China 61

China 59

notice also details the material that must be submitted, including evidence that
the applicant has suffered damage because of the improper use of its trademark.
• Regulations Concerning Copyright in the Production of Digital Products,
published in December 1999 by the National Copyright Administration of
China, state the range of digital products in which copyright law must be
respected, such as CD-ROMs, VCDs, DVDs and laser discs. Royalty standards, in
force since July 1st 2000, give guidelines such as a royalty rate of 5–12% to use
copyrighted material in digital products.
• Tentative Provisions Regarding the Administration of Software, published
on March 30th 1998, ban the development, production and trading of software
products that infringe on intellectual-property rights. Software producers must
either hold the property rights to their products or have obtained specific
permission from the holder of the rights.
Implementation and enforcement. With most of the legal framework now
meeting international requirements, China’s focus is now on implementation
and enforcement. The authorities project the image of having adopted a hard-
line against infringements. Individual achievements, such as the discovery of
1,100 pirated compact discs at Dalian Capital International Airport in February
2008, get extensive coverage in the state-controlled media.
In March 2008 China launched two new campaigns, both expected to last until
November: “Thunderstorm” targets “malicious, collective and repeated
infringement, counterfeiting or imitation of patents”; and “Skynet” targets
patent frauds. Results of the campaigns had not yet been made public in early
2009. The effectiveness of the campaigns have received mixed reviews, and
foreign businesses and governments are generally dissatisfied with the
enforcement of IPR regulations.
Patent disputes are usually settled through the courts, whereas technology-
licensing disputes are resolved through arbitration. By contrast copyright
infringements have received little court or administrative attention. Foreign
experts say this pattern is beginning to change.
In addition, local patent-administration offices are becoming more aggressive in
raiding suspected patent violators, making administrative solutions more
attractive. And more copyright cases have resulted in the courts handing down
substantial penalties against Chinese violators. A court battle is the only way a
company can obtain compensatory damages, and the publicity of a court case
can be a strong deterrent to other potential infringers.
In the first ten months of 2008, courts at all levels in China accepted 20,806 IPR
cases, an increase of 36.9% on the same period in 2007. They handled 3,251
appeal cases over the ten-month period, a rise of 49.5% from a year earlier.
In January 2007 the Supreme People’s Court issued a notice ordering stronger
penalties for IPR violations, including the confiscation of “all illegal gains and
manufacturing tools” of IPR violators as well as the destruction of pirated
products. Criminal penalties will be imposed on persons earning illegal income
of more than Rmb30,000 or producing more than 1,000 pirated copies of CDs

Country Commerce 2009 www.eiu.com © The Economist Intelligence Unit Limited 2009

60 China

or DVDs, although it was unclear when such penalties would come into effect
or how they would be enforced.
The State Intellectual Property Office (SIPO), an independent agency under the
State Council (the cabinet), was formed in 1998 from the Patent Administration
Office. SIPO’s establishment was originally to be the first step towards
consolidating all IPR regulators, and it was eventually to take charge of the
Trademark Office and the National Copyright Administration of China (NCAC).
Under the present arrangement, SIPO deals with patents, and the NCAC (part
of the State Printing and Publishing Administration) deals with copyright and
software. They also investigate violators but have far less leeway to conduct
raids and impose punishments than the State Administration of Industry and
Commerce (SAIC). The Trademark Office, an agency under the SAIC, handles
registrations of trademarks, whereas the Trademark Review and Adjudication
Board handles disputes. The SAIC and its local bureaux are the only
government departments authorised within the context of their ordinary duties
to investigate alleged infringers. Administrative decisions of both the SAIC and
the NCAC can be appealed through the court system.
The China Copyright Protection Centre under the NCAC implements some of
the parent agency’s functions, such as copyright trade negotiations and co-
operation at home and abroad. It is responsible for authenticating copyrights of
works imported from or exported to other countries and for registering
publishing contracts of audio-video and electronic publications involving a
foreign party.
Companies with a stake in IPR issues have organised themselves. Chinese
software producers set up the China Software Industry Association in 1995 to
raise IPR awareness and crack down on pirating. The Quality Brands Protection
Committee, which by January 2009 had brought together 184 foreign
companies, is engaged in active anti-counterfeiting efforts in co-operation with
the Chinese government.
The recent appearance of several Chinese and foreign investigative agencies,
which undertake assignments on behalf of foreign parties, has bolstered IPR
enforcement. Foreign investigation firms are technically not supposed to
operate in China, but they have in fact done so and with impunity; indeed,
they have even submitted information to officials on behalf of clients.
Chinese criminal law provides for more-drastic penalties in counterfeiting cases
that violate the public good. These penalties include long prison sentences and
even capital punishment. If the bureau or court hearing the dispute decides that
a violation has occurred, it can order the infringer to cease production and
destroy related goods. The authority can also impose a fine and order the
infringer to pay damages.
Intellectual-property law

Conventions. Paris Union, 1883–1967; World Intellectual Property Organisation (WIPO), 1967; Madrid Agreement Concerning
the International Registration of Marks (Madrid Union), 1891–1967; Bern Convention for the Protection of Literary and
Artistic Works; Universal Copyright Convention; Geneva Phonograms Convention; Patent Co-operation Treaty;
International Classification of Goods and Services (Nice Agreement).


China 61

Basic laws. Trademark Law of the People’s Republic of China (March 1983), Patent Law of the PRC (April 1985),
Implementing Regulations of the Patent Law of the PRC (April 1985), Implementing Regulations of the Trademark Law of the
PRC (January 1988), Copyright Law of the PRC (June 1991), Decision to Amend the Patent Law of the PRC (January 1st 1993),
Detailed Rules and Regulations for Implementation of the Revised PRC Patent Law (January 1st 1993), Decision to Amend
the Trademark Law of the PRC (July 1st 1993), Detailed Implementing Rules for the Trademark Law of the PRC (July 28th
1993), Decision to Amend the Patent Law of the PRC (August 25th 2000), Amendments to the Detailed Implementing Rules
for the Patent Law of the PRC (July 1st 2001), Decision to Amend the Copyright Law of the PRC (October 27th 2001),
Decision to Amend the Trademark Law of the PRC (October 27th 2001), Regulations for the Administration of Import and
Export of Technology (January 1st 2002), Regulations on Protection of Computer Software (January 1st 2002), Amendments
to the Detailed Implementing Rules for the Copyright Law of the PRC (September 15th 2002), Amendments to the Detailed
Implementing Rules for the Trademark Law of the PRC (September 15th 2002), Regulation on Administration of Domain
Names on China Internet Network (December 1st 2002), Decision on Revision of the Implementing Regulations of the
Patent Law (February 1st 2003), Rules on the Recognition and Protection of Well-known Trademarks (June 1st 2003), Rules
on the Registration and Administration of Collective Trademarks and Certification Trademarks (June 1st 2003),
Implementing Rules of Madrid International Registration of Trademarks (June 1st 2003), Amendments to the Foreign Trade
Law (April 6th 2004).

