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China’s Laws, Rules & Regulations 中国法律法规


China’s Laws, Rules & Regulations

Discussion Questions
? What are the key aspects of China’s political and legal environment? What options are available for foreign investors in preparing their business entry to the China market? ? How has China’s accession to the WTO membership created new opportunities and challenges for both Chinese and foreign enterprises? ? What are the legal, political and investment risks involved in doing business in China? What are the possible solutions? ? Why did China establish the Shanghai Free Trade Zone in 2013? What opportunities and challenges will the Shanghai Free Trade Zone provide for foreign investors?

China’s Political and Legal Environment
1.The political system is stable. But, although the state looks powerful from the outside, it looks less so from within 2. The communist party (CCP) is in transition. They now allows business people, or “capitalists”, to become members. But if the CCP want to keep power, it is going to have to sacrifice Marxism and communism. 3. The legal system is subordinate to the CCP ?Rule by man not rule by Law. Judges are appointed and promoted by the local party committee and government elite, not by the Ministry of Justice.

Ten Golden Business Rules for China
? Assemble the right team, train locals ? Know the market and operating environment ? China is not one but eight distinctly different markets ? Look for multiple points of entry ? Observe market developments and changes ? “Seek truth from fact” (Business records, statistics, statements etc) ? Know how to benefit from the information network and develop allies ? Be creative and pragmatic - like driving a car in China. “Grope one’s way, stone by stone, across the river” ? Have patience and keep options open -final offers are the first stage of negotiations ? Remember: You are in China to make money! *

* Conflict of interest: + China Managers strive for operational success (eg. sales) + Head Office expects Return on Investment

Foreign Investment Options
Trends

- Joint Ventures - Wholly Foreign Owned (WFOE) - Merger and Acquisition

PRODUCTION IN CHINA – AVAILABLE ALTERNATIVES
Equity Joint Venture (EJV) Legal Form
Foreign Partner’s Equity

Co-operative Joint Venture(CJV)
May be set up as a legal entity or as an enterprise having no separate legal person status

Wholly Foreign Owned Enterprise (WFOE)
Legal entity with Limited Liability 100% Not Required Required
Benefits to the China national economy

Legal entity with Limited Liability Normally cannot be less than 25% Required Required
Benefits to the China national economy, Export-oriented or utilize Advanced technologies

No strict requirement. Depends on contract

Contract
Articles of Association Standards for Investment

Required Required
Export-oriented or utilize Advanced technologies

MOFTEC Approval Project Proposal Feasibility Study SAIC registration Capital Contribution

Required Required Required Required Cash, Capital goods, Industrial Property rights
Foreign: Advanced technology and equipments must truly suited to the needs of China

Required Required Required
Required if there are changes in the statutory items (industrial/ commercial and tax registrations)

Required Required Required Required Cash, capital goods, industrial property rights, know-how, land use rights Not necessary No minimum export required
Accounting as separate entity required. Account book must be kept in China

Board of Directors Export requirement Accounting
Profit/ Loss Distribution

Required. Decided under contract No minimum export required

Chinese: Land use right

Cash, material objects, land-use rights, industrial property rights, unpatented technology and other property rights Either a Board of Director or a Joint Management Committee is needed No minimum export required Account book must be established and kept in China Profit and loss shared according to contract terms Corporate Income Tax Specified in the contract Permitted PRC Law

Accounting as separate entity required. Account book must be kept in China
Profit and loss shared according to the ratio in registered capital

After deduction of necessary fees and tax, profit can be repatriated overseas

Tax Investment Term Early Termination Governing Law

Corporate Income Tax Depends on industry; usually decided by contract Permitted PRC Law

Corporate Income Tax Submit at time of registration Permitted PRC Law

Forces that Shape the China Market
1) Monitor and understand WTO induced restructuring 2) Exploit opportunities resulting from WTO, especially domestic trading, distribution and opening branch offices 3) Exploit growing disposable income 4) Monitor inland developments and opportunities 5) Concentrate on developing and maintaining competitive strategies (competition from domestic companies is increasing) 6) Culture of Chinese companies changing 7) Improve branding and image building 8) How to deal with skill shortage? (e.g. insurance sector) 9) Attract and keep high-caliber local managers as the competition for them heats up from newcomers and domestic companies Markets with development potential are: Telecom, Chemicals, Machinery, Fast Moving Consumer Goods (FMCG), IT and Services.

