Investing in China
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There are three main types of foreign-invested enterprises, namely, the equity joint venture (EJV), the cooperative joint venture (CJV) and the wholly-owned foreign enterprise (WOFE). Together, they are referred to as foreign-invested enterprises or FIEs.
Chong Loong Charles Chaw
Charles Chaw is the author of many business guidebooks and market research reports on China. His bestselling: “Manufacturing, Outsourcing and R&D in China” is the first rating guide on China’s industrial parks across the country. Began in 2000, he has researched, consulted and promoted China’s most established industrial parks. Today, his rating on hundreds of industrial parks set the benchmarks for the sector and made available in Bloomberg BMART, FactSet, Standard & Poor’s Capital IQ and Thomson Reuters Research Bank. Under his leadership, the company has published hundreds of research reports covering more than 40 industries on China for over a decade. Charles also appears regularly as guest speaker in numerous business channels with BBC Asia, CNBC, Bloomberg TV, Phoenix TV (Chinese), Channel News Asia, Russia TV 24 and Al Jazeera etc. Leveraging on his extensive knowledge and experience on China’s industrial parks development, he has produced a 5-episodes television documentary program titled: “Inside the World Largest Factory” in 2004, and another 6-episode: “Inside China Next Powerhouse” in 2007. Both programs were broadcast internationally in 4 languages. Charles had worked with Deutsche Morgan Grenfell’s investment banking unit and Cargill Financial Services Asia, the proprietary trading arm of Cargill Group prior founded China Knowledge.
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Investing in China - Chong Loong Charles Chaw
Investing in China
Published by:
China Knowledge Press Pte Ltd
119 Genting Lane, HB@119 Genting #06-03, Singapore 349570.
T.: +65 6235 8468 F.: +65 6235 2374
www.chinaknowledge.com
ISBN: 978-981-08-6159-9
at Smashwords
© China Knowledge Press Pte Ltd, 2010
Investment Guidelines
There are three main types of foreign-invested enterprises, namely, the equity joint venture (EJV), the cooperative joint venture (CJV) and the wholly-owned foreign enterprise (WOFE). Together, they are referred to as foreign-invested enterprises or FIEs.
In addition to the three common types, three other types of investment are also available to foreign investors. These are the foreign-invested holding company (FIHC), the foreign-invested joint stock company (FIJSC), and the build-operate-transfer (BOT). With the relaxation of laws and regulations in accordance with China’s WTO commitments, these three types of investment are becoming more popular.
Six Types of Foreign Investment Enterprises:
Equity Joint Ventures (EJVs)
Cooperative Joint Ventures (CJVs)
Wholly-owned Foreign Enterprises (WOFEs)
Foreign-invested Holding Companies (FIHCs)
Foreign-invested Joint Stock Companies (FIJSCs)
Build-operate-transfers (BOTs)
Equity Joint Ventures (EJVs)
Equity joint ventures (EJVs) are enterprises that are jointly established, invested in, and operated by foreign enterprises, either economic entities or individuals (foreign participants), within the territory of the PRC, with Chinese enterprises or other economic entities (Chinese participants), in accordance with the principles of equality and mutual benefit. They are subject to approval from the Chinese government.
EJVs are legal persons subject to Chinese law and may own assets, sue and be sued. The foreign and Chinese participants share the joint ventures’ profits and bear its risks and losses. Joint ventures take the form of a limited liability company, which means that the personal wealth and property of the shareholding partners are shielded from corporate loss.
The proportion of investment contributed by one or more foreign participant(s) as its share of the registered capital of a joint venture shall in general be no less than 25%.
Cooperative Joint Ventures (CJVs)
Cooperative joint ventures (CJVs) are also called contractual operative enterprises. When Chinese and foreign partners establish a cooperative enterprise, provisions on such items as investment or terms for cooperators, distribution of earnings or products, sharing of risks and losses, method of business management and ownership of property on the expiration of the contract term shall be prescribed in the cooperative enterprise’s contract in accordance with the provisions of Chinese law.
Convenience and flexibility are the defining characteristics of this type of investment. Therefore, it is easier for cooperative partners to reach an agreement. A cooperative enterprise that complies with the provisions of Chinese law for a legal person shall have the status of a Chinese legal person.
In other words, a CJV lacking the status of a legal person is also allowed and is legally equivalent to a partnership. However, such a venture does not enjoy limited liability protection. In practice, the majority of CJVs are set up as limited liability companies with legal person status.
The general practice is that investment and cooperation provided by foreign partners is in the form of cash, equipment and technology. On the part of the Chinese partners, investment and cooperation comes in the form of land-use rights, labor and related services.
Major Differences Between EJVs and CJVs
The most significant difference between an EJV and a CJV is the allocation of profits and liabilities. In an EJV, profits and liabilities are allocated based on the ratio of the capital contributions made by the partners. For example, if one party contributes 30% of the capital investment, that party will receive 30% of the total profits and will be required to take up 30% of the liabilities.
In contrast, CJVs allow for greater flexibility in the agreement between the joint venture parties. In a CJV, profit sharing is generally prescribed by the joint venture agreement between the parties. In practice, the foreign party generally receives a higher percentage of profit in the initial years of the CJV and the Chinese partner becomes the owner of the fixed assets of the CJV at no cost upon the termination of the joint venture.
Wholly-Owned Foreign Enterprises (WOFEs)
Wholly-owned foreign enterprises (WOFEs) are enterprises established within Chinese territory in accordance with the relevant Chinese laws using capital provided by foreign investors. This category does not include branches in China of foreign enterprises or other economic entities. A WOFE is a Chinese entity registered in the territory of China and is governed and protected by Chinese laws.
WOFEs are subject to the Law of the People’s Republic of China on Wholly Foreign-Owned Enterprises. The law was approved by