffice as is the focus of this case study.The issue is - stump up the cash andoverheads for a fully fledged Repre-sentative Office - licenses are issuedfor three years - or how to set up atemporary facility to 'test the waters'and see if you really do have a con-sistent market here from which tostructure your international pur-chasing.

This is a real life situation we had tohandle as part of a major internationalvehicle manufacturer looking to ascer-tain whether or not China is a suitablemarket for purchasing auto compo-nents from. However the situationcould just as well be applied to anypurchasing strategy - how to test thewater in China without getting yourfeet too wet?

The Task:Formulate and test in production,tangible real dollar savings to thesupply chain prior to making a longterm commitment.

The Solution:Establish a temporary project office inChina.

Determining Your Structure:The first task involves determining thestructure of the office that you wish toestablish. This varies depending onthe scope of your business as well asyour own unique business culture.

For businesses that are quite complexinvolving sourced products of manydifferent components, you may wantto temporarily send over your ownteam of engineers as well as yourexperienced purchasing staff. Theseteams would more than likely be inplace for a couple of months.

For less complex purchases such asoffice supplies, you may only want tosend your staff over for specificmilestones in the project. In this caseyou would trust the management of theproject office to a reliable 3rd party.The unique culture of your business

will also determine the structure inwhich you establish your office. Somecompanies like to be very much handson whereas others are more com-fortable with outsourcing to thirdparties.

Establishing Your TemporaryInfrastructure:Regardless if you decide to send overyour own staff for several months orcompletely outsource to a third party,you will still need to hire on the ser-vices of a China business imple-mentation company such as ChinaStrategic. Why?

You know your business better thananybody else. You understand doingbusiness very well. However, yourexperience with doing business inChina is possibly limited in terms ofboth experience and infrastructure.This is where a 3rd party who focuseson China business implementations isbeneficial in keeping your project onschedule and on budget.

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Temporary Offices can allow you to conductshort-term research into the China marketwith full professional support at hand.

EstablishingYour Sourcing OfficeAn Overview by Jamie Gwynn, Operations Director, China Logistics Ltd.

The third party should be able toaccommodate you first by allocatingspace for your project office.Depending on the size of the projectand the amount of people involved,this space could be located in houseof the third party or off-site at a"project office" facility located in aserviced office such as the ExecutiveCentre.

These serviced offices can vary in sizefrom a two person to about a 12 personspace with lease terms that are on aflexible month-to-month basis. Theoffice licensing issues should becovered by your third party, thus eli-minating this need for your companyuntil you decide to set up a permanentoffice.

The third party should also be able toprovide you with experienced localstaff. For instance, China Strategic hasseveral permanent full time sourcingstaff as well as several permanent fulltime engineers from various industrysectors.

By hiring these staff on a full timebasis, China Strategic is able to ensureproperly trained personnel with theright experience and of course theability to communicate in Mandarin aswell as English.

Such staff are provided for yourcompany's projects on a temporarybasis, thus taking out the need for youto waste time and money in recruit-ment. Additionally, China Strategicemploys several overseas Western andAsian expats with practical businessexperience to ensure that the job ishandled to your required standards.

Of course, some companies may haveneeds for individuals with a specifictechnical background. In this case,

your third party should be able tosource these individuals for you on atemporary basis.

Meeting Your Deliverables:Now that your temporary infras-tructure is established if you aresending over your own personnel tomanage the project it's time for a meetand greet with your selected third partyprovider. Outline the project scope,objectives, and deliverables. Then,perform a team building exercise tomeld everyone together. After which,it's time to get down to business byperforming the allocated tasks such as:• Conducting Supplier Visits• Supplier Selection and Contracting• Production Implementation• Ongoing Management and Support

A lot of work summarized in 4 bulletpoints!

Upon Completion:Pending successful completion ingetting the procurement project up andrunning, the next step is to determinehow you want to provide support foryour ongoing business requirements inChina:

• Does your company want to fullyestablish its own procurement officein China?

• Does your company want to out-source these responsibilities to athird party?

• Does your company want to managethese activities from overseas?

