What types of foreign investment are allowed in China

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 carry 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 put in 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 funds will convert a private company into a foreign JV.