HOW TO DO BUSINESS IN CHINA

Qiang Bjornbak[1]

I.              Understand the Differences

A.   Different Cultural Backgrounds and Expectations

1.    Networking versus individual efforts

2.    Not litigious

B.   Different Mentalities

1.    Subtle v. Direct

2.    Vague v. Precise

3.    Face Saving

II.            Target a specific investment area

1. Legal Services

1. Eliminate the quantitative restrictions: Foreign law firms can establish more than one representative office in China.
2. Each office should have a chief representative with more than 3 years experience, and other lawyers with more than 2 years experience.
3. Foreign law firms are prohibited from hiring Chinese national registered lawyers. If Chinese lawyers decide to be employed by a foreign law firm, they will lose the capacity to practice RPC law.
4. Foreign law firms are prohibited from engaging in any Chinese legal business, such as litigation in China, providing a legal opinion based on Chinese law, representing a client before a PRC administrative agency.
5. Foreign law firms can provide information regarding the Chinese legal environment.
6. Foreign law firms can only engage in profit-making activities with respect to advice on foreign and international law.
7. Representative offices can collect fees if settlement is made in China.
8. Representative offices are subject to yearly review and renewal.

Regulations Regarding the Administration of Representative Offices of Foreign Law Firms in China

2. Banking Services

Foreign-funded Financial Institutions

1. The new regulations remove both client restrictions on FFI's (Foreign-funded Financial Institutions) foreign currency business within China and quantitative restrictions on the foreign currency business of FFIs as a condition to RMB market access.
2. Get approval of PBOC before establishing online banking service. (People's Bank of  China)
3. Foreign investor cannot acquire more than 20 % of a domestic Chinese financial institution.

4. Form of investment:

a. WFO banks, foreign bank branches, and equity joint venture banks,

b. WFO finance companies and joint venture finance companies

5. Scope of business for foreign funded banks: 1) accept public deposits; 2) issue loans; 3) handle acceptances and discounts on negotiable instruments; 4) buy and sell government bonds, financial  bonds, and other foreign currency securities other than stocks; 5) provide letter of credit; 6) conduct domestic and overseas settlement; 7) buy and sell foreign exchange on its own behalf or as an agent; 8) conduct foreign exchange; 9) conduct inter bank loans; 10) engage in bank cards; 11) provide safe deposit; 12) provide credit investigation, consulting services, etc.
6. Scope of business for foreign funded finance companies: 1) accept deposits; 2) issue loans; 3) handle acceptances and discounts on negotiable instruments; 4) buy and sell government bonds, financial bonds and other  foreign currency securities  other than stocks; 4) acceptance and discounts  on negotiable instruments; 5) provide guarantee, 6) buy and sell foreign exchange on its own behalf or  as  an agent; 7) provide interbank loans; 8) engage in credit investigation and consulting services; 9) provide foreign exchange trust services; 10) may not engage in the bank card business but may provide foreign exchange trust services.

Auto Finance Company

1. Business Scope: lead money and extend loan guarantees to car buyers and dealers
2. Minimum total assets: RMB 4 billion
3. Minimum revenue: RMB 2 billion
4. Minimum registered capital: RMB 500 million
5. One investor one company; no branches

Law on the People's Bank of China

Amendment to the Law on the People's Bank of China

Commercial Banking Law of the People's Republic of China

Amendment to the Commercial banking Law of the People's Republic of China

Administration of Foreign-funded Financial Institutions Regulations

Provisions relevant to the Implementation of the Circular (PBOC circular)

Anti-money Laundering Laws

Measures for the Administration of Car Finance Companies

Announcement Regarding Further Opening Renminbi Business to Foreign Invested Financial Institutions

Measures for the administration of Investments and share purchases of Domestic Financial Institutions by Foreign Financial Institutions

