China Investment Guide 2011

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Table of contents

The number of investment projects subject to central government approval has reportedly dropped more than 75 percent. Despite efforts to streamline business registration procedures, foreign companies still continue to complain about the many challenges of setting up a business, including the process of registration and obtaining administrative licenses.

Numerous companies offer consulting, legal, and accounting services for establishing wholly foreign-owned enterprises, partnership enterprises, joint ventures, and representative offices. The differences among these corporate entities are significant, and investors should review their options carefully with an experienced advisor before choosing a particular corporate entity or investment vehicle. Over time, this policy has evolved to include both state and private Chinese companies in a diversified number of economic sectors.

Today, China is one of the largest outbound direct investors in the world and invested over U. Chinese officials support foreign investment opportunities that help China move up the manufacturing value chain by acquiring advanced manufacturing and high-technology capabilities that can be transferred back to China. Chinese government officials provide preferred financing, subsidies, and access to an opaque network of investors to promote and provide incentives for outbound investment in key sectors. In other words, investments made strictly for the purpose of financial returns, like commercial real estate, or investments where a company enters a completely different economic sector than it currently operates, will receive greater scrutiny from Chinese regulators.

Second, Chinese investors expect the RMB will continue to depreciate over time, which makes holding RMB-denominated investments less attractive than investments made in U. In an attempt to diversify assets into different currencies, Chinese household and company investments have fled to quality destinations like the United States and Europe. The Yangtze River Delta: Business Guide to the Shanghai Region Fourth Edition This guide takes a practical, city-focused approach, walking you through the economy of important cities in the region with a level of specificity available through few other English sources.

Rapidly rising labor costs are almost universally considered one of the biggest challenges of doing business i This edition of Tax, Accounting, and Audit in China, updated for , offers a comprehensive overview of the Doing Business in China is designed to introduce the fundamentals of investing in China. Your email address will not be published. Notify me of follow-up comments by email. Notify me of new posts by email. Stay Ahead of the curve in Emerging Asia.

Our subscription service offers regular regulatory updates, including the most recent legal, tax and accounting changes that affect your business. For both foreign investors as well as domestic companies, the bankruptcy process is rarely used to wind down company operations or seek protection from creditors, due to the incomplete nature of the legal regime and judicial inexperience in this area of corporate law.

The Chinese government and judicial system do not maintain a public record of investment disputes. Rulings in some cases are open to the public. China has bilateral investment agreements with over countries and economies. The majority of these agreements set mediation, domestic remedies and international arbitration as the means to settle disputes. However, investor-state disputes leading to arbitration are rare in China.

There are few precedents where Chinese courts have recognized and enforced foreign court judgments. China has concluded 27 bilateral agreements on the recognition and enforcement of foreign court judgments, but none with the United States. The domestic legislation that provides for enforcement of foreign arbitral awards related to these two Conventions include the Arbitration Law, adopted in ; the Civil Procedure Law adopted in and amended in ; the Law on Chinese-Foreign Equity Joint Ventures adopted in and amended most recently in ; and a number of other laws with similar provisions.

According to the CIETAC Arbitration Rules, in an ordinary procedure case, the arbitral tribunal shall render an arbitral award within six months in foreign-related cases from the date on which the arbitral tribunal is formed. In a summary procedure case, the arbitral tribunal shall make an award within three months from the date on which the arbitral tribunal is formed. In a domestic arbitration case, the arbitral tribunal shall render an arbitral award within four months from the date on which the arbitral tribunal is formed.

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At the request of the arbitral tribunal and with the approval of the Secretary General of the CIETAC, the time period of rendering an arbitral award may be extended.. When joining the World Trade Organization WTO in , China committed to eliminate and cease the enforcement of trade and foreign exchange balancing requirements; local content and export performance offsets; and technology transfer requirements made effective through laws, regulations, and other measures. China also committed to lift within two years all measures applicable to motor vehicle producers that restrict categories, types, or models of vehicles permitted for production, and to increase limits within which investment in motor vehicle manufacturing could be approved by provincial governments.

These packages may also stipulate export, local content, technology transfer, or other requirements. There is no express prohibition against foreign firms participating in research and development programs China finances. In certain sectors where China does not possess the expertise to conduct advanced research, foreign participation is generally encouraged.

China has committed to eliminate export performance, trade and foreign exchange balancing, and local content requirements. China has also committed to enforce only technology transfer rules that do not violate World Trade Organization WTO standards on IP and trade-related investment measures. In practice, however, local officials and some regulators prefer investments that develop favored industries and support the local job market. Provincial and municipal governments often restrict access to local markets, government procurement, and public works projects even to firms that have invested in the province or municipality.

