BIZCHINA / Investment Policies
What types of foreigni investment are allowed in China?
Updated: 2006-04-17 09:35
A: Branch Offices
A branch office in China is one that is used for business purposes for
which the main company office holds responsibility. It is not a legal
entity and it can only carries out liaison and coordination work. Such a
situation would involve the existence of an offshore "parent", the
People's Republic of China would be denied control of the entity - a
situation which it seeks to avoid. In this way, China does not officially
recognise branch offices, nor does it officially allow them to operate.
Therefore, the difficulties posed by such restrictions and lack of legal
standing mean that the branch office cannot be recommended as a vehicle
for investment.
Sino-Foreign Equity Joint Ventures
These are enterprises established in China with joint investment from
foreign companies, enterprises or other economic bodies and Chinese
economic bodies. As the name suggests, such enterprises involve joint
investment, operation and share of risk in proportion to the amount of
investment inputted by the respective parties. Each party is accordingly
jointly responsible for the profits and losses of the enterprise.
Investment can come in the form of (amongst other things) currency,
buildings, industrial property or equipment. In general, the level of
investment offered by the foreign company should not be less than 25%.
The corporate form of such joint ventures is the limited liability
company, with a Board of Directors as its supreme body of power. Some
joint ventures in China have now adopted this corporate form.
Sino-Foreign Co-operative Joint Ventures
Sino-foreign co-operative joint ventures also refer to Chinese- foreign
contractual joint ventures. They are enterprises established in China
with investment or conditions for co- operation jointly offered by
foreign companies, enterprises or other economic bodies as well as by
Chinese economic bodies.
The main difference from the equity joint venture we have just discussed
is that the investment of the parties involved will not necessarily be
converted into ratios of investment.
The rights and obligations of the parties involved with regards to such
issues as distribution, investment, operation and sharing of risks and
profits is determined by the contracts signed by the parties from the
outset of the venture. These ventures tend to involve the foreign partner
providing most or all of the funds whilst the Chinese partner contribute
land, facilities and a perhaps a limited amount of funding. The usual
approach is to stipulate in the contract that the Chinese party will own
all the assets of the venture once the date of expiry of the venture is
reached, with the foreign party recouping its investment within the
duration of the venture.
Such forms of co-operative joint venture are universally attractive, for
they allow the Chinese partner to have a source of investment whilst
permitting the foreign company to recoup its investment.
Wholly- Owned Foreign Enterprises
These also refer to wholly foreign- owned enterprises. They are
enterprises set up in China by foreign companies or economic bodies in
accordance with Chinese law with the investment entirely provided by
foreign investors.
Such enterprises must be conducive to the development of China's national
economy; they must also meet one of the following requirements:
1. The application of internationally advanced technology
2. The orientation of most of the products for export
The corporate form of foreign enterprises in China is generally the
limited liability company. Although China has been late on the scene in
terms of providing a system of establishment for foreign enterprises,
they have grown in number rapidly over the past few years.
Chinese Holding Companies
Approval has recently been given to multinational corporations by China's
Ministry of Foreign Trade and Economic Cooperation (MOFTEC) to establish
foreign-invested holding companies. Though mostly analogous to Western
Holding Companies, there are a couple of differences. Multinational
companies may wish to set up holding companies in order to increase
investment or reinvestment in China, as well as to coordinate investment
companies already established in China.
A Holding Company in China may invest in such fields as industry,
agriculture, infrastructure and energy, provided that the State
encourages foreign investment in these sectors.
Typical work undertaken by a Holding Company might include action as a
purchasing agent, distribution or the provision of after sales service,
amongst other things. Provisional Regulations dictate that a Chinese
Holding Company may enjoy the preferential treatment of a foreign-
invested enterprise, and as such is awarded both a foreign- invested
enterprise certificate and licence.
B Shares
Chinese government allows foreign investment to acquire shares of special
category, B shares, of approved list companies in the Stock Exchange.
However, ownership and management are separated. Chinese government is
considering allowing foreign invested entity in China to be listed in the
Stock Exchange, but it takes time for the government to come at this
decision.
Special approved foreign JV
Foreign nationals are generally not allowed to hold equity of private
companies in China unless with special consent from the government. A
merger and acquisition exercise involving foreign fund will convert a
private company into a foreign JV.
(For more biz stories, please visit Industry Updates)
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