Anthony Chan highlights some of the considerations for foreign investors in China.
China’s aviation market looks set to open up further as new regulations effective as of 1 August 2002, entitled "Provisions on Investment in the Civil Aviation Industry by Foreign Investors", permit foreign investors to invest in a broad range of aviation projects, including buying shares in Chinese carriers, and foreign investment in Chinese airports, air transportation enterprises and general purpose aviation enterprises. This is in keeping with China’s WTO commitments to liberalise market environment for foreign investors. As businesses active in the aviation industry turn to China for its untapped potential, they are beginning to realise the many pitfalls of doing business there.
One such pitfall emanates from China’s strict foreign exchange controls. The good news for a foreign investor new to China’s aviation market is that the once strict foreign exchange controls are in fact more relaxed nowadays. Nonetheless, China’s State Administration of Foreign Exchange (SAFE) regulations in conjunction with regulations of the People’s Bank of China (PBOC) on keeping of foreign exchange/renminbi accounts and conversion and remittance of foreign exchange, provide close scrutiny of the flow of foreign currency in and out of China.
To an unwary foreign investor making its first investment in China’s aviation market, here are a number of tips worth bearing in mind:
What should go in, must go in: If the investment is made directly into the Chinese enterprise, the investment must physically be made into China, be properly noted in the invested enterprise’s books and verified by a China qualified accountant. This may sound straightforward in principle but in practice, many investments will likely be made in such a way so as to pay off a third party debt (say, a foreign aviation equipment or services supplier owed money by the invested enterprise) or to an account based outside China. Extra care needs to be taken to ensure the investment can be properly recorded in the invested enterprise’s books. If the investment is somehow offset against some other liability outside of China, problems will occur when repatriating investor capital and returns.
SAFE is safe: Thoroughly examine SAFE regulations for approval and registration requirements. If the investment is structured alongside bank financing with security to be provided by the invested enterprise or a related Chinese party, it is more likely than not that SAFE approval is required for such transaction. Always build in a long lead time for obtaining SAFE approval, since the inability to obtain such approval by the Chinese partner who is normally responsible for doing so, within a commercially acceptable time period is one major cause for projects not going ahead.
Do not bypass SAFE registration: Regardless of whether SAFE approval for a Chinese aviation project is required, there will usually be SAFE registration requirements relating to a contract involving foreign exchange, normally to be satisfied within 15 days of execution of such contract. The registration certificate may require updating from time to time by SAFE should the parties and figures appearing in the certificate change.
Keep proper records: Good corporate governance is a key to investor confidence and more importantly, return on investment. As most types of aviation investments in China under the new regulations will result in the Chinese partner having majority ownership of a joint venture, a sound management and reporting system for the joint venture is essential to protect a foreign investor’s position. Without proper records and a good paper trail, investors will find it difficult to remit foreign currency out of China promptly or at all. This is so even for current account items where SAFE controls are far less stringent than for capital account items. Despite simplification of SAFE reporting procedures, remitting foreign exchange can entail a substantial amount of bureaucracy.
Prioritise availability, convertibility and repatriation: Depending on the location of the aviation project, it is advisable to obtain long term bank support to ensure there is sufficient foreign currency availability when needed. This is especially so where sterling is to be repatriated overseas from localities in which historically foreign investments have not been extensive. Even for localities with a high level of foreign investments, there is the risk that the bank dealing with the conversion and repatriation process may treat certain foreign investors more favourably than others when there is pressure on the availability of the relevant currency.
The content of this article does not constitute legal advice and should not be relied on in that way. Specific advice should be sought about your specific circumstances.
