5 Trading & Investing

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5.1 Sources of information
5.2 The regulatory environment
5.3 Sectoral regulation
5.4 Geographical regulation
5.5 Going west?
5.6 Ways of investing in China

3.4 Trading with and investing in China

5.1 Sources of information

Even before setting foot in China itself, finding a way through China's regulatory environment is a necessary but potentially exhausting task. Rules are applied and vary according to the nature of the intended business, the sector and its location. As China continues to develop a comprehensive commercial code, the laws affecting all of these matters are subject to regular changes and updates.
What follows is a comprehensive introduction to China's investment and trading regime, relevant to any company seeking to do business in China. Since 1992, all relevant laws, rules, regulations, administrative guidance and policies governing foreign trade and investment have been published. Many are available both in hard copy and online. Regulations on general trade and investment are administered by the Ministry of Commerce (previously MOFTEC). Measures relating to individual sectors are administered through the relevant central government ministry. All of these are members of the State Council, China's supreme policymaking body.

The websites of the Ministry of Commerce and the State Council are the best places to start tracking down industry-specific regulations. The Ministry of Commerce site also contains links to the foreign trade and investment departments of local authorities across China, and to the "special zones" offering various location and business packages in different sectors.

Please refer to http://english.mofcom.gov.cn/ (Ministry of Commerce of the People’s Republic of China).

Many of China's business rules and regulations are in the process of changing to implement the WTO accession agreement. Updates on China's implementation process are available by sector, at: http://www.chamber.org.hk/wto/content/news_update.asp.


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5.2 The regulatory environment

There are a variety of ways to establish a business presence in China - each is subject to a wide spectrum of business regulation. The general tendency has been towards liberalisation and movement to international market norms, a trend accelerated by membership of the World Trade Organisation (WTO).

The regulatory environment is complex, with different rules covering industrial sectors, geographical areas and types of business and investment. In certain sectors a greater level of foreign ownership is permitted, but the output has to be exported. Investment above a certain US dollar amount may require approval from central government, as well as city or provincial officials. Though the Chinese government is moving towards equalising tax levels between foreign and domestic owned companies, certain ‘special zones’ and larger areas can still offer tax breaks and other incentives.

Laws and regulations in China tend to be far more general than in most Western countries. This vagueness allows Chinese courts and officials to apply them flexibly, which results in inconsistencies. Companies and exporters may have difficulty determining precisely whether or not their activities contravene a particular regulation. Agencies at all levels of government have rulemaking authority, resulting in regulations that are frequently contradictory. Finally, while there seems to be no shortage of rules and regulations, there are few procedures in place to appeal regulatory decisions.

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5.3 Sectoral regulation

In April 2002 the Ministry of Foreign Trade and Economic Co-operation (MOFTEC) issued Guidance on Foreign Investment in Industries. This splits investment into three categories:

• types of project for which foreign investment is encouraged
• types of project for which foreign investment is restricted
• types of project for which foreign investment is prohibited

The projects listed indicate the commercial and business areas in which China wishes to see foreign participation. Ways of encouraging investment may include:

• tax breaks or a more attractive tax regime;
• greater freedom in the amount of investment or its utilisation;
• greater leeway to sell into the domestic market.

Projects on the prohibited or restricted list are in sectors where China wishes to develop its own industrial or commercial sectors in an environment sheltered from foreign competition. This does not mean that blanket prohibitions apply across whole sectors. There may well be exceptions made for certain types of project, which supply expertise or technology that China needs. Detailed information about these will be available from the relevant ministries responsible for the sector concerned.

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5.4 Geographical regulation

China first experimented with the international markets in its "Special Economic Zones", five free trade areas situated along the East Coast. The lessons learned here were then applied elsewhere, as special or investment zones and business parks began to mushroom in and around urban areas across China. What they all have in common is a more market oriented trade and investment regime, though each will be empowered to offer a package tailored to the industrial and commercial objectives of the area in which it operates. Some specialise in exports, others in high technology or consumer goods.

Aside from offering a generally less stringent regulatory regime, one significant advantage of these zones is a streamlined process of approval for projects. Many areas now have an autonomous government specifically tasked with helping the development of projects. This is regarded as a welcome change in a country where the bureaucracy was once viewed as being deliberately obstructive and time consuming.

