KINGSFIELD LAW OFFICE

CHINA PRACTICE MINNEAPOLIS | BEIJING

China Business Climate 2020 DBEDT Webinar- Oct 22, 2020, 3:30 p.m.

Russell Leu, PartnerKingsfield Law Office

PREFACE

1979 40 Year Streak 2020

9.27% - 6.9 %Annualized GDP

.

What is the business climate today in China?

Issues of the Day- Forces Shaping China’s EconomyCovid-19 Pandemic – Seismic Shock to Business Climate

- 6.8% GDP

40-year Streak Ends. Over past 40 years, China had a 9.7% annualized GDP growth rate. In the first-quarter 2020— China experienced an unprecedented contraction since the country began its reform and opening over 40 years ago. China’s economy had a seismic shock- a 6.8 percent drop in China’s GDP.

China’s Business Climate- Issues of the Day

CHINA BUSINESS CLIMATE 2020 EXTERNAL DRIVERS THIS YEAR

Covid-19 Pandemic 10.0

Tech War/Decoupling

Trade War

15

Issues of the Day- Forces Shaping China’s EconomyAggressive, Digital, Restrictive Measures

National plan: Strict quarantine procedures, AI surveillance for contact tracing and surveillance, and a ramped-up national testing program via nucleic testing techniques--- SARS experience helped.

¡ China’s transportation system- cannot enter and use subway system without scanning into the city AI app – contact tracing APP can track down who sat nearby you at any given time – if other person is infected with coronavirus – you get contacted and tested. (Photo: Shenzen, China- Subway)

Issues of the Day- Forces Shaping China’s EconomyCovid-19 Pandemic China’s National Work Plan (Feb 2020)

February 2020 – National Work Plan

Time to Resume Working Provinces

No earlier than 24:00 onFebruary 9

Beijing, Shanghai, Zhejiang, Jiangsu, Guangdong,Chongqing, Liaoning, Hebei, Henan, Jiangxi, Jilin,Guizhou, Yunnan, Fujian, Anhui, Inner Mongolia, Hunan,Heilongjiang, Shandong, Shaanxi, Shanxi, Guangxi,Ningxia

No earlier than 24:00 onFebruary 13

Hubei

No earlier than 24:00 onFebruary 2

Tibet, Gansu, Xinjiang,Qinghai

Flexible arrangements byenterprises

Sichuan

No specific time yet Tianjin

February 2020– National Work Plan

Issues of the Day- Forces Shaping China’s EconomyCovid-19 Pandemic LABOR & EMPLOYMENT

020

000

4000

060

000

2/1/2020 3/1/2020 4/1/2020 5/1/2020 6/1/2020 7/1/2020Date

Confirmed Cases Daily Increased CasesDaily Increased Cases Without standard change

Data resource: National Health Commission of the People’s Republic of China

§ February 2020 Massive lockdowns (Wuhan 76 days)

§ Mid-February: Peak of Confirmed cases

§ February: National Plan was implemented to resume work at the end of February

§ March 2020: Covid-19 was controlled

§ April 20, 2020 : The Chinese State-owned Assets Supervision and Administration Commission of the State Council announced that the ratio of return to work reached 99.4%

National & City Employment Guidelines issued to kickstart business environment (Feb. 2020)

Issues of the Day- Forces Shaping China’s EconomyCovid-19 Pandemic 2nd Quarter Recovery: GDP 3.2%

¡ Covid-19 was the most pressing of all crises faced by China

¡ First quarter

Chinese economy recovers- 3.2% -GDP

China’s Business ClimateMay- July 2020

Data resource: Eastmoney

Shanghai Securities Composite Index Trend from 2019-01-01 to 2020-07-10

Issues of the Day- Forces Shaping China’s EconomyCovid-19 Pandemic Stock Market Recovers

January 10, 2020 China’s Shanghai stock market activity hits low- below 2800

July 10, 2020 Shanghai Stock market returns to pre-pandemic level

CHINA BUSINESS CLIMATE 2020 GDP PREDICTED 4THQUARTER 5.5%

• Stronger economy predicted in 4th Quarter 2020- predicted 5.5% GDP (source: https://www.cnbc.com/video/2020/10/20/china-is-poised-for-5point5percent-gdp-growth-in-fourth-quarter-ubs.html

