These changes now appear very timely in the light of the recent progress China has made in its bid to become a member of the WTO. Accession now appears almost certain to happen early next year.
Removal of restrictions
The amended implementing regulations remove several provisions that had previously restricted the operations of EJVs. These include:
-the list of industries in which EJVs could operate, now replaced by a reference to national regulations and the Foreign Investment Guidance Catalogue the requirement for EJVs to adopt advanced technical equipment and management methods, increase foreign exchange earnings, expand exports or help train technical and managerial personnel;
-the absolute prohibition against the reduction of registered capital. Although still generally not allowed, such a reduction is possible, with approval, where changes in total investment or production scale of the venture make it necessary;
-the obsolete provision that the chairman of the board is to be appointed by the Chinese party and the vice-chairman by the foreign party (the requirement itself was eliminated in 1990 by an amendment to the EJV law);
-the requirement that EJVs with branches in Macau or Hong Kong open bank accounts with the Bank of China;
-the restrictions (long outmoded in practice) on how an EJV may acquire materials in China;
-the restriction on how an EJV may sell its products on the domestic market; and
-the provision that required an EJV to deposit all of its foreign exchange income in the foreign exchange account it had opened for JVs
-and to make all payments from its foreign exchange deposit account.
Many changes to the implementing regulations were made to bring them into closer compliance with commitments made for WTO entry. For example, EJVs are no longer required to give priority to domestic sources for the purchase of machinery, equipment, raw materials, fuel, parts, means of transport or items for office use. Another change is the removal of the requirement that the equipment or materials contributed as capital by the foreign party to the EJV be limited to items that cannot be manufactured in China or would be prohibitively difficult to manufacture as a consequence of cost, quality or efficiency.
Both changes appear to have been made to comply with WTO restrictions against requiring companies to purchase locally made products.
Amendments were also made to Article 14 of the implementing regulations that change the requirements of the EJV contract. This includes the removal of the requirements that the contract include an export sales ratio (the ratio of goods to be sold within and outside of China) for the joint venture's products. It also removes the requirement to specify arrangements for the receipt and disbursement of foreign exchange. The requirement to balance such receipts and disbursements of foreign exchange has also been removed in an effort to comply with WTO commitments.
WTO national treatment requirements appear to have influenced the amendment to the restrictions placed on the pricing of certain goods to be purchased by the EJV. The new implementing regulations state that the EJV shall receive the same treatment as domestic enterprises both for the pricing of materials and for various fees including utilities, transport and other services.
Changes in capital contributions
Foreign exchange for capital contributions may now be converted to yuan in accordance with the benchmark rate set by the People's Bank of China at the date of conversion. Previously, the rate was set by the State Administration of Foreign Exchange. Industrial property and proprietary technology are now allowed to be contributed as capital without having to conform to previous requirements of aiding in the production of new products urgently needed by China.
Amendments to Article 53 delete prohibitions against ownership rights and remove explicit restrictions against the transfer of land-use rights. Besides these land-use rights that may be obtained pursuant to the regulations, EJVs may now obtain land-use rights pursuant to the relevant national regulations.
Dissolving an EJV has also been simplified. Previously, in instances where one party violated the EJV agreement, contract or articles of association, an application to dissolve the EJV still required the co-operation of the board of directors, including those appointed by the party accused of violations. This often led to deadlock.
The amended implementing regulations remove this requirement, allowing a party to submit an application for dissolution without going through the board of directors. In cases where there has been no violation, the task of submitting the application for dissolution still rests with the board of the venture.
The amended implementing regulations also place the responsibility of oversight in cases of liquidation on a liquidation commit-tee appointed by the EJV, instead of being handled by the government department in charge, as was previously the case.
Other significant changes to the implementing regulations include the elimination of references to the EJV's ?department in charge,? a concept that has been moribund in practice for some time the removal of the provision stipulating that applications for domestic yuan or forex loans be limited only to the Bank of China. The amended text provides for such applications to be made to ?financial institutions,? without making reference to a specific bank amendment to an article that had stipulated that EJVs adhere to regulations promulgated by the special economic zones (SEZs) in which they were established, in addition to those of the National People's Congress (NPC), the State Council and the Standing Committee of the NPC. The amended regulations now only list regulations of the relevant SEZ, as applicable.
For further information on this topic, please contact Thomas E Jones, partner Freshfields Bruckhaus Deringer, by telephone: +852 2846 3400, fax: +852 2810 6192 or email: tomas. jones @freshfields.com).
Amendments to laws and regulations concerning equity joint ventures remove an array of restrictions that formerly applied to these companies.