Amendment to the Law on the People's Bank of China

Amendment to the Commercial Banking Law of the People's Republic of China

Measures for the Administration of Car Finance Companies

3. Telecommunications

1. It must be equity joint venture (no more than 50%)

2. A license from MII (Ministry of Information Industries) is required.

3. Two years after accession, 50% foreign share participation for value added services (including e-mail, voice mail, internet access, online information and database retrieval and value-added fascimile services)

4. Five years after accession, 49% foreign equity share for mobile voice and data services (including all analogue, digital, cellular and personal communications services)

5. Six years after accession, domestic and international services (including voice, fax and data).

6. Eliminate geographic restriction for paging and value-added services two years after accession, for mobile voice and data services in five years, and for domestic and international services in six years.

7. Minimum registered capital ranges from 1 million RMB to 2 billion RMB.

Administration of Foreign-funded Telecommunications Enterprises Provisions

Catalogue of Telecommunications Services

4. Insurance

Foreign Insurance Companies

1. License requirements: 1) more than 30 years of experience, 2) a representative office in China for two consecutive years, 3) total assets of more than $ 5 billion at the end of the year prior to application.
2. Foreign Non life insurers: branches or enter into JV with equity interest up to 51% upon accession, a WFOE non life insurance company two years after accession. As of December 1, 2003, Foreign invested property insurance companies can contact all non-life insurance business, except for statutory insurance.
3. Foreign life insurer:  JV with equity interest of up to 50% upon accession. Three years after accession, it can provide health insurance, group insurance, and pension/annuities insurance to foreigners and Chinese.
4. Lifting of geographical restrictions: Upon accession, Guangzhou, Shanghai, Shenzhen, Dalian, Liaoning, and Foshan. Within two years of accession, Beijing, Chongqing, Tianjin, Chengdu, Fuzhou, Xiamen, Suzhou, Ningbo, Shenyang, Wuhan will be added. All geographic restrictions are to end within three years of accession. Master policies for large commercial risks by licensed nonlife insurers are not subject to geographical restrictions.

Insurance broker

1. License requirements: 1) 30 consecutive years of operation, 2) representative offices in China for at least two consecutive years, 3) and minimum total assets of $ 500 million upon accession, $ 400 million one year after accession, $ 300 million two years after accession, $ 200 million four years after accession.
2. Foreign Equity: 50% upon accession, 51% with 3 years of accession, a WFOE within five years of accession.
3. Geographic restrictions: Dalian, Foshan, Guangzhou, Shanghai, and Shenzehn upon accession, Beijing, Chengdu, Chongqing, Fuzhou, Ningbo, Shenyang, Suzhou, Tianjin, Wuhan and Xiamen will be added two years later. No geological restrictions after 3 years.

Types of foreign-funded insurance companies, insurance brokers and their registered capital

1. Types of foreign-funded insurance companies

1. an equity joint venture insurance company
2. a wholly foreign-owned insurance company
3. a foreign insurance company branch within China

2. Types of foreign-funded insurance brokerages and agencies

1. a LLC
2. a company limited by shares

3. Types of Insurance agencies

a. Partnership

b. LLC

c. Company limited by shares

4. Minimum registered capital of EJV and WFOC & Foreign funded branches is RMB 200 million, Insurance brokerage in the form of LLC, RMB 10 million, insurance agency RMB 500,000

Insurance Law

Administration of Foreign-funded Insurance Companies Regulations

Provisions for the Establishment of Reinsurance Companies

5. Travel

1. Foreign investor must be a travel agency or an enterprise mainly undertaking tourism, with total annual amount of tourism business more than USD 40 million for foreign holding travel agency or USD 500 million for foreign-owned travel agency, a member of the national (regional) association of tourism, and a good international credit.
2. No less than registered capital of RMB 4 million.
3. Geological restrictions: Beijing, Shanghai, Guangzhou, Shenzhen, Xi'an and other area approved by the State Council.
4. Numerical restrictions: one agency for one foreign investor.
5. Cannot directly or indirectly engage in business relating to going abroad of Chinese citizen or Chinese people in other regions going to Hong Kong, Macao, and Taiwan regions.

