MOFTEC Delivers: Foreign Majority Ownership Permitted in International Freight Forwarding Companies
January 31, 2003 | BY
clpstaff &clp articles &Under new MOFTEC rules, foreign operators can now hold up to 75% ownership in international freight forwarding agency companies in China. The key question for such foreign operators is: how to best structure their operations so as to be in a position to take full advantage when wholly foreign-owned enterprises become available in less than three years' time?
On December 11 2002 the Ministry of Foreign Trade and Economic Cooperation (MOFTEC) issued the Administration of Foreign-invested International Freight Forwarding Agencies Provisions (the New Provisions). The New Provisions became effective on January 10 2003, and replace the short-lived Order No. 31 - Administration of Foreign-invested International Freight Forwarding Agencies Provisions (the 2001 Freight Forwarding Provisions), which were issued by MOFTEC and effective from January 1 2002.
Under the New Provisions, foreign investors can now apply to establish a 75% stake in a new international freight-forwarding joint venture. This is an increase from the 49% stake that foreign investors were previously allowed in such international freight forwarding joint ventures. In addition, the New Provisions also expressly provide that foreign parties in existing international freight-forwarding joint ventures can now apply to increase their stake to 75%.
There has been some slight "clarification" concerning the areas that foreign-invested international freight forwarding enterprises are allowed to operate. The revision essentially reflects changes brought about as a result of the dispute between China Post/EMS and certain foreign-invested express courier companies. Foreign-invested express courier companies must now apply to the Ministry of Post for a Postal Entrustment Certificate in order to engage in the transport of mail and postal articles. The carriage of personal letters and most types of government-related documents is still expressly prohibited.
Much of the New Provisions mirror the earlier 2001 Freight Forwarding Provisions. Importantly, there is no change to minimum registered capital requirements for either the establishment of the initial freight-forwarding joint venture (still US$1 million) or the establishment of branches (still US$120,000). Similarly, there has been no change to the mandatory two-year period that a foreign investor must wait before establishing additional international freight-forwarding joint ventures in China, nor any change to the required one-year period for the establishment of branches. The approval procedure for new ventures and branches remains essentially the same.
The New Provisions can be viewed as implementing China's WTO commitments, which require that within one year of China's accession foreign majority ownership will be permitted in this sector. They provide that applications for wholly foreign-owned enterprise (WFOE) international freight-forwarding enterprises will be accepted at a time made public by MOFTEC. China's WTO commitments require that WFOEs will be permitted four years after accession (by MOFTEC's calculations the latest such notice could be given is January 2006) and thus formal legislative approval for the establishment of foreign-invested WFOE freight forwarding companies should be given within such a timeframe.
Many leading international freight-forwarding companies in China have been reluctant to set up an international freight-forwarding joint venture despite the advantages this particular type of corporate vehicle offers. Even with the ability to now own a majority stake in such companies as announced by these regulations, there will continue to be conservative operators that will be reluctant to enter into a new joint venture. One of the primary reasons for such reluctance is that these operators fear that by partnering with a Chinese company they will in effect be training their future competitors by the transfer of valuable technical and management expertise. At the same time, operators remain keen to establish a WFOE once this becomes possible. As a result, the key challenge for operators is how best to position their business in the next four years to take advantage of the timetable for further regulatory liberalization so they can hit the ground running.
Among the options being examined by foreign operators is the possibility of establishing a WFOE on the basis of local approvals - the assumption being that national authorities would be reluctant to crackdown on such enterprises given they are committed to allowing them in the near future anyway. Another of the more aggressive alternatives is the establishment of a joint venture within a year (or earlier) of January 2006, but which includes automatic buy-out clauses to allow the foreign investor to convert the joint venture into a WFOE as soon as the Chinese regulators give the go-ahead.
An advantage of the latter approach is that the respective time periods for the establishment of branches and additional foreign-invested freight forwarding companies (which will probably remain even after January 2006) are likely to be satisfied at the time the WFOE comes into being. If such an arrangement is to work, obviously appropriate legal and operational measures need to be put in place to ensure foreign operators' interests are sufficiently protected during the crucial lead-up period to the establishment of the WFOE.
By Dan Ryan, Associate Ince & Co. Shanghai
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