Lasom's House

Value-Added Tax as a type of turnover tax, value-added tax (VAT) is levied on the increased value of commodities at different stages of production or circulation, or on the value-added of commodities. All enterprises and individuals engaged in the sale or import of goods or the provision of processing, repair or maintenance services in China have to pay VAT.

(a) Taxpayer In China, VAT payers are divided into general taxpayers and small-scale taxpayers on the basis of their operation scale and accounting and auditing system, with different methods of tax computation. Small-scale taxpayers are taxpayers without a sound accounting and auditing system whose taxable value of sales is below the prescribed standards, namely Rmb1 million for taxpayers engaged in the production of goods or the provision of taxable services, and less than Rmb1.8 million for those engaged in wholesaling or retailing business. General taxpayers mainly refer to enterprises whose annual taxable sales value exceeds that of small-scale taxpayers. Small production enterprises with a sound accounting and auditing system may be classified as general taxpayers. However, individuals, non-enterprise units, and enterprises that do not regularly engage in taxable operations are classified as small-scale taxpayers even if their annual taxable sales value exceeds the standards for small-scale taxpayers.

(b) Method of Computation: Small-scale taxpayer VAT payable by small-scale taxpayers is calculated by a simple method on the basis of the sales value and the tax rate without offset or deduction for input VAT. The applicable rate is 4% for commercial enterprises and 6% for other Guide to Doing Business in China. The formula for the computation of VAT is as follows: Tax payable = sales value x tax rate (4% or 6%) VAT on consignment sale, sale of unredeemed goods by pawn shops, sale of second-hand goods, and retail sale of duty-free goods by approved duty-free shops, is levied at a rate of 4% using the above simple method of computation regardless of whether it is paid by a small-scale taxpayer. General taxpayer The actual amount of VAT payable by general taxpayers is the excess amount of output VAT over input VAT. The formula for the computation of the tax payable is as follows: Tax payable = current output VAT – current input VAT Output VAT = sales value x applicable tax rate If the current output VAT is smaller than the current input VAT, the amount that cannot be fully set off or deducted may be carried over to the following tax period. VAT on imported goods VAT on goods imported by taxpayers is computed on the basis of the composite assessable value and the applicable tax rate without offset or deduction for input VAT. The formula for the computation of the tax payable is as follows: Tax payable = composite assessable value x applicable tax rate Composite assessable value = customs dutiable value + customs duty.

(c) Taxable Items and Tax Rates: There are two VAT rates in China, a basic rate of 17% and a lower rate of 13%. The sale and import of the following commodities are subject to VAT at the lower.

Tax Reduction:

Tax Exemption and Reduction: In a bid to attract foreign investment, the Chinese government has introduced a range of tax concessions to FIEs and foreign enterprises. The following are some of the major preferential policies.

Concessions on Business Tax, VAT and Customs Duty

(a) Incomes derived by research and development centers established by FIEs and foreign wholly-owned enterprises and incomes derived by foreign enterprises and foreign individuals from technology transfer, technology development and related consultancy and technical services are exempt from business tax.

(b) The raw materials, auxiliary materials, parts, components, accessories and packaging materials imported by FIEs for the outward processing or assembly of products and for the production of goods for export are exempt from import tariffs based on the quantity of finished products actually processed and exported. Alternatively, import tariffs are levied on the imported materials and parts first and rebates are made later based on the quantity of finished products actually processed and exported.

(c) FIEs are entitled to full VAT rebate on the purchase of domestically-produced equipment within their investment amount if such equipment is listed in the catalogue of duty-free imports.

(d) Imports of equipment and supporting technologies, accessories and parts for own use by FIEs under the “encouraged category” or “restricted category II”, foreign-invested R&D centers, FIEs with advanced technologies and export-oriented FIEs, are exempt from import tariffs and import-related taxes in accordance with the Circular of the State Council on the Adjustment of Tax Policy on Equipment Imports.

(e) Imports of equipment for own use by foreign investment projects encouraged and supported by the state within their total investment amount are exempt from tariffs and VAT (unless otherwise stipulated by the state). Imports of equipment and supporting technologies, accessories and spare parts for own use by foreign-invested R&D centers within their total investment are exempt from tariffs and import-related taxes in accordance with the Circular of the State Council on the Adjustment of Tax Policy on Equipment Imports if the import items cannot be produced in China or if the performance of the like domestic products or technologies cannot meet their demand.

Concessions on Corporate Income Tax

(a) Preferential Tax Rate Enterprises in the following regions (sectors) are subject to corporate income tax at the reduced rate of 15%: FIEs in the Shenzhen, Zhuhai, Shantou, Xiamen and Hainan special economic zones; Foreign enterprises with establishments or venues in special economic zones and engaged in production and business operations; Production FIEs established in economic and technological development zones approved by the State Council and in the Pudong New Area in Shanghai; Technology- and knowledge-intensive projects launched by FIEs in old urban districts of special economic zones, economic and technological development zones and coastal economic open areas approved by the State Council with long investment recovery periods and foreign investment exceeding US$30 million; Production FIEs engaged in energy, transportation and port construction projects; Production FIEs engaged in export processing in bonded areas; Recognized high-tech FIEs in state new high-technology industrial development zones approved by the State Council. Production FIEs in the following regions are subject to corporate income tax at 24%: Other types of production FIEs in old urban districts of coastal economic open areas, special economic zones, and economic and technological development zones where the 15% preferential tax rate is not applicable; Open coastal cities, open cities along the Yangtze River and in inland and border regions, as well as other areas designated by the State Council to enjoy the same concessions.

(b) Exemption and Reduction of Corporate Income Tax:

Production FIEs with an operation period of over 10 years (excluding projects for the exploration of petroleum, natural gas, rare metals and precious metals) are eligible for corporate income tax exemption in the first two profit-making years and for reduction by half in the following three years. With the approval of the State Administration of Taxation (SAT), FIEs engaged in agriculture, forestry and animal husbandry and FIEs established in the economically-backward remote and border areas may be levied corporate income tax at the reduced rate of 15%-30% for another 10 years after the expiration of the above said tax exemption and reduction period.   Sino-foreign joint ventures engaged in port and wharf construction and with an operation period of over 15 years are eligible for corporate income tax exemption in the first five profit-making years and for reduction by half in the following five years. Infrastructure projects related to airports, ports, wharfs, railways, highways, power stations, coal mines and water conservancy facilities as well as agricultural development in the Hainan Special Economic Zone with an operation period of over 15 years are eligible for corporate income tax exemption in the first five years and reduction by half in the following five years. Infrastructure projects related to airports, ports, railways, highways and power stations as well as agricultural development in the Pudong New Area in Shanghai with an operation period of over 15 years are eligible for corporate income tax exemption in the first five years and for reduction by half in the following five years.

The following types of enterprises are eligible for corporate income tax exemption in the first profit-making year and for reduction by half in the second and third years with the approval of the local tax authorities:

– FIEs engaged in services in special economic zones with foreign investment exceeding US$5 million and with an operation period of over 10 years;

– Foreign-invested banks, Sino-foreign joint-venture banks and other financial institutions in special economic zones and other areas designated by the State Council with foreign capital investment exceeding US$10 million and with an operation period of over 10 years.

– Recognized high-tech Sino-foreign joint venture enterprises in state-level high-technology development zones with an operation period of over 10 years are exempt from corporate income tax in their first two profit-making years with the approval of the tax authorities. 

– Foreign-invested export-oriented enterprises are entitled to pay corporate income tax at the reduced rate of 15% or 10% following the expiration of the corporate income tax exemption and reduction by half concession if their export value amounts to over 70% of their total output value in the current year.

– Foreign-invested high-tech enterprises are entitled to pay corporate income tax at the reduced rate of 15% or 10% for three years following the expiration of the corporate income tax exemption and reduction by half concession if their status of high-tech enterprises remains unchanged. 

– The income of foreign banks from interest on loans at preferential interest rates to China’s state banks is exempt from corporate income tax. 

– Foreign leasing companies that lease equipment to Chinese enterprises and are paid leasing fees by products or in the form of product buy-back are exempt from corporate income tax.

– FIEs that undergo restructuring or merge with other enterprises to form joint-stock companies are eligible for a two-year corporate income tax exemption and three-year reduction by half concession.

Tax Rebate on Re-investment by FIEs:

Any foreign investor of an FIE re-investing its profit obtained from the enterprise directly into that enterprise or using the profit as capital investment to establish other FIEs with an operation period of at least five years is, upon approval granted by the competent tax authorities, eligible for a 40% refund of the corporate income tax already paid on the re-invested amount. If the foreign investor re-invests its profit directly in establishing or expanding an export-oriented or high-tech enterprise in China, the corporate income tax already paid on the re-invested amount will be 100% refunded.

Other Exemptions and Reductions of Income Tax

The profits of foreign investors derived from FIEs are exempt from income tax.

The interest revenue of international financial institutions derived from loans to the Chinese government or state banks and
the interest revenue of foreign banks derived from loans to Chinese state banks at preferential rates are exempt from income tax.
 
Royalties paid to foreign enterprises for their provision of special technologies to China for scientific research, exploitation of energy resources, development of transportation, production of agriculture, forestry and animal husbandry, and development of important technologies, are eligible for income tax at the reduced rate of 10%, with the approval of SAT. For those enterprises that involve advanced technologies or offered favorable terms, income tax will be exempted.

In the case of FIEs or foreign enterprises with establishments or venues engaged in production or business operations within the territory of China, 40% of their investment in the purchase of domestically-produced equipment is exempt from income tax.

With the approval of the tax authorities, FIEs that have increased their technological development expenses by more than 10% over the previous year are allowed to offset their taxable income in the current year by 50% of the amount of technological development expenses. The details are laid down in SAT’s Procedures for the Administration of Pre-Tax Deductions of Enterprise Technological Development Expenses.

The governments of various provinces, autonomous regions and municipalities have also introduced local income tax exemptions or reductions for those sectors or projects where foreign investment is encouraged.

Individual Income Tax Concession for Foreigners
The following incomes of foreigners are eligible for individual income tax concession:

(a) Housing allowance, food allowance, removal expenses and laundry fees received in non-cash forms or in the form of cash reimbursement.

(b) Travel allowance at reasonable levels.

(c) The portion of home visit allowance, language course fees and children’s education expenses deemed reasonable by the tax authorities.

(d) Dividends and bonuses received from FIEs.

(e) Any foreign individual who resides in China consecutively or accumulatively for not more than 90 days (or 183 days for those from countries that have signed tax agreements with China) in a tax year is exempt from individual income tax if his wage or salary is not paid or borne by his employer in China and is not borne by a resident establishment or permanent venue of his employer in China.

(f) Any foreign individual who resides in China for more than a year but less than five years is required to declare and pay individual income tax on his wage or salary paid by his employer both inside and outside China during his duration of work in China. With the approval of the competent tax authorities, he may be allowed to pay tax only on that part of his wage or salary paid by his employer inside China.

Tax Concessions for Central and Western Regions FIEs under the “encouraged” category in the western region that enjoy the “two-year exemption and three-year reduction by half” tax concession are eligible for corporate income tax at the reduced rate of 15% for three more years following the expiration of the said concession. FIEs recognised as high-tech or export-oriented enterprises with an export value amounting to over 70% of their annual output value in the current year are eligible for a 50% reduction of corporate income tax during this three-year period.

Patent applications are subject to examination and approval in China in accordance with its Patent Law and the Implementing Regulations of the Patent Law. For invention patents, early announcement of the application can be made upon request. For utility model and design patents, examination is only carried out as a kind of formality.
The State Intellectual Property Office is responsible for patent work nationwide. It handles and examines patent applications and grants patent rights in accordance with the law. Patent offices under the governments of provinces, autonomous regions and municipalities directly under the central government are responsible for patent administration work in their respective areas as well as handling matters involving foreign-related patents. They are also responsible for patent enforcement, settling patent disputes, as well as investigating and penalizing patent infringement acts.
FIEs applying for patents may either submit their applications direct or appoint designated patent agents. Due to the technical complexity involved in patent application, FIEs are advised to appoint designated agents in order to better protect their rights. Foreign enterprises applying for patents in China should appoint those agents authorized by the State Intellectual Property Office to deal with foreign applications.

Points to Note in Application for Patent

Documents to be submitted for patent application must be in the Chinese language.
Where there are more than two applicants and no patent agent is appointed, the first applicant designated in the application should be the representative unless otherwise stated in the application,
Application for a patent for invention or utility model should be limited to one invention or utility model. Two or more inventions or utility models belonging to a single general inventive concept may be filed as one application.
Application for a patent for design should be limited to one design incorporated in one product. Two or more designs which are incorporated in products belonging to the same class and are sold or used in sets may be filed as one application.

Procedures for Patent Application and Documents Required

(a) Patent Application and Documents Required When a patent application is filed, the applicant should submit the documents as required for the type of patent concerned. If a patent agent is appointed to handle the application, an authorization letter is also required. Documents required for application for patent for invention or utility model (in duplicate copies): – A letter of request -- stating the title of the invention or utility model, the name of the inventor or creator, the name and address of the applicant, and other related information. – A description and its abstract -- setting forth the invention or utility model in a manner sufficiently clear and complete so as to enable a person skilled in the relevant field of technology to carry it out; where necessary, drawings are required. The abstract should state briefly the main technical points of the invention or utility model. – Claims -- these should be supported by the description and should state the extent of the patent protection asked for. If several types of protection are being claimed, they should be numbered in serial in Arabic numerals. Chemical and mathematical formulae may be included but illustrations are not allowed. The claims should contain independent claims and may also include subordinated claims. Documents required for application for patent for design (in duplicate copies): – A letter of request -- stating the product incorporating the design and the class to which that product belongs. – Drawings or photographs of the design -- the size should be no smaller than 3 cm x 8 cm and no larger than 15 cm x 22 cm. – A brief description of the design. – A prototype or model of the product incorporating the design, where necessary.

(b) Approval Procedures: Approval of patent for invention -- after the Intellectual Property Office receives an application for a patent for invention and finds it to be in conformity with the requirements of the law upon preliminary examination, it will publish the application after 18 months from the date of filing. Upon the request of the applicant, the Intellectual Property Office may publish the application earlier. Upon the request of the applicant for a patent for invention, made at any time within three years from the date of filing, the Intellectual Property Office will proceed to examine the application as to substance. If, without any justified reason, the applicant fails to meet the time limit for requesting examination as to substance, the application will be deemed to have been withdrawn. The Intellectual Property Office may, on its own initiative, proceed to examine any application for a patent for invention as to substance when deemed necessary. If no cause for rejection of the application for a patent for invention is found after examination as to substance, the Intellectual Property Office will make a decision to grant the patent right for invention, issue the certificate of patent for invention, and register and publish it. The patent right for invention comes into effect on the date of the publication. Approval of patent for utility model and design -- if no cause for rejection of the application for a patent for utility model or design is found after preliminary examination, the Intellectual Property Office will make a decision to grant the patent right for utility model or the patent right for design, issue the relevant patent certificate, and register and publish it. The patent right for utility model or design comes into effect on the date of the publication.

Assignment and Transfer of Patent Application Right and Patent: Patents and the right to apply for a patent are assignable. Any assignment of patents or patent application right by a Chinese entity or individual to a foreigner is subject to the joint approval of the State Council’s foreign trade and economic cooperation department and science and technology administration department. If a patent is transferred for other reasons, the party concerned should complete the procedures for the change of patentee with the State Council’s patent administration department by presenting the relevant supporting documents or legal documentation.

Exploitation of Patent: The patentee may make the patented product or use the patented process, or he may authorize another person to make the patented product or use the patented process. The licensing of patent rights to other parties can take the form of voluntary licensing or compulsory licensing. (a) Voluntary License for Exploitation of Patent On the basis of voluntary negotiation, a patentee (licensor) may sign a licensing contract with another party (licensee) for the conditional exploitation of the patent by the licensee for a fee within a prescribed scope, duration and geographic location. The licensing contract signed by both parties should be in written form and filed with the Intellectual Property Office within three months from the date of signing.