Interim Provisions on the Establishment of Foreign holding and wholly Foreign-owned Travel Agencies

6. Transportation

Foreign-invested International Freight Forwarding Agencies

1. Minimum Registered Capital: US $ 1 million, subject to a US $ 120,000 increase for each additional branch.
2. Minimum number of personnel: at least 5 personnel who has 3 year experience of engaging in international freight agency
3. Maximum of Foreign investor equity: 75%
4. Prohibited Business: carriage of personal letters and most types of government-related documents
5. Restrictions: Wait for 2 years before establishing a new joint venture and one year before establishing a branch.
6. Form of corporation: LLC or company limited by shares, with a controlling shareholder that meets certain criteria in regards to experience and resources.

International Sea Transportation Regulations

Administration of Foreign-invested International Freight Forwarding Agencies Provisions

Measures for the Administration of Foreign-invested International Freight Agencies

Supplementary Provisions to the Measures for the administration of Foreign Invested International Freight Agencies

Detailed Rules on the Provisions for the Administration of International Freight Agencies

7. Retail Service
8. Securities

Securities Law

Administration of Securities Investments in China by Qualified Foreign Institutional Investors Tentative Procedures

Administration of Foreign Exchange for Securities Investments in the PRC by QFIIs Tentative Provisions

Establishment of Fund Management Companies with Foreign Equity Participation Rules

Establishment of Securities Companies with Foreign Equity Participation Rules

Securities Investment Fund Law of the People's Republic of China

I. Education

1. Encourage Sino-foreign efforts in higher education and occupational education
2. Prohibit the establishment of educational institutions to engage in compulsory education, military, police and politics education, and religious education.
3. The value of investors' intellectual property investment may not exceed one-third of the educational institutions' registered capital.
4. Mandatory licensing procedure.
5. Tuition fee should not be arbitrary and be paid in RMB.

Regulations of the People's Republic of China on Sino-Foreign Cooperative Education

J. International trade

1. Register with foreign trade agency under State council or its authorized agencies
2. Certain goods may be subject to state trading.
3. Submit the automatic licensing application before going through the Customs.
4. Register with foreign trade agency even if importing or exporting technologies are not subject to any restrictions.
5. Foreign trade agency should publicize a list of goods and technology that are subject to restrictions and prohibitions.
6. Prohibit the import of products produced or sold by IP infringer.
7. Foreign trade remedies: antidumping, countervailing measures, and safeguard measures.

Foreign Trade Law of People's Republic of China

III.           Investment Vehicles

A.   Local distributors

B.   Licensing

C.   Franchising

D.   Equity Joint ventures

Chinese-Foreign Equity Joint Venture Law

Interim Measures governing the establishment of Chinese-Foreign Equity Joint Foreign Trade Corporations

E.   Wholly foreign owned enterprises

Wholly Foreign Owned Enterprise Law

Regulation on the Administration of Foreign-Invested Capital Enterprises

Catalogue Guiding Foreign Investment in Industry

Regulation on Guiding Foreign Investment Direction

Decision Concerning Revision of the Interim Provisions on Foreign Invested Investment Companies and their Supplementary Regulations.

F.    Contractual joint venture

Contractual Joint Venture Law

G.   Merger and Acquisition

Administration of the Takeover of Listed Companies Procedures

Administration of Disclosure of Information on the change of Shareholdings in Listed Companies Procedures

Interim Provisions on Mergers and Acquisitions of Domestic Enterprises by Foreign Investors

