China: Business Opportunities Emerge as China Joins the World Trade Organisation

Unlocking value from China’s accession to the World Trade Organisation

• China will remove the tariff barriers on a broad range of imports, ranging from agricultural and industrial products, resulting in a substantial increase of the opportunities for foreign companies.
• Restrictions on domestic trade will be lifted in the next three years for most products.
• Access to the Chinese market will be liberalised in the next six years. Most foreign-owned joint ventures and wholly foreign-owned companies will gradually be allowed with quantitative and geographical restrictions progressively removed.
• Foreign investment restrictions on many services industries, including financial services, professional services, business services, audio-visual and tourism will be relaxed.
• Financial, distribution and telecommunications services sectors, especially the Internet-based services, will be opened to foreign participation for the first time ever in the history of China.
• With respect to intellectual property rights, China has changed its trademark and copyright laws to comply with the rules of WTO on piracy.
• China has introduced the new investment regulations to attract foreign investors in line with its commitment to the WTO.

Following the accession to the WTO, China will remove the tariff barriers on a broad range of imports, including agricultural and industrial products. The import quotas and licenses applicable to over 30 categories of import products will be phased out in 2005 at the

latest. For example, the average tariffs for industrial products and agricultural products will be reduced to 8.9% and 15% respectively. The inequitable foreign policy, such as import licensing and tendering requirements, will also be eliminated at the same time. China will also participate in the Information Technology Agreement whereby tariffs on information technology products will be eliminated by 2005.

The existing PRC laws and regulations restrict the foreign enterprises to trade their own products within China. After the entry to the WTO, China undertakes to provide trading rights

to foreign companies in the mainland, to be phased in within the next 3 years for most products. Commencing one year after accession, full rights to import and export will be granted to the joint ventures with minority foreign stakes, which will be further extended to joint ventures with majority foreign share beginning two years after accession. All enterprises in China would be granted the right to trade most products upon three years after accession.

Foreign investment (including ownership and/or management) in any form of telecommunications services is not allowed under the existing circumstances. Following the accession, foreign participation in China’s wireline telecom services will be permitted. Foreign stakes in telecom services industry will be allowed from 25% to 49% in six years’ time, while geographical restrictions on different telecom services will be phased out within the next five or six years. Chinese sources also have made it clear that a transparent licensing mechanism and effective legal and administrative regulations will be enforced in the process of the telecom market liberalisation to regulate foreign equity ownership and business operations. China will also commit its agreement to open its telecommunications sector, both to the scope of services and to direct investment in telecommunications businesses. Through these commitments,

China will become a member of The Basic Telecommunications Agreement. Tariffs on IT products, such as computers and Internet-related equipment will fall from the current average of 13.5% to 0% by the year 2005. China will phase out all geographical restrictions for paging and value-added services within the next six years.

The opportunities brought by financial liberalisation in the mainland, in the context of WTO, are immense. In two years’ time, foreign banks will be able to conduct Renminbi business with Chinese enterprises in Shanghai, Shenzhen, Tianjin and Dalian. Within the next five years, they will be able to deal with all Chinese enterprises without any geographical restriction. As the foreign direct investment in the mainland will be anticipated to soar following the entry to WTO, foreign banks will stand to benefit considerably from the increased demand for trade-related and retail banking services in China.

Prior to the accession, the securities sector in the mainland is nearly closed to foreign investment, except that foreign investors could trade B-shares (shares in the companies incorporated in China that can only be brought and sold by foreign investors) under limited circumstances. Following the accession to the WTO, China has agreed to allow foreign securities dealers to trade directly B-shares and establish securities operations as joint ventures with up to 1/3 stakes to engage in underwriting A-shares (shares in the companies incorporated in China, denominated in Renminbi in both the Shanghai and Shenzhen stock exchanges) and to underwrite and trade B and H-shares (shares in the companies incorporated in China but listed in Hong Kong).

