China Industrial news
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Types of foreign investment allowed in China
What types of foreigniInvestment are allowed in China?
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.
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