(c) Compulsory License for Exploitation of Patent: The Intellectual Property Office may grant a compulsory license to exploit a patent under the following three circumstances: Where an entity which is qualified to exploit the invention or utility model has made requests for authorization from the patentee of an invention or utility model to exploit his patent on reasonable terms and such efforts have not been successful within three years after the grant of the patent right, the Intellectual Property Office may, upon the application of that entity, grant a compulsory license to exploit the patent for invention or utility model. Where a national emergency or an extraordinary state of affairs occurs, or where the public interest so requires, the Intellectual Property Office may grant a compulsory license to exploit the patent for invention or utility model. Where the invention or utility model for which the patent right is granted is technically more advanced than another invention or utility model for which a patent right has been granted earlier and the exploitation of the later invention or utility model depends on the exploitation of the earlier invention or utility model, the Intellectual Property Office may, upon the request of the later patentee, grant a compulsory license to exploit the earlier invention or utility model. By the same token, the Intellectual Property Office may, upon the request of the earlier patentee, also grant a compulsory license to exploit the later invention or utility model. The entity or individual that is granted a compulsory license for exploitation does not have an exclusive right to exploit and does not have the right to authorize exploitation by any other parties. The entity or individual that is granted a compulsory license for exploitation should pay to the patentee a reasonable exploitation fee, the amount of which will be fixed by both parties in consultation. If the parties fail to reach an agreement, the Intellectual Property Office will adjudicate. If the patentee is not satisfied with the decision of the Intellectual Property Office granting a compulsory license for exploitation, or if the patentee or the entity or individual that is granted the compulsory license is not satisfied with the adjudication made by the Intellectual Property Office regarding the exploitation fee payable for exploitation, he may, within three months from the receipt of the notification, institute legal proceedings in the people’s court.

Duration of Patent Right: The duration of patent right for inventions is 20 years, and the duration of patent right for utility models and designs is 10 years, counted from the date of filing of the patent application.

Protection Against Intellectual Property Rights Infringement

China’s intellectual property legislation stipulates that infringement of intellectual property rights (IPRs) are dealt with by administrative procedures and legal proceedings. In terms of civil liabilities, the infringer may be ordered to stop the infringing act, eradicate the damage done, make public apologies or compensate for damages. In terms of administrative measures and criminal liabilities, they include warnings, orders to stop the infringing act, confiscation of unlawful gains, fines, and compensation for damages.

When an IPR infringement dispute arises, the interested parties may resort to mediation. If mediation is not a preferred option, or mediation has failed, or one of the interested parties refuses to abide by the outcome of mediation, legal proceedings may be instituted with the people’s court. The interested parties may also request the relevant administrative authorities for actions.

Legal Proceedings

When an IPR infringement dispute arises, the infringed party may institute legal proceedings directly with the people’s court at the place of the infringer’s domicile or where the infringing act takes place.

Under China’s current judicial system, intermediate people’s courts are courts of first instance for patent infringement cases. Civil cases involving copyright are dealt with by people’s courts at above intermediate level. High people’s courts can, based on the actual circumstances in the districts under their respective jurisdiction, assign people’s courts at lower levels to handle first hearings of civil cases involving copyright disputes.

If an interested party finds that due to emergency circumstances any delay to stop the infringing act may cause irreparable damages to his legitimate rights, he may, before instituting legal proceedings, request the people’s court to freeze the assets of the infringer.

In handling IPR infringement cases, the people’s court will see to it that the infringer, if convicted, is made to bear civil liabilities for the infringing act. Where the case is so serious as to constitute a crime, the infringer will be prosecuted for his criminal liabilities.

Administrative Procedures China currently adopts a dual-track system for IPR protection under which the interested parties may seek to resolve IPR-related disputes through administrative procedures or legal proceedings. When an IPR infringement dispute arises, the interested party may request the relevant administrative authorities at county-level and above at the place of the infringer’s domicile or where the infringing act takes place to handle the case. It should be noted that under China’s Patent Law and Trademark Law, foreign enterprises are required to appoint designated agents to handle matters related to patents and trademarks. This also applies to the handling of disputes involving infringements, which means that the designated agent should make the request for settlement of the dispute on behalf of the interested party.

(a) Information and Proof to be Submitted In making a request for the administrative authorities to handle an infringement dispute, the interested party should submit a written request, proof of his right, and evidence of the infringing act. If an agent is appointed to submit the request, an authorization letter should also be furnished. For cases involving the protection of trademarks under the grace period for renewal, the complainant should provide proof of application for renewal.

(b) Processing by Administrative Authorities The administrative authorities responsible for handling copyright disputes will make a decision whether a complaint will be processed within 15 days upon receipt of the request and inform the applicant of its decision. A written explanation will be given to the applicant if the decision is negative. The administrative authorities responsible for handling patent disputes will, after examining a request, make a decision whether the complaint will be processed within seven days upon receipt of the request. If the decision is negative, the applicant will be given a written explanation within seven days.

(c) Calculation of Compensation The competent administrative authorities may order the infringer to pay for damages based on the request of the applicant. The amount of compensation for infringing a copyright is calculated according to the direct damages caused by the infringement and reasonable fees incurred by the copyright holder in investigating and stopping the infringing act. The amount of compensation for infringing a trademark is calculated based on the profits earned by the infringer through the infringement during the infringement period or the damages suffered by the infringed party during the infringement period. The amount of compensation for infringing a patent is calculated according to the damages suffered by the patentee or the profits earned by the infringer through the infringement. Where it is difficult to determine the damages suffered by the patentee or the profits earned by the infringer, the amount of royalty for the patent may be used as the base for calculation.

(d) Dissatisfaction with Administrative Punishment Decisions Instituting administrative proceedings Where an interested party is dissatisfied with the administrative punishment decision made by the administrative authorities, he may, within three months from receipt of the notification of the decision, institute administrative proceedings with the people’s court in the place where the administrative authorities are located. If no proceedings are instituted and the decision is not performed at the expiration of the specified period, the administrative authorities may request the people’s court for compulsory execution thereof. Instituting administrative reconsideration Where an interested party is dissatisfied with the administrative punishment decision, he may, within 15 days from receipt of the notification of the decision, apply to the local people’s government or the administrative authorities at a higher level for reconsideration of the decision. In this case, the interested party should submit a written request for reconsideration. The authorities concerned should decide within 10 days whether to handle the case. If positive, a decision on the reconsideration should be made within two months from receipt of the application for reconsideration. If the interested party is dissatisfied with the decision on the reconsideration, he may, within 15 days from receipt of the notification of the decision, institute administrative proceedings with the people’s court. If no proceedings are instituted and the decision is not performed at the expiration of the specified period, the administrative authorities concerned may request the people’s court for compulsory execution thereof. Upon the request of the complainant, the industry and commerce administration departments may register and keep or seal and keep the evidence submitted, and may request the complainant to provide the corresponding guarantee according to law. If, in the process of investigating infringement cases, there is any case found to be so serious as to constitute a crime, the administrative authorities concerned should refer it to the judicial organ.

Disputes over Intellectual Property Contracts: When a dispute over an intellectual property contract arises, the interested parties may resort to mediation. If mediation is not a preferred option, or mediation has failed, or one of the interested parties refuses to abide by the outcome of mediation, legal proceedings may be instituted with the people’s court at the place of the defendant’s domicile or where the contract is executed. In addition to the above options, disputes over intellectual property contracts may also be resolved in accordance with the provisions for arbitration stipulated in the contract or with any subsequent supplemental written arbitration agreement reached. In these cases, application should be made to an arbitration organ for arbitration. For patent contracts, application should be made to economic contract arbitration organs or technical contract arbitration organs. For copyright contracts, application should be made to the Copyright Contract Arbitration Committee. The interested parties should abide by the ruling of arbitration. If one of the parties fails to comply with the decision, the other party may apply to the people’s court for compulsory execution thereof. If the people’s court handling the case finds that the format of the arbitration ruling does not conform to the law, it may refuse to order its execution. In such circumstances, the interested party may take the contract dispute case to the people’s court for litigation.

A new Ministry of Commerce (MOC) was created in the recent reshuffle of the State Council to bring domestic and foreign trade under the management of a single authority. There are suggestions that MOC is modeled after the US Department of Commerce, but the main reason for the reorganization is that the separation of domestic and foreign trade can no longer meet the needs of the market economy. The reshuffling could therefore be seen as a breakthrough in government restructuring in tandem with the development of the market economy.

Not A Simple Bundling of Internal and Foreign Trade

Some people worry that the merger of the Ministry of Foreign Trade and Economic Cooperation (MOFTEC) and relevant departments and bureaus of the State Economic and Trade Commission (SETC) would be nothing more than the simple bundling of domestic and foreign trade and that the existing practice of the management of domestic and foreign trade by separate departments would remain unchanged.

However, according to the State Council, the functions of MOC will include studying and mapping out policies and regulations for regulating the market and commercial circulation, promoting the establishment of the market system, and deepening the reform of the circulation system. These aims cannot be achieved simply by means of institutional restructuring and the removal or integration of functions.

The separation of foreign and internal trade dated back to the days of the planned economy. MOC's establishment is aimed at doing away with this separation.

Small Government, Big Business

The present government reshuffling places SETC's duties of internal trade management, economic coordination with foreign countries and the formulation and implementation of import and export plans for major industrial products and raw materials, the State Planning Commission's tasks of formulating and implementing agricultural import and export plans, and MOFTEC all under the management of the new MOC. Some people reckon that the new ministry will have much greater power than the defunct Ministry of Commerce and Ministry of Internal Trade, or even MOFTEC.

This view is in fact an extension of the view that the new MOC is just the simple merger of internal and foreign trade administration. The point is, the State Council's overall concept for its institutional reform is to replace the old administrative system of "omnipotent government" with "limited government" and to gradually turn the "big government" into a "small government¡¦. The reshuffling involves more than just the disbanding or merging of departments. More importantly, emphasis is put on the change of government functions. In line with this new concept, the power of the new MOC is reduced rather than enlarged.

Internally, the new MOC is in charge of regulating market order and strengthening the management of the market. Externally, it is responsible for creating a favorable environment for enterprises to compete in the international market. In line with this concept, enterprises will be responsible for their own commercial operations and investment, the government will only do what it is supposed to do.

Currently, domestic enterprises must apply for foreign trade rights to engage in foreign trade activities. In certain cases, it took some domestic enterprises eight years to gain import-export rights. However, in the next year or two examination and approval will no longer be needed for domestic enterprises to engage in foreign trade. It will be entirely up to the enterprises themselves whether or not to engage in foreign trade. The government will not interfere.

Internal and Foreign Trade Policies More Effective

Under the old system of "omnipotent government", each department acted on its own and enterprises often had to go through different departments to get things done. After the reshuffling, the management of all trading activities will be placed under a single ministry, thus doing away with the phenomenon of different departments each acting on its own, thereby improving government efficiency. The new MOC will be more efficient in deepening the reform of the circulation system, formulating circulation policies, unfolding international economic cooperation, handling anti-dumping and other tasks, and will be able to provide better services.

More Conducive to Attracting Foreign Investment

It is understood that the new MOC will step up efforts on formulating policies urgently needed by enterprises. For example, enterprises are concerned about export tax rebates, and foreign investors are eager to see feasible policies for merger and acquisition. The drafting of these policies had to go through many different departments in the past. While some coordination will still be needed after the reshuffling, there will certainly be fewer obstacles.

The lineup of new departments also reflects the emphasis on improving efficiency and service. For instance, the establishment of the Foreign Investment Promotion Bureau aims to provide better services for foreign investors. This bureau will be responsible for publicizing China's foreign investment policies to the outside world, establishing liaison channels, reflecting the views and suggestions of foreign investors and studying ways of improving the soft investment environment. It will also provide a range of other services to foreign investors. Such reform will help attract foreign investment.

Facilitating Modernization of Circulation Sector

Compared with the developed countries, China’s circulation sector is very backward. The sector contributed to 70% of GDP in developed countries, but only about 30% in China. Economic growth in the past 20 years has generated a pressing demand for the modernization of the sector, including the flow of commodities, information and capital. A government organ such as the newly-established MOC is needed to coordinate the domestic and foreign markets which will help accelerate reform of the circulation system and modernization of the sector.

An important duty of MOC is to formulate policies and standards for regulating the market and promote the reform of the circulation system. Its task will involve the work of the communications, railways, civil aviation and information industry ministries, state development planning and reform commissions, as well as other departments. It is no doubt a big improvement both in terms of organizational structure and in terms of efficiency to have a single organ that represents all circulation enterprises in coordinating all the relevant ministries and departments.

CATALOGUE FOR THE GUIDANCE OF FOREIGN INVESTMENT INDUSTRIES

(Promulgated by Decree No.5 of the State Planning Commission, the State Economic and Trade Commission and the Ministry of Foreign Trade and Economic Cooperation on June 20, 1995)

ENCOURAGED PROJECTS FOR FOREIGN INVESTMENT

I. Agriculture, Forestry, Animal Husbandry,
Fishing and Related Industries

1. The reclamation and development of wastelands, barren hills and shoals (except where there are military installations) and transformation of medium and low-yield farm lands and low-yield forests;

2. The development of new high-quality, high-yield strains of food grains, cotton, oil crops, sugar crops, vegetable, flowers and plants, and forage grass crops;

3. Serial non-soil cultivation and production of vegetables and flowers and plants;

4. Forest plantation and the introduction of improved varieties of forest trees;

5. Development of fine breeds of stud stock, birds, and aquatic products ( not including China's indigenous precious fine varieties);

6. Breeding of famous, special or fine aquatic products and deep-water fishing;

7. New lines of highly efficient and safe crude agricultural chemicals (which have a pest-killing and bacteria-killing rate of up to 80% and do not harm human beings, animals and crops);

8. High-concentration chemical fertilizers (urea, synthetic ammonia and phosphamidon);

9. New production technology and new kinds of agricultural plastic film (fiber film, photolysis film and multi-function film and raw materials);

10. Veterinary antibiotics (special animal antibiotics, veterinary antibiotics against internal and external parasites, new forms of veterinary antibiotics), veterinary anthelmintics;

11. All-valence compound fodder, additives and the development of fodder protein resources;

12. New technology and equipment for the storage, preservation and processing of vegetables, fruits, meat products and aquatic products;

13. Forestry chemical products and new technology for the comprehensive utilization of  inferior, small and fuel forests and new products there from?.
14. The construction and management of comprehensive water control projects (where the State commands the majority of shares and with more than 300,000 tonnes of daily water supply or with installed capacity of more than 250MW);

15. The manufacture of water-saving irrigation equipment;

16. Agricultural machinery, agricultural tools and related spare parts.

II. Light Industry

1. Mold design, processing and manufacture of non-metal products;

2. Commercial-grade paper pulp;

3. Post dressing and processing of leather;

4. Mercury-free manganese-alkaline batteries, lithium batteries and hydronickelate batteries;

5. High-tech special industrial sewing machines;

6. Polyimide wrap;

7. Enzyme products, synthetic detergent raw materials (straight-chain aldylbenzene);

8. Synthetic spices and single-ion spices;

9. Research and popularization of freon substitution technology.

III. Textile Industry

1. Chemical fibres with such modified properties as being ultra-thin, electrostatic-resistant, fire-retarding and high emulation; special chemical fibers such as aryl, spandex and carbon fiber;

2. Textile dyeing and after-treatment;

3. Highly simulated chemical fiber and fabrics;

4. Oils used in textile industries;

5. Special industrial textile products.

IV. Transport, Post and Communications Industry

1. Railway transport technology and equipment: design and manufacture of locomotives and their major parts; railline design and construction; technology and equipment manufacturing for fast railways; communication signals and transport safety monitoring equipment manufacturing; electrical-powered railway installation and equipment manufacturing;

2. Construction and management of local railways and associated bridges, tunnels and ferries (off limits to solely foreign-funded enterprises);

3. Road and port machinery and its design and manufacture technology;

4. Construction and management of urban subway and light-duty rail system (where the State should command the majority of shares);

5. Construction and management of roads, bridges, tunnels and ports ( the State shall command the majority of shares in public ports projects);

6. Construction and management of civil airports ( where the State shall command the majority of shares);

7. Manufacture of 900-MHz digital mobile communication equipment;

8. Synchronous opticfiber of more than five time-groups, microwave communication systems and measurement equipment manufacturing;

9. Manufacture of asynchronous transfer mode (ATM) exchange equipment.

V. Coal Industry

1. Design and manufacture of coal mining, excavation and transportation machinery;

2. Design and manufacture of complete sets of gasification equipment;

3. Manufacturing equipment and additives for high concentration liquid coal;

4. Comprehensive utilization and development of fuels with low calorific value and associated resources;

5. Comprehensive development and utilization of coal.

VI. Power Industry

1. Construction and management of thermal power plants (including conventional thermal power plants and power plants that utilize antipollution coal-burning technology);

2. Construction and management of hydropower stations ( the State shall command the majority of shares in those stations with more than 250MW of installed capacity);

3. Construction and management of nuclear power stations (where the State shall command the majority of shares);

4. Construction and management of power stations utilizing new types of energy (including solar energy, wind energy, magnetic energy, geothermal energy and tidal energy).