The existing barriers are that no more than 20 foreign insurers have been allowed to operate in China. They are restricted to provide insurance services in Shanghai and Guangzhou only. After the entry to the WTO, foreign insurers and insurance brokers are allowed to form sino-foreign joint venture with up to 50% foreign stakes in two years’ time covering Shanghai, Guangzhou, Dalian, Beijing, Chengdu, Chongqing, Fuzhou, Xiamen, Shenyang and Tianjin. All geographical restrictions will be phased out in three years’ time.

It is expected that the foreign insurers would position as a major intermediary services center in the areas of re-insurance, insurance agency and brokerage in three years’ time.

In a bid for compliance with the rules of WTO on piracy, China has changed its trademark and copyright laws to be effective from December 2001. Trademark holders will be allowed under the new laws to apply to the local courts for speedy injunctions to stop counterfeiters from producing and selling goods. The change makes it much easier for brand owners to use the legal system to block pirates because enforcement of the laws will be easier than that previously.

In preparing for the accession, the Chinese authorities have been revising or introducing new foreign investment regulations to enhance its foreign investment environment. For example:

• Provincial and municipal government may approve certain projects with total investment exceeding US$30 million which in the past must be approved by the Ministry of Foreign Trade and Economic Co-operation.
• Foreign investment enterprises would be allowed to set up or acquire equity interest of other enterprises, including domestic enterprises provided that certain conditions are satisfied.
• The foreign investment laws for equity joint ventures, contractual joint ventures and wholly foreign owned enterprises have been revised to remove discriminative rules on export ratio requirements, foreign exchange self-balancing requirements, and measures favouring domestic sourcing of materials.
• The scope of business of PRC Investment Company has been expanded to allow such company to act as sponsors for listing of company limited by shares; to provide technical training services to third parties, including local dealers and agents; to import and sell the products of its overseas parent company on a trial basis.
• New regulations on the set up of foreign investment leasing companies and venture capital enterprises were introduced.

There are major impending tax reforms in both the corporate and individual income tax systems. The existing corporate income tax regulations applicable to domestic enterprises, foreign enterprises and foreign investment enterprises would be unified into a single tax regime. The future trend for tax incentives will be hi-tech and industry focused. The procedure for monthly filing of individual income tax return may be simplified.

With the liberalisation of the market upon China’s accession to the WTO, foreign companies may want to re-visit and re-map their China strategies, e.g. to upgrade their representative office to other forms of foreign investment enterprises to accommodate the expanded business and investment activities; to convert contract processing factories into wholly foreign-owned manufacturing enterprises to capture the opportunity for domestic sales; to consider vertical or horizontal integration through merger and acquisition to tap into the integrated business of domestic enterprises; or to form PRC Investment Company to consolidate their overall China operations.

Andersen as well as Kwok & Yih’s professionals have fully geared up for China’s entry to the WTO and are well prepared to deal with the major legal issues on business and investment in China. Our China experts have advised Hong Kong and other multinational companies in structuring, negotiating and documenting numerous business and investment projects in China.

Our extensive experience includes:

• briefing companies on the Chinese legal environment (particularly China’s foreign investment laws and regulations in view of the accession to the WTO) and providing assistance in location and partner selection for prospective projects
• assisting companies in negotiations with prospective partners and government authorities
• preparing, in Chinese and English documents such as memoranda of understanding, joint venture contracts, articles of association, transfer of technology agreements, trademark licences, etc.
• liaising with the Chinese partner and relevant government authorities on the approval process
• assisting Chinese enterprises and the China operations of multinational companies with debt and equity funding raising in capital markets
• raising capital through the spin-off of China operations
• advising and implementing on tax planning of business and investment in China
• mapping of the entry and expansion strategy for foreign investors from both the business and tax perspectives
• advising and assisting multinational corporations in establishing subsidiary operations, entering into joint-ventures with Chinese companies, achieving growth through mergers and acquisitions and advising on the financing structures