Final Word of Caution:On a worldwide basis, procurementfunctionality generally opens itself upto opportunities of fraud and kick-backs. For assistance with this project,ensure you are using a trusted andreliable partner. Companies, like ours,with a strong infrastructure and whodo the work in house are the safest betsversus people who merely haveoverseas sales offices and subcontractmost of the work in China. Even if theylist offices on their websites one shouldverify that they are genuine - many arenot. Check your supplier really hasPRC infrastructure and is not merelysub-contracting it. You need to dealwith the real source. Don't be fooledwith cheap imitations that charge a lot.Your supplier is either in China orthey're not. Shop around and checkthem out.

For further information on setting up temporary offices for researchinto the China market please contact Jamie Gwynn, Operations Directorat China Strategic for details.

Tel: (86-21) 6279 7330Email: Jamie.Gwynn@ChinaStrategic.com

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China Strategic can provide staff support from our own employees to help you achieveyour goals without the need for you to hire directly.

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of China's Far West, with especiallyKazak, Uyghur and Kyrghz popu-lations tending to be porous in theirmovements. This may add severalmillion to the official population.Pockets of Muslims also exist all overChina, but especially in Xi'an, wherehistorically the Silk Road began, withmany of the ancient Muslim tradingfamilies still living in the city,Heliongjiang and Beijing. EvenShanghai's Muslim population isunofficially estimated to number some40,000 and Mosques exist in all majorcities including southern locationssuch as Guangzhou and Shenzhen.In terms of transient po-pulation then the realfigure at any one timemay be as high as 40million.

China - Islamic TradeThere are 57 members of the UNOrganization of Islamic Conference(www.oic-org-un.org), a body thatregroups Islamic countries. These 57countries are: Afghanistan, Albania,Alger ia , Azerbai jan, Bahrain,Bangladesh, Benin, Brunei, Dar-us-Salaam, Burkina Faso, Cameroon,Chad, Comoros, Ivory Coast, Djibouti,Egypt, Gabon, Gambia, Guinea,Guinea Bissau, Guyana, Indonesia,Iran, Iraq, Jordan, Kazakhstan,Kuwait, Kyrghistan, Lebanon, Libya,Malaysia, Maldives, Mali, Mauritania,Morocco, Mozambique, Niger,Nigeria, Oman, Pakistan, Palestine,Qatar, Saudi Arabia, Senegal, SierraLeone, Somalia, Sudan, Suriname,Syria, Tajikistan, Togo, Tunisia,Turkey, Turkmenistan, Uganda,United Arab Emirates, Uzbekistan,and Yemen.

In 2001, China's share of trade withIslamic countries amounted to about7% of its total trade.Let's have a look at China's top fiveIslamic trading partners:

MalaysiaThe Chinese and Malaysian Govern-ments have signed many bi-lateralagreements in recent years, includingagreement on avoidance of doubletaxation, trade agreement, agreementon investment protection, agreementon marine transportation and theagreement on air transportation.Compared with US$0.368 billion in

trade in 1974 when the twocountries f irst establisheddiplomatic ties, the bilateraltrade volume increased toUS$5.279 billion by 1999.

Bilateral trade volume rosedrastically to US$8.045 billion in

2000, with an increase of 52.4% overthat of 1999, with China's exports ofUS$2.565 billion, and imports ofUS$5.48 billion. In April 2000, Chinaand Malaysia s igned bi lateralagreements regarding China 'saccession to WTO.Economic cooperation has been de-veloping soundly with the mutualinvestment between China and Ma-laysia constantly increasing. BySeptember 2000, Malaysia had 1,900investment projects in China with acontract value of US$4.837 billion andactual input of US$2.11 billion.China's actual investments in Malaysiareached US$33.370 million. By theend of 1999, Chinese companies hadcontracted 89 projects in Malaysia,with a combined contract value ofUS$67.804 million US dollars and aturnover of US$33.369 million.

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Islamic Business in China

By Laetitia Henon-Hilaire and Sacha Cody, China Strategic Ltd.