VII. Ferrous Metallurgical Industry

1. Sponge iron ( using coal as reductant);

2. Powder metallurgy (iron powder);

3. Short-process steel and iron production lines of more than 200,000 tonnes; steel and iron production lines of more than 500,000 tonnes;

4. Cold-rolled silicon steel plates, galvanized plates, tinned plates and stainless steel plates;

5. Hot-and cold-rolled slit plates;

6. Bushed steel bearings, steel oil pipes, stainless steel pipes and high-pressure boiler pipes;

7. Tires and nave bosses of locomotives and vehicles;

8. Super-high power electrodes, spicule coke;

9. Aluminium alumine, hard clay pit and grog;

10. Iron ore mining and dressing;

11. Deep processing of tamping coke and coal tar;

12. Ultra-pure magnesium dust ( off limits to solely foreign-funded enterprises);

13. High grade special refractory materials for continued casting, ladle and combined blow; special protective cinder.

VIII. Non-Ferrous Metallurgical Industry

1. Single- (more than 5 inches in diameter) and multi-crystal silicon;

2. Hard alloy, chemical tin compound, chemical stibium compounds;

3. Compound materials of non-ferrous metals, new alloy materials;

4. Exploitation of copper, lead and zinc mines (off limits to solely foreign-funded enterprises);

5. Exploitation of aluminium mines (off limits to solely foreign-funded enterprises) and aluminium oxide (more than 300,000 tonnes);

6. Rare-earth minerals application.

IX. Petroleum, Petrochemical and Chemical Industry

1. Ionic membrane caustic soda and new organic chlorine product series;

2. Manufacture of caustic soda ion membrane;

3. Ethylene (with an annual production of more than 300,000 tonnes), acrylics and the comprehensive utilization of C4-C9 products;

4. Engineering plastic products and plastic alloys;

5. Synthetic rubber ( liquid styrene-butadiene rubber, butyl rubber, isoprene rubber, acetyl propionyl rubber, butadiene flange duprene rubber, lactoprene rubber, acrylic rubber and alcoholate fluoride rubber);

6. Fine chemical industry: dyes, intermediates, catalysts, auxiliaries and new color products and new technology; commercial processing technology of dyes and colors; high tech chemical products for electronics and paper-making; food additives, fodder additives, leather chemical products, oil field auxiliaries, surfactant, water treatment agents, glues, non-organic fibres, non-organic dust fillings and equipment;

7. Chloride flange phthaleins vanish;

8. Chemical products that use coal as raw material;

9. Necessary raw materials for synthetic materials (bisphenol A, butadiene-styrene latex, pyridine, 4.4 diphenyl methane diisocyanic ester);

10. Basic chemical raw materials: comprehensive utilization of benzene, methylbenzene, para-xylol derivatives, ortho-xylol derivatives and meta-xylol derivatives;

11. Comprehensive recycling of waste gas, liquid and residue;

12. Construction and management of oil and gas pipes, oil depots and ports designated for oil transportation ( where the State shall command the majority of shares).
X. Machinery Industry

1. Manufacture of welding robots and highly-efficient welding production lines;

2. Heat-resistant insulating materials (with the F and H insulating grades) and finished insulating products;

3. Manufacture of continued milling machines for slit plates, large cold-and hot-rolling equipment and gasification furnaces for urban supply and antipollution industrial use;

4. Manufacture of trackless collection, loading and transport equipment for underground mines; motorized selfloading-and-unloading mining vehicles that can handle more than 100 tonnes of load; mobile crushers; double-in double-out coal grinders; bucket-wheel excavators with speed higher than 3000 cubic meters per hour; mining loaders of more than 5 cubic meters; whole-section tunnelling machines;

5. Manufacture of container loading and unloading bridge and tubular conveyer;

6. Manufacture of complete sets of large air-separation equipment with the capacity of more than 30,000 cubic meters ( including 30,000 cubic meters);

7. Manufacture of multi-color offset printing machines;

8. Manufacture of onshore and offshore oil drilling and extraction equipment of more than 4,500 meters; antiblowout apparatus of more than 70-million-Pascal (including 70 million Pascal); fracturing equipment of more than 105 million Pascal ( including 105 million Pascal); well-building machines of more than 50 tonnes ( including 50 tonnes);

9. Manufacture of complete sets of turbine compressors, aminomethane pumps and mixer-guarantors used in synthetic ammonia projects with annual production of more than 300,000 tonnes (including 300,000 tonnes), in urea projects with annual production of more than 480,000 tonnes (including 480,000 tonnes); in ethylene projects with annual production of more than 300,000 tonnes (including 300,000 tonnes ) (the State shall command the majority of shares in the projects);

10. Manufacture of complete sets of electronics, new spinning machines and new paper-making (including paper pulp) machines;

11. Manufacture of large and precision measurement equipment;

12. Safety monitoring and checking equipment (for detection of vibration, noise, poisonous matters, dust concentration and prediotion of gas outburst and shock bump);

13. Components and spare parts of new types of instruments and materials (mainly referring to intelligent instrument sensors, instrument socket connectors, flexible circuit boards, photoelectron switches, proximity switches and other new types of switches; instrument functional materials);

14. Manufacture of large, highly-efficient numerical controlled precision machine tools and their functional parts.

15. Hydraulic components, pneumatic components and sealing elements;

16. Fine punching molds, precision hollow molds and standardized molds;

17. Manufacture of urban sewage treatment equipment that can handle 250,000 tonnes of sewage per day; industrial liquid waste membrane treatment equipment; up-flowing anaerobic fluidized bed equipment and other organic liquid waste treatment equipment, coal ashes building blocks equipment (50,000-100,000 tonnes per year), waste plastics recycling equipment, industrial boiler desulphurization and identifications equipment, large heat-and acid-resistant bag-type collectors;

18. Manufacture of large road construction equipment;

19. Manufacture of large (200-430 mm in external diameter), precision and special hearings;

20. Manufacture of major automobile components and spare parts: brake assembly, driving assembly, gearbox, steering gear, diesel engine fuel pump, piston (including piston ring), air valve, hydraulic tappet, axle pad, booster, clarifying filter (triple filter), aluminium radiator, diaphragm clutch, constant-velocity universal joint, shock absorber, car air conditioning system, safety air bag, seat angle adjusting device, car lock, rear-view mirror, glass lift, combined dashboard, engines, lamps and bulbs, special high-strength fasteners, special bearings;

21. Manufacture of automobile molds (including punching molds, injection molds, pressed molds), clamping apparatus (including welding fixture and examination fixture);

22. Automobile casting and forging blanks;

23. Automobile technology research centers and automobile design and development institutions;

24. Highly-specialized vehicles such as those used in airports and in deserts in petroleum industry.

XI. Electronics Industry

1. Production of large-scale integrated circuits;

2. New types of electronic components and spare parts (including sectional components) and power electronic components and spare parts;

3. Manufacture of photoelectronic components and parts, sensitive components and parts, sensors;
4. Manufacture of medium and large computers;

5. Manufacture of top-end 32-bit plus ( not including 32-bit) micro-computers;

6. The manufacture of key components of fax machines (heat-sensitive printing heads, image sensors, etc.);

7. Digital cassette recorders and laser disc apparatus compatible with digital television and HDTV;

8. Semiconductor and photoelectronic materials;

9. New types of display devices (color liquid crystal devices, flat panel display devices);

10. Computer aided design (CAD), computer aided tests (CAT), computer aided manufacture (CAM), computer aided engineering (CAE) systems and other computer application systems;

11. Manufacture of special electronic equipment, instruments, tools and molds;

12. Manufacture of hydrologic data collection instruments and equipment;

13. Manufacture of satellite communications telephone earth stations (TES) and personal earth stations (PES) and key components;

14. Manufacture of SDH optical communications systems, cross connection equipment and network management systems;

15. Development and production of (computer and communications ) software;

16. Manufacture of air traffic control system equipment;

17. Development and manufacture of large capacity laser disk and magnetic disk storage and related components;

18. Development and manufacture of new types of printing devices ( laser printers, etc.)

XII. Building Materials and Equipment and Other Non-Metallic Minerals Industries

1. Float glass production lines with daily melting output of 500 tonnes or more;

2. High-grade sanitary ceramics production lines with annual output of 500,000 pieces;

3. New types of building materials;

4. Special cement;
5. Cement additives;

6. Storage and transport facilities for bulk cement;

7. Manufacture of special urban sanitary equipment;

8. Manufacture of tunnel excavators, urban subway entry-driving machines;

9. Manufacture of tree transplanting machinery;

10. Manufacture of road milling and repairing machinery;

11. Glass fiber and glass fiber reinforced plastic products;

12. Inorganic, non-metal materials and products;

13. Non-metallic mineral deposits and deep processing.

XIII. Medical and Pharmaceutical Industries

1. Chemical raw materials that are within the patented period under the protection of China's administration; special medical intermediates that need to be imported;

2. Antiphlogistics and fever-allaying medicines: new varieties that have good curative effects and have not been produced domestically;

3. Vitamins: vitamin D3, dextropantothenic calcium, niacin;

4. New types of anti-cancer, cardio-and cerebral-vascular medicines;

5. Medicine agents: slow-releasing agents, release controlling agents, targeting agents, skin-penetrating and other new types of forms of medicines and related supplements;

6. Amino acids: serine, tryptophan proteinochromogen, histamine, etc.;

7. New types of medicine packaging materials, containers and advanced pharmaceutical equipment;

8. New types of highly efficient and economic contraceptive medicines and devices that have not been produced domestically;

9. New technologies and equipment that can improve the quality of patent traditional Chinese medicines and that can improve the packaging of the medicines;

10. New techniques of analyzing traditional Chinese medicine's active agents and extraction;

11. New types of medicine manufactured by biological engineering technology.

XIV. Medical Equipment

1. X-ray machines of more than 800 milliamperes;

2. Digital subtraction angiography apparatus;

3. Biochemical analysis instrument;

4. Electronic endoscopes;

5. Medical monitoring instrument;

6. Multi-function anesthesia apparatus;

7. Medical tubes.

XV. Space and Aviation Industries

1. Civilian aircraft manufacturing;

2. Aircraft engines;

3. Airborne equipment;

4. Light combustion turbines;

5. Civilian satellite manufacturing;

6. Manufacture of satellite pay loads;

7. Satellite application (the State shall command the majority of shares).

XVI. Shipbuilding Industry

1. Manufacture and repairing of special ships, high performance ships and ships larger than 35,000 tonnes;

2. Manufacture of necessary ship accessories.

XVII. New and Developing Industries

1. Micro-electronic technology;

2. New materials;

3. Bioengineering technology;

4. Information and communications networking technology;

5. Isotope radiation and laser technology;

6. Ocean development and oceanic energy development;

7. energy-saving technology development;

8. Resources regeneration and comprehensive utilization technology;

9. Engineering and technology for the control of environmental pollution..

XVIII. Service Industry

1. International economic and scientific and technological information consultation services;

2. Repairing and after-sale services of precision instrument and equipment.

PROJECTS RESTRICTED FOR FOREIGN INVESTMENT

I. Light Industry

1. Assembling of movements of mechanical and electronic watches and finished watches; bicycles and sewing machines for household use;

2. Home appliances: washing machines, refrigerators, freezers;

3. Disposable aluminum cans.

II. Textile Industry

Long polyester fiber with annual production under 5,000 tonnes.

III. Coal Industry
Local method coke making.

IV. Ferrous Metallurgical Industry

1. Sillicon iron, ordinary carbon electrodes;

2. Electric furnace steel processing projects under 30 tonnes; revolving furnace steel processing projects under 30 tonnes; blast furnace smaller than 300 cubic meters and their related sintering and coal carbonization;

3. Welded steel pipe of 100 millimeters or thinner, rolling mills, ordinary steel primary rolling mills and rough mills for steel pipes thinner than 76 millimeters.

V. Non-Ferrous Metal Industry

Aluminum materials and aluminum doors and window frames.

VI. Petrochemical and Chemical Industries

1. Barium salts, naphthalene flange benzene anhydride;

2. Oil refineries smaller than 2.5 million tonnes;

3. The renovation of cross-ply, old tires (except ?/FONT>meridian?/FONT> tires) and low performance industrial rubber replacements;

4. Iodine extraction from kelps.

VII. Machinery Industry

1. Ordinary long polyester fiber and short fiber equipment;

2. Manufacture of ordinary passenger and cargo ships, ship diesel engines and diesel electricity generating sets;

3. Processing of carbon silion raw materials;

4. Power station, electricity-powered grinders;

5. Ordinary carbon steel welding rods;

6. Ordinary grade standard fasteners, small and medium-small ordinary bearings;

7. Ordinary lead acid batteries;
8. containers;

9. Elevators.

VIII. Electronics Industry

1. Radio cassette recorders, radios;

2. Black-white television sets and black-white kinescopes;

3. Computers below 16-bits (including 16-bits)

4. Wireless telephone systems under 450 MHz;

5. Broadcast and television transmitting systems.

IX. Building Materials and Equipment and

Other Non-Metallic Mineral Industries

1. Cement production lines with annual output of less than 300,000 tonnes;

2. Ordinary building plate glass production lines with daily melting output lower than 200 tonnes.

X. Medical and Pharmaceutical Industry

1. Antibiotics: chloromycetin, lincomycin, gentamicin and dihydrostreptomycin;

2. Synthetic chemcial medicines: anlagin, vitamin B1, vitamin B6;

3. Traditional Chinese medicine decoction (except traditional preparation techniques);

4. Traditional Chinese medicine products and semi-finished products.

XI. Medical Devices

1. Non-self-destructible disposable syringes;

2. Medium and low-grade B ultrasonic imaging devices;

3. Electrocardiongraphs.

XII. Service Industry

1. Taxi (cars can only be purchased domestically);

2. Gas stations ( restricted to the construction and management of related projects).

I. Agriculture, Forestry, Animal Husbandry,

Fishing and Related Industries

1. Processing and export of rare trees and timbers (off limits to solely foreign-funded enterprises);

2. Aquatic fishing in offshore and inland waters (off limits to solely foreign-funded enterprises).

II. Light Industry

1. Table salt, industrial salt;

2. Foreign brand non-alcoholic beverages (including solid drinks);

3. Famous brand white spirit;

4. Cigarette diacetin cellulose and tows;

5. Tobacco processing industries such as those in the manufacture of cigarettes and filters;

6. Processing and production of pig, ox and goat hides;

7. Natural spices.

III. Textile Industry

1. Wool and cotton spinning;

2. raw silk and blank silks;

3. Chemical fibers and their raw materials ( polyester, acrylnitrile, caprolactam, nylon 66 salts, etc.).

IV. Coal Industry

1. Extraction of coking coals (off limits to solely foreign-funded enterprises).

V. Non-Ferrous Metal Industry (Off Limits to Foreign-Funded Enterprises)

1. Copper processing;
2. Extraction, dressing, smelting and processing of precious metal ores (gold, silver, platinum);

3. Extraction of non-ferrous metal ores such as wolfram, tin and stibium;

4. Rare earth extraction and smelting.

VI. Petrochemical and Chemical Industries

1. Color and black and white film;

2. Extraction and processing of ludwigite;

3. Strontiam salts;

4. Benzidine.

VII. Machinery Industry

1. Whole cars (the State shall command the majority of shares);

2. Whole motorcycles (the State shall command the majority of shares);

3. Whole light vehicles ( light passenger vehicles, vans) (the State shall command the majority of shares);

4. Automobile and motorcycle engines (the State shall command the majority of shares);

5. Automobile air-conditioning compressors, electronically controlled fuel injection system;

6. Renovation, dismantling and reassembling of old cars and motorcycles;

7. Compressors for air conditioners and refrigerators (excluding those used in automobile air conditioners) with power of 2 kilowatts or less;

8. Decentralized control systems ( including programmable controllers);

9. Desktop electrostatic copiers;

10. Thermal power generation equipment: manufacture of generation set (generators, steam turbines, boilers, auxiliaries and control devices )of 100MW or above; combustion turbines combined circulating power generating equipment; circulating fluidized bed boilers; gasification combined circulatory technology and equipment (IGCC), pressurizing fluid bed (PFBC); desulphurization and denitrification equipment (off limits to solely foreign-funded enterprises);

11. Hydropower equipment: manufacture of hydropower sets (including hydropower auxiliary equipment and control devices) with runners of 5 meters in diameter and larger; large pumped storage generating sets of 50MW or larger; tubular turbine generating sets of 10MW or larger (off limits to solely foreign-funded enterprises);

12. Nuclear power generation sets: manufacture of generation sets of 600MW or larger ( off limits to solely foreign-funded enterprises);

13. Power transmission and conversion equipment: transformers of 220,000 volts or above, high-voltage switches, mutual-inductors and the manufacture of cable equipment (off limits to solely foreign-funded enterprises).

