Hong Kong: Regulations for Pilot Trade Joint Ventures in China

Last Updated: 11 December 1996
People familiar with China will know that sino-foreign joint ventures have been limited to areas of manufacturing or services and have not generally been permitted to carry on trading activities except ancillary to such primary objectives. There was therefore a considerable interest when it was announced earlier in 1996 that the Chinese government would permit the establishment of trading joint ventures to allow certain specified sino-foreign joint ventures to carry on trading activities and be set up primarily with these objectives in mind.

The Provisional Measures for the Pilot Sino-foreign Foreign Trade Joint Ventures (the "Measures") was promulgated by the Chinese Ministry of Foreign Trade and Economic Co-operation (MOFTEC") and came into force on 2 September 1996 The Measures set out certain qualifications and requirements for sino-foreign joint ventures formed to can on import and export business ("Trade JV") as well as for both Chinese and foreign Trade JV parties. As the Measures are intended to introduce foreign investment into this "experimental field", the Trade JVs are for the time being only permitted to set up in Shenzhen Special Economic Zone (the "SEZ") and Shanghai Pudong New Area (the "Pudong"). Like other pilot reforming measures, it is likely that there will be a tight control over the number (or quota) of pilot Trade JVs permitted.

1 Qualifications for the investors

Foreign investors to the Trade JVs should have the following qualifications:-
  • turnover for the previous year must be over US$5 billion;
  • the average annual trade turnover with China for the previous three years was over US$30 million, and
  • representative office(s) in China has been established for more than three years, or, the aggregate investment in China is over US$30 million.

Chinese co-investors to the Trade JVs should have the following qualifications:

  • they must be permitted to do import and export business;
  • the average annual import and export turnover for the previous three years was over USS200 million in which the average annual export turnover was not less than US$100 million; and
  • more than three branches, subsidiaries or joint ventures have been established outside China whose average annual turnover for the previous three years was over US$10 million.

2 What Can the Trade JVs Do?

The application to set up such a Trade JV must clearly and specifically list the scopes of commodities or the business that the Trade JV is proposed to trade or carry out. The Trade JVs may only carry out such import and/or export business within the limited scope as approved by MOFREC. Without MOFFEC's approval. Trade JVs are not permitted to carry out any other business.

So far as the geographical area of the Trade JVs' business operation is concerned, it is not entirely clear whether such Trade JVs may extend their import and/or export business to cities other than the SEZ or Pudong because the Measures itself do not specifically deal with this- Nor it is clear whether the Trade JVs are permitted to set up branch(es) in other cities of China. Obviously, the Trade JVs themselves, and perhaps the local authorities of the SEZ and Pudong, will be keen wish to not be so constrained. MOFTEC's view on this, however, is untested.

3 What are the Requirements of the Trade JVS?

The Measures provide that the Trade JV should be a limited liability company. Accordingly, Trade JVs may only be established in the form of equity joint ventures. The chairman of the board of directors shall be appointed by the Chinese co-investor. In addition, the Trade JVs should meet the following requirements:-

  • the registered capital may not be less than Rmb100 yuan (or approximately US$12 million), and the foreign investor's equity should be 25% or more but may not be higher than 49%;
  • they must have their own names and management organisations,
  • they must have their own business premises, professional staff and other facilities suitable and necessary for the import and export business.

4 What are the Obligations of the Trade JVs?

Trade JVs must comply with the laws and regulations of China. Foreign exchange, accounting and auditing and taxation matters will be dealt with in accordance with the relevant laws and regulations. In addition to these, Trade JVs have the following obligations:-
  • registered capital of the trade JVs should be paid up within one month after their respective business licences are issued;
  • the Trade JVs should apply to join the chambers of the import and export companies or the association of foreign investment enterprises and shall be subject to the rules of the chambers or the association.

5 Approving Authority

Applications for setting up Trade JVs should be made to the MOFTEC via local branches of the MOFTEC. MOFTEC will review the applications and report to the State Council, Once the State Council approves, MOFTEC will issue the approval certificate.

6 Conclusion

it still remains to be seen that how many and what foreign companies will be selected by Chinese government to form Trade JVs with Chinese counterparts and when the Trade JVs will be permitted to established in any other cities. It might be the Chinese government's intention to allocate a number of quotas to the foreign companies which have been continuously, actively and friendly trading with China. Door for trading business has not been fully opened (foreign involvement in domestic trading is still strictly prohibited) in China. This pilot Measures, however, open a window to a selected number of foreign companies that are going to share a cake with China.

FURTHER INFORMATION on the above may be obtained via Linklaters & Paines Hong Kong office or via any of the other nine Linklaters & Paines offices world-wide, located in Singapore, Tokyo, London, Brussels, Paris, Frankfurt, New York, Washington D.C. and Moscow. Contact details for the various L&P offices worldwide are available via the Linklaters & Paines corporate listing c/o Business Monitor Online - http://www.businessmonitor.co.uk

c Linklaters & Paines 1996 - Tel +852 2842 4888

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