Doing Business in China

To develop is the first priority.
Deng Xiaoping

The Fundamental Principles of Economic Laws and Regulations Related to Overseas Investment

1. The Principle of Respect for State Sovereignty
   First of all, Article 18 of the Constitution of the People's Republic of China states that “All foreign enterprises, other foreign economic organizations as well as Chinese-foreign joint ventures within the Chinese territory shall abide by the law of the People's Republic of China. Their lawful rights and interests are protected by the law of the People's Republic of China.” This article maintains the principle of respect for state sovereignty, and it is embodied in all economic laws and regulations related to foreign investment. It is an important fundamental principle for China's economic legislation and for the administration of justice related to foreign investment, and an important fundamental principle that China must follow in conducting its economic and technical cooperation with foreign countries. For example, there are stipulations in explicit terms in many economic laws and regulations related to foreign investment. Article 5 of the Regulations for the Implementation of the Law of the People's Republic of China on Chinese-Foreign Equity Joint Ventures states that "Application for the establishment of a joint venture shall not be approved if the proposed joint venture would involve any of the following circumstances: (1) Injury to China's sovereignty; (2) Violation of China's laws; “The Regulations of the People's Republic of China on Exploitation of Offshore Petroleum Resources in Cooperation with Foreign are formulated with a view to promote enterprises state: “These Regulations the development of the national economy, expanding international economic and technological cooperation and, under the condition that the sovereignty and economic interests of the nation are maintained, permitting foreign enterprises to cooperate with Chinese enterprises in exploiting offshore petroleum resources.” The Regulations and the Provisions on the Control over Data in the Exploitation of shore Petroleum Resources in Cooperation “with Foreign Enterprises contain specific stipulations for measures to safeguard China's sovereignty in the joint exploitation of off-shore petroleum resources. Moreover, some economic laws and regulations formulated by special economic zones and economic and technological development zones also contain such clauses in explicit terms. For example, Article 2 of the Regulations of Guangdong Province on the Special Economic Zones states:” The enterprises and individuals in the special economic zones must abide by the laws, decrees and related provisions of the People's Republic of China. "
   
2. The Principle of Equality and Mutual Benefit
   Another important fundamental principle for the economic laws related to foreign investment is the principle of equality and mutual benefit. This is also a fundamental principle of international public law, international private law and international economic law.
   
   The Constitution of the People's Republic of China reiterates in its preamble: "China constantly carries out an independent foreign policy, and adheres to the five principles of mutual respect for sovereignty and territorial integrity, mutual non-aggression, non-interference in each other's internal affairs, equality and mutual benefit, and peaceful co-existence in developing diplomatic relations and economic cultural exchanges with other countries.”
   
   The principle of equality and mutual benefit has the implications of each treating the other as equals and for mutual benefit. This means that in foreign economic relations, the two countries or two parties involved are equals before the law, and the interests should be mutually beneficial. The principle of equality and mutual benefit requires the natural person, the legal person and other economic organizations to have equal positions, to enjoy rights and obligations on a reciprocal basis and to hold consultations on a voluntary and equal basis in their economic intercourses. Both parties should benefit from the economic intercourses instead of one imposing their will on the other, or doing harm to others to benefit themselves.
   
   The principle of equality and mutual benefit is explicitly stated in the Chinese economic laws and regulations related to foreign investment. For example, it is explicitly stated in Article 1 of the Law of the People's Republic of China on Chinese-Foreign Joint Ventures: “... in accordance with the principle of equality and mutual benefit.” It is also stated in Article 3 of the Law of the People's Republic of China on Economic Contracts Involving Foreign Interests: "The signing of a contract shall be based on the principle of equality and mutual benefit and the principle of reaching unanimity through consultation.” In addition, some local economic laws and regulation also contain such explicit provisions, and the principle of equality and mutual benefit is fully embodied in the specific provisions.
   