• Key driver during 1st/2ndquarter 2020: Domestic consumption (blue)

OCTOBER 1-8, 2020COVID-19 & ECONOMICRECOVERY VALIDATED

¡ 637 million Chinese traveled domestically during the eight-day National Day holiday period *

¡ Spent $ 68.6 billion *

¡ 186 confirmed cases of Covid-19

¡ Positive sign for China that with health priorities handled and managed properly, business climate can reopen and recover

http://english.www.gov.cn/news/topnews/202010/09/content_WS5f7f998ac6d0f7257693d2ff.html

China’s Business Climate 2020 Tech War

¡ Regardless of trade war, the tech war will escalate – tariffs are the easy part- the tech will be difficult. Why?

¡ $ 9 Trillion Worth in Tech vs. under $ 1 trillion in annual global trade. (Exchange of communications, goods and services)

¡ Total value of daily exchanged information and communications (ICTS) goods and services

¡ Compared with just under $ 1 trillion for annual global trade

¡ China - center of global electronics supply chain and fastest-growing technology consumer market

¡ Restrictions on technology exports to Huawei, Semiconductor Manufacturing International Corporation

China’s Business Climate 2020 Tech War

¡ China’s 14th Five Year Plan (this month NPC meets to conclude plan)

¡ Addresses technology- central core of a Dual Circulation Strategy

¡ Internal circulation: Ramp up investment to build technology innovation & development (other strategy- increase domestic consumption)

¡ Developing a chip is immediate focus¡ US immigration policy and anti-Chinese

environment- more returning Chinese tech resources?

China’s Business Climate 2020Chinese CEO Views on 2020 Business Climate- Stanford Study

Stanford Study (5/20): ¡ Chinese CEOs (doing $1 Trillion

Business)- what hurt most Chinese businesses during Covid-19 and Tech war fallout ----- more businesses would benefit from digitalization --- key post Covid-19----expect Chinese businesses to transform to digital platforms

¡ Business climate post 2020: technology-focused platforms

China Business Climate 2020: Business Climate Survey Viewed by American Businesses- AmCham-China Declining Revenues

2019

• 21% reported declining revenues

• 46% reported increase in revenues

2018

¡12% (and 7% compared with 2017)

¡ 62%

How does your estimate 2019 revenue compare with 2018? Increase in reported decline in revenue

China Business Climate 2020: Business Climate Survey Viewed by American Businesses- AmCham-China Potential Profitability 2 Yr. Outlook

2020

¡ 11 % optimistic

¡ 38 % slightly optimistic

Ø 49%

2019

¡ 8 % optimistic

¡ 33 % slightly optimistic

¡ 41%

What is your 2-year outlook in terms of profitability? Overall, 49% this year expressed optimism of potential profitability over next two years versus 41% last year

China Business Climate 2020: Business Climate Survey Viewed by American Businesses- AmCham-China Intellectual Property Protection

2019

• 69 % noted improvement

2018

¡ 59 %

In last 5 years has intellectual property protection improved ? A substance increase of 10% noted that China has improved protection of intellectual property. Note this year the new Foreign Investment Law has added more intellectual property protection enhancements which possibly contributed to this changing perception.

China Business Climate 2020: Business Climate Survey Viewed by American Businesses- AmCham-China U.S.- China Relations

2020

§ 17% pessimistic

§ 34% slightly pessimistic

51 % pessimistic

2019

¡ 24% pessimistic

¡ 37 % slightly pessimistic

61 % pessimistic

What is your 2-year outlook in terms of the U.S.-China relationship? There is still considerable pessimism as compared with the previous year, but with 51% having varying degrees of pessimism- a majority of business still has significant concerns about the U.S.-China relationship.

China Business Climate 2020: Business Climate Survey Viewed by American Businesses- AmCham-China 2019 Revenues

2019 goods produced or sourced in China for the U.S.