Patents
Types and duration. Twenty years for inventions, ten years for utility models and designs. These terms are not renewable.
Novelty. Before the date of filing, no identical invention or utility model may have been disclosed in publications in China
or abroad, publicly used in the country or filed previously with the State Intellectual Property Office (SIPO).
Unpatentable. Scientific discoveries, rules and methods of intellectual activity, methods of diagnosing and treating diseases,
animal and plant varieties, and substances obtained through nuclear transformation. But patents may be granted for
processes used in producing animal and plant varieties.
Fees. Applications: invention, Rmb900; utility model, Rmb500. Annual fees: invention, Rmb900 for the first to third year;
Rmb1,200 for the fourth to sixth year; Rmb2,000 for the seventh to ninth year; Rmb4,000 for the tenth to 12th year;
Rmb6,000 for the 13th to 15th year; Rmb8,000 for the 16th to 20th year. See below for annual fees for models. Examination:
Rmb2,500. Annual application maintenance fee: Rmb300.
Compulsory licences may be granted if another entity requests and is denied permission by a patent holder to work an
unused patent on reasonable terms; if use of a patent is necessary to exploit a new, more technically advanced patent and
the owner is not co-operative; during a state of national emergency or in other extraordinary circumstances; or if licensing is
in the public interest.

Industrial designs and models
Duration. Patent protection for designs and utility models is ten years from filing date, with application for renewal of
three years.
Registration procedure. Foreigners and foreign enterprises with no habitual residence in China must appoint a patent
agency designated by the State Council to act as an agent. All patent applications for designs and utility models must be
filed with the SIPO and must include the title of the design or utility model, a description of it, the name of the inventor or
creator, and the name and address of the applicant. For a design, drawings or photographs of it and the class to which that
product belongs should be indicated. Applications for utility models should include with the description an abstract and
any relevant technical claims. Upon rejection, an applicant or third party may request a re-examination by the SIPO.
Fees. The fee for application is Rmb500. Annual registration fee for models is Rmb600 for the first to third year (agent fee,
US$50); Rmb600 for the fourth and fifth year (agent fee, US$60); Rmb900 for the sixth to eighth year (agent fee, US$70); and
Rmb1,200 for the ninth and tenth year (agent fee, US$80). Annual registration fee for designs is Rmb150 for the first to third
year (agent fee, US$50); Rmb300 for the fourth and fifth year (agent fee, US$60); Rmb600 for the sixth to eighth year (agent
fee, US$70); and Rmb800 for the ninth and tenth year (agent fee, US$80). An additional fee of Rmb100 applies for renewing
a patent for models and designs (agent fee, US$80).


62 China

Trademarks
Types and duration. Ten years from the approval date for registration, renewable for equal periods. Service trademarks are
registrable since July 1993. The status of collective, associated and certification marks remains unclear.
Legal effect. First to register is entitled to exclusive right to a trademark. However, since December 1984, when China joined
the Paris Convention, nationals of other member nations may claim priority use of trademarks within six months of the
date of the first filing. Registered trademarks must be used to avoid challenge to registration. Trademarks unused for more
than three years may be cancelled.
Not registrable. National flags and emblems, generic names of goods, words or symbols having direct reference to the
nature of the product, words or symbols “detrimental to socialist morals or customs or having unhealthy influences”,
commonly known foreign place names, and names of Chinese administrative districts at or above the county level.
Fees. Application, Rmb1,000 (agent fee, US$370); renewal, Rmb2,000 (agent fee, US$390); appeal against rejection, Rmb1,500
(agent fee, US$340 and up); opposition, Rmb1,000 (agent fee, US$280 and up).

Copyrights
Types and duration. Copyrights are protected for the life of the author plus 50 years, or for 50 years from first publication in
employment or made-for-hire situations. Copyright holders can license their rights for ten years (renewable upon
expiration), after which the rights revert to the original owner.
Legal effect. The various rights protected under the law include the right to receive compensation, use, distribute, amend,
adapt and earn accreditation for the works, and also various derivative-work rights. In work-for-hire and employment
situations, the copyright belongs to the author, except for computer programs, engineering designs and drawings of product
designs and specifications (which belong to the employer).
Registrable. Protection is granted to written, spoken, recorded, broadcast and artistic works; construction and product
drawings; maps and charts; and computer software. Not covered are newspaper and media reports. It is unclear whether
databases (such as directories and lists) fall under its provisions, and the implementing regulations failed to clarify this
point. The fee for registering a copyright is US$400 (including official fees and attorney fees). However, as a signatory to the
Bern Convention and the Universal Copyright Convention, China adopts the principle of automatic protection for
copyright in accordance with international practice, and works need not be registered.

Registering property Patents. The State Intellectual Property Office (SIPO), an authority under the
State Council, reviews patent applications and grants patent rights. There are 70
administrative authorities for patents, including 54 at the provincial level and 16
at the central ministerial level. They process applications and handle disputes
relating to the patent rights of Chinese individuals or enterprises.
Foreign applicants with a residence or business office in China can use local
patent-administration offices. Other foreign applicants must use specially
designated agencies. The SIPO received 828,328 patent applications in 2008,
19.3% more than in 2007. China had received about 5m patent applications by
the end of 2008, according to the SIPO. China accepted its first online patent
application in early 2004.
Trademarks. Foreign companies wishing to register trademarks in China must
go through the Trademark Office of the State Administration for Industry and
Commerce. Implementing Rules for the Trademark Law, which came into force
on September 15th 2002, stipulate that foreign companies with a presence in
China can file directly; foreign companies without a permanent local business
must use a Chinese trademark agent.
Foreign firms should carefully monitor the work of trademark agents and
consider employing foreign law firms with experience in China to prepare


China 63

registration documents, and thus leaving the agent with the simple task of filing
the prepared documents.
Copyright. China acceded to the Bern Convention in 1992; hence, copyright
automatically comes into existence at the time of creation. Even so, China
encourages the registration of computer software. Chinese companies can
register copyrights with the National Copyright Administration of China.
This administration has handed over the responsibility of registering computer
software to the China Copyright Protection Centre. Registration of software is
no longer a precondition for filing infringement actions with either the courts or
the administrative departments, following the promulgation of the Regulations
on Protection of Computer Software on January 1st 2002.
Recent licensing agreements