Legal Opportunities of Representations
?agreements of tenancy (business and living-room) ?residents permits for foreign employees ?showing company logo ?using of business-cards ?opening bank accounts ?indirect employment of Chinese staff (about a service agency
licensed by national administration)

The Tasks of Representations
Representations are not allowed to set up business activities, i.d. they are not allowed to issue invoices in China. Main Tasks: ?observation of the market, ?contacting, maintaining contacts, ?strengthening the ties to clients, ?After-sales Service ?promotion and support of the company's name or brand, ?market study.

Wholly Foreign Owned Enterprise
Advantages
uncomplicated license procedure, no negotiations with a potiental partner necessary

launching of a completly new company, no taking over and restructuring of an obsolete company
no problems in evaluating

more flexibility in how to empower management
free locational choice

Wholly Foreign Owned Enterprise
Disadvantages
higher investments strict regulations for export there is no established partner for setting up a distribution net

personell and management has to be send over

Equity Joint Venture
legal basis
Law on Chinese Foreign EquityJoint Venture 8.7.1979, revised 4/4/90, Regulations for the Implementation of the Law on Foreign Equity Joint Ventures from 9/20/83, Law on Companies 7/1/94

aims Distribution in China foreign minimum share 25 % legal form of enterprise

usually Limited Liability Co.

Joint Venture
Advantages
existing base for localization existing distribution net as well as a functioning net of suppliers

Joint Venture
Disadvantages
no freedom of choice concerning operative and strategic company decisions

a planned increase in share capital can be blocked by the partner
no absolute secrecy of know-how can be ensured

no free choice of location

JV-Problems
problems

?different interests on both sides

?uncontrolled Know-How transfer
solution

?foundation of a WFOE, ?restructuring of the jv, ?restructuring of decisioning areas ?increasing tendency
to WFOE

Which legal form of enter- Which form would you prise did you choose? choose now?
no answer CJV WFOE

6% 18%
34%

11% 9% 60% 18%

EJV

42%

How long took it medium-sized business companies to prepare their undertaking of investment?

less than 1 year 1 to 2 years
31 40

no comment
1 4

5 years and more
24

2 to 5 years
in percent %

Main problems for representations concerning the preparation of investments in China

reliable market information search and choice of partners local employees negotiations, contract concluding feasibility study adjusting of products/services to the Chinese market financing insufficient support by Chinese authorities commercial protection of law

73
43 40 33

25
24 19 17 9

0

20

40
in percent %

60

80

Main problems for representations concerning the realization of investments in China
payment behavior of clients other market characteristics than expected local employees standard of performance of local contributors establishing distribution 38 34 32 18 16 15 13 47 42

co-operation with the JV-partner co-operation between German management and Chinese personnel
local infra-structure certainty and implementing of law corruption

13
financial difficulties of the JV-partner local negotiation culture 17 10 in percent %

0

10

20

30

40

50

Problems Concerning the Representation

competition by other companies
3 19 51 25

overview of the market
1 41 43 12

competition by Chinese companies
26 30 29 14

corruption
25 32 31 10

identify potential clients
3 60 31 4

adjustment of products/ performances to the demands of the clients
100 no relevance 80

11 60

61 40 20 problematic 0

23 20

4 40 60 80

slightly problematic

highly problematic

The Market Situation and WTO Implications
China’s accession to the WTO will bring both new opportunities and new challenges Manufacturing Challenges: - “Made in China” or “Import” - Reduction in tariff rates ? will impact everyone’s manufacturing strategy Manufacturing in China no longer a key advantage - New competitors emerging - Wholly Foreign Owned Enterprise (WFOE) or Joint Venture (JV)? Manufacturing Opportunities: - Tariff reductions ? reduction in imported material costs - Heightened competition ? domestic restructuring ? M&A opportunity - New FDI in logistics, distribution and customer financing ? better support services

Chinese legend: “The hills are high, the Emperor is far away”

