Changes to Laws on Foreign Invested Companies

On March 15 2001, the Fourth Session of the Ninth National People's Congress adopted the latest amendments to the PRC Sino-Foreign Equity Joint Venture Law (中华人民共和国中外合资经营企业法)(the EJV Law). First promulgated in July 1979, this law was modified only once before, and that was in April 1990.

Eight articles in total were changed in the recent amendments, three of which are substantially important.

(a) Article 9 in the amended EJV Law (which was previously Section 4, Article 8) provides that equity joint ventures are permitted to purchase insurance from insurance companies "within the territory of China". The original wording of this section, which read as, "the equity joint ventures shall purchase insurance from Chinese insurance companies", was interpreted as excluding the Chinese business of foreign insurance companies. The amended section permits equity joint ventures to purchase and maintain insurance with foreign insurance companies who are licensed to do business in China.

(b) Section 1 of the original Article 9 is deleted. This means that equity joint ventures are no longer required to file their production and business plans at responsible government authorities.

(c) Section 2 of the original Article 9 was re-ordered as Section 1 of Article 10 of the amended EJV Law. With this amendment, the priority that was given to domestic sources for the procurement of equity joint ventures has been relinquished. The principles of fairness and reasonability shall prevail when determining domestic or overseas procurement sources.

Cooperative Joint Ventures and WFOE's

Prior to these EJV Law amendments, the Standing Committee of the Ninth Session of the People's Congress approved and promulgated the amendments to the PRC Sino-Foreign Cooperative Joint Venture Law (中华人民共和国中外合资经营企业法)(the CJV Law) and the PRC Wholly Foreign-Owned Enterprise Law (中华人民共和国外资企业法)(the WFOE Law) on October 31 2000.

An amendment to Article 19 of the CJV Law on procurement was made. This was similar to the amendment made to the EJV Law (see point (c) above). A further important amendment to the CJV Law was the deletion of Article 20. This article stated which relevant government authorities would not assist the cooperative joint ventures to balance their renminbi and foreign exchange incomes (note that such assistance was of no practical use post 1994 because foreign-invested companies could use their renminbi incomes to purchase foreign exchange funds under the foreign exchange settlement and payment system from that time).

The amendments to the WFOE Law covered three main points. These concerned its production and business plan (the same amendment as point (b) above), the principle of fairness and reasonability for domestic and overseas procurement, and the foreign exchange balance (the same as that to the CJV Law).

More Amendments Needed

This recent round of amendments to the EJV and CJV Law neglects to address additional issues that are causing concern to legal practitioners and other members of the business society. For example, despite the practical demand, PRC individuals are still not permitted to establish joint ventures with foreign parties. Additionally, the laws do not clearly set out the requirements and application procedures for foreign investors to set up joint ventures in which they hold an equity interest of less than 25%. For various reasons more and more foreign companies are considering setting up joint ventures in which their equity interest is less than 25%, and in practice MOFTEC (the government authority responsible for the approval of foreign-invested companies) requires the parties to such joint ventures to go through similar procedures in each instance.

Additionally, after China gains accession to the WTO, there will be the need for national legislature, and relevant government authorities will have to review and amend all laws and regulations regarding foreign investment to accommodate the requirements of the WTO. So, do not be surprised if these three laws, together with their implementing regulations, are to be amended again in a short period of time.

By Kenneth Lu,
Fangda Partners, Shanghai