A China Strategic Market Report

China has a long history of Islamdating back several thousand

years, with ten Islamic minoritiesamongst the fifty-two minorities thatChina recognizes amongst it's ownpopulation. Due to their religiouscreed, Muslims have certain re-quirements, especially in food, in orderto live by their chosen discipline. Thisis sometimes very hard to adhere to inChina, which as a country is notactively Muslim and is still officiallyan atheist society. Opportunities existtherefore for other Muslims incountries such as Malaysia and so onto service China's Muslim communityin accordance with their doctrine. Firstthough, let's take a look at China'sMuslims from a market niche pers-pective.

China identifies the following peoplesas being part of it's Muslim minorities:

Name Population (millions)

Hui 8.6Uyghur 7.2Kazak 1.2Kyrghz 0.14Salar 0.08Dongxiang 0.37Bonan 0.012Tadjik 0.33Tatar 0.005Ozbek 0.014

Most of these are concentrated inXinjiang Province (12.5m) with therest centred around Ningxia, Gansu &Qinghai. Remember that these figuresare for Chinese nationals only and donot include immigrants. Immigrantfigures are difficult to pin down dueto the nomadic nature and wild borders

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In 2001, China's mainexport to Malaysia invalue was Machinerya n d E l e c t r i c a lAppliances, BaseMetal & metal article,vegetables, textile

and apparel. The same year Chinesemain imports from Malaysia were:Machinery and Electrical Appliances,Chemicals, Plastics, Fats and Oils,Wood and wood articles. Malaysiaand China will be directly linked by2004 by the Singapore - Kuala Lumpur- Kunming railway being completed -so expect to see a lot of Malaysian in-vestment activity in Yunnan Province.

IndonesiaDue to the impact of the financial crisisin South-east Asia, the bilateral tradevolume between China and Indonesiahas seen a sharp dropdown since 1997.In 1999, bilateral trade saw a fight-back, with annual export and importvolume of US$4.83 billion, in-creasing by 33%, of which, Chinaexports accounted for US$1.78billion,imports to US$3.05 billion, respectiveincreases of 52% and 24%.By the end of 1999, the number ofIndonesian foreign investment projectsthat had been approved by Chinareached 700, totalling investing valueUS$1.501 billion with actual invest-ment US$688 million. In 1999,Indonesian investment to Chinashowed an increase. Newly approvedIndonesian investment projects toChina reaches 54, increasing by 26points compared to the previous year;with contractual foreign investmentvalue of US$ 96.20 million with actualinvestment of US$129.17 million.Indonesia's main exports to Chinainclude mineral products, pulp andpaper, wood and wood articles, textileand apparel, chemical, machinery andelectrical appliances. China's mainexport to Indonesia includes mineralproducts, chemicals, textile andapparel, machinery and electricalappliances.

Saudi ArabiaThe bilateral tradevolume has grown fastsince the establishmentof dip-lomatic relations.The trade volume between the twocoun-tries increased from US$290million in 1990 to US$3.098 billionin 2000, of which China exportedUS$1.145 billion and importedUS$1.953 billion. China main exportsto Saudi Arabia are textiles, clothing,light industry pro-ducts, and foodssuch as grain and edible oils. Itsimports from Saudi Arabia includecrude oil, chemical fertilizer, andpetrol-chemical raw materials. 2000saw a drastic increase of imports ofSaudi Arabian crude oil by China.The China Council for the Promotionof International Trade has held sixChinese export commodities fairs inSaudi Arabia since 1989. In Feb.1996,the first meeting of the Sino-SaudiJoint Committee on Economic, Tradeand Technologic Cooperation was heldin Beijing. In November 1999, thesecond such meeting was held in Riad.The trade office of the Saudi Embassyin China was established in August2001.

IranChina and Iran startedtrade relat ions in1 9 5 0 . T h e t r a d evolume in 1998 wasUS$1.215 bill ion,among which there were US$657million of exports to Iran and US$558million of imports to China. In 1999,the two-way trade volume wasUS$1.348 billion, including US$663million of exports to Iran and US$685million of imports to China. The majorproducts that China exports to Iran aremechanical and electrical equipmentsand products of chemical industry.China's main imports from Iran arecrude oil. Other imported goods arechrome ore, raw cotton, polyvinylchloride, synthetic rubber, raisin andpistachio, etc. By the end of July 1999,

the volume of bilateral trade is $635million, among which there are$352 million of exports to Iran and

