A: Branch Offices
A branch office in China is one that is used for business purposes for which
the main company office holds responsibility. It is not a legal entity and it
can only carries out liaison and coordination work. Such a situation would
involve the existence of an offshore "parent", the People's Republic of China
would be denied control of the entity - a situation which it seeks to avoid. In
this way, China does not officially recognise branch offices, nor does it
officially allow them to operate. Therefore, the difficulties posed by such
restrictions and lack of legal standing mean that the branch office cannot be
recommended as a vehicle for investment.
Sino-Foreign Equity Joint Ventures
These are enterprises established in China with joint investment from foreign
companies, enterprises or other economic bodies and Chinese economic bodies. As
the name suggests, such enterprises involve joint investment, operation and
share of risk in proportion to the amount of investment inputted by the
respective parties. Each party is accordingly jointly responsible for the
profits and losses of the enterprise. Investment can come in the form of
(amongst other things) currency, buildings, industrial property or equipment. In
general, the level of investment offered by the foreign company should not be
less than 25%.
The corporate form of such joint ventures is the limited liability company,
with a Board of Directors as its supreme body of power. Some joint ventures in
China have now adopted this corporate form.
Sino-Foreign Co-operative Joint Ventures
Sino-foreign co-operative joint ventures also refer to Chinese- foreign
contractual joint ventures. They are enterprises established in China with
investment or conditions for co- operation jointly offered by foreign companies,
enterprises or other economic bodies as well as by Chinese economic bodies.
The main difference from the equity joint venture we have just discussed is
that the investment of the parties involved will not necessarily be converted
into ratios of investment.
The rights and obligations of the parties involved with regards to such
issues as distribution, investment, operation and sharing of risks and profits
is determined by the contracts signed by the parties from the outset of the
venture. These ventures tend to involve the foreign partner providing most or
all of the funds whilst the Chinese partner contribute land, facilities and a
perhaps a limited amount of funding. The usual approach is to stipulate in the
contract that the Chinese party will own all the assets of the venture once the
date of expiry of the venture is reached, with the foreign party recouping its
investment within the duration of the venture.
Such forms of co-operative joint venture are universally attractive, for they
allow the Chinese partner to have a source of investment whilst permitting the
foreign company to recoup its investment.
Wholly- Owned Foreign Enterprises
These also refer to wholly foreign- owned enterprises. They are enterprises
set up in China by foreign companies or economic bodies in accordance with
Chinese law with the investment entirely provided by foreign investors.
Such enterprises must be conducive to the development of China's national
economy; they must also meet one of the following requirements:
1. The application of internationally advanced technology
2. The orientation of most of the products for export
The corporate form of foreign enterprises in China is generally the limited
liability company. Although China has been late on the scene in terms of
providing a system of establishment for foreign enterprises, they have grown in
number rapidly over the past few years.
Chinese Holding Companies
Approval has recently been given to multinational corporations by China's
Ministry of Foreign Trade and Economic Cooperation (MOFTEC) to establish
foreign-invested holding companies. Though mostly analogous to Western Holding
Companies, there are a couple of differences. Multinational companies may wish
to set up holding companies in order to increase investment or reinvestment in
China, as well as to coordinate investment companies already established in
China.
A Holding Company in China may invest in such fields as industry,
agriculture, infrastructure and energy, provided that the State encourages
foreign investment in these sectors.
Typical work undertaken by a Holding Company might include action as a
purchasing agent, distribution or the provision of after sales service, amongst
other things. Provisional Regulations dictate that a Chinese Holding Company may
enjoy the preferential treatment of a foreign- invested enterprise, and as such
is awarded both a foreign- invested enterprise certificate and licence.
B Shares
Chinese government allows foreign investment to acquire shares of special
category, B shares, of approved list companies in the Stock Exchange. However,
ownership and management are separated. Chinese government is considering
allowing foreign invested entity in China to be listed in the Stock Exchange,
but it takes time for the government to come at this decision.
Special approved foreign JV
Foreign nationals are generally not allowed to hold equity of private
companies in China unless with special consent from the government. A merger and
acquisition exercise involving foreign fund will convert a private company into
a foreign JV.
(For more biz stories, please visit Industry Updates)