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
27 Oct 2016, Seminar, Toronto, Canada

Please join members of the Blakes Commercial Real Estate group as they discuss five key provisions of a commercial real estate purchase agreement that are often the subject of much negotiation but are sometimes misunderstood.

1 Nov 2016, Seminar, Toronto, Canada

What is the emotional culture of your organization?

Every organization and workplace has an emotional culture that can have an impact on everything from employee performance to customer or client satisfaction.

3 Nov 2016, Seminar, Toronto, Canada

Join leading lawyers from the Blakes Pensions, Benefits & Executive Compensation group as they discuss recent updates and legal developments in pension and employee benefits law as well as strategies to identify and minimize common risks.

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”

Mondaq Advice Centre (MACs)
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
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). 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 & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd 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 or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.