• 26% Up

2019 Import goods or services into China

¡ 52% up

How does estimated 2019 revenue of China operations compare with 2018 results? Over half who imported goods or services into China expected higher revenues in 2019 as compared with only a quarter of those whose business model considered exporting goods from China to the US.

China Business Climate 2020: Business Climate Survey Viewed by American Businesses- AmCham-China 2019 Revenues

2019 Produce or source goods or services in China for China

How does estimated 2019 revenue of China operations compare with 2018 results? For businesses whose business model consisted of all goods or services made or sourced in China for China – these companies experienced increases. The rise of a 500 million middle class suggests domestic spending will be a key driver of the economy in the coming years.

46% Up

China Business Climate 2020: Business Climate Survey Viewed by American Businesses- AmCham-ChinaQuality of Investment Environment

2019

• 50 % noted improvement

2016

¡ 24 %

When asked about the quality of China’s investment environment – a half or 50% reported it has improved. Considering that in 2016 24% reported improvement, the positive response to improvement doubled from 2016.

China Business Climate 2020: Business Climate Survey Viewed by American Businesses- AmCham-China Profitability

2019

• 61% deemed performance as profitable

2018

¡ 69%

Was performance profitable in 2019 as compared with 2018? A drop of 8%-- but compared with 2017 where 74% reported profitable– that would be 10% greater drop-lowest percentage in reporting profitability since question was first asked 20 years ago.

China Business Climate 2020: Business Climate Viewed by American Businesses Key Takeaways- US Business Experience

Business Climate Overview 2020

• AmCham-China 2020 Business Climate Survey reveals the business climate in China is positive, encouraging and profitable – despite the challenges faced.• Majority of members profitable (61%) is a positive sign that the business climate is encouraging.

• A major issue raised by the Trump administration is protection of intellectual property – a majority of members view enforcement of intellectual property rights have improved over past 5 years (69%).

• The U.S. –China relations brings a lot of concerns as 51% express pessimism about the relations

• China continues to remain a priority and 50% of members agree that the investment environment is improving as compared with 38% last year or 24% four years ago. With the new Foreign Investment Laws taking effect on January 1, 2020- anticipated to promote equal treatment of foreign investors with domestic companies and better intellectual property protection – perhaps the business climate will continue to improve even more.

• For respondents whose business model is either based on goods or services imported into China (52%) or based on producing or sourcing goods or services in China for China (46%) expected higher revenue than businesses which produced or sourced goods in China for the U.S market (26%).

China Business Climate 2020 Government Policy & Laws

¡ New Foreign Investment Law (effective January 2020)

¡ Improves intellectual property enforcement

¡ Includes foreign businesses in government procurement process

¡ Aims to give foreign investments national treatment - same treatment to domestic businesses

¡ Dual Circulation Strategy under 14th Five-Year Plan

¡ Focus on internal circulation- boost domestic spending and consumption (eg Oct 1 Golden week travel and spending boost $ 68.6 billion; November 11/11 Alibaba- 2019 $38.4 Billion Sales during 24-hour period)

¡ Focus on internal circulation – government and private investment in developing innovation and technology (especially develop computer chip)

¡ Focus on external circulation- trade

What is the China Business Climate Outlook in 5 Years (2020-2025) Globally?

China’s Business Climate 2020 Predictions on Business Climate- Following the Money

¡ Confidence 2X: Managing Covid-19 to bring back economy and only global economy to grow in 2020

¡ Domestic Consumption: Over 500 million in growing middle-class– key drivers to keep Chinese economy from sputtering –domestic consumption & spending will continue to drive economy. It helps that China’s 14th Five Year Plan will emphasize domestic spending and consumption

¡ For next five years, China will increase its global imprint as it will lead with more than a quarter – 27.7% of World GDP

¡ China will become a refuge for global businesses as countries still recover from economic fallout due to Covid-19

¡ Doing business with China – move to digitalizing and move over to Chinese technology platforms – connect over digital platforms

¡ Follow your dreams, follow the money