Points for Observation Concerning Management of Enterprises

As independent corporations, foreign-funded enterprises can independently operate their business once they are approved by the government's reviewing and approving authorities and once they are registered by competent administrative authorities for industry and commerce. There is no relationship of administrative affiliation between the Chinese government and foreign-funded enterprises, but foreign-funded enterprises, in their production and business operation, must accept the guidance and supervision by the Chinese government in line with law, government regulations and relevant policies.

I. Use of Land

China applies the system of public ownership of land, which comes in two forms ¨C the ownership of land by the State and the ownership of land by collectives. The land in urban areas is owned by the State while the land in suburban and rural areas is owned by collectives except for the part otherwise defined by law as owned by the State.

1. There are generally five ways in which foreign-funded enterprises can obtain the right to use State-owned land:

(1) Compensated Transfer: The State, in the capacity of the owner of land, transfers to foreign-funded enterprises the right to use land for a number of years, and the latter shall pay the land-use right transfer fee in one lump. Foreign-funded enterprises can obtain the right to use land transferable through the invitation of tenders and auctions or in the form of signing agreements. In obtaining the right to use land, foreign-funded enterprises shall sign contracts on the transfer of land-use right with land administration authorities, fully pay the land-use right transfer fee in line with relevant provisions of the contracts, and go through the formalities for the registration of land before receiving the certificate of land-use. The right to use land obtained in this way can be re-transferred, leased or mortgaged.

(2) Administrative allocation: In this way, foreign-funded enterprises shall sign contracts for land-use with land administration authorities, go through the formalities for registration and obtain the certificate of land-use. Under such an arrangement, users of land shall pay the government the land development fee in one lump and are liable to pay the land-use fee on an annual basis.

(3) Offer of land by Chinese partners as investment in equity joint ventures or contractual joint ventures: This way refers to the approach that Chinese partners buy shares or propose conditions for cooperation by offering their workshop buildings, equipment and land through evaluation as investment to form with foreign investors equity joint ventures or contractual joint ventures.

(4) Leasing of real estate and sites: In this way, foreign-funded enterprises directly lease real estate and sites from State-run enterprises, collectively-own enterprises in urban areas or township businesses, and pay rents to the latter. It is noteworthy that in this way, Chinese enterprises actually lease real estate together with the land-use right. Where the land leasable by Chinese enterprises has been obtained through the transfer of land-use right, the leasing shall fall into the category of legal business operations. Where the land leasable by Chinese enterprises has been obtained through administrative allocation, the parties concerned shall go through the formalities for the transfer of land-use right retrogressively and pay the land-use right transfer fee. Otherwise, the leasing shall be viewed as an illegal act.

(5) Retransfer: In line with relevant regulations, foreign-funded enterprises can also obtain the right to use land for a number of years from other users of land in the form of retransfer. Under such an arrangement, the number of years available to use the land retransferred shall be the remaining years from the total of years for using the land minus the number of years which have already elapsed.

2. There are generally two ways in which foreign-funded enterprises can obtain the right to use collectively-owned land:

(1) Under Chinese law, collectively-owned land shall first of all be converted into State-owned land through expropriation by the State before it can be transferred to foreign-funded enterprises for use. No collectively-owned land may be directly transferred or leased.

(2) Collectively-run economic organizations in rural areas or township businesses can buy shares or propose conditions for cooperation by offering their collectively-owned land through evaluation as investment to form with foreign investors equity joint ventures or contractual joint ventures. However, joint venture projects of such a nature are subject to approval by people's governments at the county level or higher.

3. Points for observation:

(1) Where investment projects involve the conversion of farmland into land for construction purposes, the conversion shall be required of prior approval by the Central Government no matter how small or large the land involved will be, and no matter whether the land involved will be expropriated.

(2) Where investment projects involve the expropriation of land from collectives of farmers, the expropriation shall be approved by the Central Government or provincial governments.

For the expropriation of basic farmland, it shall be approved by the Central Government;

For the expropriation of cultivated land other than basic farmland, it shall be approved by the Central Government where the expropriation involves land of more than 500 mu (33 hectares), or it shall be approved by provincial governments where the expropriation involves land of less than 500 mu (33 hectares);

And, for the expropriation of other types of land, it shall be approved by the Central Government where the expropriation involves land of more than 1,000 mu (67 hectares), or it shall be approved by provincial governments where the expropriation involves land of less than 1,000 mu (67 hectares).

(3) For the use of large areas of land for the construction of investment projects and line-shaped projects such as highways and railways, the expropriation shall be approved by the Central Government.

For the development of land for participation in implementing the general urban development planning on a unified basis, it shall be approved by the Central Government.

(4) No governments under the provincial level have the authority to approve the conversion of farmland into land for other purposes or the expropriation of all types of land.

