I am a multinational corporation (MNC) and I want to set up a China regional headquarters (RHQ), but I'm confused as to where to look. There's no doubt that Shanghai is still booming, with good infrastructure and incredible potential, but in Beijing I'd be close to the government and regulators. I know that both cities have recently extended incentives to multinationals; I've also heard a lot about China's second-tier cities.

Where should I set up my China headquarters?

The international perspective
When choosing a city in which to set up their headquarters in China, multinational corporations may have to consider various factors.

First, what is the city's potential for economic development? Beijing is consistently ranked by the China Headquarters Economic Research Centre as the city with the best potential, followed by Shanghai; and Nanjing, Hangzhou and Tianjin are amongst the top of the second-tier cities.

Second, are there good infrastructure and professional support services? Both Beijing and Shanghai lead the other cities in this respect.

Third, are there standard and transparent government practices? This is important to facilitate the MNCs to plan their business operations. Beijing and Shanghai have gradually developed mature and standardised government practices and procedures. As the capital city where state level government authorities are located, Beijing offers convenience for consultation with such authorities.

Fourth, are government incentives available? Both Beijing and Shanghai have recently announced new rules offering financial and non-financial incentives to MNCs setting up their regional headquarters there. These include: reducing the registered capital required to be paid in China to US$10 million, granting subsidies of up to Rmb10 million (US$1.46 million), granting rewards for the lease of office premises, allowing a wider business scope of the regional headquarters and adopting policies to facilitate the recruitment of expatriate employees. Similar incentives are also offered in second tier cities like Nanjing and Tianjin, but the capital requirements of the MNCs are higher. These cities also offer a variety of tax incentives both to the MNCs and their expatriate employees in China.

Fifth, are business costs relatively high or low? The downside of both Beijing and Shanghai is that setting up and maintenance costs are high. Business costs in second tier cities are comparatively lower.

Sixth, is there a good system for dispute resolution? Beijing and Shanghai offer good options, with both a court system and an arbitration system. Cietac (the China International Economic and Trade Arbitration Commission) has its headquarters in Beijing and a sub-commission in Shanghai.

Seventh, what is the nature of business of the MNCs? For industries that are policy sensitive, for example, telecommunications, Beijing is more suitable. For those which require upstream and downstream chain integration in operations like manufacturing, Shanghai or second-tier cities may be more appropriate.

Hilda Chiu
Partner and head of corporate
Stephenson Harwood & Lo








The domestic perspective
The ideal location should be suitable for realisation of the functions of a headquarters or regional headquarters. To consider in which city you should set up a RHQ in China, you may wish to take into account at least the following factors: the local favourable policies and incentives, efficient governmental service, sound infrastructure, convenient commercial and IT services, proper geographic location, and/or talent resources.

Beijing vs. Shanghai
The present RHQ incentive policies of Beijing and Shanghai offer rather similar financial incentives to RHQs, and the thresholds for formation of RHQs hereunder are the same (except that Beijing requires an RHQ to be the sole highest management entity for its parent's China business). As such, you would need to find out what other features each city has that attracts you to determine where you would locate your RHQ. Generally, Shanghai may have more developed and dynamic commercial services and more efficient government services, plus it is reported to have more RHQs than Beijing, but Beijing offers the unique convenience of liaison with the government and regulators. When the incentive rules of the two cities are similar, you should bear in mind what is most important and attractive to an RHQ to determine where it should be located.

First-tier city vs. Second-tier city
Beijing and Shanghai appear to be more competitive than other cities in attracting RHQs – because most RHQs, as the statistics show, were established in these two cities. However, some second-tier cities (such as Hangzhou, Xiamen, Chengdu, Tianjin and Guangzhou) also issued incentive policies to encourage multinational corporations to set up RHQs in their respective cities, and some policies even imposed lower formation thresholds and offered some more favourable incentives. What's more, the costs for operating RHQs in such cities may be relatively lower because the rental and manpower costs, etc. are normally less expensive.

Having said the above, there is no clear answer to your question, as “suitable is best”. When selecting a suitable city, it is important to bear in mind your main concerns and needs as well as all the factors discussed above.

Zhang Wei
Partner
Jun He Law Offices






CLP's perspective
As the question briefly mentions, both Beijing and Shanghai have issued special regulations governing the establishment of headquarters by multinational companies. There are striking similarities, as well as differences, between the two sets of rules.

Shanghai's Provisions on Encouraging the Establishment of Regional Headquarters by Multinational Corporations (上海市鼓励跨国公司设立地区总部的规定) became effective on July 7 2008; not to be outdone, the Beijing government issued its Several Provisions for Encouraging the Establishment of Regional Headquarters in Beijing by Multinational Corporations (北京市关于鼓励跨国公司在京设立地区总部的若干规定)a few months later. They took effect on January 1 2009.

Shanghai's Provisions allow a China holding company or a management company to be classified as regional headquarters, and lower the thresholds for setting up a management company regional headquarters (from US$30 million to US$10 million in the case of the parent company's cumulative paid-up registered capital in China). The Provisions also allow a company which has obtained China holding company status to automatically qualify for recognition as Shanghai regional headquarters.

To supplement the top-level Provisions, in December 2008 the General Office of the Shanghai Municipal People's Government issued implementing opinions (上海市关于《上海市鼓励跨国公司设立地区总部的规定》若干实施意见 ) which gave further details of how financial incentives would be distributed (in three tranches of 40%, 30% and 30% over three years, in the case of the Rmb5 million startup assistance), the source of funds, simplified entry and exit procedures for relevant expats, and facilitation of customs clearance procedures.

To some, Beijing's rules appear slightly more favourable. They also lower the threshold for establishing a regional headquarters and expand the scope of business of the regional HQ to cover new business activities including import and export, PRC distribution and service outsourcing. The rules also, for the first time, allow RHQs to participate in pilot projects for what are labelled “the centralised management of foreign exchange funds, extensions of loans abroad, etc.” – this should provide a boost to foreign-invested enterprises who often worry about foreign exchange control and cash management in the PRC.