In addition, Chinese regulators have reportedly pressured foreign firms in some sectors to disclose IP content or license it to competitors, sometimes at below market rates. In China, as elsewhere, there are vast opportunities in cloud computing. A broad range of companies are using online data storage to capture cost savings and easier access to data. For example, a draft counterterrorism law that began working its way through the legislative process in early December contains troubling requirements for ICT companies, including data-localization provisions.

This draft law would require all telecommunications and Internet businesses to place all data-related equipment and store all domestic user data within China. At the 24th U.

Update: Latest Guidance Catalogue for Foreign Investment Industries Released - China Briefing News

In China, all commercial enterprises require a license from the government. There is no broad right to establish a business. Disposition of an enterprise is also tightly regulated. The Administrative Permissions Law requires reviews of proposed investments for conformity with Chinese laws and regulations, and is the legal basis for China's complex approval system for foreign investment.

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The Chinese legal system mediates acquisition and disposition of property. Chinese courts have an inconsistent record in protecting the legal rights of foreigners. All land in China is owned by the State. Individuals and firms, including foreigners, can own and transfer long-term leases for land, structures, and personal property, subject to many restrictions. China's Property Law stipulates that residential property rights will be automatically renewed while commercial and industrial grants shall be renewed absent a conflicting public interest.

A number of foreign investors have seen their land-use rights revoked when neighborhoods are slated by the government for development. Investors report compensation in these cases has been nominal. China's Securities Law defines debtor and guarantor rights and allows mortgages of certain types of property and other tangible assets, including long-term leases as described above. China does not have laws or regulations prohibiting foreigners from buying non-performing debt, which they may acquire through state-owned asset management firms.


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In general, criminal penalties for infringement are not applied on a frequent and consistent enough basis to significantly deter ongoing infringement. Furthermore, administrative sanctions are typically non-transparent and are so weak as to lack a deterrent effect. Because of relatively low damage awards, civil litigation against IPR infringement continues to have a limited effect. China's legal and regulatory system is complex and Chinese regulators and other government authorities inconsistently enforce regulations, rules, and other regulatory documents.

Foreign investors rank inconsistent and arbitrary regulatory enforcement and lack of transparency among the major problems they face in China's market. In addition, it has also issued notices to require its own departments and other central government agencies to post proposed trade- and economic-related administrative regulations and departmental rules on the official SCLAO website for public comment.


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Comment periods can be extremely brief, and the impact of public comments on final regulations is not clear. Moreover, there are an increasing number of regulatory policies for which public comment is not sought before they are finalized. Foreign investors report that Chinese regulators at times rely on unpublished internal guidelines that nonetheless affect their businesses. State actions motivated by a perceived need to protect social stability or achieve other political goals can affect foreign investors.

Access to foreign online resources, including news, cloudbased business services, and virtual private networks VPNs , is often and increasingly restricted without official acknowledgement or explanation. Foreign-invested companies have also reported threats of retaliation by the government for actions taken by the U. Bank loans continue to provide the majority of credit in China, although other sources of capital, such as corporate bonds, trust loans, equity financing, and private equity financing, are expanding their scope, reach, and sophistication.

Regulators use administrative methods to control credit growth, although market-based tools such as interest rate policy play an increasingly important role. The People's Bank of China PBOC , China's central bank, has gradually increased flexibility for banks in setting interest rates; the floor on the lending rate was removed in The PBOC has increased flexibility on deposit rates and has said that the ceiling on deposit rates will be gradually lifted, possibly within the next year. Favored borrowers, particularly SOEs, benefit from greater access to capital and lower financing costs, as lenders perceive these entities to have an implicit government guarantee and hence lower risk profiles.

Small- and medium-sized enterprises SMEs , by contrast, experience the most difficulty obtaining bank financing, and instead, often finance investments through retained earnings or informal channels, including other Chinese firms or private lenders. The Chinese authorities have taken successive steps to increase the transparency and strengthen the supervision of these activities, while also permitting their continued development, as in many cases, these products increase channels for private firms to obtain capital at market rates.

In , the government also announced a pilot program that will allow private investors to establish small commercial banks, with an expansion of this pilot in Non-bank financing has expanded over the last few years, including through public listing of stock, either inside or outside of China, and more firms are issuing bonds. Most foreign portfolio investment in Chinese companies occurs on foreign exchanges, primarily in New York and Hong Kong. In addition, China has significantly expanded quotas for certain foreign institutional investors to invest in domestic stock markets, and has approved a two-way cross-border equity direct investment scheme between Shanghai and Hong Kong, which will allow Chinese investors to trade designated Hong Kong-listed stocks through the Shanghai Exchange, and vice versa.

