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INTERNATIONAL BUSINESS
PRACTICES IN CHINA
BUSINESS ORGANIZATIONS
There are primarily three types of enterprises with foreign investment
(foreign-invested enterprises) in China: wholly foreign-owned ventures,
contractual joint ventures and equity joint ventures. As of the
end of 1991, there were about 42,000 approved foreign-invested enterprises
in China. Representative offices are also popular vehicles for establishing
ties between foreign firms and the Chinese market. Other types of
business establishments include consignment sales and service centers
established to market foreign company products and to service those
products, and foreign bank branches.
Representative Offices: For foreign companies, the most common
way to establish a permanent presence in China is to register as
a representative office. Registration legitimizes business operations
in China and allows a foreign company to establish a permanent presence
in the Chinese market. Although representative office personnel
cannot directly sign contracts or receive fees or income in China,
they can perform market research, consulting, or liaison type work.
A foreign company must first find a sponsor organization that will
approve its application to establish an office. An application is
then submitted to the State Administration for Industry and Commerce
(SAIC) for review and registration.
Equity Joint Ventures: Under Chinese law, equity joint ventures
are limited liability companies. Normally, the foreign partner of
an equity joint venture must contribute at least 25 percent of the
capital although there are no limitations on the number of partners
in a venture. Profits are distributed according to each partner's
capital contribution. Upon successful completion of the pre-approval
screening, the Ministry of Foreign Economic Relations and Trade
(MOFERT) or a corresponding authority will normally make a decision
on approval within 90 days. Depending on the scope of the venture,
the contract period may be decided by negotiation among the parties
or in accordance with sector specific regulations. The foreign investor
may not recover its investment until liquidation or sale of the
venture.
Contractual Joint Venture: Under the law governing contractual
joint ventures, often called cooperative joint ventures, the parties
determine the form of operation through the negotiation of a contract.
Generally, the parties agree to operate jointly like partners or
to form a new limited liability company. There are no set government
requirements on the duration of the venture, on the amount of capital
the foreign investor must contribute, or on how profits are to be
distributed. If ownership of the fixed assets of the venture reverts
to the Chinese partner at the end of the contract term, the foreign
investor may recover its share of the investment during the term
of cooperation. Assuming successful completion of the required pre-approval
procedures, MOFERT or a corresponding local authority will make
a decision on approval within 45 days.
Wholly Foreign-owned Ventures: Approval of a wholly foreign-owned
venture depends on whether the enterprise is deemed to benefit the
development of China's national economy. The Chinese government
prefers enterprises which employ advanced technology and equipment
to manufacture products that are important to the national economy
and are not produced in China. Ventures which export a large portion
of their products also are more likely to be approved. MOFERT is
responsible for approval of wholly foreign-owned ventures, although
other national and local authorities typically participate in the
pre-approval screening steps required before the application documents
are forwarded to MOFERT for approval. Because the foreign investor
is the sole operator of a wholly foreign-owned venture, it is responsible
for guiding its application through the Chinese bureaucracy.
EXPORTING
Australia and China signed an agreement on market access for exports
to China. The agreement reduces tariffs for selected products; requires
China to systematically publish its import and export related laws
and guidelines; reduces China's reliance on import quotas and other
restrictions; eliminates China's use of import substitution policies;
and requires that more sales and marketing information be made available
to foreign exporters.
China's stated policy is to bring its trade system into line with
international standards. Thus, the degree of central control over
Chinese business entities may differ widely between industries and
regions. National foreign trade companies that are responsible for
goods tightly controlled by the central plan are still preeminent
in their areas. In other sectors, however, local foreign trade companies,
industry and trade companies, manufacturers and other entities have
increased ability to deal directly with foreigners. Additionally,
many Chinese business organizations have established offices in
Hong Kong, Macau and other locations outside of China, allowing
them to import goods outside the central planning controls. Foreign
companies seeking to negotiate contracts in China may contract MOFERT
or its local branch to ascertain which Chinese organizations are
authorized to directly negotiate and conclude specific types of
foreign trade transactions, or may ask a prospective partner for
written evidence of its ability to directly engage in foreign trade.
The Chinese government encourages barter, compensation trade and
processing arrangements because Chinese buyers sometime lack control
over foreign currency needed to import goods.
The Chinese government issues testing, labeling and certification
standards which may increase documentation required for entry of
goods into China and may require time consuming inspection.
Agents and Distributors: There are few regulations specifically
applying to the conduct of agents and distributors in China. Contracts
between foreign companies and Chinese entities acting on their behalf
are governed by general contract laws and regulations. A number
of experienced foreign trading companies and consultants, most likely
located in Hong Kong or a major coastal Chinese city, represent
a wide variety of foreign manufacturers in China. Also, certain
foreign-invested enterprises are vehicles for distribution within
China.
Chinese trading corporations, under the present trade regime, are
still primarily export oriented, but handle purchasing transactions
for Chinese end users with no direct links to foreign manufacturers.
