China: 2008 Perspective – China Trends

Copyright 2008, Blake, Cassels & Graydon LLP

Identifying trends in the dynamic legal and business environment that characterizes China is a challenge. Nonetheless, the following six significant trends will have an impact on how foreign investors conduct their business in China.

1. Shift from a Manufacturing Base

China's economy and its impressive growth rate since its opening up in the late 1970s has been based upon manufacturing and export and processing trade, a system built on an abundance of inexpensive labour and tax breaks and other incentives made available to foreign investors. Now China is actively working towards transitioning from a manufacturing-based economy to one that is positioned higher on the global value chain. China's new tax laws, which entered into force in early 2008, phased out traditional tax incentives for manufacturers and exporters. The incentive structure was repositioned to allow tax breaks to companies engaged in specific industry sectors, primarily companies engaged in the development of high technology, environmental protection and energy-saving processes. Prior to the implementation of the new tax laws, a revised foreign investment catalogue was issued, the contents of which indicate the government's desire to shift the economy away from a manufacturing base and towards sustainable economic development and higher-value industries. Investors who still view China as simply a manufacturing or finishing hub may discover their investments are no longer greeted with the open arms they once were. Investors who are willing to establish research and development facilities, on the other hand, should expect a warmer welcome from the Chinese authorities.

2. Investing in Central China

The focus of foreign investment in China has traditionally been on the eastern provinces and the Pearl River Delta. With rising costs in the more developed parts of the country, investing in inland China is becoming a more attractive alternative. The Chinese government has been working hard to attract investors into the central provinces by offering tax incentives and by pouring resources into the development of information and transportation infrastructure. These policies are driven by concerns that the central region of China has not kept pace with the economic development of the east, as well as a desire to re-tool the eastern provinces as centres of innovation and value-added industry. Investors who are familiar with the lack of certainty and the need for flexibility that has often defined doing business in China should be prepared to encounter those issues in the central provinces, as those provinces work to catch up with the eastern part of the country. However, given the rising costs of doing business in those areas of China that have traditionally attracted foreign investment and the efforts being made to integrate the central part of the country into the overall economy, for investors who are willing to adapt to changing conditions there are likely to be benefits to investing in the emerging central cities and provinces.

3. Merger Regulation

On August 3, 2008, China's State Council issued implementing rules under the new Anti-Monopoly Law (AML) specifying the monetary thresholds for transactions that would require mandatory pre-merger notifications to the relevant Chinese AML enforcement authorities. The new AML that came into effect on August 1, 2008 after more than 10 years of drafting and discussion introduces a modern competition regime to China. The AML covers three main areas: (i) merger control; (ii) prohibition of abuse of dominant positions; and (iii) prohibition of monopoly agreements that restrict or eliminate competition.

In relation to merger control, which is generally of greatest concern to foreign investors, transactions that meet either of two thresholds are subject to pre-merger notification: (i) if the total worldwide turnover in the previous fiscal year of all parties to the transaction exceeded 10-billion yuan renminbi (RMB) (approximately US$1.5-billion) and the turnover of at least two parties exceeded RMB 400-million (approximately US$60-million) within China; or (ii) if the total turnover within China in the previous fiscal year of all parties to the transaction exceeded RMB 2-billion (approximately US$300-million) and the turnover of at least two parties exceeded RMB 400-million within China. In addition, even if a transaction falls below those thresholds, if there is evidence it may result in restricting or eliminating competition, the relevant AML enforcement authority may conduct an investigation.

The effect of the new AML and the associated implementing rules regarding mergers is that foreign and domestic entities seeking to enter into transactions involving Chinese entities, and indeed even transactions outside of China that have the effect of restricting competition in China, must determine whether pre-merger approval is required from the relevant Chinese enforcement agency and obtain such approval before the transaction is completed. Closing a transaction without obtaining the requisite approval could result in significant sanctions, including fines and an unwinding of the transaction.

Ultimately, the real test of the merger control provisions and the pre-merger notification requirements will be in the implementation and application of these provisions. It won't be long before this happens – Coca-Cola's US$2.3-billion acquisition of Chinese fruit-juice maker Huiyuan announced in September 2008 is expected to require pre-merger notification and is anticipated to be a major test of the merger control provisions of the AML.