Royal Dutch Shell (Netherlands/UK) signed a licensing agreement in November 2008 with Yunnan Yuntianhua Co,
permitting the Chinese company to use Shell’s coal-gasification technology at a methanol plant in Shuifu county in the
south-west of China. It was Shell’s third such agreement in recent months, following coal-gasification licensing agreements
with Datong Coal Mine Group in September 2008 and Yongcheng Longyu Coal Chemical Co in July 2008. Shell’s coal-
gasification technology offers a way of using coal to produce fertilisers and chemicals, or to produce synthetic gas for use in
power generation. Financial details were not disclosed.
Nokia of Finland entered into a cross-licensing agreement with Huawei Technologies Co in September 2008. The agreement
gives Huawei access to Nokia patents in wireless standards. Nokia and Nokia Siemens Network are granted access to
patents held by Huawei for third-generation mobile service technologies. Financial details were not disclosed.
Mitsubishi Motors of Japan signed a technology-licensing agreement in July 2008 with Harbin Dongan Automotive Engine
Manufacturing Co, a joint-venture manufacturer of electronic fuel-injection engines and other automotive components in
which the Japanese company holds a 5.7% stake. Other partners in Harbin include Harbin Dongan Auto Engine Co (36%),
Harbin Dongan Engine (Group) Co. (19%), Harbin Aircraft Industry (Group) (15%), Mitsubishi Motor Co (15.3%), Malaysia
China Investment (9%) and Mitsubishi Motors Corp (5.7%). The agreement covered production of 4- and 5-speed automatic
transmissions. No details were made available.
GE Energy of the United States signed a licensing agreement with Guizhou Jinchi Chemical Co in February 2008, allowing
the Chinese company to use GE Energy’s gasification technology for a project in Tongzi county, in south-west China’s
Guizhou province. The technology enables Guizhou Jinchi Chemical Co to turn coal into synthetic gas, a mixture of
primarily of hydrogen and carbon monoxide, which is used in the production of chemicals. It marked the US company’s
32nd gasification licensing agreement in China. Financial details were not disclosed.

Negotiating a licence To ensure the success of a technology-transfer deal, foreign suppliers should
ascertain at the start whether the technology recipient has the authority to sign
a technology-transfer deal with a foreign entity and has access to hard currency
to pay for imported technology. Suppliers should also confirm that local
planning authorities have approved the project by asking to see the project’s
feasibility study and authorisation certificate.
Foreign investors looking for information on China’s technology priorities and
potential technology-transfer projects can contact the provincial- or municipal-
level foreign-investment commissions in most of China’s major cities. These
commissions, along with local offices of the State Scientific and Technological
Commission, often publish lists of advanced-technology projects for which
China is seeking foreign participation. Most Chinese provinces and government
ministries have become extremely competitive in recent years in seeking foreign
investment; this has led to the creation of informative, bilingual and relatively


64 China

user-friendly websites at many levels of China’s bureaucracy that can be useful
for gathering initial information.
China’s technology-implementing rules do not cover contracts for licensing
trademarks. But the Provisional Measures for the Administration of Trade in the
Importation of Technology and Equipment (implemented in March 1996)
specifically cite trademarks linked to licensed patents or other licensed
technology as falling within the purview of the technology-transfer regime.
Where trademarks are not linked to a licensed technology, they are often
licensed through a separate, less restrictive contract for a separate (possibly
higher) fee.
A development policy for the steel sector in force since 2005 calls for de facto
technology transfer, the US Trade Representative’s Office said in its December
2008 annual report to Congress. This is because the policy requires foreign
investors in the steel sector to possess proprietary technology or intellectual
property, though it bars them from holding controlling shares in steel ventures.
When the Chinese show reluctance to pay outright royalties or fees, foreign
firms may resort to more-flexible and indirect forms of compensation. One
pharmaceutical firm transfers manufacturing and managerial know-how but
bills its client solely for the full international price of the bulk active ingredients
it supplies. Other firms include technology in the price of knocked-down kits
they supply to Chinese clients. One US company is helping its Chinese client to
design a new product; in exchange, the Chinese firm has agreed to a part-
sourcing contract.
There are no formal ceilings on maximum royalty rates or fixed rules on how
to structure compensation agreements, but foreign licensers report that informal
guidelines apply to some industries. There is more reluctance to pay for know-
how (especially in its more intangible forms) than for patented inventions. The
compensation terms established by a particular Chinese negotiating authority
in earlier deals tend to establish benchmarks that succeeding licensers find
difficult to surpass.
The Chinese generally try to discourage upfront compensation for technology
transfer, preferring instead to spread the payments over the term of a contract
and to defer final payment until the time the licensee is actually producing
goods. Where the technology is to be licensed to an unrelated party (that is, not
a joint venture involving the licenser), a lump-sum upfront payment may be
preferable to a royalty, since it reduces risk to the licenser. China prefers that
royalties be based on net sales or net value added, and Chinese negotiators try
to whittle down the basis for payments by excluding such inputs as imported
materials and parts.
For royalty-based agreements, the rate is generally 5–7% of net sales or 2–3% of
gross sales. The rate can be lower—perhaps 2% of net sales—when the licence is
part of a sale of equipment or when the technology in question is considered
less advanced. Rates of around 5% or more are available when it is recognised
that substantial research-and-development effort went into the technology.


China 65

Software piracy in Asia/Pacific, 2007
as % of software in use in each country
100

80

60

40

20

0

China

Hong Kong

India

Indonesia

Japan

Malaysia

Pakistan
New Zealand

Philippines

Singapore

South Korea

Taiwan

Thailand

Vietnam

Other A/P
Australia

Source: Business Software Alliance/IDC 2008 Global Piracy Study.

Administrative restrictions The Regulations for the Administration of Import and Export of Technology,
issued by the State Council and implemented from January 1st 2002, cover a
broad range of technology and patent transfers. They established three
categories for imported and exported technologies: (1) freely imported and
exported technology; (2) restricted technology; and (3) prohibited technology.
The regulations clarify procedures for approval and registration of imported
technology, replacing previous contradictory regulations in the field.
No prior application is necessary for freely tradeable technology, but
registration is necessary after the technology has been imported. Registration is
online via the China International Electronic Commerce Network. The Ministry
of Commerce (MOFCOM) is responsible for registering technology imports for
“large projects”, including ones that need approval from the State Council and
ones funded partly by the national budget or by foreign-government loans.
Provincial-level foreign-trade bureaux are in charge of registering other contracts
involving the import of freely tradeable technology.
For restricted technology, an application for import licence must be filed with
MOFCOM, which must process the application within 30 days. Upon approval
of the licence, and after the technology-import contract has been signed, it must
be resubmitted to MOFCOM, which must reply within ten days. The importer
must also file a registration with MOFCOM after approval of the licence.
The licenser should keep the registration certificate that the MOFCOM provides,
since the regulations require the certificate to be produced when applying for
foreign-exchange settlements, including overseas remittances of royalties.
The 2002 regulations removed previous rules that restricted most technology
contracts to ten-year terms and required the licensee to maintain confidentiality
only for this period. The new regulations do not set a time limit, and it is now
up to the contracted parties to determine whether the licensee may use the
technology beyond the end of the contract. However, the regulations could
make life harder for the licenser by imposing a series of new warranties. They