VIII. Electronics Industry

1. Color television sets and tuners, remoter controllers, flyback transformers;

2. Color kinescopes and glass shells;

3. Camcorders (including camcorder-recorders), video recorders;

4. Video recorder magnetic heads, drums and movements;

5. Emulated mobile communications system (comb, trunk, pagers, wireless telephones);

6. Facsimile machines;

7. Satellite television receivers and key components;

8. Microwave relay communications equipment below 4 time group.

IX. Building Materials and Equipment and

Other Non-Metallic Mineral Industries

Exploration, extraction and processing of precious non-metal minerals such as diamonds and other natural gem stones (off limits to solely foreign-funded enterprises).

X. Medical Industry

1. Traditional Chinese medicines administrated by the export licensing system;

2. Narcotic precursors: ephedrine, pseudoephedrine, ergobasine, ergotamine, lysergic acid;

3. Penicillin G, artemisinin anti-malaria drugs;
4. Addictive narcotics and psychotropic drugs;

5. Vitamin C;

6. Blood products.

XI. Transportation, Post and Telecommunications Industries

1. Construction and management of arterial railways (the State shall command the majority of shares);

2. Overwater transportation (off limits to solely foreign-funded enterprises);

3. Cross-border car transportation (off limits to solely foreign-funded enterprises);

4. Aerial transportation (the State shall command the majority of shares);

5. Interchangeable aviation (the State shall command the majority of shares in industrial aviation projects; agricultural and forestry aviation projects are off limits to solely foreign-funded enterprises);

6. Manufacture of digital program-controlled exchanges.

XII. Domestic and Foreign Trade, Tourism, Real Estate and Service

Industries ( Off Limits to Solely Foreign-Funded Enterprises)

1. Retail and wholesale business;

2. Goods supply and sales;

3. Foreign trade;

4. Construction and management of State-level tourist zones;

5. High grade hotels, villas and office buildings;

6. Golf courses;

7. Travel agencies;

8. Accounting, auditing and legal consultancy and broker services;

9. Representative services (shipping, freight, futures, sales and advertisements);
10. Education and translation services.

XIII. Financial and Related Services

1. Banks, financial companies, trust investment companies;

2. Insurance companies, insurance brokerage and representative companies;

3. Securities companies, investment banks, merchant banks, fund-management companies;

4. Financial leasing;

5. Foreign currency dealing;

6. Financial, insurance and foreign currency consultancy;

7. Production, processing, wholesale and retail sale of gold and silver, jewelry and ornaments.

XIV. Miscellaneous

1. Printing and publishing and distribution services (off limits to solely foreign-funded enterprises);

2. Inspection and verification of import and export commodities (off limits to solely foreign-funded enterprises);

3. Manufacture, publication and distribution of audio and video products.

XV. Other Projects that Are Restricted by the State and by International Accords that China Joined

PROJECTS PROHIBITED TO FOREIGN INVESTMENT

I. Agriculture, Forestry, Animal Husbandry and

Related Industries

1. Wild animal and plant resources protected by the State;

2. China's rare fine strains (including fine genes in crop planting, animal husbandry, and aquatic industries);

3. Construction of natural animal and plants conservation regions;

4. Processing of green tea and other special tea products (famous brand tea, black tea, etc.).
II. Light Industry

1. Ivory carving and processing of tiger bones;

2. Hand-made rugs;

3. Bodiless lacquerware;

4. Enamel and hawksbill turtle products;

5. Blue and white exquisite procelain;

6. Xuan paper, ink sticks.

III. Power Industry and Urban Public Facilities

1. Construction and management of electric network;

2. Construction and management of urban water supply and drainage, gas and heat supply networks.

IV. Mining, Dressing and Ore Processing, Extraction, dressing and smelting of radioactive minerals.

V. Petrochemical and Chemical Industry

1. Extraction and processing of szaibelyite;

2. Extraction of celestite.

VI. Medical and Pharmaceutical Industry

1. Traditional Chinese medicines protected by the State (muck, licorice root, the bark of eucommia and magnolia);

2. Preparation techniques of patent traditional Chinese medicines and traditional medicines prepared by secret recipes.

VII. Post, Telecommunication and Transportation Industries

1. Management and administration of postal and telecommunications services;

2. Air traffic control.

VIII. Trade

Futures trade.

IX. Broadcast, Television and Film-making

1. Broadcasting and television stations (including cable television networks and transmitting and relay stations at any level;

2. Production, publication and circulation of broadcast and television programs;

3. Shooting, circulation and screening of movies;

4. Video projection.

X. News Media

XI. Military Arms Production

XII. Others

1. Projects endangering military facilities and their effectiveness;

2. Eaw materials that can cause cancer, deformity and sudden mutation and their processing;

3. Racing rings, casinos;

4. Pornographic services.

XIII. Other Projects that Are Banned by the State and by International Accords that China Joined

Value-Added Tax as a type of turnover tax, value-added tax (VAT) is levied on the increased value of commodities at different stages of production or circulation, or on the value-added of commodities. All enterprises and individuals engaged in the sale or import of goods or the provision of processing, repair or maintenance services in China have to pay VAT.

(a) Taxpayer In China, VAT payers are divided into general taxpayers and small-scale taxpayers on the basis of their operation scale and accounting and auditing system, with different methods of tax computation. Small-scale taxpayers are taxpayers without a sound accounting and auditing system whose taxable value of sales is below the prescribed standards, namely Rmb1 million for taxpayers engaged in the production of goods or the provision of taxable services, and less than Rmb1.8 million for those engaged in wholesaling or retailing business. General taxpayers mainly refer to enterprises whose annual taxable sales value exceeds that of small-scale taxpayers. Small production enterprises with a sound accounting and auditing system may be classified as general taxpayers. However, individuals, non-enterprise units, and enterprises that do not regularly engage in taxable operations are classified as small-scale taxpayers even if their annual taxable sales value exceeds the standards for small-scale taxpayers.

(b) Method of Computation: Small-scale taxpayer VAT payable by small-scale taxpayers is calculated by a simple method on the basis of the sales value and the tax rate without offset or deduction for input VAT. The applicable rate is 4% for commercial enterprises and 6% for other Guide to Doing Business in China. The formula for the computation of VAT is as follows: Tax payable = sales value x tax rate (4% or 6%) VAT on consignment sale, sale of unredeemed goods by pawn shops, sale of second-hand goods, and retail sale of duty-free goods by approved duty-free shops, is levied at a rate of 4% using the above simple method of computation regardless of whether it is paid by a small-scale taxpayer. General taxpayer The actual amount of VAT payable by general taxpayers is the excess amount of output VAT over input VAT. The formula for the computation of the tax payable is as follows: Tax payable = current output VAT – current input VAT Output VAT = sales value x applicable tax rate If the current output VAT is smaller than the current input VAT, the amount that cannot be fully set off or deducted may be carried over to the following tax period. VAT on imported goods VAT on goods imported by taxpayers is computed on the basis of the composite assessable value and the applicable tax rate without offset or deduction for input VAT. The formula for the computation of the tax payable is as follows: Tax payable = composite assessable value x applicable tax rate Composite assessable value = customs dutiable value + customs duty.

(c) Taxable Items and Tax Rates: There are two VAT rates in China, a basic rate of 17% and a lower rate of 13%. The sale and import of the following commodities are subject to VAT at the lower.

Tax Reduction:

Tax Exemption and Reduction: In a bid to attract foreign investment, the Chinese government has introduced a range of tax concessions to FIEs and foreign enterprises. The following are some of the major preferential policies.

Concessions on Business Tax, VAT and Customs Duty

(a) Incomes derived by research and development centers established by FIEs and foreign wholly-owned enterprises and incomes derived by foreign enterprises and foreign individuals from technology transfer, technology development and related consultancy and technical services are exempt from business tax.

(b) The raw materials, auxiliary materials, parts, components, accessories and packaging materials imported by FIEs for the outward processing or assembly of products and for the production of goods for export are exempt from import tariffs based on the quantity of finished products actually processed and exported. Alternatively, import tariffs are levied on the imported materials and parts first and rebates are made later based on the quantity of finished products actually processed and exported.

(c) FIEs are entitled to full VAT rebate on the purchase of domestically-produced equipment within their investment amount if such equipment is listed in the catalogue of duty-free imports.

(d) Imports of equipment and supporting technologies, accessories and parts for own use by FIEs under the “encouraged category” or “restricted category II”, foreign-invested R&D centers, FIEs with advanced technologies and export-oriented FIEs, are exempt from import tariffs and import-related taxes in accordance with the Circular of the State Council on the Adjustment of Tax Policy on Equipment Imports.

(e) Imports of equipment for own use by foreign investment projects encouraged and supported by the state within their total investment amount are exempt from tariffs and VAT (unless otherwise stipulated by the state). Imports of equipment and supporting technologies, accessories and spare parts for own use by foreign-invested R&D centers within their total investment are exempt from tariffs and import-related taxes in accordance with the Circular of the State Council on the Adjustment of Tax Policy on Equipment Imports if the import items cannot be produced in China or if the performance of the like domestic products or technologies cannot meet their demand.

Concessions on Corporate Income Tax

(a) Preferential Tax Rate Enterprises in the following regions (sectors) are subject to corporate income tax at the reduced rate of 15%: FIEs in the Shenzhen, Zhuhai, Shantou, Xiamen and Hainan special economic zones; Foreign enterprises with establishments or venues in special economic zones and engaged in production and business operations; Production FIEs established in economic and technological development zones approved by the State Council and in the Pudong New Area in Shanghai; Technology- and knowledge-intensive projects launched by FIEs in old urban districts of special economic zones, economic and technological development zones and coastal economic open areas approved by the State Council with long investment recovery periods and foreign investment exceeding US$30 million; Production FIEs engaged in energy, transportation and port construction projects; Production FIEs engaged in export processing in bonded areas; Recognized high-tech FIEs in state new high-technology industrial development zones approved by the State Council. Production FIEs in the following regions are subject to corporate income tax at 24%: Other types of production FIEs in old urban districts of coastal economic open areas, special economic zones, and economic and technological development zones where the 15% preferential tax rate is not applicable; Open coastal cities, open cities along the Yangtze River and in inland and border regions, as well as other areas designated by the State Council to enjoy the same concessions.

(b) Exemption and Reduction of Corporate Income Tax:

Production FIEs with an operation period of over 10 years (excluding projects for the exploration of petroleum, natural gas, rare metals and precious metals) are eligible for corporate income tax exemption in the first two profit-making years and for reduction by half in the following three years. With the approval of the State Administration of Taxation (SAT), FIEs engaged in agriculture, forestry and animal husbandry and FIEs established in the economically-backward remote and border areas may be levied corporate income tax at the reduced rate of 15%-30% for another 10 years after the expiration of the above said tax exemption and reduction period.   Sino-foreign joint ventures engaged in port and wharf construction and with an operation period of over 15 years are eligible for corporate income tax exemption in the first five profit-making years and for reduction by half in the following five years. Infrastructure projects related to airports, ports, wharfs, railways, highways, power stations, coal mines and water conservancy facilities as well as agricultural development in the Hainan Special Economic Zone with an operation period of over 15 years are eligible for corporate income tax exemption in the first five years and reduction by half in the following five years. Infrastructure projects related to airports, ports, railways, highways and power stations as well as agricultural development in the Pudong New Area in Shanghai with an operation period of over 15 years are eligible for corporate income tax exemption in the first five years and for reduction by half in the following five years.

The following types of enterprises are eligible for corporate income tax exemption in the first profit-making year and for reduction by half in the second and third years with the approval of the local tax authorities:

– FIEs engaged in services in special economic zones with foreign investment exceeding US$5 million and with an operation period of over 10 years;

– Foreign-invested banks, Sino-foreign joint-venture banks and other financial institutions in special economic zones and other areas designated by the State Council with foreign capital investment exceeding US$10 million and with an operation period of over 10 years.

– Recognized high-tech Sino-foreign joint venture enterprises in state-level high-technology development zones with an operation period of over 10 years are exempt from corporate income tax in their first two profit-making years with the approval of the tax authorities. 

– Foreign-invested export-oriented enterprises are entitled to pay corporate income tax at the reduced rate of 15% or 10% following the expiration of the corporate income tax exemption and reduction by half concession if their export value amounts to over 70% of their total output value in the current year.

– Foreign-invested high-tech enterprises are entitled to pay corporate income tax at the reduced rate of 15% or 10% for three years following the expiration of the corporate income tax exemption and reduction by half concession if their status of high-tech enterprises remains unchanged. 

– The income of foreign banks from interest on loans at preferential interest rates to China’s state banks is exempt from corporate income tax. 

– Foreign leasing companies that lease equipment to Chinese enterprises and are paid leasing fees by products or in the form of product buy-back are exempt from corporate income tax.

– FIEs that undergo restructuring or merge with other enterprises to form joint-stock companies are eligible for a two-year corporate income tax exemption and three-year reduction by half concession.

Tax Rebate on Re-investment by FIEs:

Any foreign investor of an FIE re-investing its profit obtained from the enterprise directly into that enterprise or using the profit as capital investment to establish other FIEs with an operation period of at least five years is, upon approval granted by the competent tax authorities, eligible for a 40% refund of the corporate income tax already paid on the re-invested amount. If the foreign investor re-invests its profit directly in establishing or expanding an export-oriented or high-tech enterprise in China, the corporate income tax already paid on the re-invested amount will be 100% refunded.

Other Exemptions and Reductions of Income Tax

The profits of foreign investors derived from FIEs are exempt from income tax.

The interest revenue of international financial institutions derived from loans to the Chinese government or state banks and
the interest revenue of foreign banks derived from loans to Chinese state banks at preferential rates are exempt from income tax. 

Royalties paid to foreign enterprises for their provision of special technologies to China for scientific research, exploitation of energy resources, development of transportation, production of agriculture, forestry and animal husbandry, and development of important technologies, are eligible for income tax at the reduced rate of 10%, with the approval of SAT. For those enterprises that involve advanced technologies or offered favorable terms, income tax will be exempted.

In the case of FIEs or foreign enterprises with establishments or venues engaged in production or business operations within the territory of China, 40% of their investment in the purchase of domestically-produced equipment is exempt from income tax.

With the approval of the tax authorities, FIEs that have increased their technological development expenses by more than 10% over the previous year are allowed to offset their taxable income in the current year by 50% of the amount of technological development expenses. The details are laid down in SAT’s Procedures for the Administration of Pre-Tax Deductions of Enterprise Technological Development Expenses.
The governments of various provinces, autonomous regions and municipalities have also introduced local income tax exemptions or reductions for those sectors or projects where foreign investment is encouraged.

Individual Income Tax Concession for Foreigners
The following incomes of foreigners are eligible for individual income tax concession:

(a) Housing allowance, food allowance, removal expenses and laundry fees received in non-cash forms or in the form of cash reimbursement.

(b) Travel allowance at reasonable levels.

(c) The portion of home visit allowance, language course fees and children’s education expenses deemed reasonable by the tax authorities.

(d) Dividends and bonuses received from FIEs.

(e) Any foreign individual who resides in China consecutively or accumulatively for not more than 90 days (or 183 days for those from countries that have signed tax agreements with China) in a tax year is exempt from individual income tax if his wage or salary is not paid or borne by his employer in China and is not borne by a resident establishment or permanent venue of his employer in China.

(f) Any foreign individual who resides in China for more than a year but less than five years is required to declare and pay individual income tax on his wage or salary paid by his employer both inside and outside China during his duration of work in China. With the approval of the competent tax authorities, he may be allowed to pay tax only on that part of his wage or salary paid by his employer inside China.

Tax Concessions for Central and Western Regions FIEs under the “encouraged” category in the western region that enjoy the “two-year exemption and three-year reduction by half” tax concession are eligible for corporate income tax at the reduced rate of 15% for three more years following the expiration of the said concession. FIEs recognised as high-tech or export-oriented enterprises with an export value amounting to over 70% of their annual output value in the current year are eligible for a 50% reduction of corporate income tax during this three-year period.