4. Employment Laws

Since the dismantling of the "iron rice bowl" under which Chinese citizens were effectively cared for from cradle to grave by the state-owned enterprises that employed them, it has been a challenge for the Chinese government to implement a broad-based social safety network. Employers have been forced to shoulder a significant portion of the social benefit cost by way of contributions to various social benefit programs. In China's largest cities, the employer cost of social benefit contributions for an employee making an average salary can equal as much as 50 per cent of the employee's monthly salary. In addition, the ability of employers to terminate employees is much more limited than in many other jurisdictions. In many cases, employer obligations have been ignored, either intentionally or through a lack of understanding of what is involved, and employees have been hesitant to take action to enforce their rights under employment law. This is changing. China recently promulgated an employment contract law that levies penalties against employers who fail to enter into written employment contracts with their employees. In addition, as the individual rights movement in China gains momentum, more and more employees are taking action against employers that fail to comply with Chinese employment laws. These actions, as well as being supported by the courts and labour tribunals, have developed a tendency to become very public in nature, causing public relations problems for the companies involved. The cost of labour in China is still relatively inexpensive and one of the key benefits of doing business in China, a highly motivated work force, still exists. Nonetheless, employers in China will need to pay closer attention than ever before to ensure their relationships with employees are conducted in accordance with law. Failure to do so could lead to costly termination settlements and unwelcome publicity.

5. Foreign Currency

China continues to struggle to find a balance between allowing the free flow of foreign investment capital into the country, trying to protect against unwelcome and potentially harmful hot-money inflows and attempting to achieve a balance of payments. Although there is still a general perception that getting money out of China can be a challenge, in reality, current foreign currency policies are much more concerned with the inflow of foreign currency and its conversion into RMB.

A number of recent regulations and circulars have been promulgated in China setting forth details as to how the supervision of foreign exchange is to be implemented by the State Administration of Foreign Exchange and its local branches (SAFE). These recent changes appear to consolidate what has been developing on an ad hoc basis over the past few years.

Typically when a foreign investor establishes an entity in China it capitalizes that entity with foreign currency. The foreign currency is held in a segregated capital account. When the foreign invested enterprise applies to a bank for the conversion of funds from its registered capital account into RMB, it must first obtain a "capital verification" report from a licensed Chinese accounting firm. A capital verification report can take up to two weeks to be issued by an accounting firm and, under the current rules, foreign currency cannot be converted from the registered capital account until a capital verification report has been issued.

Generally, RMB funds that have been converted from capital contributions may not be held by a foreign-invested enterprise in its RMB bank account, except where the funds are to be used for payment of wages and salaries and other obligations that are payable within a limited period of time. Where a conversion of foreign currency above a predetermined amount is requested, it is necessary to provide fairly voluminous documentation to prove why the funds are needed by the company. Typically a contract confirming that a payment must be made, a related invoice evidencing the required payment and a commitment letter from the company confirming how the funds are to be used are required before funds will be converted into RMB.

What is clear is that investors need to remain abreast of foreign currency policies in China in order to avoid the unpleasant (but all too common) situation of needing to quickly fund an operation only to discover that funds will not be available for weeks due to the formalities involved in converting capital contributions into local currency.

6. Intellectual Property

Effective protection and enforcement of intellectual property (IP) rights in China has always been a concern to foreign investors and enterprises. Recent developments suggest that there is a growing awareness of the need to protect IP rights and the availability of enforcement mechanisms to do so among Chinese companies. The level of intellectual property activity in China is high. For the past few years, the total number of new patent applications filed by Chinese entities has increased at an annual rate of approximately 20 per cent. There is also significant IP litigation in China, mostly between and among Chinese parties. Between 2001 and 2007, over 77,000 IP court cases were filed, of which 18,521 involved patent litigation. This is comparable to the number of patent cases filed in the United States, even though the total number of issued patents in China is still far fewer than in the United States.

These statistics point to a greater awareness of the value of IP and a more aggressive IP protection strategy being adopted by Chinese companies. Of note to foreign investors is the fact that foreign companies are more and more often the ones being sued by Chinese owners of IP. In a recent court case, a Chinese company based in Wuhan successfully sued a Japanese company and its customer (a wholly owned subsidiary of a foreign company) in China for patent infringement. The Japanese company was found liable for patent infringement and ordered to pay damages of about RMB 50-million (about C$8.7-million) while its customer was ordered to pay an annual royalty of RMB 480,000 (about C$83,000) for the remainder of the patent term. Although the trial court's decision has been appealed, IP infringement actions against foreign companies and their Chinese subsidiaries are no longer isolated cases. When formulating an IP strategy, it is no longer enough to only consider protection and enforcement; it is becoming equally important for foreign investors to ensure they and their Chinese affiliates are not breaching the intellectual property rights of others.

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.

Events from this Firm
26 Oct 2018, Other, Vancouver, Canada

Cybersecurity, including data privacy and security obligations, has become a critical chapter in every company’s risk management playbook.

30 Oct 2018, Other, Toronto, Canada

Please join us for discussions on recent updates and legal developments in pension and employee benefits as well as employment law issues.

12 Nov 2018, Other, Toronto, Canada

Stories aren’t falsehoods. Stories are the root of all effective human communications: they motivate, animate and clarify. If you aren’t telling stories, you probably aren’t getting your point across.

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