To lease or to buy?

With prices dropping and plenty of property coming onto the market, leasing isn't a bad option for Beijing-bound SMEs

----By Mark Godfrey

Allotment of land use rights and title in China is shifting to a market-based system but quality and management of property in Beijing remains patchy, a seminar on real estate hosted by the SME working group in Beijing recently revealed. Recent government rules are shifting the system of offering land rights - granted for 70 years for residential property and 50 years for commercial use - to tender, auction and negotiation, Anna Kalifa, head of research at the Beijing office of Jones Lang LaSalle, told the September 26 seminar. "New government rules are an attempt to make land allotment more transparent."

Rents in Beijing have slipped 25 to 30 percent as office space increased from 2.4 to five million square metres, explained Kalifa. But prices fluctuate wildly, she warned, especially as a second hand market emerges. Construction and maintenance quality, while improving, is also limited in the capital. "It's not comparable to EU or US... Beijing is less sophisticated than Shanghai, there's less international or professional management."

The practise of strata titles, developers selling buildings off to several seperate investors before completion, has devalued prime properties like Jinwai Soho, Vantone and Fortune Plaza, said Kalifa. "Serious corporate clients prefer not to use mixed use buildings," she said, citing the case of a foreign firm which spent RMB3 million on fine furnishings only to have a karaoke bar next door.

"Do your homework," Kalifa encouraged firms. "Know the market, don't lease for three years, if you know there will be a supply glut in two years. Know your developer's strategy. Since leasing terms in China are shorter take time before lease expires to consider leasing packages." Clients should look for buildings sold on a floor or block basis and consider lease only properties, she added.

Describing it as "a temporary stop," Franck Desevedavy, Managing Partner at law firm Adamas outlined a city government circular which entered into force on June 19 prohibiting the registration of offices in residential buildings in Beijing. Specific use of each unit must be stated in purchase agreement and appears on ownership certificates.

The new measure does not apply to businesses already registered.

Launch of the 7th European Business in China Position Paper

----By Daniel Inman

The European Business in China Position Paper is an annually published document that is designed by the European Chamber to identify the problems that inhibit the progress of European business interests in China. The 2006-2007 edition of the report was launched in Shanghai on September 20. The paper is designed to convey to Chinese policy makers the concerns of European businesses, as a complement to efforts of the relevant political bodies. As Dominique de Boiss¨¦son, Vice-President of the EUCCC, pointed out at the Shanghai event, the report shouldn't be taken as a message that all recent developments are unwelcome: "You always have to look at the long-term. There are always hiccups in the long-term, but the reaction is generally positive."

De Boiss¨¦son highlighted the key points raised in the paper. Limitations to FDI are an important issue: there are significant concerns over the extent to which foreign companies can invest in certain key sectors; such as petrochemicals, pharmaceuticals and the automotive industry where foreign companies are restricted to entering 50/50 joint ventures. The paper sees such limitations to be a significant disincentive to investment.

Also seen as a serious problem, despite the progress that has been made over the last year, are issues relating to IPR protection. A European business confidence survey, conducted by the EUCCC this year found that only nine percent of respondents had never encountered IPR problems in China, and the majority of respondents believed that this was due to current Chinese laws not acting as a sufficient deterrent.

Peter Curas, chair of the Chamber's Legal Working Group, said that the legal section of this year's paper doesn't focus as much on the legal industry as it has in previous years, but more on the legal system itself. "What hasn't developed to an adequate extent is the enacting of laws, transparency and due process," said Curas. He went on to say that what is needed is "a consistent legal environment that allows planning." The paper itself speaks about the short periods given to make a commentary on draft laws, which when provided, varies from one week to a month. Developments in procedural law have not caught up with the developments in substantive law, which hinders the legal framework from acting in a consistent manner.

High capital costs and the long waiting period for an RMB license are two of the big problems facing the banking sector, said Marcus Wassmuth, chair of the Chamber's Banking Working Group. Currently, for a bank to obtain an RMB license it must be operating in China for three years. Wassmuth said that an RMB license is required for the profitability of a bank, but for the licence to be rewarded it is necessary for the bank to show that it is profitable for at least two years. This leaves the bank with the problem of finding the requisite profit elsewhere. In addition to the problem with the RMB license, the report says that the capital requirements needed to operate a bank in China are significantly higher than international practice: a full branch license for a foreign bank in China requires minimum capital of RMB400 million compared to the EUR5 million of capital that a Chinese banks need to operate in Europe.

Licensing issues affect the logistics industry too, with Andreas Kirchener, chair of the Logistics Working Group, calling for "the creation of one government body that grants one license of general applicability for logistics". Such an entity would stop the need for logistics companies to apply for licenses from various ministries, a process that the paper describes as "complicated and costly".

De Boiss¨¦son stressed throughout the event that whatever problems European businesses faced in China, they would be resolved through dialogue with the appropriate Chinese authorities.

Few good men

Two HR professionals explain how to hold onto executive staff in an increasingly talent-strapped China

----By Mark Godfrey

Shortages of skilled staff in China means companies need to figure out smarter ways of engaging employees, HR professionals told a Chamber seminar in Beijing recently. Even though inflation remains low salaries in China are rising at eight percent Garry Wang, a senior consultant at HR services group Hewitt, told the September 21 seminar.

"In most markets salaries usually track inflation but in China that's not the case," said Wang. High turnover rates are most acute in chemical non-manufacturing and auto parts R&D, at 13.8 and 19 percent respectively. Turnover is lower at senior management level but rising for mid management positions.

Staff is leaving for better pay and better growth opportunities. Others go because of "role stagnation and poor work-life balance." Companies are struggling to come up with non cash incentives, such as training and pension benefits. Pay, career opportunities and "company processes" are the top three priorities for Chinese companies in engaging staff, reported Wang.

Solid leadership, he added, is vital, and should include regular communication with staff. "Frequency is important. It's better to communicate company goals to staff weekly than monthly." Staff roles must be valued and training opportunities provided, while also ensuring adequate company resources and processes. Engagement strategies must be smart, and well marketed, said Wang. "They won't work unless you market them. The best companies are doing branding and stressing work life balance and pay for performance."

And yet turnover is not always a bad thing. "It brings new blood into the company," explained Wang. "It's impossible to please everyone. Different demographics look for different things; 25-year-olds want cash but older employees want authority." With so much competition for talent, retention of key staff should be a priority, said Wang.

Speaking for a firm offering non cash incentives to hold staff, Tian Ren Can, CEO of Fortis Haitong Asset Management Ltd. described how his company offers staff 50 percent of overall pay in benefits, including an Enterprise Annuity, the new voluntary pension payment system being piloted in China. Employers contribute roughly four percent of wages to the overall pension, a contribution which is usually tax free.