II. Environment Protection

The protection of environment is a fundamental national policy of China. Over recent years, China has enacted and enforced a series of laws and regulations to protect the environment and natural resources, and to prevent the air, water and sea from pollution. When preparing feasibility study reports on the establishment of foreign-funded projects, the investors concerned shall have to submit to environment protection administration authorities reports on possible impacts of the projects upon the environment. The State will not approve any foreign-funded projects that will produce or will likely produce pollution of the environment. When projects are completed, the investors concerned shall have to report to the environment protection administration authorities which have originally approved the establishment of the projects. The latter will check the environment protection facilities of the projects to see whether they are technically acceptable. When the environment protection facilities of projects are found to be unacceptable, the projects may not be put into operation and production. In their routine operation, foreign-funded projects shall have to accept the supervision and management of environment protection administration authorities.

III. Management of Labor Force

Foreign-funded enterprises in China have the full decision-making power in employment, and no government authorities or institutions are entitled to interfere in this regard. However, in an effort to safeguard the legal rights and interests of workers, China has enacted the ¡°Labor Law of the People's Republic of China¡± and the ¡°Decision of the State Council on Work Hours of Employees¡± as well as other laws and regulations.

1. Enterprises can independently employ personnel. But they may not use child labor. Nor may they assign women to do work specified by the State as unsuitable for women.

2. Normally, foreign-funded enterprises are not allowed to employ general personnel overseas, including those from Hong Kong, Macao and Taiwan.

Where enterprises wish to employ needed personnel with special skills unavailable in China, including senior technicians and senior managers, they must apply to labor management authorities for approval before proceeding to employ personnel overseas and go through the formalities for their overseas employees to reside and work in China in line with relevant regulations.

3. To legally dismiss workers is a proper right of enterprises. However, in an effort to prevent enterprises from arbitrarily dismissing workers, the State has defined a category of conditions prohibiting the dismissal of workers, covering the period of medical treatment of workers suffering industrial injuries, pregnancy, childbirth and breast-feeding on the part of female workers, etc.

4. The monthly remuneration paid by enterprises to their employees may not be lower than the minimum level of salaries defined by local governments.

5. Employees shall work eight hours per day and 40 hours per week. The income of employees may not be cut back.

Out of necessity of production or operation, employers may extend the work hours after consultations with the Trade Union and workers concerned. Normally, the work hours may not be extended by more than one hour per day. Where the work hours have to be extended by more than one hour per day because of special reasons, the extension may be made under the condition that the health of workers is guaranteed, but it may not exceed the ceiling of three hours per day and a total of 36 hours per month.

Where workers are assigned to work overtime, the employer shall pay extra remuneration of no less than 150% of the normal wages. Where workers are assigned to work on days off and the employer can not arrange other days off for the workers, the employer shall pay extra remuneration of no less than 200% of the normal wages. Where workers are assigned to work on official holidays, the employer shall pay extra remuneration of no less than 300% of the normal wages.

Enterprises shall assume some legally defined responsibilities for the welfare, insurance and production safety for workers.

IV. Loans

In line with Chinese law, foreign-funded enterprises, in raising part of the funds needed for production and operation, are eligible to apply to banks in China for borrowing loans. Foreign-funded enterprises are covered by similar terms, interest rates and handling charge rates on loans with domestically-funded enterprises. After going through the formalities for the registration of foreign debts in line with relevant regulations, foreign-funded enterprises can directly borrow loans from banks outside China. Foreign-funded enterprises shall report the funds in foreign currencies they have borrowed from overseas banks to State foreign exchange control authorities for records.

An application for the extension of loans shall be filed in the name of the enterprise concerned. The bank shall investigate the qualifications of the applicant, covering whether its establishment has been approved by Chinese reviewing and approving authorities, whether it has gone through the formalities for registration, whether its registered capital has arrived in full and as scheduled, its credibility, its credibility rating, the source of funds for the repayment of debts, etc.

For a foreign-funded enterprise applying for loans for use as liquid funds, the proportion of its own funds for use as liquid funds shall reach a minimum of 30% of the total. Before the extension of loans, the bank will investigate this fact. However, for some newly established foreign-funded enterprise whose own funds for use as liquid funds can not reach this required level, the bank will normally adopt a flexible approach by extending loans first and demanding that the enterprises gradually make up for the proportion in the process of operation, in order that it will reach the required level at an early date.

V. Import and Export

In line with Chinese law and government regulations, foreign-funded enterprises have the right to independently operate the import and export trades as of the date of their establishment. They are eligible to independently import machines, equipment, raw materials, fuel, spare parts and components, auxiliary equipment, elements, devices, means of transportation, office equipment and other supplies needed for their production and operation within their scope of business approved, and independently export their products. They may also commission other foreign trade enterprises to import and export the aforesaid supplies and products on behalf of them. Presently, China does not allow foreign-funded enterprises to import supplies which are not needed by themselves or export products which are not produced by themselves. However, for the purpose of balancing their foreign exchange accounts, foreign-funded enterprises, with the approval of relevant reviewing and approving authorities, may purchase part of the products produced by other enterprises in China and export them to earn hard currencies. The volume of exports under such an arrangement is restricted to balancing the foreign exchange account only. Foreign-funded investment companies may act on behalf of the enterprises in China in which they have invested in importing supplies for their own use, and exporting products produced by themselves as well. Foreign-funded commercial retail enterprises may purchase part of the products produced in China and export them to earn hard currencies, with the approval of competent authorities.

