Gaining Access to China's Foreign Trade Industry

The Tentative Procedures have lifted or lessened some of the restrictions on the establishment of a Foreign Trading JV that were contained in the 1996 Regulations, including geographic restrictions, high qualification requirements of the proposed investors and capital requirements for forming a Foreign Trading JV.

The table on the following page is a comparison between the 1996 Regulations and the Tentative Procedures showing the relaxed guidelines:

Although a number of restrictions have been removed, the restriction on maximum shareholding held by the foreign partner in a Foreign Trading JV still remains. The new regulations provide that the Chinese shareholdings in the Foreign Trading JV must be not less than 51%. Therefore, the foreign partner in the Foreign Trading JV is only allowed to have minority ownership of the JV company, while majority shareholding and board control of the JV company will still be held by the Chinese partner. According to the new regulations, this limitation on foreign shareholding will not be removed until December 11 2003. This stipulation follows China's commitments in the Working Party Report, which provided for majority ownership by foreign investors in joint venture trading companies two years after WTO accession.

In addition to the limit on foreign shareholding, and the high capital investment and qualification requirements, the establishment of the Foreign Trading JV is also subject to government approval. The investors must apply to a Chinese approval authority to establish the Foreign Trading JV. They must also complete registration formalities with a number of PRC authorities after they have obtained the government approval in order to legally establish the JV company. The whole process will likely take several months.

In practice, if a foreign investor wishes to establish a Foreign Trading JV, the following steps must be taken before it can commence any import and export business operations.

Qualifications Requirements

The investor must ensure that his company is qualified to be a foreign partner as required under the Tentative Procedures, i.e. that their company has an average annual trading volume with China of over US$30 million for the last three years or an average annual trading volume with China of over US$20 million for middle or western China.

The authorities will require documentary evidence of the financial qualifications of the investing company, such as audited annual returns for the last several years.

Finding a Chinese Partner

It is important to find a financially strong Chinese partner who can assist in obtaining the necessary government approvals for the establishment of the JV company. In our experience, a Chinese company with good government ties will be of considerable help in the process of completing the application and registration formalities.

The qualification requirements for the Chinese partner are that they have a foreign trade licence and an average annual import and export volume of US$30 million for the last three years. If the Foreign Trading JV is to be established in middle or western China, an average annual import and export volume of US$20 million for the last three years is sufficient.

Preparation of the Joint Venture Contract and other Application Documents

The foreign partner must enter into a Joint Venture Contract with the Chinese partner to set out the shareholdings, board and management controls, share of profits and losses, and other matters agreed by the partners in relation to the JV company. The Joint Venture Contract is a very important document and must be submitted to the approval authorities.

In addition to the Joint Venture Contract, the partners must also prepare the following documents for submission to the approval authorities:

1) a project proposal, a feasibility study report and the articles of association of the JV company;

2) company registration documents of the Chinese partner and the foreign partner and bank reference letters;

3) a list of the commodities to be imported and/or exported by the JV company;

4) annual returns of the Chinese partner and the foreign partner for the last three years; and

5) other relevant documents that the approval authorities may require.

Lodging the Application with the Approval Authorities

Under the Tentative Procedures, the Chinese approval authority in charge of the application to establish a Foreign Trading JV is the Ministry of Foreign Trade and Economic Cooperation (MOFTEC) in Beijing. The investors must first lodge the application with the local government authorities in charge of foreign trade. The local authorities will pre-examine the application documents and will forward the application documents to MOFTEC in Beijing once they consider that the application documents are in order.

It will take a maximum of 90 days for MOFTEC to examine the application documents. After the examination of the application documents, MOFTEC will either give a notice to the investors stating that it does not approve the application and explain the reasons, or it will issue an approval certificate to the investors. The investors are deemed to be permitted to establish the JV company once they have obtained the approval certificate from MOFTEC.

Completing Registration Formalities with the AIC

Under the PRC Company Law and other relevant regulations, all companies established within the PRC, including a Foreign Trading JV company, must be registered with the Administration for Industry and Commerce (the AIC). Under the Tentative Procedures, the investors of the Foreign Trading JV must register the JV company with the AIC within one month after they have obtained the approval certificate from MOFTEC.

Once the investor has completed all registration formalities, the AIC will issue a business licence to the JV company. The JV company is deemed to be established once it receives the business licence from the AIC.

Other Compulsory Registration Formalities

The JV company cannot conduct import and export activities immediately after its establishment. It must complete other compulsory registration formalities before it commences business operations. These formalities include registration with the tax authority, customs, and the foreign exchange authority, among others. The authorities will issue the relevant registration certificates once the registration formalities are completed.

Once the above procedures are completed, the Foreign Trading JV will be able to conduct import and export of goods and technologies within its approved scope of business. The JV company is permitted to join the import and export chamber or the foreign-invested enterprises association. The JV company can also enjoy favourable tax treatment as provided under China's tax regulations, such as tax rebates or exemption from tax for its exported commodities.

Conclusion

The publishing of the Tentative Procedures is one of the legislative measures that China has taken to realize its commitments to the WTO. Although the Tentative Procedures still require a comparatively high qualification and capital contribution to form a Foreign Trading JV by a foreign investor, these new regulations show the Chinese government is serious about allowing foreign competition and expertise into this sector of the economy. We expect that in the coming years, more existing laws and regulations relating to the access of foreign investment to China's trading industry will be amended or replaced by the Chinese government to further open the industry as it has committed to the WTO.