In China Applications for trademark registration are handled in accordance with China’s Trademark Law and the Implementing Regulations of the Trademark Law. The Trademark Office under the State Administration for Industry and Commerce (SAIC) is the government authority for the registration of trademarks in China. The Trademark Management Office under SAIC is the administrative arm responsible for managing all trademark-related matters, while Trademark Affairs Offices set up in various major cities are trademark agents designated by the state and under the supervision of SAIC. The Trademark Review and Adjudication Board, also under SAIC, is responsible for handling disputes related to trademarks. Provincial-level administration offices for industry and commerce handle matters concerning trademarks under their jurisdiction, such as protecting the exclusive right to use registered trademarks and investigating acts of trademark infringement. Any foreigner or foreign enterprise intending to apply for trademark registration in China should file an application in accordance with relevant agreements concluded between the country to which the applicant belongs and China, or according to relevant international treaties to which both countries are parties, or on the basis of the principle of reciprocity. Foreign-invested enterprises (FIEs) may apply for trademark registration in China either directly or through trademark agents. Foreign enterprises wishing to do the same should appoint agents designated by the state to handle trademark registration for foreign parties. 8.1.1 Points to Note in Application for Trademark Registration In applying for trademark registration, the class and description of the goods should be put in the application form according to the prescribed classification system. Currently, China adopts the International Classification System, which classifies goods and services into 34 categories and 8 categories respectively. Where an applicant intends to register the same trademark for goods in different classes, a separate application for registration should be filed in respect of each class of the prescribed classification of goods. Where a registered trademark is to be used in respect of other goods of the same class, a new application for registration should be filed. Where any design of a registered trademark is to be altered, a new registration should be applied for. Where, after the registration of a trademark, the name, address or other matters concerning the registrant change, an application regarding the change should be filed. A geographical indication may be the subject of an application for registration as a certification mark and a collective mark.

Procedures for Trademark Registration and Documents Required:
In applying for trademark registration, the following documents should be submitted to the relevant authorities: Application for Trademark Registration, power of attorney, five copies of the reproductions of the trademark (if color is claimed, five copies of the color reproductions of the trademark), and one copy of the black and white design thereof. The reproductions of the trademark must be clear and easy to be pasted up and should be printed on smooth and clear durable paper or substituted by photographs, the length and width of which should be less than 10 cm but more than 5 cm each. When a foreigner or foreign enterprise applies for trademark registration, the Chinese language should be used (any document in a foreign language should be accompanied by a Chinese translation). Where trademark registration is applied for a three-dimensional mark, the applicant should state the same in the application and submit reproductions enabling determination of the three-dimensional shape. Where trademark registration is applied for a color combination, the applicant should state the same in the application and submit a text description. When applying for registration of a collective mark or certification mark, the applicant should state the same in the application and submit a certificate of qualification as subject and the rules for administration of the use of the mark. Applications for trademark registration will undergo examination as to form and examination as to substance by the Trademark Office in accordance with the Trademark Law. Where an application has passed the examination both in form and in substance, preliminary approval will be granted and the trademark will be published. Any person may, within three months from the date of publication of the trademark, file an opposition against the trademark that has been granted preliminary approval. The Trademark Office will send the Application for Trademark Opposition to the opposed party for a response to be made within 30 days as from the receipt of notification. The Trademark Office will then make an adjudication based on the facts and grounds presented by both parties. Where no opposition has been filed against a trademark or the opposition is not justified, approval will be granted for the trademark to be registered. A certificate of registration will be issued and the trademark will be published. Where the opposition is justified, registration will be refused. If the registration of an opposed trademark has been published before the ruling on the opposition becomes effective, the original publication will be revoked and the trademark whose registration is approved in the adjudication on the opposition will be published anew.  

Right of Priority in Trademark Registration Application: Where an applicant, within six months from the date of his first-time application for registration of a trademark in a foreign country, applies for registration of the same trademark for goods in the same class in China, he may enjoy the right of priority in accordance with any relevant agreement entered into between that country and China or any relevant international treaties to which both countries are parties, or on the basis of the principle of reciprocity. Where a trademark is used for the first time in respect of a commodity displayed in an international exhibition organized or recognized by China, the applicant of the trademark is entitled to the right of priority for a period of six months from the date of the display of the commodity.

Application for Change of Details of Registered Trademark: To change the name, address or other registered particulars of a trademark registrant, an application for change should be filed with the Trademark Office. Upon granting approval, the Trademark Office will issue a certificate to the registrant and announce the change; for rejected cases, the Trademark Office will notify the applicant in writing, stating the grounds for rejection. To change the name of a trademark registrant, a document in support of the change issued by the registration organization should be submitted. Where the name or address of a trademark registrant is to be changed, the trademark registrant should make the same modification in respect of all his registered trademarks. 8.1.5 Application for Assignment of Registered Trademark and Transfer of Exclusive Right to Use a Trademark Where a registered trademark is to be assigned, both the assignor and assignee should submit an Application for Assignment of Registered Trademark to the Trademark Office, while the application procedures are to be completed by the assignee. Upon approval granted by the Trademark Office, a certificate to that effect will be issued to the assignee and the assignment will be announced. When assigning a registered trademark, the trademark registrant should assign simultaneously the same or similar trademarks registered by him for the same or similar goods. If the exclusive right to use a registered trademark is to be transferred for reasons other than assignment, the transferee should complete the procedures for the transfer of such right with the Trademark Office by presenting the relevant supporting documents or legal documentation. When transferring the exclusive right to use a registered trademark, the transferor should transfer simultaneously the same or similar trademarks registered by him for the same or similar goods. 

Validity Period and Renewal of Registered Trademark: The period of validity of a registered trademark is 10 years, counted from the date of approval of the registration. For renewal, the period of validity of each renewal is 10 years, counted from the day immediately following the expiration of the preceding validity period. Where the registrant intends to continue to use the registered trademark beyond the expiration of the validity period, an application for renewal should be made within six months before the said expiration. If no application is filed within this period, a grace period of six months may be granted. If no application is filed at the expiration of the grace period, the registered trademark will be cancelled. To apply for renewal of a trademark registration, an application for renewal of trademark registration should be filed with the Trademark Office. Upon approval granted by the Trademark Office, a certificate to that effect will be issued to the registrant and the renewal will be announced.

Authorized Use of Registered Trademark: A trademark registrant may, by signing a trademark licensing contract, authorize other persons to use his registered trademark. The licensor should file a copy of the trademark licensing contract with the Trademark Office for the record within three months from the signing of the contract. Parties authorized to use the registered trademark of others must show the name of the licensee and the place of production of the goods on the goods using the licensed trademark.

Re-issuance of Certificate of Trademark Registration: Where a Certificate of Trademark Registration is lost or damaged, it is necessary to apply for re-issuance of the certificate and the registrant should submit an Application for Re-issuance of Certificate of Trademark Registration and five copies of the reproductions of the registered trademark to the Trademark Office. Where the Certificate of Trademark Registration is lost, a declaration should be published in the Trademark Gazette. Where the certificate is damaged, it should be returned to the Trademark Office.

Protection of Well-known Trademark: The Trademark Office under SAIC is responsible for endorsing and managing well-known trademarks. A trademark registrant seeking protection for his well-known trademark should file an application with the Trademark Office. Upon endorsement, the Trademark Office will notify the applicant and publish the relevant information. For trademarks endorsed by the Trademark Office as well-known, no application for renewal of endorsement is necessary within three years after endorsement. If any person uses a trademark that is identical with or similar to the well-known trademark of another person on goods of a different class, insinuating that the goods are in some way associated with the registrant of the well-known trademark thereby causing possible damage to the registrant, the registrant of the well-known trademark may make a request, within two years from the date on which he obtains or should have obtained knowledge of such acts, to SAIC to stop such acts. Once a well-known trademark has been endorsed, SAIC will not approve the use of any word or device that is identical with or similar to the said well-known trademark by any person as part of the name of an enterprise which may mislead the public. For well-known trademarks that have been registered, the registrant may, within two years from the date on which he obtains or should have obtained knowledge of such acts, request SAIC to cancel it.

(Approved by the State Council on June 15,1996 and promulgated by Decree No.2 of The Ministry of Foreign Trade and Economic Cooperation on July 9.1996)

Chapter 1 General Provisions

Article 1This set of procedures are formulated in accordance with relevant laws to ensure the smooth progress of the process of liquidation of the foreign-funded enterprises (FFEs), protect the rights and interests of the creditors and investors and safeguard the social and economic order related to the liquidation.

Article 2This set of procedures apply to the liquidation of the sino-foreign equity and contractual joint ventures and wholly foreign-owned enterprises(hereinafter referred to as FFEs) set up within the People's Republic of China. The liquidation of FFEs which have been declared bankrupt according to law shall be handled in line with relevant laws and administrative regulations on liquidation due to bankruptcy.

Article 3FFEs that are competent to organize by themselves liquidation committees for their own liquidation may proceed their liquidation in accordance with the stipulations on the general liquidation of this set of procedures. But for FFEs that are incompetent to do so or which that have met with difficulties in general liquidation processes their power organs such as the board of directors or joint management committee(hereinafter referred to as power organ),investors or creditors may apply to departments in charge of examining and approving the FFEs for a special liquidation. If approved, the liquidation of a FFE concerned liquidation in accordance with stipulations on special liquidation in this set of procedures. The liquidation of a FFE which has been closed according to law should be proceeded in accordance with the stipulations on special liquidation in this set of regulations.

Article 4Liquidations of FFEs should be proceeded in accordance with relevant State laws and administrative regulations, on the basis of the FFEs ' approved contracts and articles of association under the principles of being fair, reasonable and protecting the rights and interests of the enterprise, investors and creditors.

Chapter 2 General Liquidation

Section 1 Duration of Liquidation

Article 5Liquidation of a FFE should be begun at the date of expiration of the operation term of the FFE, the date of the closure of the FFE as permitted by the examining and approving department, or the date of the termination of the contract of the FFE judged by the people's court or arbitrated by the arbitration agency.

Article 6The duration of a liquidation cannot exceed 180 days beginning from the starting day of the liquidation ending with the submission of the liquidation report by the FFE to the examining and approving department of the FFE. When there is the need to extend the duration of the liquidation due to special reasons, the liquidation committee should apply to the examining and approving department of the FFE 15 days before the end of the duration, and the extension cannot exceed 90 days.

Article 7FFEs should not engage in any new business activities during the duration of the liquidation.

Section 2 Liquidation Organization

Article 8The power organ of a FFE should organize a liquidation committee for the liquidation of the enterprise and the committee should be set up within 15 days beginning from the date of beginning of the liquidation.

Article 9A liquidation committee should be made up of at least three people selected by the power organ or among members of the organ or employed from related professionals.

The liquidation committee should have a head member appointed by the power organ of the FFE. With the approval of the power organ the liquidation committee may employ staff to do the routine work of liquidation.

Article 10Members of the liquidation committee should be changed in one of the following cases during the liquidation period (1)The member violates laws; (2)Creditors ask to change under just reasons; and (3)The member dies or loses ability to act.

Article 11The liquidation committee exercises the following terms of power during the liquidation period1)clearing enterprise's property, making of the balance sheet an detailed list of property and formulation of liquidation plan;(2) announcement to unknown creditors and notifications to known creditors in written form;(3)handling and clearance of the unfinished business of the enterprise;(4)working out of principles of evaluation and of computation of property;(5)clearing and payment of overdue taxes;(6)clearing of credits and debts;(7)handling of the property surplus after clearing and payment of the debt of the enterprise; and (8)participation in civil lawsuits on behalf of the enterprise.

Article 12The balance sheet, detailed list of property, the basic principles for property evaluation and computation and the liquidation plan, proposed by the liquidation committee, shall be reported to examining and approving department of the FFE for record after appraisals by the enterprise's power organ.

Article 13After the liquidation committee is set up, staff of the enterprise concerned should hand in accounting statements, financial books, list of property, name list of creditors and debtors, and other written materials related to the liquidation committee within a set deadline.

Article 14The liquidation committee should perform its duty of liquidation according to law and handle related affairs under consulting principles.

Members of the liquidation committee perform according to their duties and should not take bribes by abusing their power, seek illegal income, or defalcate the property of the FFE.

Article 15During the liquidation, the examining and approving department of the FFE and other competent departments may send people to attend the meetings about the liquidation of the enterprise and supervise upon the work concerned.

Section 3 Notice and Announcement of Liquidation

Article 16Within 7 days beginning from the date of the start of the liquidation the FFE should notify the examining and approving department of the FFE, the department in charge of the enterprise, the customs, the foreign exchange administrative department, the enterprise registration department, taxation department and the bank where the FFE opens its account, of the name and address of the enterprise to be liquidated ,the reason and the beginning date of the liquidation; FFEs with State-owned assets should also notify the competent State assets administrative department, the enterprise registration department, taxation department and the bank where the FFE opens its account, of the name and address of the enterprise to be liquidated, the reason and the beginning date of the liquidation; FFEs with State—owned assets should also notify the competent State assets administrative department.

Article 17The liquidation committee should notify the known creditors with their credit amount in written form within 10 days beginning from the date of the setting up of the committee, and publish the announcement at least twice in a national newspaper, a local provincial or city newspaper within 60 days beginning from the date of its setting up. The first announcement should be published within 10 days beginning from the date of its setting up.

The liquidation announcement should specify the name and address of the enterprise, the reason and beginning date of the liquidation, the mail address of the liquidation committee and names of its members and person for liaision.

Article 18The creditors should report their credits to the liquidation committee within 30 days beginning from the date of receiving the notice and those who receive no notice, within 90 days beginning from the date of the first announcement published.

Article 19The creditors should report their credits with the amount and relevant certificate of the credit within the set term.

Failures of reports by creditors within the set terms shall be settled as followings: (1) Credit claims of the known creditors should be listed to be handled in the liquidation; and (2) Credit of unknown creditors may be claimed and paid before the end of the distribution of the enterprise’s surprise’s surplus property; but after the end of the distribution of the enterprise’s surplus property, the claims are regarded as abandoned.

Section 4 Credits, Debts and Repayment

Article 20The liquidation committees should register the credit claims reported by creditors and notify the creditors in written form of the results of the checkups of the claims.

Article 21If the creditors have objections to the results of the checkups provided by the liquidation committees, they may ask the committees to make re-checks to the credit claims within 15 days beginning from the date of receiving the written notices. If the creditors still have objections to the re-checked results, they may bring a lawsuit before the local people’s court within 15 days beginning from the date of receiving the written notices about the result of the re-checks; if the creditors and the FFEs concerned have agreed to settle the matters through an arbitration the matters shall be submitted to arbitration. During the judicial proceedings or arbitration, the liquidation committee must not distribute the disputed properties.

Article 22For any property gains and losses discovered in stocking property, sales, unpayable debts, or unreceivable credits as well as any incomes and losses during the liquidation period, the liquidation committees should provide written explanations and certificates of evidence to power organs of the FFEs and put the related amounts into gains or losses of the liquidation.

Article 23The following liquidation expenses should enjoy priority in payments form the liquidated property: (1) expenses incurred through management, sales and distribution of the enterprise property during the liquidation; (2) expenses incurred through announcements, lawsuits and arbitration; and (3) other expenses incurred during the liquidation period.

Article 24Creditors with claims for property guaranteed credits before the starting date of the liquidation enjoy priority of repayment from the guaranteed properties. The part of the claims in exceed of guaranteed property may be paid in the order set in the Article 25 of this set of this set of regulations.

Article 25fter payments for the expenses of the liquidations are made repayments should be in order of: (1) employees wages and labour insurance fees; (2) State taxes; and (3) other debts.

Article 26FFEs properties must not be distributed before payments of liquidation expenses and debts surplus properties of the FFEs after payments of liquidation expenses and debts should be distributed according to the actual investment percentages of the investors except the cases as stipulated by laws, administrative regulations or enterprise contracts and articles of association.

Article 27Should FFEs properties not be able to make up for payments for debts, the liquidation committees should apply to the people’s court for announcing the bankruptcy of the enterprises; enterprises being announced bankruptcy according to law shall be handled in accordance with relevant laws and administrative regulations on the liquidation of the bankrupt enterprises.

Article 28Following actions of the FFEs are invalid within 180 days beginning from the date of starting liquidation: (1) free transfers of enterprise property; (2) sales of enterprise property at abnormally low prices; (3) provision of property guarantee for debts which originally have no property guarantees; (4) repayment of undue debts in advance; and (5) abandonments of credits of FFEs concerned.

None of the Chinese or overseas investors has the power to handle the enterprise property beginning from the starting date till the end of the liquidation.

Section 5 Appraisal, Pricing and Handling of the Liquidated Property

Article 29Appraisals and pricings of the liquidated property should be made in accordance with: (1) the stipulations of contracts and articles of associations of the enterprises if there are any; (2) decisions of the Chinese and overseas investors through consultations with approvals by examining and approving department of FFEs if without any stipulations defined in (1) ; (3) decisions made by the liquidation committee in accordance with relevant State regulations and also opinions of the asset appraisal agency with approvals by examining and approving department of FFEs if without any stipulations defined in (1) and decisions defined in (2) ; and (4) decisions of the court or the arbitration commission if terminations of the contract of the enterprise are upon judgements of the contract of the enterprise are upon judgements of the court or rulings of the arbitration commission.

Article 30When the liquidated properties are put on sale, investors of the FFEs should enjoy priority for the purchase with the actual purchase to be made by the part who gives the higher offer.

