This content is from: Local Insights

China

Market access for foreign enterprises into China is still restricted. Particularly limited are possibilities for the establishment of foreign investment enterprises (FIE), including equity and contractual joint venture companies with Chinese and foreign investment as well as wholly foreign owned enterprises, directly engaged in trading and distribution activities.

Generally, only Chinese entities with so-called foreign trade authority are legally permitted to carry out import and export activities. FIEs, by definition, are vested with foreign trade rights. However, such rights are limited to the import of equipment, materials, parts and products required for the FIE's own production and to the export of products manufactured by the FIE.

There are only a few exceptions so far where FIEs with a business scope covering trading and retailing of third party products, can be or have been approved.

The Foreign Investment Guidance Catalogue of China, revised at the beginning of 1998, only permits the establishment of FIEs dealing in foreign trade if the Chinese partner to the project holds at least 50% of the equity interest. A wholly foreign owned enterprise in the area of foreign trade is not permitted. As a first step, China introduced in 1996 the possibility that foreign trade companies are established as pilot projects in certain regions, namely the Shanghai Pudong New Area or the Shenzhen Special Economic Zone. The foreign partner is required to have had an annual turnover of at least US$5 billion (worldwide) and an average business volume in China during the last three years of US$30 million. These pilot projects are mainly to attract multinational trading and retail companies.

In addition, there are certain regions in China where a more liberal policy and greater flexibility in the approval of FIEs are tolerated. One of these areas is the Shanghai Waigaoqiao Bonded Zone. Here, it is permitted that foreign enterprises establish majority joint venture companies or wholly foreign owned enterprises engaged in foreign trade. However, a literal reading of the relevant local provisions and their business licences only permits these enterprises to trade within the zone. Any sales into other parts of China then qualify as a foreign trade transaction, requiring on the side of the purchaser/importer an entity vested with foreign trade authority. Nevertheless, these bonded zones have established a practice which considerably eases customs clearance and import value added tax payments when foreign investment companies established in them trade with other parts of China.

Under national Chinese law, holding companies established by foreign investment enterprises in China are limited to act as agents regarding the products of their subsidiaries and may not carry out sales in their own name.

It is worth looking at Shanghai, where pilot projects are often introduced before they are sanctioned nationwide. There, it seems that a foreign company with significant investment in China (requirements comparable to those of a holding company) and diversified production outlets in China may be permitted to establish a trading company in China. One requirement seems to be that the enterprise is a joint venture enterprise with significant Chinese equity interest.

The business scope of the company will, however, be limited to the distribution of products manufactured by other, affiliated foreign investment manufacturing companies in China. The scope does not include trading of products of the parent company manufactured outside the China or of unrelated companies. It remains to be seen whether this concept will be introduced on the national level after the practical experience of Shanghai enterprises and authorities.

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