66 China

require the licenser to guarantee that he is the owner of the technology, that it is
without glitches and will achieve the technological objectives described in the
import contract. Foreign licensers must carefully limit the warranties to which
they agree. The licenser might also require the licensee to meet certain
competence standards before offering a warranty—to avoid becoming liable
when a technology fails to perform because of incorrect use or inadequate
provision of power or utilities on the part of the licensee.
Foreign companies interested in licensing the same technology to different end-
users might have difficulties negotiating compensation. For example, authorities
challenged one US company’s technology-transfer agreements with Chinese
recipients on the grounds that the country should pay for the same know-how
only once. But the contract with the original Chinese licensee included a non-
disclosure clause that prevented sharing know-how. The US licenser eventually
got around the objections by charging a “documentation” fee when it passed
on technology.
The State Administration of Industry and Commerce provides some protection
for foreign licensers of technology under Several Provisions Concerning
Prohibition of Acts of Infringement of Commercial Secrets, which came into
force in November 1995. “Business or commercial secrets” protected under the
regulations include information relating to the design, procedures, product
formulae, manufacturing process, manufacturing know-how, client lists,
information on sources of goods, production and sales tactics, and the details of
bids submitted in contract tenders. The commercial-secrets provisions also vest
local authorities with the power to seize any secret materials that were
unlawfully obtained, and either to destroy them or to return them to their
rightful owners.

Competition and price policies
Overview Strong lobbying by officials in the more-reform-minded coastal areas and
special economic zones (SEZs) coupled with fears of massive rural
unemployment has prompted the central government to become more tolerant
of non-state enterprises throughout China. Four recent landmark events
highlight growing official recognition of the importance of private enterprise:

• The National People’s Congress (NPC), the national legislature, adopted the
long-awaited Property Law in March 2007, granting protection not just for public
but also for private property.
• The NPC adopted a constitutional amendment in March 2004 that, for the
first time, recognises and protects private property;
• The 16th Congress of the Communist Party decided in November 2002 to
allow private entrepreneurs to enter the party ranks at; and
• Constitutional amendments passed in March 1999 elevated the status of
the non-state sector.
Economic contradictions—celebrating free markets on the one hand while
maintaining market-distorting practices like energy subsidies on the other—


China 67

reflect China’s ambiguous embrace of capitalism. But there is no doubt that the
overall trend in China is towards a liberalisation of the economy. On the
negative side, private enterprises continue to have far less access to loans from
the principal Chinese banks and face more red tape in obtaining approvals for
various economic activities.
China’s first Anti-monopoly Law took effect on August 1st 2008, a year after it
the Standing Committee of the NPC passed it, following 13 years of agonising
preparation. (See Monopolies and market dominance for details.) China has
other laws banning certain anti-competitive behaviour; for example, its foreign-
technology import laws ban tied-selling arrangements between a licenser and
licensee. China has promulgated several national laws bolstering market
competition and consumer rights, including the following:

• Regulations Prohibiting Regional Barriers under the Market Economy,
issued by the State Council and in force since April 21st 2001, targets the regional
protectionism that had emerged in various forms. The regulations specifically
state that local governments and authorities may not hinder the import of
goods and services originating in other parts of China. This applies to crude and
obviously illegal means (such as roadblocks to bar products from the outside)
and to more-sophisticated methods (such as having local officials hint to local
companies that they should buy only locally made goods). The regulations
specify a range of penalties; these range from issuing notes of criticism to
dismissal and criminal prosecution.
• Provisional Rules on Banning Exorbitant Profits, implemented on
February 1st 1995, require businesses to display accurate price tags, forbid
collusion between enterprises and dealers to set prices, and protect consumers
from paying exorbitant prices.
• Law Concerning Protection of the Rights and Interests of Consumers,
implemented on January 1st 1994, outlines the basic rights of consumers and
obligations and liabilities of business operators providing goods or services.
It also sets penalties for infringing the rights and interests of consumers.

Monopolies and market The first Anti-monopoly Law, 13 years in the making, took effect on August 1st
dominance 2008. The Standing Committee of the National People’s Congress (NPC), the
national legislature, passed the law in August 2007. It bans monopolistic
arrangements (such as cartels) and monopolistic behaviour (such as price fixing
and curbing competition). Monopolies will still be permitted in individual cases
where they are believed to promote innovation.
The law adopts a wide definition of monopolistic behaviour, banning a range
of practices, including not just fixing prices but also restricting sales, dividing up
sales territories, and engaging in collective boycotts of certain transactions. It
also bans all “other forms of monopolistic agreements”. The law defines
dominant market position as a situation where one business has a 50% market
share; two businesses have a combined 66% market share; or three businesses
have a 75% market share. The law lists penalties that can be imposed for
monopolistic behaviour, including fines of up to 10% of the sales turnover


68 China

during the previous year for monopolistic agreements or abuse of dominant
market position.
After the law entered into force in 2008, (1) the Ministry of Commerce
(MOFCOM) set up the Anti-monopoly Bureau, (2) the National Development
and Reform Commission (NDRC) established the Price Supervision Office, and
(3) the State Administration for Industry and Commerce (SAIC) set up the Anti-
monopoly and Anti-unfair Competition Bureau. This followed the rough
division of labour among the three: MOFCOM is in charge of merger approvals;
the NDRC handles cases related to pricing; and the SAIC targets alleged abuse
of dominant market position. In November 2008 the Anti-monopoly Bureau of
the MOFCOM issued its first public decision under the new law; the decision
related to the acquisition by InBev, a Belgian beer maker, of Anheuser-Busch, its
US rival (see Acquisition of an existing firm).
The Unfair Competition Law curbed some monopolistic behaviour; the law,
implemented on September 1st 1993, defined specific business practices as
constituting unfair competition. The law has applied to legal persons, other
economic organisations (including foreign-invested enterprises—FIEs) and
individuals engaged in business. Among the actions it defines as unfair are the
following: use of bribes to sell or buy merchandise; restrictions by the
government (including subordinate departments) on the entry or exit of
merchandise from or to a local market; collusion in the submission or
acceptance of tenders; restrictions imposed by businesses with legal
monopolies (such as utilities) requiring the purchase of products from
designated business operators; spreading of false information injuring the
reputation of competitors; and selling merchandise below cost to force
competitors out of business.
The central government has acknowledged that the Unfair Competition Law
has had only a limited effect on monopolistic practices. As part of its anti-
inflation campaign of the mid-1990s, the central government introduced
Provisional Rules on Banning Exorbitant Profits, in January 1995, to curb price
gouging by enterprises and retailers.
Further decentralisation of economic control and intensification of competition
from a variety of sources are weakening the state-run monopolies that have
dominated major industries. Competition, which is coming from rural
township enterprises, joint ventures and foreign imports, has further intensified
since a law implemented in December 2004 has opened China’s domestic
market to FIEs (see Freedom to sell).
Although the central government has been curbing the power of some state-run
monopolies (like telecoms and foreign-trade companies), it has had to reinstate
certain monopolies. For example, a two-year drop in cotton production coupled
with increasing demand from textile producers prompted it in 1994 to
reintroduce its monopoly over cotton pricing, marketing and sales; the
measures were abandoned only in September 1999. Similar price pressures in
the oil sector prompted the government to reinstitute state monopoly control
over prices, marketing, and the import and export of oil and oil products.