Section 6 Termination of Liquidation

Article 31A liquidation committee shall prepare a liquidation report after completing all the work set in the liquidation plan. The report concerned shall includeL 1) the reason, time and procedures of the liquidation; (2) results of the handling of the credits and debts by the committee; and (3) results of the handling of the liquidated property.

Article 32 A liquidation report shall be reported to examining and approving department of the FFE concerned for record after its confirmation by the power organ of the enterprise.

Article 33The liquidation committee shall cancel the registration of the enterprise with the taxation and customs administrations within 10 days beginning from the date of handing in the liquidation report to the examing and approving department of FFEs. 
Within 10 days, beginning from the date of the cancellation of registration as stipulated in the preceding clause, the liquidation committee shall send the liquidation report together with the certificates to ce4rtify the cancellation of registration issued by the taxation and customs administrations to the registration office of FFEs cancel the registration of the enterprise, had over the business license and announce the termination of the enterprise in a national newspaper and a local provincial or city newspaper.

Article 34Upon the termination of a liquidation, the various accounting vouchers, books and statements kept by the liquidation committee should be handed over to: (1) The Chinese partner in cases of Sino-overseas joint equity and contractual ventures and if there are two or more Chinese partners, to the one that is appointed by the department in charge of FFEs for keeping of documents; and (2) the accounting evidences, books and report forms shall be kept by a unit appointed by the examining and approving department before the process of cancellation of registration of FFEs in cases of wholly overseas owned enterprises.

Chapter III Special Liquidation

Article 35Special liquidation of an enterprise should be started on the day when the examining and approving department of FFEs approves the special liquidation of the enterprise or when the enterprise is ordered to be shut down by law.

Article 36For the special liquidation of an enterprise, a liquidation committee shall be set up by the approving department of FFEs or another department authorized by it with the participation of Chinese and overseas investors of the enterprise, representatives of relevant departments and professionals concerned.

Article 37The liquidation committee should have a head appointed by the examining and approving department of FFEs or a department entrusted by it. During the special liquidation, the head of the committee shall exercise the functions and powers of legal representative of the enterprise and the liquidation committee shall exercise the functions and powers of the enterprise’s power organ.

A liquidation committee should handle affairs related to liquidation and report its work to the examining and approving department.

Article 38A liquidation committee may call meetings of the enterprise’s power organs for the creditors to discuss the details about the liquidation.

Article 39All creditors should be in title of participation and voting in the meeting of the creditors except those who have the property guarantee and have not given up their priority of receiving the repayment. Chairman of a creditors meeting should be appointed from among the creditors who have the right to vote by the examining and approving department of FFEs or the department entrusted by it.

Article 40A liquidation committee is responsible for calling up the creditors meetings when doing so, the clearing committee should notify the creditors in written form in 15 days before the meeting is held. Those creditors who cannot attend the meeting should entrust their agents in a written form to attend.
Article 41A creditors meeting exercises the following functions and powers: (1) check the evidences of claims, amount of credits, and guarantee about the credits; and (2) check the fact of debt repayment and according to which propose to the liquidation committee scheme for the liquidation on behalf of the creditors.

Article 42The liquidation scheme and report worked out by the liquidation committee shall be confirmed by the examining and approving department of FFEs.

Article 43The stipulations in Chapter II of this set of this set of regulations should apply to the special liquidations in cases without any special stipulations as set in this chapter.

Chapter IV Legal Liabilities

Article 44Engagement in new business operations by a FFE concerned during the liquidation period shall be ordered a correction and may also be imposed a fine between RMB10,000 yuan and RMB100,000 yuan by the department concerned in charge of registration of FFEs.

Article 45An enterprise concerned failing to notify or make announcement on the liquidation to creditors in violation of the stipulations in Article 17 of this set of regulations shall be ordered to correct and may be imposed a fine between RMB10,000 by the enterprise registration department.

Article 46Chinese and overseas investors disposing the enterprise property during a liquidation period in violation of the stipulation in the second clause of Article 28 of this set of regulations shall be ordered to restore to the original state or repatriate the disposed properties and compensate to losses if any by the examining and approving department of FFEs.

Article 47A liquidation committee in violation of stipulations in articles 32 and 33 of this set of regulations of failing to send the liquidation report to the examining and approving department of FFEs and registration department for record, or having department important facts held up or omitted in the report, shall be ordered to correct by the examining and approving and registration departments of FFEs.

A liquidation committee failing to go through the formalities of writing off the enterprise in violation of the stipulations in Article 33 of this set of regulations shall be revoked its business license by the registration department accompanied with an announcement.

Article 48An enterprise which hides property during a liquidation, give false records or balance sheets or property lists or distributes its property before paying the liquidation expenses and repaying its debts should be ordered to correct by the examining and approving and registration departments of FFE and imposed a fine between 1% and 5% of the value of the hidden property or the property distributed by the enterprise before repaying all its debts and a fine between RMB10,000 yuan and RMB100,000 yuan shall be imposed on persons who have direct responsibility and other responsible persons.

Article 49Liquidation committee members who abuse their power to seek illegal incomes or intrude the enterprise properties shall be ordered to return intruded properties by the examining and approving and registration departments of FFEs and be confiscated the income they obtain by violating laws and regulations, and may be imposed a fine between 2 and 6 times their illegal incomes by the enterprise registration department.

Article 50Those who violate the stipulations of this set of regulations and commit crimes shall be investigated and affixed their responsibilities for the crimes

Chapter V Supplementary Provisions

Article 51This set of regulations goes into effect as of the dated of its promulgation.

Article 1: The present provisions are formulated in accordance with the laws and administrative regulations on foreign-funded enterprises and other relevant laws and administrative regulations with a view to promoting and regulating foreign investors' investments in China, absorbing advanced technologies and management experiences from abroad, improving the level of utilizing foreign investments, realizing reasonable allocation of resources, ensuring employment, as well as maintaining fair competition and state economic security.

Article 2: The merger of a domestic enterprise by a foreign investor, which is mentioned in the present provisions, shall mean that the foreign investor purchases by agreement the share rights of the shareholders of a domestic non-foreign-funded enterprise (hereinafter referred to as "domestic company") or subscribes a domestic company to increase the capital, and thus modifying the domestic company to establish a foreign-funded enterprise (hereinafter referred to as "share right merger"); or, a foreign investor establishes a foreign-funded enterprise, and through which purchases by agreement the assets of a domestic enterprise and operates its assets, or, a foreign investor purchases by agreement the assets of a domestic enterprise, and then invest such assets to establish a foreign-funded enterprise and operates the assets (hereinafter referred to as "asset merger").

Article 3: Foreign investors shall, when merging domestic enterprises, abide by Chinese laws, administrative regulations and departmental rules, comply with the principles of fairness, reasonableness, making compensation for equal value, honesty and credibility, and shall not cause excessive market centralization, exclude or limit competitions, or disturb the social economic order or damage the public benefits.

Article 4: Foreign investors shall, when merging domestic enterprises, conform to the requirements in Chinese laws, administrative regulations and departmental rules on the investors' qualification and industrial policies. For the industries where solely foreign-owned operation is not permitted by the "Catalog for the Guidance of Foreign Investment Industries", the merger shall not lead to a consequence that a foreign investor holds the enterprise's whole share rights; for the industries where a Chinese party needs to control or relatively control the shares, the Chinese party shall, after an enterprise in such industries is merged, still controls or relatively controls the shares of the enterprise; for the industries where foreign investors are prohibited from operation, no foreign investor shall merge any enterprise engaged in such industries.

Article 5: A foreign investor shall, when merging a domestic enterprise to establish a foreign-funded enterprise, apply to the approval organ in accordance with the present provisions for approval, and make registration of modification or establishment in the administrative organ for registration. The proportion of investments contributed by a foreign investor shall not be less than 25% of the registered capital of the foreign-funded enterprise established after the merger. Where the proportion of a foreign investor's contribution of investments is less than 25%, it shall, unless otherwise provided for in laws or administrative regulations, get the approval and make registration by following the procedures on approving and registering the establishment of foreign-funded enterprises. The approval organ shall, when issuing the approval certificate of foreign-funded enterprise, indicate on the certificate the following words: "investments contributed by the foreign party are less than 25%". The administrative organ for registration shall also, when issuing the business license of foreign-funded enterprise, indicate on it the words of "investments contributed by the foreign party are less than 25%".

Article 6 The approval organ in the present provisions shall be the Ministry of Foreign Trade and Economic Cooperation of the People's Republic of China (hereinafter referred to as "the MOFTEC") or the department at the provincial level in charge of foreign trade and economic cooperation (hereinafter referred to as "the approval organ at the provincial level"), while the administrative organ for registration shall be the State Administration for Industry and Commerce of the People's Republic of China or the authorized local administration for industry and commerce. Where, in accordance with the laws, administrative regulations or departmental rules, a foreign-funded enterprise established after the merger belongs to the foreign-funded enterprises of certain types or in certain industries that shall be approved by the MOFTEC, the approval organ at the provincial level shall transfer the application documents to the MOFTEC for approval, and the MOFTEC shall decide on whether to grant the approval in accordance with the law.

Article 7: Where a foreign investor carries out a share right merger, the claims and debts of the merged domestic company shall be succeeded to by the foreign-funded enterprise established after the merger. Where a foreign investor carries out an asset merger, the domestic enterprise that sells assets shall assume its original claims and debts. The foreign investor, the merged domestic enterprise, the creditors and other parties may reach an agreement separately on the disposition of the claims and debts of the merged domestic enterprise, provided that the agreement shall not damage a third person's benefits or public benefits. The agreement on disposition of the claims and debts shall be submitted to the approval organ. The domestic enterprise that sells assets shall, within 10 days as of the day when the resolution on the sale of assets is made, send written notices to the creditors, and promulgate an announcement on a newspaper at or above the provincial level which is issued nationwide. The creditors shall, within 10 days as of the receipt of the written notice or promulgation of the announcement, be entitled to demand the domestic enterprise that sells assets to provide the corresponding guaranty.

Article 8: The parties to a merger shall take the result valuated by the asset valuation institution on the value of the share rights under planned transfer or the assets under planned sale as the basis for determining the transaction price. The parties to a merger may determine an asset valuation institution established inside the territory of China in accordance with the law. The assets shall be valuated in a way internationally used. When a foreign investor merges a domestic enterprise, and thus resulting in the modification of the share rights formed from investment of state-owned assets or transference of the property of state-owned assets, valuation shall be made in accordance with the relevant provisions on the administration of state-owned assets for determination of the transaction price. Foreign investors are prohibited from diverting capital abroad in a disguised form by transferring share rights or selling assets at a price obviously lower than the valuated one.

Article 9: A foreign investor shall, when merging a domestic enterprise to establish a foreign-funded enterprise, within 3 months as of the day when the foreign-funded enterprise is issued its business license, pay all the consideration to the shareholders who transfer the share rights or to the domestic enterprise which sells the assets. In case of any particular circumstance under which the period needs to be extended, the foreign investor shall, upon the approval by the approval organ, pay 60% or more of the consideration within 6 months as of the day when the foreign-funded enterprise is issued its business license, and pay all the consideration within one year, and the proceeds shall be distributed according to the proportion of investments it has actually contributed. Where a foreign investor carries out a share right merger, and the capital of the established foreign-funded enterprise after the merger is increased, the investor shall stipulate the time limit for contribution of investments in the contract and articles of association of the foreign-funded enterprise under planned modification and establishment. If the investments are stipulated to be contributed in a lump sum, the investor shall contribute all within 6 months as of the day when the foreign-funded enterprise is issued its business license; while if the investments are stipulated to be contributed by installments, the first installment of investments contributed by each investor shall not be lower than 15% of investment amount it has subscribed, and shall contribute all the investments within 3 months as of the day when the foreign-funded enterprise is issued its business license. Where a foreign investor carries out an asset merger, it shall stipulate the time limit for contribution of investments in the contract and articles of association of the foreign-funded enterprise under planned establishment. Where the foreign investor establishes a foreign-funded enterprise, and through which purchases the assets of a domestic enterprise and operates such assets, it shall contribute the investments equivalent to the consideration of the assets within the time limit for payment of consideration as provided for in Paragraph 1 of the present article; as for the remaining investments, the time limit for contribution shall be stipulated in a way provided for in Paragraph 2 of the present article. Where a foreign investor merges a domestic enterprise to establish a foreign-funded enterprise, and the proportion of investments it contributes is less than 25%, the investor shall, contribute all the investments in cash within 3 months as of the day when the foreign-funded enterprise is issued its business license; or contribute all the investments in kind or in industrial properties, etc. within 6 months as of the day when the foreign-funded enterprise is issued its business license. The means of payment as the consideration shall conform to the state's relevant laws and administrative regulations. If the foreign investor uses the shares over which it has the right to disposition or the Renminbi assets it lawfully owns as the means of payment, it shall obtain the approval of the department of foreign exchange control.

Article 10: After a foreign investor purchases by agreement the share rights of a domestic company, and the domestic company has been modified to be established as a foreign-funded enterprise, the foreign-funded enterprise's registered capital shall be the registered capital of the original domestic company, and the proportion of investments contributed by the foreign investor shall be the proportion of the purchased share rights in the original registered capital. If the domestic company merged by means of share right merger increases its capital at the same time, the registered capital of the foreign-funded enterprise established after the merger shall be the sum of the original domestic company's registered capital and the increased amount; the foreign investor and other original investors of the merged domestic company shall, on the basis of the asset valuation of the domestic company, determine the proportions of their respectively contributed investments in the foreign-funded enterprise's registered capital. Where a foreign investor subscribes a domestic company's increased capital, the registered capital of the foreign-funded enterprise established after the modification of the domestic company shall be the sum of the original domestic company's registered capital and the increased amount. The foreign investor and other original shareholders of the merged domestic company shall, on the basis of the asset valuation of the domestic company, determine the proportions of their respectively contributed investments in the foreign-funded enterprise's registered capital. The Chinese natural person shareholder of a domestic company merged by means of share right merger may, if having been a shareholder in the original company for one year or more, be approved to continue its identity as a Chinese investor of the foreign-funded enterprise established after the modification.

Article 11: Where a foreign investor merges a domestic enterprise by means of share right merger, the upper limit of the total investment amount of the foreign-funded enterprise established after the merger shall be determined according to the following proportions: (a) if the registered capital is less than 2, 100, 000 USD, the total investment amount shall not exceed 7/10 of the registered capital; (b) if the registered capital is more than 2, 100, 000 USD but less than 5, 000, 000 USD, the total investment amount shall not exceed two times of the registered capital; (c) if the registered capital is more than 5, 000, 000 USD but less than 12, 000, 000 USD, the total investment amount shall not exceed 2.5 times of the registered capital; (d) if the registered capital is more than 12, 000, 000 USD, the total investment amount shall not exceed 3 times of the registered capital.

Article 12: Where a foreign investor merges a domestic enterprise by means of share right merger, it shall submit the following documents to the approval organ with the corresponding approval power according to the total investment amount of the foreign-funded enterprise established after the merger: (a) resolution of the shareholders of the merged domestic limited liability company on unanimous consent of the foreign investor's share right merger, or resolution of the shareholders' meeting of the merged domestic stock limited company on consent of the foreign investor's share right merger; (b) application letter for the merged domestic company to be modified in accordance with the law into and be established as a foreign-funded enterprise; (c) contract and articles of association of the foreign-funded enterprise established after the merger; (d) agreement on the foreign investor's purchase of the share rights of the shareholders of the domestic company or on the subscription of the domestic company to increase capital; (e) the financial auditing report of the merged domestic company in recent accounting years; (f) the investor's documents on proof of identity, or proof of the opening of business and proof of credibility; (g) statement on the enterprises invested by the merged domestic company; (h) business licenses (copies) of the merged domestic company and of the enterprises it invests in; (i) the merged domestic company's proposal on settlement of employees; (j) documents to be submitted as required by Articles 7 and 19 of the present provisions. Where the business scope, scale and obtainment of land use right of the foreign-funded enterprise established after the merger involves permits from other relevant governmental departments, the relevant permit documents shall be submitted along with those provided for in the preceding paragraph. The business scope of the company previously invested by the merged domestic company shall meet the relevant requirements on foreign investment industrial policies; otherwise it shall be adjusted.

Article 13 The agreement on purchase of share rights and the agreement on increase of capital by the domestic company, which are provided for in Article 12 of the present provisions, shall be governed by Chinese law, and shall include the following main contents: (a) information of each party to the agreements, including the name and domicile of each party, the name, position and nationality, etc. of each legal representative; (b) the amount of the purchased share rights or the capital increased from subscription and the price thereof; (c) time limit and method for implementation of the agreements; (d) the rights and obligations of each party to the agreements; (e) breach liabilities and settlement of disputes; (f) time and place for conclusion of the agreements.

