Types of foreign investment allowed in China

Branch Offices

A branch office in China is one that is used for business purposes for which the main company office holds responsibility. It is not a legal entity and only carries out liaison and coordination work. Such a situation would involve the existence of an offshore "parent", the People's Republic of China would be denied control of the entity a situation which it seeks to avoid. Beijing does not recognize branch offices, nor allow them to operate. Branch office cannot be recommended as an investment vehicle.

Sino-Foreign Equity Joint Ventures

These are enterprises established in China with joint investments from foreign companies, enterprises or other economic bodies and Chinese economic bodies. Such enterprises involve joint investments, operations and share of risk in proportion to the amount of investment inputted by respective parties. Each party is jointly responsible for profits and losses. Investments can come in the form of currency, buildings, industrial property or equipment. The level of investment offered by a foreign company should not be less than 25%.

The corporate form of such joint ventures is the limited liability company, with a Board of Directors as its supreme body of power. Some joint ventures have adopted this corporate form.

Sino-Foreign Cooperative Joint Ventures

Sino-foreign cooperative joint ventures refer to Chinese foreign contractual joint ventures. They are enterprises established in the country with investments or conditions for cooperation jointly offered by foreign companies, enterprises or other economic bodies, as well as by Chinese economic bodies.

The main difference from the equity joint venture is that investments of parties involved will not necessarily be converted into ratios of investments.

The rights and obligations of parties involved with regards to such issues as distribution, investments, operations and sharing of risks and profits is determined by contracts signed by parties from the outset of the venture. These ventures involve the foreign partner providing most or all of the funds while the Chinese partner to contribute land, facilities and perhaps a limited amount of funding. The usual approach is stipulated in the contract that the Chinese party will own all assets of the venture once the date of expiry is reached, with the foreign party recouping its investments within the duration of the venture.

Such forms of cooperative joint ventures are attractive, since they allow the Chinese partner to have a source of investment while permitting the foreign company to recoup its investments.

Wholly-Owned Foreign Enterprises

These refer to wholly foreign owned enterprises. They are enterprises set up in China by foreign companies or economic bodies in accordance with Chinese law with the investment entirely provided by foreign investors.

Such enterprises must be conducive to the development of the national economy; they must meet one of the following requirements:

1. Application of internationally advanced technology

2. Orientation of most products for exports

Corporate form of foreign enterprises in China is generally the limited liability company. The country has been late to provide a system for foreign enterprises, but they have grown in number over the past few years.

Chinese Holding Companies

Approval has recently been given to multinational corporations by China's Ministry of Foreign Trade and Economic Cooperation (MOFTEC) to establish foreign-invested holding companies. Though mostly analogous to Western Holding Companies, there are some differences. Multinational companies may wish to set up holding companies to increase investments or reinvestments in the country, as well as to coordinate investment companies already established here.

A Holding Company in the country may invest in such fields as industry, agriculture, infrastructure and energy, provided the State encourages foreign investments in these sectors.

Typical work undertaken by a Holding Company might include action as a purchasing agent, distribution or provision of after sales services. Provisional Regulations dictate that a Chinese Holding Company may enjoy preferential treatment of a foreign invested enterprise, and is awarded a foreign invested enterprise certificate and license.

B Shares

Chinese government allows foreign investors to acquire shares of a special category, B shares, of approved listed companies in the Stock Exchange. However, ownership and management are separated. Chinese government is considering allowing a foreign invested entity in the country to be listed in the Stock Exchange, but it takes time.

Special approved foreign JV

Foreign nationals are generally not allowed to hold equity of private companies in the country unless with special consent from the government. A merger and acquisition exercise involving foreign funds will convert a private company into a foreign JV.