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Global Economic Crisis and the Chinese Economy

2009.08.14

The global economy has been suffering from the financial crisis since the second half of last year. It has been affecting not only Korea but others such as the U.S., Europe and South East Asia. However, amid the crisis, China has been continuing to see its economic growth. While prospects are mounting over negative growth all around the world, China has been forecast to see 7~8% economic growth. Rather, the Chinese authorities have been mentioning possibilities of taking preemptive measures against inflation. The fast increasing impact of China on the global economy has produced a coinage, "G2," based on such rapid growth. Bloomberg quoted George Soros on its July 8th edition as saying China will help drive growth as the world emerges from the current economic crisis and presenting the country as a positive force." The growth can be explained to be caused by its strong growth engine but also by proper and prompt measures taken by the Chinese authorities during the financial crisis last year in a number of events, such as the lowering of the interest rate and an investment plan worth up to 4 trillion yuan. The move seems to be geared towards recovery of the economy by expanding domestic consumption, amid the reduction of exports due to the global economic crisis. 
 
In light of such economic growth of China, Korean investment in China should presumably have increased a great deal. However, based on my experiences to date, the investment on the contrary has decreased. The first reason I should note is the trend of avoiding risk-taking as well as funds crunch of domestic businesses and financial institutions. In other words, no matter how positive the prospects over the Chinese market are, investors do not have enough capacity for investment due to a shortage of capital. Even if there is enough capacity, they will avoid investments due to prevailing uncertainties. Secondly, the foreign exchange rate has also played a significant role. In the past, 1 yuan was equivalent to 120~130 won. However, nowadays, it is hovering at 200 won or higher. In other words, even if the price level remains stagnant, the amount domestically supplied now doubles the same investment, resulting in difficulties for making profits. In any case, the domestic financial institutions who used to play a significant role in investments in China have rarely participated in the investment from the second half of last year to the first half of this year. (Obviously, there has not been any additional investment.) However, lately there are signs of seeking opportunities for investment in China in various sectors. This is so because countries are undoubtedly making strong economic growth and the yuan is forecast to be stronger based on the growth. 
 
In relation to this, I have thought about a couple of matters in legal perspectives. First of all, China is a country with a strong legal system. When opening a business in a country, sometimes one will have a legal basis but for others this may not be the case. In China, such legal basis has been more bolstered than you would expect. This means that there are not many deficiencies regarding whether one can open a business or not in China. Of course, this does not necessarily mean one would always find it convenient to open a business under the legal system. And, in case the concerned business is banned or prohibited by the laws or it attempts to evade taxes, there are sufficient regulations to avoid such violations of laws. Often, China is known as a country of 'guan-xi,' (meaning relationship in Chinese) implying that networking will make every business possible. But, this is not so in reality. If there is no legal ground, no matter how great one's guan-xi is, one will not be able to open a business in China. Secondly, Chinese acts and subordinate statutes are frequently amended. This has to do with their unique legislative system. In Korea, any matter affecting the rights and obligations of people must be legislated by the National Assembly, and the administration only regulates matters specifically delegated by the National Assembly. To this end, in case of legislation of new issues or legislation under changed conditions, a fair amount of time is needed. However, in China, such matters can be regulated by the administration. In other words, the uniqueness of Chinese law is that important matters may be regulated through legislation by the administration and to this end a prompt process for such legislation is possible. For example, consider legislation regarding real estate properties, after the enforcement of restrictions on ownership of real properties by foreigners in 2006, regulations on foreign debts have been in effect for companies developing the real estate properties built with foreign capital in 2007. However, these regulations have been eased lately. It was done by legislation of the administration. In short, for one to open a business in China, it is very important that one should take interest in the enactment, amendment and modification of acts and statutes at all times. Thirdly, local governments are given a fair degree of independence. This may be realized through the legislative power of local governments, but it is also done by legal interpretation and accumulation of precedents. In case of acts and statues with room for interpretation, one cannot expect to see uniform regulation for every local government. Thus, it will be required to check how acts and statues are interpreted and operated in a particular local area of the business. The proverb, "the night is darkest before dawn" has never sounded as relevant as nowadays.

KOREA LEGAL INSIGHT Korea’s Cash Subsidies and Tax Incentives: What Foreign Investors Need to Know in 2025 2025.03.17

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