Article 14: Where a foreign investor merges a domestic enterprise by means of asset merger, it shall determine the total investment amount of the foreign-funded enterprise under planned establishment according to the transaction price for purchasing the assets and the actual scale of production and operation. The proportion of the registered capital of the foreign-funded enterprise under planned establishment in its total investment amount shall conform to the relevant provisions.

Article 15: Where a foreign investor merges a domestic enterprise by means of asset merger, it shall, pursuant to the total investment amount of the foreign-funded enterprise under planned establishment, the type of the enterprise and the industry it engages in, submit the following documents to the approval organ with the corresponding approval power in accordance with the laws, administrative regulations and departmental rules on establishment of foreign-funded enterprises: (a) resolution of the property holders or authority of the domestic enterprise on agreeing to sell the assets; (b) the application letter for the establishment of the foreign-funded enterprise; (c) contract and articles of association of the foreign-funded enterprise under planned establishment; (d) the agreement concluded between the foreign-funded enterprise under planned establishment and the domestic enterprise on purchase of assets, or, the agreement concluded between the foreign investor and the domestic enterprise on purchase of assets; (e) the merged domestic enterprise's articles of association and business license (copies); (f) proof proving that the merged domestic enterprise has notified and announced the creditors; (g) the investor's documents on proof of identity, or proof of the opening of business and proof of credibility; (h) the merged domestic enterprise's proposal on settlement of employees; (i) documents to be submitted as required by Articles 7 and 19 of the present provisions. Where the assets of the domestic enterprise purchased and operated in accordance with the preceding paragraph involves permits from other relevant governmental departments, the relevant permit documents shall be submitted along with those provided for in the preceding paragraph. Where a foreign investor purchases the assets of a domestic enterprise by agreement and invests such assets in establishing a foreign-funded enterprise, it shall not, prior to the establishment of the foreign-funded enterprise, carry out any business activities with such assets.

Article 16: The agreement on purchase of assets as provided for in Article 15 of the present provisions shall be governed by Chinese laws, and shall contain the following main contents: (a) natural conditions of each party to the agreement, including the name and domicile of each party, the name, position and nationality, etc. of each legal representative; (b) the list of the assets under planned purchase and the price thereof; (c) time limit and method for the implementation of the agreement; (d) the rights and obligations of each party to the agreement; (e) breach liabilities and settlement of disputes; (f) time and place for conclusion of the agreement.

Article 17: Where a foreign investor merges a domestic enterprise to establish a foreign-funded enterprise, the approval organ shall, unless otherwise provided for in Article 20 of the present provisions, decide on, in accordance with the law, whether to grant the approval within 30 days as of the receipt of all the documents submitted. If the approval is to be granted, the approval organ shall issue the approval certificate of foreign-funded enterprise. Where the approval organ decides to approve a foreign investor to purchase by agreement the share rights of the shareholder of a domestic company, it shall simultaneously make copies of the relevant approval documents separately to the foreign exchange control department at the share rights transferor's locality and that at the domestic company's locality. The foreign exchange control department at the share rights transferor's locality shall handle the registration of foreign investments and foreign exchanges on the collection of exchanges, and issue proof of registration of foreign investments and foreign exchanges which indicates that the consideration to the foreign investor's share right merger has been fully paid.

Article 18: Where a foreign investor merges a domestic enterprise by means of asset merger, it shall, within 30 days as of the receipt of the approval certificate of foreign-funded enterprise, apply to the administrative organ of registration for making registration of establishment, and obtaining the foreign-funded enterprise's business license. Where a foreign investor merges a domestic enterprise by means of share right merger, the merged domestic company shall, in accordance with the present provisions, apply to the original administrative organ of registration for making registration of modification, and obtaining the foreign-funded enterprise's business license. If the original administrative organ of registration has no jurisdiction of registration, it shall, within 10 days as of the receipt of the application documents, transfer them to an administrative organ of registration with the jurisdiction for handling the registration, and meanwhile attach the domestic company's registration files. The merged domestic company shall, when applying for registration of modification, submit the following documents, and be responsible for their genuineness and validity: (a) the application letter for registration of modification; (b) resolution of shareholders' meeting (general meeting) made by the merged domestic company in accordance with the Company Law of the People's Republic of China and the company's articles of association on transfer of share rights or increase of capital; (c) agreement on the foreign investor's purchase of the share rights of the shareholders of the domestic company or on the subscription of the domestic company to increase capital; (d) the amended articles of association of the company or the amendment to the original articles of association, and the contract of the foreign-funded enterprise that needs to be submitted in accordance with the law; (e) the foreign-funded enterprise's approval certificate; (f) the foreign investor's documents on proof of identity, or proof of the opening of business and proof of credibility; (g) the amended name list of the board of directors, the documents stating the names and domiciles of the newly increased directors, and the documents on the positions held by the newly increased directors; (h) other relevant documents and certificates provided for by the State Administration for Industry and Commerce. In case of transfer of state-owned share rights or subscription by a foreign investor of the increased amount of a company containing state-owned share rights, the approval documents issued by the department in charge of economy and trade shall be submitted in addition. The investor shall, within 30 days as of the receipt of the foreign-funded enterprise's business license, make registration in the departments of taxation, customs, land administration and foreign exchange control, etc..

Article 19: Where a foreign investor merges a domestic enterprise under any of the following circumstances, it shall report the situation involved to the MOFTEC and the State Administration for Industry and Commerce: (a) the sales turnover of the party who merges a domestic enterprise in China's market exceeds RMB 1.5 billion Yuan in the current year; (b) the enterprises in domestic associated industries, which it merges within one year, totaled more than 10; (c) the market occupancy ratio of the party who merges a domestic enterprise has reached 20% in China; (d) the merger leads to the fact that the market occupancy ratio of the party who merges a domestic enterprise has reached 25% in China.When the foreign investor fails to meet the conditions mentioned in the preceding paragraph, but the MOFTEC or the State Administration for Industry and Commerce considers upon request by a domestic enterprise of competitive relationship, a relevant functional department or industrial association that the merger by the foreign investor involves huge market share, or there are other major factors which seriously impact market competition, national economy and people's livelihood, or state economic security, etc., it may also demand the foreign investor to make a report. The above said party who merges a domestic enterprise may be any of the foreign investor's associated enterprises.

Article 20 Where a foreign investor's merger of a domestic enterprise is under any of the circumstances mentioned in Article 19 of the present provisions, and the MOFTEC and the State Administration for Industry and Commerce consider that the merger may cause excessive market centralization, hinder fair competition, or damage the consumers' benefits, they shall, within 90 days as of the receipt of all the documents submitted, either solely through negotiation or jointly, convene the relevant departments, institutions, enterprises and other interested parties and hold a hearing, and shall decide on whether to grant the approval in accordance with the law.

Article 21: Where an overseas merger is under any of the following circumstances, the merging party shall, before announcing the merger proposal or when submitting the said proposal to the competent authority in the country of its locality, submit the merger proposal to the MOFTEC and the State Administration for Industry and Commerce. The MOFTEC and the State Administration for Industry and Commerce shall examine whether there is any circumstance leading to excessive centralization in the domestic market, hindering domestic fair competition, or damaging the domestic consumers' benefits, and shall make a decision on whether approve the proposal or not: (a) the overseas party who merges a domestic enterprise owns more than RMB 3 billion Yuan of assets inside the territory of China; (b) the sales turnover of the overseas party who merges a domestic enterprise in China's market is more than RMB 1.5 billion Yuan in the current year; (c) the market occupancy ratio of the overseas party who merges a domestic enterprise and its associated enterprises in China has reached 20%; (d) the market occupancy ratio of the overseas party who merges a domestic enterprise and its associated enterprises in China has reached 25% due to the overseas merger; (e) due to the overseas merger, there will be more than 15 foreign-funded enterprises in the relevant domestic industries with the shares of which directly or indirectly participated in by the overseas party who merges a domestic enterprise.

Article 22: In case of a merger under any of the following circumstances, the party who merges a domestic enterprise may apply to the MOFTEC and the State Administration for Industry and Commerce for examination of exemption: (a) the merger may improve the conditions for fair competition in the market; (b) a loss-making enterprise is merged and the employment is ensured; (c) the merger absorbs advanced technologies and management talents and is able to improve the enterprise's international competitiveness; (d) the merger may improve the environment.

Article 23 An investor shall, when submitting the documents, classify them in accordance with the provisions, and shall attach a catalogue of the documents. All the documents to be submitted shall be in Chinese.

Article 24 An investment company which is established by a foreign investor inside the territory of China in accordance with the law shall be governed by the present provisions to merge a domestic enterprise. The share right mergers by foreign investors of foreign-funded enterprises inside the territory shall be subject to the present laws and administrative regulations on foreign-funded enterprises, and the Some Provisions on the Share Right Modification of the Shareholders of Foreign-Funded Enterprises. If there are no applicable laws, such mergers shall be handled by referring to the present provisions.

Article 25: The mergers by investors from Hong Kong Special Administrative Region, Macao Special Administrative Region and Taiwan Region of the enterprises in other regions inside the territory shall be handled by referring to the present provisions.

Article 26 The present provisions shall come into force on April 12, 2003.
   
Promulgated by The Ministry of Foreign Trade and Economic Cooperation, the State Taxation Administration, the State Administration for Industry and Commerce, the State Administration of Foreign Exchange on 2003-3-7

In recent years, foreign investment in the form of merger and acquisition (M&A) has been on the increase in China. In view of this, MOFTEC (now Ministry of Commerce), State Administration of Taxation (SAT), State Administration for Industry and Commerce (SAIC), and State Administration of Foreign Exchange (SAFE) have jointly released the Provisional Rules on the Merger and Acquisition of Domestic Enterprises by Foreign Investors, which set out the principles and procedures for approval and become effective on 12 April 2003. The rules provide a legal framework for foreign investment in M&A in the following ways: where a foreign investor acquires the existing equity shares or increased capitalization or newly issued shares of a domestic enterprise (equity acquisition); where a foreign investor sets up a foreign-invested enterprise (FIE) to purchase and operate the assets of a domestic enterprise; and where a foreign investor acquires the assets of a domestic enterprise and uses such assets to set up an FIE to operate these assets (asset acquisition).

The new rules stipulate that the foreign investor acquiring a domestic enterprise and setting up an FIE should go through the approval procedure according to the relevant regulations and complete the necessary registration procedure with the government authorities concerned. For industries where wholly foreign-owned enterprises are not allowed under the Catalogue for the Guidance of Foreign Investment Industries, any M&A must not lead to 100% foreign ownership. The same applies to situations where the enterprise to be acquired engages in industries where majority mainland stakes are mandatory or where foreign participation is prohibited.

In setting up an FIE after M&A, the share of the foreign party in the registered capital of the FIE should not be less than 25%. Unless otherwise stated in laws and administrative regulations, if the foreign equity share is below 25%, the FIE concerned has to seek approval for establishment and registration according to existing procedures. Under the new rules, MOFTEC and its provincial bureaus are the approval authorities for FIE establishment while SAIC and its designated local administrations are responsible for registration.

The maximum total investment of FIEs established as a result of equity acquisition by foreign investors should comply with the following schedule:

Registered Capital           Maximum Total Investment
< US$2.1 million         1.43 times the registered capital
  US$2.1 million - 5 million 2 times the registered capital
  US$5 million - 12 million 2.5 times the registered capital
> US$12 million 3 times the registered capital

As for asset acquisition by foreign investors, the total investment in the FIE to be established should be determined according to the asset transaction price and scale of production and operation. The ratio of registered capital to total investment should comply with the relevant regulations. Moreover, the foreign investor must not operate the assets of the domestic enterprise to be acquired before the FIE is established.

If a proposed M&A by a foreign party falls under one of the following conditions, the prospective acquirer should file the M&A proposal with MOFTEC and SAIC before the proposal is publicized or when it files the proposal with the competent authority in its home country:

1. The foreign party possesses assets worth more than Rmb3 billion in China;
2. The foreign party has annual sales of more than Rmb1.5 billion in China during the current year;
3. The foreign party, together with its associated enterprises, already commands a 20% share of the mainland market;
4. As a result of the M&A, the foreign party and its associated enterprises will achieve a combined 25% share of the mainland market;
5. As a result of the M&A, the foreign party will hold direct or indirect stakes in more than 15 FIEs in related businesses in China.

MOFTEC and SAIC will investigate whether the proposed M&A will monopolize the industry, undermine fair competition or harm the interests of consumers, before making a decision.

In recent years, foreign investment in the form of merger and acquisition (M&A) has been on the increase in China. In view of this, MOFTEC (now Ministry of Commerce), State Administration of Taxation (SAT), State Administration for Industry and Commerce (SAIC), and State Administration of Foreign Exchange (SAFE) have jointly released the Provisional Rules on the Merger and Acquisition of Domestic Enterprises by Foreign Investors, which set out the principles and procedures for approval and become effective on 12 April 2003. The rules provide a legal framework for foreign investment in M&A in the following ways: where a foreign investor acquires the existing equity shares or increased capitalization or newly issued shares of a domestic enterprise (equity acquisition); where a foreign investor sets up a foreign-invested enterprise (FIE) to purchase and operate the assets of a domestic enterprise; and where a foreign investor acquires the assets of a domestic enterprise and uses such assets to set up an FIE to operate these assets (asset acquisition).

The new rules stipulate that the foreign investor acquiring a domestic enterprise and setting up an FIE should go through the approval procedure according to the relevant regulations and complete the necessary registration procedure with the government authorities concerned. For industries where wholly foreign-owned enterprises are not allowed under the Catalogue for the Guidance of Foreign Investment Industries, any M&A must not lead to 100% foreign ownership. The same applies to situations where the enterprise to be acquired engages in industries where majority mainland stakes are mandatory or where foreign participation is prohibited.

In setting up an FIE after M&A, the share of the foreign party in the registered capital of the FIE should not be less than 25%. Unless otherwise stated in laws and administrative regulations, if the foreign equity share is below 25%, the FIE concerned has to seek approval for establishment and registration according to existing procedures. Under the new rules, MOFTEC and its provincial bureaus are the approval authorities for FIE establishment while SAIC and its designated local administrations are responsible for registration.

The maximum total investment of FIEs established as a result of equity acquisition by foreign investors should comply with the following schedule:

Registered Capital           Maximum Total Investment
< US$2.1 million         1.43 times the registered capital
  US$2.1 million - 5 million 2 times the registered capital
  US$5 million - 12 million 2.5 times the registered capital
> US$12 million 3 times the registered capital

As for asset acquisition by foreign investors, the total investment in the FIE to be established should be determined according to the asset transaction price and scale of production and operation. The ratio of registered capital to total investment should comply with the relevant regulations. Moreover, the foreign investor must not operate the assets of the domestic enterprise to be acquired before the FIE is established.

If a proposed M&A by a foreign party falls under one of the following conditions, the prospective acquirer should file the M&A proposal with MOFTEC and SAIC before the proposal is publicized or when it files the proposal with the competent authority in its home country:

1. The foreign party possesses assets worth more than Rmb3 billion in China;
2. The foreign party has annual sales of more than Rmb1.5 billion in China during the current year;
3. The foreign party, together with its associated enterprises, already commands a 20% share of the mainland market;
4. As a result of the M&A, the foreign party and its associated enterprises will achieve a combined 25% share of the mainland market;
5. As a result of the M&A, the foreign party will hold direct or indirect stakes in more than 15 FIEs in related businesses in China.

MOFTEC and SAIC will investigate whether the proposed M&A will monopolize the industry, undermine fair competition or harm the interests of consumers, before making a decision.

Inspection and Quarantine System

In its development, the system of international trade is further improved and perfected so as to facilitate the flow of commodities and meet the demands of free trade. For this purpose, relevant terms have been included in various international conventions, bilateral treaties, and cooperative agreements between regions to eliminate trade barriers as much as possible. Particularly, worldwide remarkable achievements have been made in the reform of the international trade system, which is characterized by tariff reduction and the simplification of passage formalities at customhouses. However, it is interesting to note that all countries still attach importance to the necessary inspection and quarantine of import and export commodities. To declare inspection and quarantine seems to be nothing new for a businessman who is engaged in import and export business. Foreigners intending to do business with their Chinese counterparts should make certain they understand the commodity inspection and quarantine system in China.

I. Inspection and Quarantine Authorities

In China, the department in charge of the inspection and quarantine of commodities is the State Administration for Entry-Exit Inspection and Quarantine of the People's Republic of China (SAIQ), which was established on March 29, 1998. It was created by a merger of three government departments, namely, the State Administration of Import and Export Commodity Inspection, the State Animal and Plant Quarantine Administration under the Ministry of Agriculture, and the National Health and Quarantine Administration under the Ministry of Health.

