What types of foreign Investment 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.