Business Challenges
? Size and diversity of country ? Personnel development ? Operational limitations: business activity, industry scope ? Reliability of information and data For example, financial data (balance sheet, profit & loss statement) ? Predictability: unexpected policy changes create uncertainty for foreign investors. For example, China Netcom (telecom backbone carrier), in which Goldman Sachs and News Corporation invested US$25mio, is to be amalgamated, in North China with rival China Telecom (State owned)

China’s Current Problems (1)

- Domestic Trade barriers

are a major hurdle for companies in China Trade and investment between China’s provinces has largely stagnated. “International Corruption Perception Index” - China 3.5 (nearly corrupt) - Hong Kong 7.9 (nearly clean) * Bank of China 28% * Construction Bank 40-50% * Agricultural Bank 80-90% (estimates by foreign banks) For comparison: International Norm 6% - censorship of media - new restrictions for service providers are to screen private e-mail messages for political content …

- Corruption is rampant

- Non-performing loans

- Lack of Transparency

China’s Current Problems (2)

- Potential for social unrest: Increasing unemployment resulting from the reform process, growing income disparity city / countryside and coastal provinces and the interior.
- Not playing by the rules: Local protectionism Unauthorized local fees & taxes

- IPR infringement, product piracy - Poor enforcement of court judgments: “amazingly poor, even in local cases” (J. Cohen, US attorney) - Glass ceilings: “Guanxi” prevents direct action against senior officials and their children Especially in North East China

- Fresh water shortage:

Potiential Risks Involved in Doing Business in China
Export Representation
?legal uncertainties ?political risks ?hidden costs

Companies

general risks

?over estimating the market ?loss of know-how ?insufficient planning ?staff

specific risks

?default of payments ?no close customer relations ?wrong choice of agents

?jv problems ?moral of clients concerning payments

Over Estimating the Market
PROBLEME
Problems

?China is not a market with a potential of 1,2 b clients!!! ?lokal and foreign competition is enormous !!!

Solutions

?enter the market step by step ?regular market analysis
volume of trade

company

representation

export through agents

time

Loss of Know-How

problems

?permanent infringements of copyright

?no legal opportunities to avert those infringements
solutions

?short development and product life-cycles ?registering of brands, labels and patents ?lobbying authorities, department of trade and industrie etc. ?do not produce main components in China

Problems Concerning Staff

problems

?finding appropiate staff, fluctuation of employees
solutions

?controlling and support by German management, ?clear distinction between board and management, ?personell management, development of staff etc.

Uncertainty of Planning

problems

?due to insufficient or wrong planning wrong strategic decisions are made
solutions

?drawing up a business plan during the whole phase of entrance in the market ?working out price, distributions and competition analysis, promotion plans

Political Risks

problems

?social tensions due to Chinas shift to market economy, ?increasing unemployment rates, ?significant difference in the increase of income rates between the cities and the countryside
solutions

?none

Legal Risks

problems

?about 1.300 laws are being changed or issued due to Chinas becomming member of the WTO ?the process of adjusting and construeing the new law will take time

solutions

?none

Hidden Costs

problems

?high expenses for launching, quality, travelling
?high costs for production,

?hidden costs
solutions

?exact calculation of costs during entrance in the market
Representation
considerable expenses: ?staff ?travelling ?rents ?communication ?min. Costs???

Company
considerable expenses: ?quality ?education ?long-term aims of payment ?administration ?min. costs???

New Free Trade Zones
? The Chinese government has issued a series of

regulations for the China (Shanghai) Pilot Free Trade Zone, in a bid to allow greater involvement of foreign investors in formerly restricted areas such as telecommunications. ? The Shanghai pilot free trade zone will provide unprecedented breakthrough opportunities for foreign investors. ? Shanghai will strive to work on a set of policies that can be replicated and promoted in China's other potential free trade zones as part of its reform efforts.

Reform Guideline
? The Shanghai government has recently published a

reform guideline, calling for a reduction in government interference in the operation of state-owned enterprises. ? The guideline seeks to ensure that the management of state-owned assets will be put under integrated supervision, replacing previous systems with myriads of separate regulations by local supervision commissions. ? According to a ranking released by the China Institute of City Competitiveness, Shanghai overtook Hong Kong to become China's most competitive city, mainly due to the pilot free trade zone.


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