SAIQ is the administrative institution enforcing the law in the field of entry/exit commodity health inspection and quarantine, animal and plant quarantine and the inspection, survey, and supervision of commodities. Its main functions are to check the import licenses of civil-use imports subject to the import license system, take responsibility for entry/exit animal and plant quarantine and the inspection of the sanitation and quality of foodstuff being exported or imported, to implement statutory inspection of imports and exports, and to control GSP Form A and certificate of origin.

Apart from SAIQ, another quarantine office is China National Import & Export Commodities Inspection Corporation (CCIC). It is a comprehensive inspection and survey agency duly authorized by the Chinese Government. Founded in 1980, it is the first national non-governmental organization of its kind in China, focusing its principal activities on the field of import and export commodity inspection and certificate inspection. Both the SAIQ and CCIC are government authorized organizations for import/export commodity inspection and quarantine, with their headquarters in Beijing. They have branches in cities and ports across the country. Inspection and quarantine subject to CCIC shall be carried out under the direct supervision of the SAIQ.

As to those commodities, that are excluded from the list of commodities for statutory inspection and quarantine, may, if necessary, be declared for inspection and quarantine by the owner. And he or she can engage by agreement either a Chinese or a foreign inspection and quarantine office to conduct the work. Generally, Chinese inspection and quarantine offices have been equipped with comparatively advanced techniques and facilities for carrying out the task. Moreover, they usually charge a lower fee than some other internationally famous quarantine institutions. As a result, Chinese businessmen, as well as increasing numbers of foreign businessmen, prefer a Chinese quarantine office. Of course, some foreign businessmen still favor a more creditable foreign office. So far, a few leading foreign famous commodity inspection and quarantine institutions have set up branches in China, thereby providing more choices for businessmen.

II. Main Inspection and Quarantine Operation

A. Import and Export Commodity Inspection

Import and export commodity inspection covers the inspection of a commodity's quality, quantity, weight, safety and sanitation. All commodities listed in the Catalogue of Import and Export Commodities subject to Statutory Inspection, or commodities subject to statutory inspection otherwise specified by laws and regulations, must be subject to inspection by the Chinese entry/exit inspection and quarantine authorities or other designated institutions. The consignee of the imports subject to statutory inspection must register with the inspection and quarantine authorities at the port of discharge; and the consignor of the imports and exports subject to statutory inspection shall declare commodity inspection within the period and at the place specified by the inspection and quarantine authorities. Commodities subject to statutory inspection may not be marketed or used before being inspected, and export commodities may not be exported if found inferior in quality through inspection.

B. Pre-shipment Inspection on the Wastes to Be Imported as Raw Material:

China is a party to the Basel Convention on Control on the Transboundary Movement of Hazardous Wastes and Their Disposal of 1989. Pre-shipment inspection must applied to wastes when they are imported to China as raw material, in a bid to prevent hazardous wastes from entering China. The contract for the wastes business signed between a consignee and consignor must specify that the inspection shall be executed by the China entry/exit inspection and quarantine authorities or SAIQ-accredited inspection entities. The wastes shall not be loaded on ship before they have passed the inspection.

C. Sanitation Supervision and Inspection on Food for Export, Animal and Plant Quarantine, and Health Quarantine and Treatment:

All food for export or import must be inspected and up to the required standards. Otherwise, they may not be imported or exported.

All animals, plants, and their products for import, export and in transit, as well as materials used for carrying animals and plants, shall be subject to quarantine and inspection. Any person entering or leaving the country shall be placed in quarantine by the inspection and quarantine authorities to discover any possible communicable diseases, and the necessary prophylaxis and control measures shall be adopted by the authorities. They shall also inspect the sanitary conditions at border ports and on the means of transport inbound and outbound at ports.

D. Foreign Investment and Assets Appraisal

China's inspection and quarantine authorities in various parts of the country may appraise foreign investment and assets either upon the application of the assets-related parties or their deputies or parties relating to economic interests, or upon the designation or entrustment of the judicial or arbitration or assets-appraisal bodies. This includes assets valuation and damage appraisal, and appraisal on the variety, quality, and quantity of assets.

Besides the above operation, SAIQ is also responsible for administering and implementing nationwide accreditation and quality certification in the field of import and export.

III. Functions of the Inspection and Quarantine Statement and Certificate

The inspection and quarantine statement on commodities to be imported and exported is to certify the quality of the commodities, and the certificate of qualification can be useful at least for three purposes, as follows:

a. For statutory inspected commodities, the quarantine certificate of qualification is one of the necessary documents for their entry or exit of a country. Customhouses will give clearance for them upon receiving the certificate.

b. For those commodities to be inspected and quarantined as specified in a business agreement signed between two parties, the qualified certificate of commodities is used to certify the quality of commodities up to the standard specified in the agreement. Both parties to the agreement usually at the same time agree on their appointed institution, place and time for inspection and quarantine in the terms. Both the parties can claim for any loss and launch a suit, if necessary, only under the condition that they have already strictly executed the terms on inspection and quarantine as specified in the agreement and acquired a qualified certificate of quarantine.

c. Even if the terms on quarantine are not included in an agreement, they may have their commodities quarantined voluntarily. For the consignor or exporter, a qualified certificate of commodities inspected before loading on board ship can certify the quality of commodities up to the standard specified in the agreement when they are discharged. In case of a problem of quality arising when they have reached the port of termination, the consignor or exporter can use the said qualified certificate to reject the recourse of the consignee for losses. The quality problem may be caused in transit by the carrier's negligence or by improper stowage; for the consignee or importer, inspecting commodities immediately after they reach the port of termination can ensure the quality condition of the commodities. If a quality problem arises, timely inspection before they are transferred and treated will provide a convincing evidence for the consignee to claim for losses. Therefore, inspection and quarantine are equally beneficial to both sides in a trade.

1) Foreign Investment:   http://www.mofcom.gov.cn
2.) Foreign Trade:http:  //www.chinawto.gov.cn
3.) Finance & Foreign Exchange:  http://www.abailaw.com
4.) Customs & Taxation:http:  //www.chinatax.gov.cn
5.) Commodity Inspection & Environment Protection:http: //www.zhb.gov.cn
6.) www.kompass.com 
7.) http://www.mofcom.gov.cn

8.) http://www.decision-consult.com

The foreign investments are basically divided into direct investment and other means of investment. The direct investment, which is widely adopted, includes Sino-foreign joint ventures, joint exploitation and exclusively foreign-owned enterprises, foreign-funded share-holding companies and joint development. The other means of investment includes compensation trade and processing and assembling.

1. Sino-foreign joint ventures

Sino-foreign joint ventures are also known as share-holding corporations. They are formed in China with joint capitals by foreign companies, enterprises, other economic organizations and individuals with Chinese companies, enterprises, other economic organizations and individuals. The main feature is that the joint parties invest together, operate together, take risk according to the ratio of their capitals and take responsibility of losses and profits. The capitals from different parties are translated into the ratios of capitals, and in general the capital from foreign party should not be lower than 25%.

The Sino-foreign joint ventures are among the first forms of China's absorption of foreign direct investment and they account for the biggest part. At present they are still a great part in the absorption of foreign investments.

2. Cooperative businesses

Cooperative business is also called contractual cooperation businesses. They are formed in China with joint capitals or terms of cooperation by foreign companies, enterprises, other economic organizations and individuals with Chinese companies, enterprises, other economic organizations and individuals. The rights and obligations of different parties are embedded in the contract. To establish a cooperative business, the foreign party, generally speaking, supplies all or most of the capital while Chinese party supplies land, factory buildings, and useful facilities, and also some supply a certain amount of capital, too.

3. Exclusively foreign-owned enterprises

Exclusively foreign-owned enterprises, which are totally invested by foreign party in China by foreign companies, enterprises, other economic organizations and individuals in accordance with laws of China. According to the law of foreign-funded enterprises, the establishment of foreign enterprises should benefit the development of our national economy and agree with at least one of the following criteria: the enterprises must adopt international advanced technology and facility; all or most of the products must be export-oriented. The foreign funded enterprises often take the form of limited liability.

4.Joint exploitation

Joint exploitation is the abbreviation of maritime and overland oil joint exploitation. It is a widely adopted measure of economic cooperation in the international natural resources field. The striking features are high risk, high investment and high reward. The joint development is often divided into three steps: exploitation, development and production. Compared with the other three means mentioned above, joint cooperation accounts for a small ratio.

5.Foreign-funded share-holding companies

Foreign companies, enterprises, other economic organizations and individuals can form foreign funded share-holding companies in China with Chinese companies, enterprises, and other economic organizations. The total capital of the share-holding company is formed by equal shares，shareholders will take due responsibilities for the company according to shares purchased; company will take responsibilities for all its debts through all its assets and the Chinese and foreign shareholders will hold the shares of the company. Among them, the shares purchased and held by foreign investors account for more than 25% of the total registered capital of the company. Limited company can be founded either by means of starting-up or raising, and the limited liability company invested by the foreigners can also apply to turn into share-holding companies. The qualified enterprises can also apply to issue A & B share and list abroad.

6. New types of foreign investment

While expanding areas and opening-up domestic market, China is also exploring and expanding actively its new types of utilizing foreign investment such as BOT, investment company and so on. Since multinational merger and acquisition has become the major type of international direct investment, Chinese government is now researching and enacting related policies so as to facilitate the foreigners to invest in China by means of merger and acquisition.

II. The Basic Situation of China's Absorption of Foreign Investment 

1) The basic situation of absorbing foreign investment

From January to October of 2002, china has newly approved foreign 27630 enterprises, up 34.46% compared with the same period of last year; contract foreign investment US$74.989 billion, up 35.85%; actual foreign investment utilization US$44.724 billion, up 20.05%. By the end of October, 2002, China has totally approved 417,655 foreign-funded enterprises, with contract foreign investment reached US$820.28 billion and actual foreign investment utilization amount to US$439.944 billion.
By the end of 2001, China has totally approved 215484 Sino-foreign joint ventures with US$308.307 billion contract investment and US$176.515 billion actual investment; 51370 Sino-foreign cooperative businesses have been approved, in which the contract foreign investment amount to US$157.102 billion, including US$77.725 billion foreign investment and the amount of foreign enterprises is 122,992, the contract foreign investment and the actual foreign investment of which are US$275.283 billion and US$133.891 billion; China has also approved 179 joint exploitation programs with contract foreign investment and actual investment US$4.599 and US$7.092 billion respectively. The project of the primary industry invested by the foreign investors amounts to 11242, the contract foreign investment of which is US$14.071 billion; the project of the secondary industry are 285000, with US$463.160 billion contract investment and the project of the tertiary industry are 93783 with contract foreign investment of US$268.060 billion. When it comes to the source of foreign investment, 200031 projects from Hong Kong with US$348.604 billion contract investment and US$187.001 billion actual investment; American programs are 33917 with the US$68.125 billion contract investment and US$34.466 billion actual investment; the number of Japanese programs is 22402 with US$44.234 billion contract and US$32.105 billion real investment; Taiwan programs amount to 50838 with US$54.730 billion contract investment and 29.140 actual investment; 9797 programs are funded by Singapore with US$37.364 billion contract investment and US$19.136 billion actual investment.

2). The rule of foreign investment in the development of national economy

The absorption of foreign investment not only makes up the shortage of capital for domestic construction of China, but also brings in a large amount advanced appropriate technologies and management experiences, boosts the development of China's opening-up economy and facilitates the development of China's high-tech industries as well as enhances the establishment and perfection of China's socialist market economy. Foreign enterprises create more job opportunities, foster a large number of talents, expand the national revenues and foreign exchanges, and improve China's international competitiveness as well as strengthen the comprehensive power of China. They have become an important and indispensable component and new growth point of national economy, and have made great contribution to the continuous rapid and stable development of our national economy.
According to statistics, from January to September 2002, the exports of foreign enterprises amounts to US$119.881 billion, up 23.9% compared with the same period of last year, and is 4.5 percentage point higher than that of export increase rate of China (19.4%). The exports of foreign-invested enterprises accounts for 51.6% of national exports volume and the proportion rises 1.9 percentage point over last year, the added export value amounts to US$23.148 billion, accounting for 61.3% of the added value of national exports volume (US$37.787 billion). From January to June, the industrial added value of foreign-invested enterprise is RMB364.1 billion yuan, up 12.2%, accounting for 25.18% of national industrial added value volume; from January to July, the tax revenues up 16.39% over the same period of last year, accounting for 20.44% of total national tax revenues. At present, the employees directly work in the foreign-invested enterprises amount to 23 million, accounting for 10% of national labor force.

III. China's Policy Direction of Absorption of Foreign Investment

We should hold up high the flag of Deng Xiaoping Theory, follow the requirement of three representatives, center on the principles and policies of our nation's economic and social development determined at the 16th National Congress of the Communist Party of China, adapt to the new situation of world economic development, stick to the principles of active and reasonable utilization of foreign capital, combine foreign capital absorption with economic structure adjustment and industrial upgrading promotion, the improvement of socialist market economy system, the reinforcement of enterprise competitiveness, the expansion of export and development of open economy, the vigorous exploitation of China's western area, and promotion of regional economies' harmonious development. Measures should be taken to further improve the soft environment for foreign investment, explore actively new methods for absorbing foreign capital, put emphasis on absorbing advanced technologies, modern management and special talents, and actively absorb foreign capital to invest in industries of new and advanced technologies, encourage multinational to set up district headquarters, research and procurement centers; speed up the development of supporting industries and push on the service trade field to open up to foreign countries step by step.

1. Energetically improve the political and legal environment for foreign investment, and to enhance legal administration level. According to our commissions for joining WTO and the requirement for our opening-up process, we will further improve the legal system of absorbing foreign investment, keep on the steadiness, consistency, predictability and feasibility of the policies and laws of foreign investment laws, try to create a united, steady, transparent and predictable environment for foreign investment. We will further simplify the examination and approval procedures for foreign investment and adopt a standardized examination and approval system; reinforce our sense of legality, try to be open, just and transparent, and establish an incorruptible, industrious, pragmatic and effective government, creating a good administrative environment for foreign investment.

2. Maintain and improve an open and fair market environment. We should combine this with the current work of rectifying and standardizing the order of market economy, prohibit firmly the improper collecting fees from foreign companies as well as improper inspection and fine of them. Measures should be taken to destroy local protectionism and industrial monopoly. We should also enhance the lawful measures to protect the intellectual property right and take strong actions against illegal piracy, therefore, establish an open, unified and fair market environment, further perfect the complaining mechanism of foreign-funded and protect the legal rights of foreign merchants according to law.

3. Further open the field of service industry. In accordance with China's self-development and Commitment to the WTO, we will open this field vigorously and steadily and systematically, perfect rules and regulations for service industry and formulate a united and standard system for accession into the market of foreign investment service. We will encourage the import of modern service concepts and advanced management experiences, technologies and modes of modern market operation, improve structure of service industry in China.

4. Encourage foreign businessmen to invest in the new high-tech industry, the basic industry, and supporting industry. The ability of technology innovation and sustainable development directly reflect the competitiveness advantages of a country. We will continue to encourage foreign investors to introduce, develop and innovate technology and to invest in technology-intensive project, and projects with advanced technology and to guide in enterprise registered capital proportion limitation and funding condition. The relevant stipulations of setting pioneering investment enterprise should also be consummated in order to facilitate the conditions of setting and developing high-tech corporations. We should attract foreigners to invest in supporting industry and encourage the localization of new materials, push domestic small and medium-sized enterprises to enforce cooperation with foreign companies and introduce the advanced and applicable technology to match the large foreign-funded enterprises, thus to enter the production and sales network of multinational companies.

5. Attract actively more multinational companies to invest in China. Multinational companies as leading force of today's world economy. We will pay more attention to improve the relevant policies to attract multinationals to invest in China, establish the local headquarters and set up cross-country procurement centers. Using the experience and methods of merger and acquisition of other countries and taking the economical system with China's characteristics and realities of into consideration, we should speed up the step to draft and improve the practical policy and stipulations of investment through merger and acquisition, further revise the relevant stipulations of the foreign-invested share-holding companies, push the formulation and perfecting of BOT and special permission transfer investment methods, the various stipulations for foreign-funded enterprise's listing domestically and abroad.

6. Further promote foreign invest in the central and western regions. Vast areas in these regions are rich in resources for farming and stock raising, mineral resources and tourist resources. With a large population and a market of great potential labor forces, other key elements for production are relatively inexpensive with the steady progress and western development strategy, such facilities as transportation, communication and construction has impressively improved. Because of the improvement of investment environment and ecological development and emergence of potential for the development of specialty economy, foreign businessmen who invest in these regions are facing brand-new opportunities and great development space.