H.   Modified FIE laws

1. Wholly Foreign Owned enterprise law

1. Eliminate export performance requirements.
2. Delete advances technology and import substitution requirements.
3. Delete foreign exchange balancing requirements.
4. Delete the requirement that only those machines that cannot be produced in China or their availability cannot be guaranteed will be allowed to contribute as capital investment.
5. Delete prohibition against WFOE direct domestic sales of products without prior government approval.
6. Delete requirement that raw materials and fuel for WFOEs be obtained solely within China unless unavailable from the domestic market.
7. Delete requirement that WFOEs submit production and operation plans to local authorities.
8. Delete requirements that WFOEs sell products in accordance with China's price control and tax authorities.
9. Delete from the law specific limitations or prohibitions to WFOEs investment in certain business lines, including foreign trade, real estate, communications and transportation, and public utilities.
10. WFOEs is permitted to adjust the scale of their registered capital upon the approval for such adjustment.
11. Application to establish WFOEs can be denied for following reasons:

1)    Endanger China's national security

2)    Violate China's laws and regulations

3)    Detriment to China's sovereignty or public interest.

4)    Nonconformity with requirements of the development of China's national economy.

5)    Possibility of environmental control.

2. The Chinese foreign equity joint venture law

1. Replace a list of allowed trades with reference to the directions of the state for foreign investment and the catalogue of foreign investment industries.
2. Delete requirement that JVs either procure raw materials, fuel and some capital goods from the domestic market or source from the international market using on hand foreign currency.
3. Delete requirement that JVs file production and business plans with government offices and implement the plans through business contracts.
4. Delete foreign exchange balancing requirements.
5. Delete the mandatory export performance requirement
6. Delete advances technology requirements.
7. Delete the requirement that capital contribution as machine, materials, and IP rights must be approved by Chinese partner before submitting the plan to the approval agency.
8. Delete the clause that director of the board should come from Chinese partner.
9. All insurance of an equity joint venture shall be furnished by insurance companies within the Chinese territory instead of from Chinese insurance companies.
10. JVE is permitted to adjust the scale of their registered capital upon the approval for such adjustment.
11. Delete requirements that JVEs sell products in accordance with China's price control authorities.
12. Instead of mandatory Chinese banks, JVE can establish bank account in banks within China.

3. Chinese contractual joint venture law

a. Delete foreign exchange balancing requirements.

IV.          U.S. Regulations Affecting Doing Business in China

A.   Foreign Corrupt Practices Act: bribery versus business

B.   Export control

1.    Written approvals must be obtained before exporting defense articles, technical data, and defense services.

2.    Employment of a non-resident alien is deemed an export.

3.    Technical data exclude the information in the public domain.

4.    Defense services regulate the act of assisting foreign persons in any aspect of defense articles, including providing technical data and military training. Defense services must be in direct support of fundamental research and will be limited to discussion on assembly of an article fabricated for fundamental research or integrating such article into a scientific, research, or experimental satellite.

V.           Antidumping and Countervailing measures

A.   Better defense from China. Chinese enterprises win more cases on antidumping issues.

B.   Take initiative to use this tool to protect Chinese industries from imported dumping goods.

1.    Pass new antidumping and countervailing laws.

2.    A domestic enterprise or government authorities may register a case.

3.    The fair trade bureau for import and export under MOC must decide whether to register a case within 60 days.

4.    MOC is in charge of investigation.

5.    Methods of investigation include questionnaire, sampling, hearings, expert examination, on site investigation and so on.

6.    You must retain a Chinese attorney to do the investigation if Chinese enterprises allege the harm from imported dumping goods.

7.    Judicial review of administrative decisions by intermediate courts and superior courts.

8.    If any country applies discriminatory anti-dumping measures to goods exported from the PRC, PRC may adopt corresponding measures to be applied to that country.

VI.          IP Protection

A.   New Amendments to Patent law

1.    Extend patent protection from 15 years to 20 years.

2.    Allow the patenting of chemical and pharmaceutical products as well as food, beverages, and flavorings.

3.    Stricter standard for compulsory license.

4.    Unauthorized offering for sale is a violation of a patent holder's right.

5.    A clearer definition of employment invention. An employment invention is an invention made while performing the tasks of employer or made by the employee using the employer's material and technological resources.

