In preparation for China's entry into the World Trade Organisation (WTO), the Standing Committee of the National People's Congress has approved certain amendments to the 1988 law on Sino-foreign cooperative joint venture enterprises and the 1986 law on wholly foreign-owned enterprises.
The amendments, effective from October 31, 2000, remove existing requirements on the purchase of foreign exchange, preferential treatment to domestic enterprises in purchasing raw materials, as well as export quotas. Amendments to the law on Sino-foreign joint equity enterprises are expected to be adopted at this month's full session of the National People's Congress.
One of the amendments to the law on cooperative joint ventures (CJVs) concerns the purchase of raw materials, goods and other materials. Under these amendments, CJVs are no longer required to export a certain percentage of their products in order to maintain a balance between their foreign income and expenditure; nor will they be required to give preference to domestic enterprises when purchasing these goods.
CJVs may now purchase raw materials, goods and other materials from domestic or international markets ?in accordance with the principles of fairness and reasonableness.? However, opinion is divided as to whether the insertion of this phrase is a liberalisation or a further restriction in respect of the autonomy that CJVs may enjoy in managing their own businesses. It is likely that its intent is to grant greater autonomy.
A related change is the removal of the requirement for CJVs to balance foreign exchange income and expenditure. Since December 1996, when the Chinese authorities announced that the yuan would thereafter be convertible on the current account, foreign investment, enterprises have been able to purchase foreign exchange to acquire raw materials and parts, and to pay wages, dividends and profits. Whether foreign exchange balancing is no longer a cause for concern among foreign investors is not yet clear. Although the requirements have officially been removed from the law, the potential exists for foreign exchange balancing to become a back-door issue for investors.
WFOE law amendments
Four amendments were made to the law on wholly foreign-owned enterprises (WFOEs), including the removal of requirements on foreign exchange balancing and purchase of raw materials.
Previously, WFOEs could be established only if they utilised advanced technology or exported a minimum of 50 per cent of their products. The revised law now provides that ?the establishment of WFOEs must benefit the development of the Chinese national economy? and ?encourages the establishment of export-oriented or technologically advanced WFOEs.?
Consequently, it should now be possible for foreign investors to establish WFOEs – the preferred type of foreign investment enterprise – for a wider range of projects. However, it is still unclear whether companies will face practical difficulties in obtaining approval for WFOEs that are neither technologically advanced nor export-oriented. However, the approval authorities in Beijing have stated that the changes do in fact mean that WFOEs will no longer be limited to the previous categories.
Under the amendments, WFOEs no longer need to submit production plans to the authorities and, like CJVs, they are now free to purchase raw materials from non-Chinese companies. The previous provision was intended to benefit domestic industrial development in China and was in conflict with the WTO's principle of national treatment.
An article that previously required WFOEs to balance their own foreign exchange has been deleted in its entirety. The result is that, as is the case with the CJV law, the legal requirement for foreign exchange balancing has now been removed.
The amendments to China's foreign investment laws help to bring China into greater compliance with WTO requirements, particularly with regard to the application of national treatment to equipment and materials purchases. The changes also seem to offer greater flexibility in the area of foreign exchange management as a step towards eventual full convertibility of the yuan.
Overall, however, it is unlikely that these minimal changes will have much of an impact on foreign investment flows into China, especially since certain changes merely memorialise what is already common practice. For investors who already have a presence in the mainland, China has agreed in the Sino-US Market Access Agreement not to enforce provisions of contracts imposing foreign exchange balancing and trade requirements. However, it is still unclear how this will be implemented.
Given the amount of speculation preceding these amendments, the meagre results do not inspire hope that China's entry into the WTO will result in a sudden liberalisation of the investment environment. Instead, the march to a full opening of China's markets under the WTO is likely to be long and slow.
This article was written by Freshfields Bruckhous Deringer, an international law firm. For more details, contact Lucille Barale in Hong Kong (tel. +852 2846 3400) or by email (firstname.lastname@example.org).