State Council General Office, Issues Relevant to the Proper Handling of Current Projects with Guaranteed Fixed Returns for Foreign Investors Circular

Issued: September 10 2002

Main contents: The Circular states that projects in which the foreign investor is guaranteed fixed returns are not in compliance with the principle of sharing of profits and risks between the Chinese and foreign parties, and violate joint venture laws and regulations. The Circular requires the Chinese and foreign parties to negotiate to rectify the situation. Methods to be adopted include: (1) amendment of contract terms to replace or remove the fixed return provisions; (2) purchase of all share equity of the foreign party by the Chinese party; (3) conversion of the foreign investment into the Chinese party's foreign debt; and (4) dissolution and termination of the contract. However, the foreign investment related to power purchase agreements is not affected in this regard.
Effective from January 1 2003, designated foreign exchange banks may not handle the matters of purchase and payment of foreign exchange for fixed return projects in which the proceeds received by the foreign party exceed the distributable revenue and other lawful revenue of the project without the approval of the State Administration of Foreign Exchange. In future, no work units may guarantee fixed returns for foreign investors in violation of the law, otherwise the contract will be void.
Related legislation: State Council, Strengthening the Administration and Launching the Examination of Foreign Exchange and Foreign Debts Circular, Sep 1998 and State Council, Further Strengthening and Improving the Administration of Receipts and Payments of Foreign Exchange Circular, Apr 2001; PRC Sino-foreign Equity Joint Venture Law (2nd Revision), Mar 15 2001, CLP 2001 No.3 p5 andPRC Sino-foreign Cooperative Joint Venture Law (Revised), Oct 31 2000, CLP 2000 No.10 p4