Direct investment by private equity and venture capital firms is also rising rapidly, although from a small base. The reported non-performing loans NPL ratio rose to 1. China's leading SOEs benefit from preferential government policies and practices aimed at developing bigger and stronger national champions. SOEs enjoy favored access to the most essential economic inputs land, hydrocarbons, finance, telecoms, electricity and considerable power in the markets for others steel, minerals.

SOEs have long enjoyed preferential access to credit and the ability to issue publicly traded equity and debt. According to some Chinese academics, provincial governments have used their power to manipulate industrial policies to deny operating licenses in order to persuade reluctant owners to sell out to bigger state-owned suitors. The December Guiding Opinions Concerning the Advancement of Adjustments of State Capital and the Restructuring of State-Owned Enterprises called on China to consolidate and develop its state-owned economy, including enhancing its control and influence in "vital industries and key fields relating to national security and national economic lifelines.

At the time the document was published, the Chairman of the State-owned Assets Supervision and Administration Commission SASAC listed industries in which the State should maintain "absolute control" aviation, coal, defense, electric power and the State grid, oil and petrochemicals, shipping, and telecommunications and "relative control" automotive, chemical, construction, exploration and design, electronic information, equipment manufacturing, iron and steel, nonferrous metal, and science and technology.

China maintains that these lists do not reflect its official policy.

Update: Latest Guidance Catalogue for Foreign Investment Industries Released

In some cases, more than 50 percent ownership in some of these industries has been permitted on a case-by-case basis, especially if a particular expertise or technology is deemed important at the time. China's State Assets Law is intended to safeguard China's economic system, promote the "socialist market economy," fortify and develop the state-owned economy, and enable SOEs to play a leading role in China's economy, especially in "vital industries and key fields.

China has indicated to the Working Party that it intends to use OECD guidelines to improve the professionalism of its SOEs, including making boards more independent from political influence. Analysts have discussed the need to push forward a clear separation of SOE administration and policy functions. SOEs enjoy preferential access to a disproportionate share of available capital, whether in the form of loans or equity. Moreover, SOE executives are often promoted to high-ranking positions in the Central Party or local government positions, which further complicates the regulation of Chinese SOEs.

CIC is overseen by a board of directors and a board of supervisors and invests on a year time horizon, using rolling annualized returns to evaluate performance. Corporate social responsibility CSR , or what is increasingly known as sustainability, is a relatively new concept for domestic companies in China, where it is less widely accepted than in the United States. Investors looking to partner with Chinese companies or expand operations with Chinese suppliers face challenges ensuring domestic firms meet internationally recognized, voluntary industry standards in such areas as labor, the environment, and good manufacturing practices.

China's 12th FYP highlights sustainability issues as a means to draw attention to the subject. Foreign-invested enterprises tend to follow generally accepted CSR principles, and most report annually on their CSR policies and achievements. In the past year China has appeared more willing to engage in dialogue around international standards for responsible investment. The risk of political violence directed at foreign companies operating in China remains small.

Every year there are reportedly many tens of thousands of protests. The government is adept at handling them without violence, but given the number of mass incidents annually, the potential for violent flare-ups is real. Violent but unconnected protests that have occurred throughout China generally involved ethnic tensions or local residents protesting corrupt officials, environmental and food safety concerns, confiscated property, and disputes over unpaid wages. In several recent examples, workers and mid-level managers have protested against corporate merger and acquisition decisions on the grounds that employees were not consulted.

There have also been a small number of cases of foreign businesspeople being trapped in China during a business dispute. Corruption remains endemic in China.

China's 2011 foreign investment industrial guidance catalogue

The lack of an independent press, as well as the fact that all bodies responsible for conducting corruption investigations are controlled by the Chinese Communist Party, hamper the transparent and consistent application of anti-corruption efforts. According to Chinese law, accepting a bribe is a criminal offense with a maximum punishment of life in prison or death in "especially serious" circumstances.

The maximum punishment for offering a bribe to a Chinese official is five years in prison, except when there are "serious" or "especially serious" circumstances, when punishment can range from five years to life in prison. A February amendment to the Criminal Law made offering large bribes to foreign officials or officials of international organizations a punishable offense, although there has yet to be a prosecution.

The Supreme People's Procuratorate and the Ministry of Public Security investigate criminal violations of laws related to anti-corruption, while the Ministry of Supervision and the Chinese Communist Party Discipline Inspection Commission enforce ethics guidelines and party discipline.

China is in the midst of the most intensive and large-scale anti-corruption campaign it has seen in decades, with investigations reaching into all sectors of the government, military and SOEs. President Xi Jinping has said that endemic corruption threatens the Party's survival. The Party announced at its annual plenums in and its intention to press ahead with judicial and administrative reform and to more thoroughly fight corruption.

Key Party meetings in late and early pledged to use judicial reforms to institutionalize the fight against corruption, but concrete measures are only just beginning to emerge.