China 69

The telecoms industry, once a huge, all-encompassing and inefficient state
monopoly, has been split into several companies. All are still large by any
standard, but they are meant to compete with each other. China now has two
fixed-line operators, China Telecom Group and China Netcom Group, which
were initially divided geographically but are being encouraged to compete, and
they are actively expanding into each other’s turf. China Netcom, originally
focusing on northern China, established two separate entities, Netcom North,
covering ten provinces in northern China, and Netcom, in 15 southern
provinces. There are two cellular-phone operators: China Mobile and China
Unicom. China Telecom Satellite and China TieTiong (previously China Railcom)
provide fixed lines for leasing. China Mobile took over China TieTong in May
2008, but the latter was promised relative independence in operations.
Foreign-trade companies are one example of an industry where anti-monopoly
measures may gradually benefit foreign investors. The business was originally
the exclusive province of state-owned enterprises, but entry by non-state
enterprises has gradually become easier.

Mergers China has continued to encourage mergers in a bid to create large, competitive
local conglomerates (based on the model of South Korea’s chaebol) that can
withstand the pressure of foreign competition. This massive merger drive could
involve thousands of state-owned enterprises (SOEs) in the coming years.
There is some room for foreign participation in this merger programme. The
Provisional Rules on the Merger and Acquisition of Domestic Enterprises by
Foreign Investors came into force on April 12th 2003; the rules permit two types
of operations: (1) equity acquisitions, where foreign investors buy existing
shares of a Chinese enterprise or subscribe to new shares issued by a Chinese
enterprise; and (2) asset acquisitions, where foreign investors buy the assets of a
Chinese enterprise. An updated version of the provisional rules, published in
September 2006, specify when mergers and acquisitions require the approval
by Chinese authorities. These include instances in which at least one of the
parties in the merger has annual sales of Rmb1.5bn or more and holds 20% of
the Chinese market; or the Chinese partner is an industry leader, has a famous
brand or employs more than 2,000 people.
Regulations on Mergers and Divisions of Enterprises with Foreign Investment,
which came into force on November 1st 1999, combines previous regulation
and best practice on the rights and obligations of merging and dividing foreign-
invested enterprises (FIEs), approval authority, capital requirements and share
distribution. Specifically, it seeks to ensure that a foreign shareholding does not
fall below 25% after mergers or divisions in types of FIEs where this minimum
percentage is required. It also states that an FIE may not participate in a merger
if the registered capital has not been paid in full, or if the FIE has not yet
commenced operations.
For a merger between a joint venture (JV) and an SOE, JV regulations require
prior approval from all partners and from the original approval-granting
authority. The resulting merged enterprise would presumably be some sort of
JV, in which control would be based on the shares of registered capital held by
each partner. In practice, however, such mergers rarely occur. Instead, the


70 China

partners generally create a separate entity through contributions of assets and
cash from existing enterprises, which are in effect left with the same terms of
ownership structure.
The Company Law provides that a joint-stock company seeking to undertake a
merger must notify its creditors and give them 90 days to raise objections. All
parties involved enter into a merger agreement, and they must make three
separate announcements of the merger in approved publications. Each party
then submits the agreement along with an application for merger to the
appropriate administrative department. On receiving the department’s consent,
the parties submit the same application to the examination authorities and for
approval by the two companies. The newly merged entity must then apply to
the authority in charge of registration of enterprises to amend its registration.

Freedom to sell Chinese authorities used to discourage foreign-invested enterprises (FIEs) from
selling their products on the domestic market but that has changed dramatically
in recent years. First, amended regulations governing equity joint ventures
(EJVs), promulgated on July 22nd 2001, loosened previous requirements
“encouraging” ventures to sell their products in foreign markets. Under the
rules, foreign EJV partners no longer have to commit to exporting a high
proportion of the venture’s output, and the EJV contract no longer has to
specify what proportion of the total production it will export.
Then, the regulations abolished a rule that had generally banned domestic sale
of most of a joint venture’s output unless the product was urgently needed or
would substitute for imports. Previously, industrial and consumer-product joint
ventures with major operations in China (like Alcatel, Motorola, Procter &
Gamble, Siemens and Volkswagen) had to strike specific deals to permit some
their output to go to the local market.
In addition, wholly-foreign-owned enterprises (WFOs) have been allowed since
December 11th 2004 to engage in domestic wholesale and retail trade, although
companies must apply for approval to the Ministry of Commerce. According to
PricewaterhouseCoopers, an accountancy, foreign retailers are now growing
both organically and through mergers. An enterprise’s exports may be handled
by the foreign partner (using its knowledge of the international market), the
Chinese partner or a third party (such as a foreign-trade company). Some
products may require export licences. WFOs and JVs may set their own export
prices. In particular, China maintains export restrictions on antimony, bauxite
and a number of other minerals. But export prices for those items that involve
export licences or quotas, that use inputs subject to import licences or that
involve other state restrictions must be reported to the local office of the
Ministry of Commerce. WFOs (but not JVs) also need clearance for the prices.

Resale-price maintenance De facto price maintenance occurs in China through price controls on major
goods and services at the wholesale and retail levels. Both state-owned
enterprises and foreign-invested enterprises selling in the domestic market (and
sometimes the international market) are subject to these controls.


China 71

The State Development and Reform Commission’s Interim Regulations on the
Prohibition of Monopolistic Pricing Acts, Article 5, published in June 2003,
prohibits producers from requiring distributors to charge a fixed reselling price.