$283 million of imports to China.Since 1982, Sino-Iranian cooperationon economy and technology hascontinued to develop. In April 1985,the two countries set up the JointCommittee on Cooperation of Eco-nomy, Trade, Science and Technology.The main projects are subways inTeheran, multi-functional vessels, thebuilding of oil tankers, cement plants,thermal power electrical machineryunits in Arak, hydroelectric generationequipment, and so on.Since the two nations establishedforeign relationship in August 1971,trade relation has been further de-veloped. Trade payment between thetwo nations was changed to cashpayment. The trade volume rocketedto US$314 million, of which Chinaexports accounted for US$261 million,and imports at US$53.21 million. In1999, bilateral exportation andimportation added up to US$1.347billion, of which China exportsaccount for US$660 million, importsto US$685 million, increasing by10.9%, 0.9% and 22.6% respectively,compared to the year before.In 1970s and 1980s, China mainlyimported crude oil from Iran. In therecent years, China's exportation toIran includes machinery facility, lightindustry, hardware and mimingproducts, chemical industry, textile,apparatus, industrial and agriculturaltool, food and oil. Machinery andelectric product has become the topcommodity exporting to Iran. Crudeoil is on the top of China's importationlist from Iran, accounting for 74 percent of China's total importationvolume from the country.

United Arab EmiratesIn November 1985, Chinaand the Uni ted ArabEmirates established a JointCommittee of Economic,Trade and Techn ica l

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Cooperation. China mainly exports tothe United Arab Emirates textileproducts, clothes, light industrialproducts, products made of the fivemetals (gold, silver, copper, iron andtin), handicraft articles and machinery,etc. China mainly imports from theUnited Arab Emirates aluminum ingot,chemical fertilizer, petroleum andpolythene, etc.In recent years, the labor service co-operation between the two countrieshas developed from labor contracttowards a trend of project subcon-tracting and general contracting. Thefields of cooperation include cons-truction, factories, and shops, medicalcare centers and sailors. According tothe statistics of the Customs Bureau,the total volume of bilateral tradebetween China and the United ArabEmirates in 2000 was US$2.495billion, with US$2.079 billion beingChina's export and US$416 millionbeing China's imports.The agreements signed by the twosides include: Agreement on Eco-nomic, Trade and Technical Co-

operation (1985), Agreement on Pro-tection of Investment, and, Agreementon Avoidance of Double Taxation(1993).

Halal FoodsOne big area of interest is the supplyto China's Muslim population of Halalproducts. China's official Islamicorganization is the China Islam Asso-ciation, who have branches in everyprovince. (In Beijing, contact: 0106353 0693). The government ma-nagement is the State Ethnic AffairsCommiss ion o f PRC (SEAC,www.seac.gov.cn).With the Islam Association's help,SEAC is the official Halal certificationbody. SEAC branches in every city canprovide the license and certificate formanufacturing, distributing and sellingIslamic food and other products suchas medical equipment. For food im-ported to China from another Islamiccountry, the official certificateprovided by original country will beneeded to obtain China's certificate.For Chinese Halal exporting to other

Islamic country, the official certificatewill be provided by the China IslamAssociation, as China is not a Islamiccountry, the government agencydoesn't have the right to issuance.Obtaining the certificate is notcomplicated and require the followingcriteria:1) For distributors & retailers, at least

25% employees must be Muslims,for manufacturers, at least 10%.

2) At least one Muslim is the ma-nagement person. For privatebusinesses, the owner must beMuslim. The purchasing staff,warehouse manager, and technicalstaff must be Muslim.

3) Must follow the canon whenbutchering.

4) If the retailer also sells non-Islamicfood, they must keep the distancebetween them (e.g. for shoppingcenter). The warehouse and mea-sur ing equ ipment mus t beseperated from non-Islamic ones.

So, there're many Islamic restaurantshere serving Halal food. However, inpractice, many local Muslim's do nottrust Chinese Halal certification out-side of their own local area. MostMuslims select retailers and restau-rants by word of mouth rather than bycertification as the official certificateis not strict enough. So opportunitiesexist for exports to China for thismarket.

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