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5.5 Going west?

In December 2000, China's State Council officially announced a series of economic measures designed to promote economic development in six Western Provinces, three autonomous regions and the city of Chongqing (which is China's largest conurbation with a population of around 30 million). The ‘Go West’ policy envisages development through both public and private funds, and foreign investment is seen as a key element in the programme.

Foreign investment is particularly sought in the mining, infrastructure, energy and transportation sectors, amongst others. Aside from a package of tax and regulatory benefits, import-export regulations have been loosened and the programme also serves as a test bed for foreign involvement in the until now highly protected agriculture sector. Foreign companies will also be able to tender for projects funded by the World Bank and Asian Development Bank in the region.

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5.6 Ways of investing in China

Foreign investment into China can be undertaken through a number of different corporate mechanisms, each of which carry their own regulatory framework.

• Representative Offices
Representative offices are a cost effective and popular way for businesses to gain a foothold in China. They enable a company to second or hire staff, research local markets and/or suppliers and advertise and promote company goods or services.

Representative Offices are not allowed to invoice locally for sales of goods and services, though they can be used as a conduit through which parent company goods and services can be sold on local markets.

As well as providing a useful and flexible means of gaining initial market access, Representative Offices are often used by companies wishing to prepare locally in sectors of the economy not yet opened to foreign investment.

• Joint Ventures
Since the first Sino-Foreign Joint Venture (JV) opened in 1980, over 220,000 foreign invested firms have used this means to do business in China. Prior to 1998 for 70% of China's FDI was used in this format. They are effectively a kind of business marriage in which a Chinese and foreign company unite to form a third business. Both sides usually bring cash investments. The foreign partner also typically brings new technology and management expertise. The Chinese partner offers manpower and knowledge of local markets, regulatory procedures, policy interpretation and ways of doing business.

There are two varieties of Joint Venture. The Equity Joint Venture is used for larger investments in sectors where foreign investment is encouraged, while Contractual (or Co-operative) Joint Ventures tend to be used in more restricted sectors, or ones which mandate a higher foreign capital requirement. Which version is most suitable for a proposed business can depend on a range of complex factors and local advice from a consultant or similarly qualified firm is advisable when taking this route into China

Different regulations apply to JVs depending what sector they are in. In some areas, such as auto production, the Chinese partner must have minimum of a 50% share of the business however much investment it puts in. In others, minimum percentage levels of investment are required from the non-PRC partner.

For many years, the JV has served as the front line in the battle for business partnership between Chinese and foreign companies. They are the places where most of the hard-won wisdom about cross-cultural communication has been learned. Profound differences are still often reported, with particular flashpoints being management philosophy, approaches to HR issues and the protection or sharing of intellectual property.

But as China's business environment increasingly conforms to international norms and as foreign partners become experienced in operating in China, the tendency is for the foreigner to gradually assume a higher degree of control of the JV company. These factors have also meant that many foreign companies now prefer to enter the market using different investment vehicles, notably the Wholly Foreign Owned Enterprise (WFOE).

• Wholly Foreign Owned Enterprises
As their name suggests, these are businesses set up and run as subsidiaries of firms headquartered abroad. In China there is an increasing trend to turn JVs into WFOEs once the business has been successfully established. But WFOE's are also increasingly popular as initial investment vehicles, especially for businesses transferring manufacturing, assembly or processing facilities to take advantage of China's low wage and business costs. WFOEs need to meet registered capital requirements typically in the US$150-200,000 range.

As part of its WTO commitment, China has undertaken to equalise the treatment of foreign and domestic firms. This frees WFOEs to invoice locally, sell into the domestic market and set up sister operations in other cities as well as downtown sales offices. They can still take advantage of tax preferences on profits for a five-year period, though these privileges are in the process of being phased out.

Previously restricted to manufacturing for export, WFOE's can now be set up in over 80% of China's industrial and commercial sectors. These and other advantages are increasingly making the WFOE the vehicle of choice for businesses with a substantial financial commitment to China. In 2001, their rate of growth outstripped that of JVs for the first time.

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