6.    The defendant bears the burden of proof of legitimate source.

7.    Injunctive relief is available.

8.    Judicial review is available for all three types of patents.

9.    Invalidation procedures are the only mechanism to be utilized at any time after a patent grant to contest the patent.

10. Standards for determining infringement damages are provided.

11. Statutory damages is provided, from RMB 5,000 to RMB 500,000

B.   New Amendments to Trademarks Law

1.    Expand the definition of what may be registered to include collective marks and certification marks.

2.    Protect three dimensional symbols.

3.    Enhance the protection for well-known marks.

1. prohibit the reproduction, imitation or translation of the well-known mark
2. set standards of well-known marks: reputation of the mark, time of continuous use, extent of ad, records of protection and other factors.

4.    Provide pre-litigation injunctive relief.

5.    A court is allowed to assess damages for infringement in the form of either the amount of the improperly earned profit or, where it is difficult to determine the profit, in an amount not to exceed RMB 500,000.

C.   New Amendments to Copyright Law

1.    Protection of rental rights in respect of software and films, the right of public performance of works on the public, the right to distribute works via internet.

2.    Specifically permits the full or partial assignment of economic rights in copyright subject matter.

3.    The restriction in the earlier law that copyright licenses be limited to 10 years has been removed.

4.    Explicit protection for database.

5.    Categories of media and other media were permitted to use copyright works under certain circumstances without payment of royalties.

6.    The fair use by the government must be reasonable.

7.    Strengthened provisions on the enforcement of copyright through civil and administrative measures.

8.    Preliminary injunctions.

9.    The infringer has the burden to prove.

10. The national Copyright administration has a wide range of powers: including administrative injunctions, confiscate illegal income from infringement, confiscate and destroy infringing copies, impose fines.

11. Statutory damages are up to 500,000 yuan if actual damages cannot be determined.

12. Expanded definition of infringement to deter the modern violation of IP rights.

13. Clarification of Administrative Enforcement Powers.

VII.         Impact of WTO

A.   Positive Development:

1.    More than 2300 laws and regulations had been amended to comply with WTO rules and 830 abolished.

2.    Reductions of tariffs occurred in 70 percent of all tariff categories.

3.    China has begun to take steps to implement its commitment to allow both foreign and domestic enterprises to import and export most goods within three years of the accession.

4.    China revised many of its foreign-investment law. China has revised "Catalogue Guiding Foreign Investment in Industry" and its regulations on "Guiding Foreign Investment Direction". Encouraged categories grow from 186 to 262. Restricted categories drop from 112 to 75. Prohibited categories rise from 31 to 34. Chinese government has embarked on an effort to shift away from an operational role in commercial activities to a more detached, regulatory one.

5.    Foreign investment in foreign currency services was allowed nationwide. The right to offer Renmibi lending to foreign companies and individuals has been expanded to include Dalian, Tianjin, along with Guangdong and Shanghai.

6.    China Insurance Regulatory Commission approved seven foreign insurers to set up or expand their insurance operations in China.

7.    China permits foreign investment in the telecom sector if it is a Chinese-Foreign equity joint venture.

8.    China has amended its patent, copyright, trademark laws.

B.   Negative Development:

1.    Legal and regulatory gaps still exist. There is a lack of transparency in implementing the laws and regulations. Legislative language is vague and provides wide administrative discretion.

2.    China has tariffs on certain semiconductors and telecommunications. Insufficient implementation of WTO commitments in quota and tariff rate quota.

3.    China imposes high capital requirements for foreign enterprises to engage in export and import business. There are also geographic restrictions.

4.    Regulations in service sectors require unreasonably high capital requirements and burdensome licensing and re-licensing requirements to establish branch.

5.    China's compliance with TRIPS is a long-term effort requiring extensive transformation.

[1] Law Offices of Qiang Bjornbak

523 West 6^th Street, # 701

Los Angeles, CA 90014

Tel: 213-239 9730

Fax: 213-239 9730

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