China: The Dragon Comes Calling!

Last Updated: 25 May 2006
Article by Andrew Lui

It seems everyone wants a piece of China. China was the world's number two destination for foreign investment in 2004 drawing a record US$61 billion for two years running in 2004 and 2005. With a population of 1.3 billion and GDP growth of 8.1%, China is set to be the second largest economy in the World by 2020, behind only the USA.

Having said that, the nature and extent of foreign investment allowed in China is still heavily regulated by the Chinese government. China is an enormous market abounding with opportunities, offering foreign investors in all trades a vast horizon for development. However, the business environment of China is different from other countries in many aspects such as trade laws, investment approval procedures, import-export administration and taxation. Moreover, in the process of market opening, China has been constantly amending its trade-related laws and regulations, often leaving foreign investors interested in developing the mainland market at a loss. The following sets out in broad terms the considerations for starting up in China but any foreign company hoping to get a piece of the action in China should seek specific advice if contemplating a move into the China market.

Industry sectors in which foreign companies may participate are divided into categories of "permitted", "encouraged" and "restricted". No foreign investment is allowed in "prohibited" categories such as media and mass communication. The last 4 years of liberalisation have seen many "restricted" industries re-categorised as "permitted". These include financial, insurance and foreign exchange consultancies, manufacture of consumer products. Previously "prohibited" sectors such as banking, telecommunications, retail publication, gas, heat and water supplies are now in the "restricted" category.

Investors in "encouraged" sectors (for example, oil and gas exploration, automobiles, wholesale and retail of ordinary commodities) are given incentives such as exemptions from importation VAT and from customs duties on the importation of equipment.

Foreigners carry on business in China through investment vehicles called "Foreign Invested Enterprises" or "FIEs". These may take the form of a representative office ("RO"), a Wholly foreign-owned enterprises ("WFOE") or a joint venture.

The RO is the quickest and cheapest way to set up in China. It is typically used for testing the market. An investor who wishes to do more than just marketing or coordination would have to set up a WFOE or a joint venture. WFOEs are popular for a number of reasons - the investor has more control over the running of the company and over the protection of its intellectual property, plus the WFOE structure obviates the need for a Chinese co-investor, although a foreign investor could also jointly establish a WFOE with another foreign investor (WFOEs are not required to be wholly-owned by one foreign investor). In "restricted" industries where WFOEs are not usually allowed, the foreign investor might have to set up in joint venture with a Chinese co-investor. Disadvantages of the joint venture include capping of the foreign investor's share in some industries which means the foreign investor cannot hold a controlling interest in the company. Approval for sino-foreign joint ventures is easier to obtain if the Chinese party is a large state-owned company or one with a good relationship with local authorities. FIEs may in certain circumstances acquire interests in domestic Chinese companies.

FIE's are generally established as limited liability companies, with liability restricted to the amount of capital contributed by each investor. Chinese law (both nationally and locally) may regulate a number of aspects of an FIE, including its capitalisation and its gearing. Capital contributions need not be made in full up front (although they can be), but depending on capitalisation can be made anywhere between six months and three years from the issuance of the business licence.

It is expected that the foreign party will contribute cash, although other assets such as machinery and intangible assets like patents can be contributed subject to limitations (for example, intellectual property may not comprise more than a certain percentage by value of the foreign investor's share of the capital). The application process for an FIE can take anywhere from two to six months, the timescale varying from city to city within China. The rules also change if an FIE is located in a Free Trade Zone (of which there are a number throughout China).

FIEs generally pay 33% tax (30% on national level and 3% on local level) on net income on both domestic and foreign income sources but FIEs established in special zones pay less tax. For example, FIEs in a Special Economic Zone or Economic and Technology Development Zone only pay 15% tax. Hi-tech enterprises setting up in the Beijing Hi-tech Experimental Zone are exempt from tax for 3 years and allowed a 50% reduction in tax for the following 3 years. Production-oriented FIEs only pay 24% tax, are generally exempt from paying tax in the 1st and 2nd profit-making years and are entitled to 50% reduction in tax in the 3rd to 5th profit-making years.

A key factor to bear in mind is that the Renminbi, the Chinese currency, is not freely convertible and all foreign exchange activities are subject to approval by the State Administration of Foreign Exchange. A foreign investor can repatriate profits (usually by way of dividend) back to its domicile upon audit of the FIE and payment of all due salaries and taxes (such as enterprise income tax). In light of China's exchange control provisions, repatriation must go through a government agency.

Since China's accession to the World Trade Organisation in December 2001, it has clearly become easier for foreigners to do business in China due to the gradual market access liberalisation for foreign investors over the past four years. Investor confidence should also be boosted by the introduction of China's new Company Law which came into force on 1 January 2006. This brings significant modernisation to Chinese Company Law by improving corporate governance, enhancing shareholders' rights and recognising the common law principle of "piercing the corporate veil".

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Related Topics
Related Articles
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of

To Use you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions