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
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
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.
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.
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
• types of project for which foreign investment is
• types of project for which foreign investment is
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
• 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
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.
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.
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
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
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
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
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.