Price controls China began 2008 being extremely worried that inflation could spin out of
control. Reflecting these concerns, the National Development and Reform
Commission (NDRC) in January 2008 moved to control price increases for
grain, edible oil, meat, milk, eggs and liquefied petroleum gas. In these product
categories, major enterprises (not specifically defined) were to seek government
approval ten working days in advance if they wish to increase prices.
However, the general economic slowdown brought about by the global
financial crisis caused inflation to moderate towards the end of 2008. In
December, as policy priorities shifted from inflation control to growth creation,
the NDRC lifted the temporary price controls imposed in January on edible oil,
grain meat, milk and eggs. It lifted the controls on liquefied petroleum gas in
January 2009.
Market forces now determine the prices of more than 90% of products traded in
China, and in general, prices remain controlled only for goods and services
deemed essential. As at early 2009, the government maintained price controls
on tobacco, natural gas and some telecommunication services. Certain products
are subject to “guidance pricing”—the government sets a basic reference price
level, and companies are allowed to set their prices in a band typically 5% to
15% within this reference price. Petrol, kerosene, diesel fuel, cotton and fertiliser
have guidance prices. Also subject to guidance are prices of certain services in
transport, telecommunications and architecture.
In September 2008 the US government launched discussions with Chinese
officials regarding a proposal by the NDRC to manage the prices of medical
devices. The objective on the Chinese side was to keep medical services
affordable, but the US concern was that implementation of the measure would
restrict competition. In the talks with US officials, China agreed to seek the
views of the medical-device-making industry before carrying out the price
control system.
The government continues to control the prices of some goods sold
domestically. An amended Pharmaceutical Law, implemented on December 1st
2001, allows the authorities to introduce price controls on drugs if they deem it
necessary. Even for products where market-determined pricing is allowed, the
amended law stipulates that pricing must be fair and not too far out of line
with production costs. To ensure implementation of the rules, the law provides
that drugs firms should offer precise and unbiased information about
production costs to the authorities.
Price controls generally apply at the ex-factory level in the form of subsidies to
state-owned enterprises to let them produce and sell goods to wholesalers and
retailers at artificially low prices. The government has controlled the prices of
imports through licensing and quota regimes, but China is now revamping
these to reflect its new status as a member of the World Trade Organisation.


72 China

Exchanging and remitting funds
Overview After months of anticipation, the People’s Bank of China (PBoC), the central
bank, in July 2005 announced the end of the country’s long-standing peg of its
currency, the renminbi, to the US dollar at a rate of Rmb8.28:US$1. The
renminbi was pegged to a basket of ten currencies and allowed to fluctuate in
value up to 0.3% up or down from the previous day’s closing; this trading band
was increased to 0.5% in May 2007.
The State Administration of Foreign Exchange (SAFE) took another step to
liberalise the currency in December 2005, when it granted licences to 13 banks
to quote continuous buy and sell prices for the renminbi. These are the “Big
Four” state-owned commercial banks (Industrial and Commercial Bank of
China, Agricultural Bank of China, Bank of China and China Construction
Bank); four other local banks (Citic Bank, China Merchants Bank, Bank of
Communications and Fujian Industrial Bank); and the local branches of five
foreign banks (Bank of Montreal, Citibank, HSBC, Standard Chartered Bank and
ABN Amro). The currency’s core daily value thus reflects a weighted average of
the banks’ quotes and is published at the start of each trading day. In January
2006 the PBoC modified the system established the previous June by allowing
over-the-counter renminbi trading.
The central bank designed these changes to make the exchange-rate regime
more market directed and to improve the risk-management capabilities of
financial institutions. Although they are not intended to allow a more rapid
appreciation of the renminbi, they will probably have this effect anyway,
though any appreciation will continue to be gradual.
Foreign-exchange (forex) outflow—a serious problem for China in the 1990s—
subsided following government measures adopted in the late 1990s to
strengthen administrative controls on forex dealings. China’s forex reserves
grew to US$1.95trn at the end of 2008, an increase of US$417.8bn from the end
of 2007. Rising reserves are attributable to the ongoing trade surplus and to
recent policies banning prepayment of foreign debt not explicitly stipulated in a
debt agreement, restricting forex trading by domestic bank branches and
requiring financial institutions to conduct more-thorough checks on companies
wishing to obtain forex.
Reflecting the fact that fund outflow is no longer the main challenge facing
policymakers, whereas fund inflow and upward pressure on the currency is a
growing issue, the State Council issued Regulations on the Administration of
Foreign Exchange, implemented on August 1st 2008. Among other things, the
regulations removed a requirement for Chinese enterprises and individuals to
convert forex proceeds into the Chinese currency, and allowed Chinese
enterprises and individuals to hold foreign exchange abroad.
To better track flows of foreign exchange across China’s borders, the regulations
require that exporters set up a basic foreign-currency settlement account for
collecting export proceeds and converting them into the local currency.
Following up on the State Council regulations, the SAFE in November 2008
introduced a new rule ordering all legal entities, including FIEs to establish such


China 73

accounts. The only exceptions were for FIEs with virtually no inflow or outflow
of funds (that is, they remit funds across borders no more than twice a year,
with the amount totalling less than US$100 each time).
The government maintains relatively strict exchange controls, but many foreign
businesses believe it will have to simplify procedures, given the rapid increase
in foreign trade and investment from China’s new status as a member of the
World Trade Organisation. The authorities took one step in this direction in
August 2005, with new rules allowing local residents going abroad for up to
half a year to buy US$5,000 (up from US$3,000); those going abroad for more
than half a year may buy US$8,000 (up from US$5,000).
Despite the plethora of restrictions still in place, the general trend over the past
decade has been towards a gradual liberalisation of China’s forex market. The
country reached its most significant milestone in December 1996 when it
officially made the renminbi convertible on the current account. In doing so,
China agreed to Article VIII of the International Monetary Fund, which
prohibits discriminatory measures like restricting payments and transfers for
international transactions and multi-currency practices. Extending this policy,
China’s exchange authorities closed the country’s forex swap markets in
December 1998.
China amended its rules on foreign-invested equity joint ventures (EJVs) in July
2001 to be consistent with the partial convertibility of the local currency. This
change cancelled a previous requirement that EJVs maintain a balance of forex
revenues and expenditures. The rule had become obsolete (and enforcement
had ended) after current-account convertibility allowed foreign-invested
enterprises (FIEs) to buy and sell forex at local banks for trade purposes.
Current-account convertibility, which allows importers and exporters to have
free access to foreign exchange, has required China to remove all restrictions on
payments by enterprises (including FIEs) for imports, labour and services;
repayment of interest on foreign debt; and repatriation of profits by foreign
businesses in China. Convertibility on the capital account is not expected in the
near future. Capital-account transactions include those related to direct
investment, international loans and securities.
The interbank market consists of designated state forex banks and approved
foreign banks. They operate as members of the China Foreign-Exchange Trading
System (CFETS) in Shanghai, a national centre linked by computer to regional
forex-trading centres. The CFETS allows some small daily fluctuations in the
renminbi’s forex rate, and it oversees trading of US dollars, Hong Kong dollars
and Japanese yen.
The PBoC provides daily quotes of unified rates for the US dollar and other
major currencies based on the previous day’s closing prices in the interbank
market. The PBoC maintains a special hard-currency account for intervention if
the rate fluctuates during the day outside a narrow, set band.
China issued a slew of measures to improve currency supervision in 1998–99,
following the regional financial crisis. It has added few additional restrictions
since then, although the authorities have announced occasional measures to


