Relocation of FIEs' Sites in China

Legal Framework

China's primary legislation for relocation is the Administrative Regulations on the Demolishment and Relocation of Urban Buildings (the Relocation Regulations). In the context of relocations of FIE factory sites, the Relocation Regulations indicate that an equitable compensation should include (i) the market value of the site (including both land use rights for the remaining term and the buildings) from which the FIE will be moved, (ii) costs of moving and the establishment of a new site, (iii) costs of temporary housing and settlement (if no temporary housing has been made available by the party who initiated the relocation process), and (iv) losses due to the interruption of business operations.

The Relocation Regulations authorize provincial-level governments to formulate local standards in determining the actual market value and various costs and losses.

Compensation Schemes

In most cases, a relocating party may choose between either monetary compensation or alternative housing, or in certain cases a combination of the two. However, for FIEs, monetary compensation is usually the preferred choice because of its liquidity. This is especially true for FIEs with sites in large Chinese cities, which, when forced to relocate, can take advantage of the monetary compensation to afford a bigger parcel of land with similar infrastructure and facilities in a smaller city.

Among the factors mentioned above as indicators for determining the amount of monetary compensation, item (iii) is usually irrelevant to the relocation of FIEs' sites, and item (ii) is easily quantifiable based on local standards published by the relevant construction authorities.

In determining the market value of a site, the parties to the relocation process must choose an appraiser from a list of candidates provided by the local land administration authorities. Appraisal results obtained from an international appraiser will not be recognised in China unless the relevant local land authority otherwise permits. The appraisal value of a site should be determined according to the reference market prices of properties located in the same area, which are published by local governments annually or semi-annually. If the appraisal value cannot be agreed on, the parties may engage the original appraiser or a new appraiser to do another evaluation. If, after a second evaluation, the parties still cannot come to an agreement, they may submit the dispute to the local Commission of Real Estate Price Valuation Experts for a final decision.

Loss of profit due to an interruption of business operations is another issue that may cause a dispute. Most Chinese cities have established local standards for calculating these losses. For example, Beijing formerly applied a one-time overall compensation of Rmb500 to 1,500 per square metre for business interruption and economic losses, whereas Shanghai applies a much lower standard of Rmb300 to 400 per square metre. However, it should be noted that such local standards have been published for reference only and may not be strictly enforceable. It is not unusual for an FIE to achieve a significantly higher compensation for its losses due to business interruption than what is being regarded as standard at the local level. Of course, this is subject to the bargaining position and negotiation techniques of the FIE.

Role of the Government

Although FIEs tend to deal with private parties, the local government can play a key role in the relocation process as many relocation projects affect the implementation of urban planning and developers rely on the local government on an economic as well as a policy level.

Therefore, it may be helpful to involve local government bodies in relocation negotiations at an early stage (in fact, local governments may be automatically involved in most major relocation projects). The use of diplomatic support from an FIE's home jurisdiction may also help in reaching a more satisfactory settlement.