In importing supplies and exporting products, foreign-funded enterprises can contact customs authorities to go through the formalities for import and export with import and export contracts under most of the circumstances. In importing and exporting commodities whose import and export are restricted by the State (including commodities whose export is restricted under bilateral agreements) under a few circumstances, foreign-funded enterprises shall have to apply for import and export quotas and obtain import and export licenses.

1. Import management

Where the import of machines and equipment offered by foreign investors as investment is covered by import quotas and is managed with import licensing, the investors concerned shall apply for import licenses. Where foreign-funded enterprises plan to import supplies (except for special commodities) needed for producing goods destined for domestic sales within their scope of business approved, they shall obtain the quota certificate in advance and take the quota certificate to contact issuing authorities to apply for import licenses if the import of the supplies is covered by import quotas and is managed with import licensing. Where foreign-funded enterprises need to import supplies (except for special commodities) needed for implementing relevant contracts for export of products, they are generated exempted from obtaining the quota certificate and import licenses. The import of supplies under such a condition is supervised and managed by customs authorities, and the imports shall be checked in with relevant contracts of the enterprises or import-export contracts. In importing non-quota commodities which are subject to automatic registration, foreign-funded enterprises concerned shall obtain the registration certificate in advance before going through the customs formalities.

2. Export management

For the establishment of foreign-funded projects designed to produce goods to be covered by export quotas and to be managed with export licensing, the investors concerned shall gain prior approval from competent authorities for foreign trade and economic cooperation in the period of registering the projects. When the projects are put into operation, the operators concerned shall apply for obtaining export licenses once every six months, in keeping with the total export volume approved by competent authorities for foreign trade and economic cooperation. Since 1994, China has been adopting the approach of inviting tenders for part of the quotas of exports. All foreign-funded enterprises meeting relevant requirements are eligible to offer tenders for the part of export quotas, to obtain them through open competition.

Before handling business affairs involving supervision or management by customs authorities, foreign-funded enterprises shall first of all accept examination and approval by customs authorities and go through customs formalities for the registration of enterprises.

VI. Foreign Exchange Control

The Chinese yuan, or Renminbi, has so far not been a freely exchangeable currency. Therefore, in accordance with the ¡°Regulations on Foreign Exchange Control of the People's Republic of China¡± and the ¡°Rules for the Implementation of Foreign Exchange Control Regulations Relating to Enterprises with Overseas Chinese Capital, Foreign-Capital Enterprises and Chinese-Foreign Equity Joint Ventures¡± as well as other official regulations, competent authorities exercise supervision and control over foreign exchange.

For foreign-funded enterprises whose establishment has been approved by competent authorities, when they have obtained the business license issued by the authorities for industry and commerce, they are required to contact local authorities for foreign exchange control to have their foreign exchange registered. Then, the local authorities for foreign exchange control will examine and check the basic conditions of the foreign-funded enterprises concerned, including their investment forms and ratios, sources of funds, sources of revenue and expenditure of operating foreign exchange, proportions of products for domestic sales and exports, forms to shares the foreign exchange profits and measures to reach the foreign exchange equalization. After examining and approving all these conditions, the local authorities for foreign exchange control will go through the procedure for the enterprises concerned to register their foreign exchange before issuing them the ¡°Certificate on Foreign Exchange Registration for Foreign-Funded Enterprises.¡±

With the ¡°Certificate on Foreign Exchange Registration for Foreign-Funded Enterprises,¡± foreign-funded enterprises may directly open their foreign exchange accounts with a foreign exchange bank designated by Chinese authorities or a foreign-funded bank in China. According to relevant official regulations, all activities of foreign exchange receipts and disbursements of a foreign-funded enterprise must be conducted through its foreign exchange account with a bank in China, except for those otherwise approved by the State.

Starting on July 1, 1996, China will include overseas-funded enterprises in the foreign exchange selling-and-buying system, overseas-funded ventures can sell and buy foreign exchange to or from designated banks. Compared with the domestic firms, overseas-funded ventures still enjoy some preferential treatment. They can still trade their foreign exchange at swap centres. Meanwhile, overseas-funded ventures are allowed to open foreign exchange settlement accounts for the transaction under current account and special foreign exchange accounts for transaction under capital accounts. The State Administration of Exchange Control set the ceiling amount for the foreign exchange settlement accounts according to overseas-funded ventures' paid-out capital and demands for fund circulation. Foreign banks, their branches and Sino-foreign joint ventures are allowed to act as designates banks.

The authorities for foreign exchange control conduct annual examinations and routine spot-checks on the operation of foreign exchange accounts of foreign-funded enterprises.

VII. Others

Foreign-funded enterprises are also required to thoroughly understand and abide by China's systems governing the management of financial affairs, business accounting, taxation and industrial and commercial affairs, etc.