74 China

raise regulatory capabilities. They also conduct periodic crackdowns, including
on black-market currency transactions and on companies that overstate their
imports to obtain hard currency.
Given the continued growth in exports and the rise in forex holdings, there
appears to be no immediate outside threat to the stability of the currency. This
gives regulators a rationale for standing pat on controls—and sometimes for
relaxing them. For instance, the PBoC and the Hong Kong Monetary Authority
(the central bank of the Special Administrative Region) signed a memorandum
of understanding on November 19th 2003 allowing Hong Kong banks to accept
renminbi-denominated deposits by individuals and tourism businesses,
provide renminbi-based credit-card services and offer free exchange between
Hong Kong dollars and renminbi. Customers face a daily exchange limit of
Rmb20,000. From March 2006, Hong Kong banks have been allowed to offer
renminbi current accounts.
Under 1996 rules, FIEs may make trade-related forex transactions without prior
approval from the SAFE. FIEs need only take the related trade documentation to
a designated forex bank to obtain hard-currency funds. All forex receipts and
disbursements must flow through a “basic” and specialised forex accounts.
China allows FIEs to set up a range of different forex accounts, depending on
their purpose. Although the exact types of accounts on offer vary among the
banks, basically they can be classified as follows:

• Accounts for receiving investment into the enterprise. Funds in this account
are for purposes previously approved by the SAFE.
• Accounts for receiving proceeds of forex loans. Again, the SAFE is involved
in approving the project for which the loan is intended; financial institutions
must deny withdrawal if it is for purposes not covered by the loan agreement.
• Accounts to repay forex loans. For debt repayment to take place via this
channel, the lender must submit a request to the SAFE for approval.
• Accounts for proceeds from disposal of assets.
The SAFE introduced relaxed rules, from July 2002, on forex accounts held by
FIEs for receiving investment into the enterprise. FIEs no longer need prior
approval from the SAFE or its local bureaux to convert forex on these accounts
into renminbi. New regulations, implemented in May 2002, strengthened
supervision of foreign currency used as capital contributions for foreign
investments. The rules require accountants to check the forex registration
certificates obtained by foreign investors to ensure that the funds have been
paid into the investors’ special account for capital investments.
In an important change, the SAFE issued new rules, implemented on
October 15th 2002, abolishing a previous system whereby only FIEs could
maintain limited amounts in special forex accounts; domestic enterprises had to
sell all hard currency to designated banks. The new regulations allow all
domestic enterprises (both FIEs and wholly-Chinese-owned companies) to hold
a basic forex account for current-account or trade-related purposes. The account
is capped at 80% of the enterprise’s trade-related forex receipts of the previous


China 75

year (increased from 20% following regulations from the SAFE that came into
force on May 1st 2006). For companies that had no trade-related forex receipts
the previous year, the cap is set at US$500,000 (raised from US$100,000).
Retained forex exceeding this limit must be sold into the local market; if the
holder of the account does not do this of his own account, the bank must
perform the sale within ten working days. Accounts that have not been active
for one year will be closed.
The new system allows a certain degree of flexibility, since companies may be
allotted a higher cap or allowed to open more than one account—in either US
dollars or another foreign currency—if the nature of their business requires it.
But in general, no locality in China is allowed to let the total cap exceed 25% of
trade-related forex receipts of the previous year.
Annual forex inspections, launched by the SAFE in 1995, provide the
supervision necessary to allow FIEs to buy forex from the designated banks
making up the China Foreign-Exchange Trading System. Within the first three
months of each year, FIEs must file a forex examination report (FEER) to qualify
for forex privileges. The report requires FIEs to provide a vast range of
information on their forex dealings, including compliance with capital-
contribution requirements and agreed export undertakings as set out in joint-
venture and other contracts.
In 1997 the SAFE combined the required documentation into a single
consolidated annual report, dealing not only with forex but also with all
aspects of an enterprise’s business. Individual sections of the report must have
the approval of the relevant government departments and then go to the State
Administration for Industry and Commerce (SAIC) for final approval. A joint
circular issued in 1997 by a number of government departments, including the
Ministry of Commerce and the SAIC, required categorisation of foreign
enterprises in China into “satisfactory” and “unsatisfactory” groups, based on
the acceptability of their annual audits. There is no sign that unsatisfactory FIEs
are being penalised, but it is possible that in the event of a currency crisis—
where the central bank is forced to ration forex—companies with “satisfactory”
ratings would get preferential treatment.
An enterprise that meets the relevant forex requirements gets an approval
stamped on its Foreign-Exchange Registration Certificate (FERC), which may
then be presented to an approved forex bank so the enterprise can conduct
forex deals without obtaining SAFE approval each time. Businesses that fail to
submit a report or to meet forex criteria have to seek approval from local SAFE
offices for each transaction before obtaining money through designated foreign-
exchange banks.
An FIE must first apply to the SAFE to obtain a FERC. It must give the SAFE
evidence of its legal existence, its assets and the purpose of the desired forex
account. This requires submitting copies of the joint-venture contract, articles of
association, the business licence issued by the SAIC and an investment-
verification report issued by a certified public accountant registered in China.
Only after obtaining this certificate may the FIE apply to the SAFE to open a
forex account. Based on the applicant’s investment, the SAFE will determine the


76 China

upper limit of deposits allowed on the account, but with the possibility of
adjusting that upper limit for increased investment.
All forex receipts and disbursements must flow through the “basic” and
specialised forex accounts. Companies from a country with an investment
agreement with China are guaranteed convertibility of royalties arising from an
investment or licensing agreement and convertibility of a foreign partner’s
investment (to the extent of contributed registered capital) on liquidation of a
joint venture. Funds are convertible at the exchange rate at the time of
repatriation or transfer. Foreigners are allowed to hold any amount of renminbi
in a domestic savings or current account. Locals are free to open US-dollar
accounts at the Bank of China (the nation’s largest foreign-currency bank) or
other state-approved banks.

Repatriation of capital When a foreign or joint venture company is dissolved in China, the remaining
claims of the foreign investor may be remitted through the firm’s forex account
upon approval from the State Administration of Foreign Exchange. Funds are
convertible at the exchange rate at the time of repatriation or transfer.

Profit remittances Foreign investors may remit dividends and profits from foreign and joint
ventures after they pay Chinese income taxes and meet all reserve-fund and
labour-fund obligations. Funds are convertible at the exchange rate at the time
of repatriation or transfer.
For joint ventures, the board of directors normally establishes dividend policies.
Profits may not be distributed until the enterprise makes up losses from
previous years. Dividend distributions must be according to the equity shares of
the investing parties, and there is no cap on their amount.
Foreign-invested enterprises may freely remit their after-tax profits and
dividends; they do not need prior approval from the State Administration of
Foreign Exchange. Funds may be drawn either from forex accounts or by
conversion and payment at designated forex banks, on the strength of an
appropriate corporate-board resolution concerning profit distribution and proof
from the appropriate authorities of tax payment.

