Budidjaja & Associates Lawyers in cooperation with JunZeJun Law Offices has successfully conducted the first lawyer exchange that was completed on July 2015. One of B&A's senior lawyers, Ms. Diana Kusumasari was stationed in JunZeJun Law Offices (泽君律师事务所 ) in Guangzhou, P.R.C.

We are pleased to share the article about Trade & Investment in China - A Summary & Update by JunZeJun Law Offices.

1. Introduction

Since becoming a WTO member in 2001 China has gradually improved market entry conditions for foreign trade and investment. With China's recent emergence as a global economic power this reform process has been greatly accelerated over the past few years with the Chinese government implementing significant reforms aimed at making China's business framework more consistent with international practices. We summarizes below the current regulatory system applicable to foreign trade and investment in China and the impact of recent key reforms.

2. Market Entry Options

A foreign business engaging in Chinese trade or investment can structure their activities either:

  1. Directly from offshore by dealing or contracting with a Chinese entity; or
  2. By investing in China by setting-up a foreign invested business entity (FIE) to operate the business within China.

Engaging in China Business Directly from Offshore

A foreign business operating from offshore can do so in the following ways:

  • Contracting with a Chinese company (e.g. for the sale of goods or for the licensing of intellectual property).
  • Appointing a Chinese agent to negotiate or promote its business in China.
  • Registering a representative office in China to act on behalf of the foreign business and to promote its business within China.
  • Cooperating with a Chinese distributor where the latter buys and then re-sells the goods or services to the Chinese customer under its own name (e.g. distribution of food products or entering into a franchising arrangement with a domestic franchisee).

Investing in China - Foreign Investment Guidance Catalogue

A foreign business or investor that intends to invest in China and to establish a business entity needs to first determine whether the investment activity is allowed in China by consulting the PRC Foreign Investment Guidance Catalogue (the Catalogue). The Catalogue provides specific descriptions of industries that are subject to the government's foreign investment policy and these are categorized as follows:

  • Prohibited Category: foreign investment is not allowed (e.g. sensitive defence related industries, or the publication of books, newspapers and periodicals).
  • Restricted Category: foreign investment is allowed but the form of investment and foreign shareholding will be restricted (e.g. education for Chinese nationals or the exploitation of certain minerals must be in the form of a Chinese-foreign joint venture controlled by the Chinese party).
  • Encouraged Category: these are industries the government seeks to promote and where foreign investors may enjoy certain preferential policies.
  • Permitted Category: these are industries not listed in the Catalogue. Where this is the case foreign investment is generally allowed but usually no preferential policies are available.

A second step would be to consider specific regulations and approval or licensing requirements for each industrial sector. These may impose specific requirements with regard to the approval process, the size of the project, a minimum capital thresholds, and secondary licenses or permits.

Foreign Invested Business Entity Options

If the foreign investment activity is allowed, the following types of FIE options can be used to operate the investment project or business:

  • A wholly-owned foreign invested entity (WFOE). A WFOE is a wholly foreign invested limited liability company registered in the PRC and is the most common form of business entity chosen by foreign investors. But note that in certain restricted areas a WFOE may not be permitted (such as in the financial or education sectors).
  • A Chinese-foreign joint venture. This may be in the form of an equity joint venture or a contractual joint venture. A joint venture is more commonly used where there are strategic or financing reasons for having a Chinese partner. In certain Chinese industrial sectors a Chinese-foreign joint venture is required.
  • A foreign invested company limited by shares (FICLS). A company limited by shares (or joint stock companies) is a company whose capital is denominated in shares that can be issued to shareholders (unlike Chinese limited liability companies which have the concept of registered capital). Only companies limited by shares can apply to list on Chinese stock markets. Foreign investors usually chose to set-up an FICLS if they plan to eventually list on the Chinese stock markets to avoid restructuring later.
  • A foreign invested partnership enterprise. This arrangement is similar to a partnership in western jurisdictions (that may be limited or unlimited). It is usually used where a foreign investor (company or individual) wants to partner with local investors to further invest in a number of PRC projects, or to set-up a private equity or venture capital fund for the purpose of investment activities in China.

China has also developed clear rules for the acquisition of an existing Chinese company or business by foreigners (M&A Rules). The M&A Rules applies to the acquisition of all types of Chinese businesses and covers both the private and State-owned sectors. An acquisition of a Chinese business can be in the form of an asset acquisition or an equity acquisition.

Although above market entry options have provided a satisfactory platform for foreigners doing business in China, business efficiency have been held back by: (a) the large collection of separate rules and regulations applicable to foreign business activities; and (b) restrictive rules that inhibit operational flexibility (e.g. tight controls over foreign exchange transactions, limited access to offshore financing, and heavy corporate compliance requirements).

3. China's New Pilot Free Trade Zones

Pilot Free Trade Zones - Shanghai, Guangdong, Tianjin, Fujian

In order to improve China's trade and investment regulatory framework, and to facilitate the demand for international best practices, the Chinese government recently established a number of "Pilot Free Trade Zones (Pilot FTZs). The purpose of the Pilot FTZs is to introduce and experiment with a series of significant reforms and to later apply these reforms more generally across China.

There are 4 new Pilot FTZs located in Shanghai, Guangdong, Tianjin, and Fuijian. The policy and regulatory reforms are different in each Pilot FTZ but generally the key reforms include:

  • Liberalization of the services sector (including financial, shipping, commercial and trading, professional, cultural and social services).
  • Implementation of a regulatory environment that fosters innovation and investment.
  • Reform of inbound/outbound capital flows and financial transactions arrangements (such as security and guarantee reforms, access to foreign commercial loans) and foreign exchange liberalization
  • Streamlined procedures for cross-border Ecommerce and customs/quarantine procedures
  • Establishing fast-track inbound and outbound onshore investment project approvals
  • Implementing new administrative (such as company law reforms and adopting a negative list approach to manage the permitted scope of foreign investment in the zone).
  • Tax reforms (such as import tax reforms).

The Pilot FTZs represent a very import development in terms of the future direction of China's business and regulatory environment. The policies in each Pilot FTZ may offer a foreign investor significant market entry and operational advantages. Foreign investors should examine the policies that have been implemented and carefully consider the option of locating their business in a Pilot FTZ.

Other Special Zones that Offer Preferential Treatment

Pilot FTZs should not be confused with older special zones in China that continue to exist both within and outside of the new Pilot FTZs. These zones offer specific preferential tax, customs or regulatory treatment intended to promote foreign investment or export oriented industries. They include:

  • Economic and Technological Development Zones (ETDZs).
  • Free Trade Zones (FTZs commonly referred to as "Bonded Zones").
  • Export Processing Zones (EPZs commonly referred to as "Bonded Zones").
  • High and New Technology Industrial Development Zones (HTDZ). .
  • Central and Western Regions. Preferential treatment has been adopted to encourage foreign investment in China's central and western regions.

4. Summary

Following the direction provided by the Pilot FTZs, foreign businesses can look forward to the continuing reform of China's foreign trade and investment regulatory framework and the adoption of international best practices. China's Ministry of Commerce, the key government agency supervising foreign trade and investment, has also indicated the implementation of a new foreign investment law that will consolidate and streamline the existing system regulating foreign businesses.

This is good news for foreigners doing business in China. Improvement of the business regulatory framework will free up more resources for foreigners to take-on the unique challenges provided by cultural differences and local business practices.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.