Agreements between foreign companies and Chinese entities to establish
consignment sales and service centers are increasingly common. Trade
shows and trade missions are also useful ways to begin marketing
a foreign product in China. Direct hiring of Chinese individuals
as sellers and agents is constrained, in part, by existing labor
laws and policies, and the linkage between social and welfare benefits
and employment with a Chinese entity.
Import Restrictions: Under the October, 1992 agreement, China agreed
to eliminate licensing requirements, quotas, controls and other
restrictions for many key U.S. export sectors over a five-year period
commencing on December 31, 1992. China has promised to publish a
list of all organizations that are responsible for authorizing or
approving imports whether through license review or approval, and
will publish procedures and criteria for the approval of import
licenses. In addition, approval of import licenses will not be contingent
upon the transfer of technology to China or the existence of competing
Chinese suppliers. Moreover, China has promised not to subject any
products to any import substitution measures in the future.
Import Duties: China adheres to the Harmonized System (HS) for
tariff classification purposes. There is a general tariff rate and
a minimum tariff rate granted to nations which have concluded tariff
agreements with China, such as Australia. Pursuant to the October,
1992 agreement, China promised to significantly reduce tariffs on
a number of important U.S. produced goods.
Foreign companies or foreign-invested enterprises importing materials
to produce goods to be exported may often obtain an exemption from
custom duties. Foreign representative offices can sometimes obtain
favorable tariff treatment on certain materials imported for office
use.
COMMERCIAL POLICIES
Free-Trade Zones: The central government has approved five free-trade
zones. These are located in the municipalities of Shanghai and Tianjin,
the city of Dalian in Liaoning Province, the city of Haikou in the
Hainan Island Special Economic Zone (SEZ), and within the Shenzhen
SEZ. The zones offer duty-free entry for imported materials used
in production within the free-trade zones. Bonded warehouse areas
have also been approved for cities such as Guangzhou in Guangdong
Province and Dalian.
Exchange Controls: China has a two tiered currency system in use:
foreign exchange certificates (FEC) and renminbi (RMB). The RMB
is not convertible into foreign currency, and is used for internal
commerce, but not for the purchase of imported goods. The FEC is
convertible into foreign currency at government controlled rates
and was designed to be used for the purchase of imported goods.
Thus, control of FEC is a key issue for any Chinese entity wishing
to conduct foreign trade. The State General Administration of Exchange
Control (SGAEC) is responsible for currency exchange issues while
the Bank of China is the only bank authorized to conduct foreign
exchange business.
Foreign-invested enterprises must maintain a separate FEC account
with the Bank of China and repatriation of foreign exchange profits
is regulated by the Bank and the SGAEC. Foreign-invested enterprises
must generally balance their FEC receipts and expenditures. Swap
centers administered by the SGAEC allow foreign-invested companies
to exchange RMB earnings for FEC. SGAEC still sets the swap range
and amount in most cases.
Regulatory Policies: The central government imposes production
quotas and sets prices on key commodities. Under the current five-year
economic plan and annual plans, the State Planning Commission and
its local branches control many of the important purchasing and
investment decisions made by Chinese enterprises. In recent years,
however, the amount of non-plan commercial activity has grown dramatically.
In many industries, market-oriented business practices are increasingly
prevalent.
FOREIGN INVESTMENT
Total U.S. investment in China is approximately US$ 5 billion.
Oil, coal, and hotel and property development projects accounted
for large amounts of investment initially. More recently, investment
funds have shifted to manufacturing ventures. Ventures using advanced
technology or focusing on exports are generally more encouraged
than consumer product and service sector projects.
Potential investments go through a multi-tiered screening process
often involving a number of government clearances at both the national
and local levels. Implementation of national investment laws at
the local level can vary widely. Generally, the five SEZs (Shenzhen,
Zhuhai and Shekou in Guagdong Province, the Hainan SEZ, and the
Xiamen SEZ in Fujian Province) provide good investment incentives
and have established streamlined approval procedures. Many of the
major cities on China's coast have economic and technical development
zones offering incentives similar to those existing in the SEZs.
INTELLECTUAL PROPERTY RIGHTS
In January of 1992, China reached an agreement on intellectual
property rights under which China pledged to make significant changes
in its copyright and patent laws. China also promised to enact legislation
governing the control of trade secrets.
Copyrights: Pursuant to the January, 1992 agreement, China agreed
to accede to the Geneva Phonograms Convention and the Berne Convention
for the Protection of Literary and Artistic Works. On October 15,
1992, China's accessions to the Berne Convention and the Universal
Copyright Convention took effect. Also, China will treat computer
software as a literary work under its copyright law and will protect
computer software for a period of 50 years. Copyright protection
will be offered to foreign copyright holders in other Berne Convention
member states should their works be first published outside of China.
Protection will also be extended to works in existence before China's
new obligations become effective.