Loan inflows and repayment Foreign-invested joint ventures (JVs) may borrow hard currency for their
projects under Article 78 of the Implementing Regulations of the Law on Equity
Joint Ventures, amended in July 2001. The loans must be reported to, but need
not be approved by, the State Administration of Foreign Exchange (SAFE) or one
of its branches. In this regard, foreign-invested enterprises (FIEs) are treated
more liberally than Chinese enterprises.
To ensure that JVs are not too highly leveraged, however, guidelines governing
permissible debt-to-equity ratios were set out in the Interim Provisions of the
State Administration of Industry and Commerce Concerning the Ratio Between
Registered Capital and Total Amount of Investment of Chinese-Foreign Equity
Joint Ventures, of March 1987. The rules aim to inhibit investors who contribute
a comparatively small amount of their own cash. Where the total amount of
the investment (or total project cost) is less than US$3m, the registered capital
(or actual equity contributions of the partners) must be at least 70% of the


China 77

project cost (that is, 30% may be borrowed). For projects valued at US$3m–10m,
50% may be borrowed; for those valued at US$10m–30m, 60% may be
borrowed; and for those worth more than US$30m, 66.6% may be borrowed.
External borrowing by Chinese financial institutions or enterprises falls under
the annual credit plan and is subject to stringent controls. All such loans must
be approved by and registered with the SAFE. Rules apply to any foreign
currency borrowed by national enterprises with terms of 365 days or more. The
failure of Guangdong International Trust & Investment (Gitic) in late 1998
demonstrated that such rules were often disregarded; subsequently, the SAFE
cracked down on these illegal practices. Foreign banks may not engage in any
lending without approval from the SAFE. The Chinese authorities will not
acknowledge unregistered debt.
The Administrative Measures on Domestic Institutions Borrowing International
Commercial Loans, of January 1998, made international borrowing more
difficult for domestic non-financial institutions. Domestic firms must overcome
the following hurdles to be eligible to borrow from abroad: (1) to have been
profitable in the preceding three-year period; (2) to have permission to conduct
an import/export business; (3) to be in an economic sector encouraged by the
state; (4) to have well-established financial control systems in place; (5) to have
net assets amounting to not less than 15% of total assets for a trading business,
or net assets of not less than 30% of total assets for a non-trading business; (6) to
have an aggregate balance of international commercial obligations and foreign-
related security obligations of no more than 50% of net assets expressed in
forex; and (7) to have an aggregate balance of international commercial loans
plus foreign-related security obligations of not more than the forex revenue for
the previous year.
The People’s Bank of China (PBoC) and the SAFE in 1998 introduced new forex
regulations for FIEs: (1) the Administrative Provisions on Foreign-Exchange
Accounts Outside China required FIEs that seek to establish overseas accounts
to submit to the SAFE a capital-verification certificate (verifying that the FIE’s
registered capital has been contributed) prepared by a previously approved
accounting firm; and (2) the Administrative Measures for the Borrowing of
International Commercial Loans by Domestic Organisations required FIEs,
which had not previously been considered domestic organisations, to comply
with foreign-debt registration procedures. This regulation also required
domestic and foreign enterprises to obtain approval from the SAFE to deposit
borrowed funds overseas or to convert borrowed funds into renminbi.
The PBoC relaxed borrowing rules for FIEs in Circular 223, implemented in July
1999. Its major provisions were that FIEs may finance fixed-asset investment
with forex-backed renminbi loans; that forex-backed renminbi loan terms may
be extended up to five years; that FIEs may pledge forex equity contributions
and current-account receivables to obtain renminbi financing; and that in the
event of default, forex guarantees or collateral are to be realised at the exchange
rate prevailing on the date of default.
Special loan accounts. The 1996 forex reforms require the establishment of
special accounts to service foreign loans or forex loans from domestic financial


78 China

institutions. The rules reiterate the need for strict control over foreign borrowing
and call for the establishment of “debt-repayment funds”. Should forex be
insufficient to service these loans, the debtors have recourse to the designated
forex banks to convert renminbi for that purpose. But the banks need proof that
the foreign debt has been registered, and the payment of principal and interest
in renminbi must be approved. The account-holding bank must use a
specialised account for repayment of loans when the period for repayment
specified in the agreement has expired.
Loan guarantees. Measures for Control of the Provision of Security to Foreign
Parties by Organisations within the People’s Republic of China, implemented in
October 1996, stipulate that security provided to foreign-invested financial
institutions inside the country is deemed security to foreign parties. The 1996
measures apply to domestic banks (but not foreign-invested banks) and to
domestic enterprises and FIEs that are legal entities and that have the ability
to repay debts in place of debtors. The measures require that, after the provision
of security to a foreign party, the security provider must register with the
local SAFE.
The government itself does not guarantee commercial loans, and it has
restricted the number of financial institutions able to issue guarantees to foreign
lenders. Similarly, provincial governments and authorities are not permitted to
guarantee loan facilities. Any such guarantees given—verbally or in writing—are
illegal and may not be honoured.
No restrictions apply to FIEs on foreign-loan payments. But such transactions
must go through a venture’s forex account designated for this purpose. FIEs
have access to the designated forex banks for converting renminbi.

Remittance of royalties and The Ministry of Commerce, or one of its regional counterparts, must approve
fees all licensing agreements. For joint ventures in which the foreign parent is
providing technology, approval comes along with that for the Chinese
investment. The 1996 forex reforms provide that once the authorities have
approved a licensing agreement, payments or fees arising from it may be
remitted without prior approval of the State Administration of Foreign
Exchange. Foreign exchange (forex) may be drawn either from the basic forex
account or by conversion of renminbi at designated forex banks on the strength
of supporting documentation.

Restrictions on trade-related The 1996 foreign-exchange (forex) reforms, amended in October 2002,
payments specifically authorise foreign-invested enterprises (FIEs) to retain partial
proceeds from exports (or other earnings) in a basic forex account, up to a
specified maximum, with one of the designated forex banks. However, the FIE
must sell off all export receipts that exceed the limit in the local forex market
within five days. FIEs requiring more forex for current-account needs, such as
paying for goods and services, may obtain funds from the designated banks
upon presentation of supporting documentation.
Regulations in October 2002 permitted domestic companies, which
traditionally could not retain forex earnings, to hold a forex account for trade-
related purposes. A State Administration of Foreign Exchange (SAFE) circular,


China 61

Recommandé

Recommandé

Contenu connexe

Tendances

Tendances (20)

Similaire à China 61

Similaire à China 61 (20)

China 61