Patents: To qualify for patent protection in China, the property
involved must not have been publicly disclosed worldwide or used
in China prior to the time of filing. China now provides patent
protection for pharmaceuticals and other chemical products in addition
to providing process protection for those categories of goods. The
length of patent protection is 20 years. In addition, compulsory
licenses are not generally allowed unless the proposed user has
made reasonable efforts to obtain authorization from the rights
holder on reasonable commercial terms. Contracts for the licensing
or assignment of patent rights held by a foreign entity to a Chinese
entity are subject to the examination and approval of MOFERT or
its local branches.
Trademarks: In China, the SAIC is responsible for trademark registration
matters. Foreign companies filing applications to register their
trademarks must use a Chinese trademark agent affiliated with organizations
such as the China Council for the Promotion of International Trade
(CCPIT). China follows the first to file rule of protection. The
initial length of protection is 10 years. A trademark registrant
which licenses its trademark must file a copy of the licensing contract
with the SAIC.
TAXATION
Australia and China have an agreement for the avoidance of double
taxation which applies to the taxation of Americans and U.S. companies
doing business in China. Apart from the relevant Chinese tax laws,
foreign companies and individuals may be alert to various types
of administrative regulations and decrees, at both the local and
national levels, that may change the amount of tax foreign companies
pay on their income produced in China.
Corporate Taxes: A new income tax law for foreign-invested companies
took effect in July, 1991. Under the new law, wholly foreign-owned
ventures, equity joint ventures and contractual joint ventures pay
a combined national and provincial tax of 33 percent of pre-tax
income. Depending on the location, purpose, length and profit reinvestment
plans of a foreign-invested venture, there are opportunities to
lessen, defer or exempt income from taxation.
Foreign partners of foreign-invested companies should be on notice
that taxes in the form of periodic benefits payments to Chinese
workers or to the Chinese partner itself may measurably increase
the tax burden of the foreign-invested enterprise.
Foreign companies that do not have joint venture investments, but
have established an office or place of business in China to engage
in production or business operations, also pay a tax of 33 percent
of the amount of profit before income tax. Consignment sales and
service centers established by a Chinese entity to market a foreign
company's products, or to maintain or sell spare parts for the foreigner's
products, are subject to the 33 percent tax. In addition, foreign
companies which perform construction work or provide labor services
in China are deemed to have a taxable establishment in China and
are subject to income tax.
A foreign enterprise which has no establishment or place of business
in China, but derives profits, interest, rental, royalties and other
income from sources in China, pays a withholding income tax of 20
percent of the revenue amount. However, profit repatriated by a
foreign investor from a foreign-invested enterprise is exempted
from further income taxation. Royalties received for selected types
of technical know-how are taxed at a reduced rate of 10 percent
of the revenue amount or may be exempted from income taxation.
Foreign company representative offices which engage solely in liaison
activities within China on behalf of their head offices normally
have no Chinese source income and therefore do not pay income tax,
although a tax return must be filed. Offices of foreign service
companies such as consultants, accountants, banks and trading companies
that derive income from their services may be taxed on their income.
Consolidated Industrial and Commercial Tax: The Consolidated Industrial
and Commercial Tax (CICT) applies to the production of industrial
and agricultural goods, commercial retailing, and service, transportation
and communications activities conducted in China. The tax is levied
on the gross amount of proceeds received from the sale of goods
and services at each stage of production when the taxable goods
and services are transferred from one entity to another. The typical
CICT rate is five to 10 percent, although the rates range from 1.5
to 69 percent. Taxpayers importing goods pay CICT on the amount
of their purchases.
Personal Income Taxes: Americans temporarily residing in China
for up to 183 days in a calendar year are exempt from Chinese personal
income tax on services performed in China, but paid outside of China.
Only actual days spent in China are counted and days of temporary
absence are excluded. Individuals residing in China and subject
to income tax pay progressive rates ranging from five to 45 percent
of their wages and salaries earned in China. Compensation for personal
services, royalties, interest, dividends and other forms of income
are taxed at a flat rate of 20 percent. Per diem or periodic allowances
paid to employees of foreign companies in China are normally considered
taxable income, but company expenditures such as lodging, business
entertainment costs and transportation costs are not personal income
for the employee.
REGULATORY AGENCIES
The following list includes some of the more important agencies
and policies foreigners should be aware of when doing business in
China:
* Five-year economic plans establish general goals and priorities
for capital investment, production, and supply. Annual plans set
performance targets for state-owned industrial and commercial enterprises
and govern allocation of state funds.
* The State Planning Commission is responsible for economic plan
implementation at the national level.
* The People's Bank of China exercises power over China's other
financial institutions.
* The Ministry of Foreign Economic Relations and Trade (MOFERT)
and the State Council's Economic and Trade Office are the two government
agencies responsible for China's foreign trade system. Import licenses
can be obtained from the MOFERT.
* The State Administration of Import and Export Commodity Inspection
issues a list of commodities for which inspection is required.
* The General Customs Office Administration regulates customs clearance
of all import and export cargoes by land, sea, air, and mail.
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