3. The Principle of Respect for International Treaties
   The principle of abiding by international treaties is a fundamental principle in international intercourse. It is also a fundamental principle in the Chinese economic laws involving foreign interests.
   
   It is explicitly stated in many important Chinese laws that if an international treaty that the People's Republic of China concludes or accedes to be different from its domestic laws, it shall apply the international law, except for the articles and clauses for which the People's Republic of China declares its reservations. This is stated in explicit terms in Article 142 of the General Rules of the Civil Law of the People's Republic of China, Article 238 of the Civil Procedure Law of the People's Republic of China, Article 72 of the Administrative Procedure Law of the People's Republic of China, and Article 6 of the Law of the People's Republic of China on Economic Contracts Involving Foreign Interests.
   
4. The Principle of Following International Practice
   In economic relations with foreign countries or enterprises, such as in the import and export trade, the import of foreign funds, the import of foreign technology, processing and assembling goods with supplied raw and processed materials or components, compensatory trade, transportation of goods to and from abroad and insurance for such goods, correspondence has to be made with and credit has to be established for the international market. Therefore, it is impossible not to adopt the common international practice in economic activities involving foreign interests.
   
   The principle of following international practice is clearly reflected in Chinese economic laws and regulations involving foreign interests. For example, China's foreign trade and its transportation and insurance of import and export goods both follow international practice. The provisions of the Law of the People's Republic of China on Economic Contracts Involving Foreign Interests all embody the principle of following international practice. For example, Article 5 on the application of laws states: “A party to the contract may choose the laws applicable to the settlement of disputes over the contract, and it may also apply the laws of the country with which the contract has the closest ties.” In other words, except for the compulsory clauses in the laws, the parties to the contract may reach an agreement that the contract contains a clause on the application of laws and that they will choose the laws of the countries that they deem can most appropriately help settle their disputes over the contract. If the parties have no choice, they may apply the laws of the place where the contract is concluded, the laws of the place where the contract is honored, the laws of the place where the business is done, the laws of the place of target, the laws of the place where arbitration is done, or the laws of the place where the court is located. This provision is consistent with the principle of "autonomy of idea" now currently followed in international economic and trade contracts. Article 10 says: "A contract concluded by means of deception or coercion is invalid," and the other articles and clauses on the conclusion and performance of contracts and the responsibilities for violations of contracts are all consistent with current international practices. Moreover, local economic laws and regulations also embody the principle of following international practice.
   
5. Establishment of a Legal System for Economic Affairs
   In order to create a congenial investment environment and to encourage overseas firms to invest in China, China has gradually set up a relatively complete legal system. In 1979, the National People's Congress issued The Law of the People's Republic of China on Chinese-Foreign Equity Joint Ventures. Over the following 20-odd years, the Chinese government has promulgated and issued a series of laws and statutes concerning the establishment, operation, termination and liquidation of foreign-invested enterprises. The main laws and regulations include the three basic laws -- The Law of the People's Republic of China on Chinese-Foreign Equity Joint Ventures, The Law of the People's Republic of China on Chinese-Foreign Contractual Joint Ventures, and The Law of the People's Republic of China on Wholly Foreign-Owned Enterprises; detailed rules for the implementation of the three basic laws – The Company Law of the People's Republic of China; Th4 Income Tax Law of the People's Republic of China for Enterprises with Foreign Investment and Foreign Enterprises; Interim Provisions for Guiding Foreign Investment; Industrial Catalogue for Foreign Investment; Interim Provisions Concerning the Investment within China of Foreign-Invested Enterprises, Provisions Regarding the Merger and Separation of Foreign-Invested Enterprises, and Liquidation Measures for Enterprises with Foreign Investment. These provide legal bases from which to guarantee the independent operating rights of foreign-funded enterprises and to protect the legitimate rights and interest of both domestic and overseas investors.
   
   Currently, the Chinese government is re-examining its existing laws and statutes in accordance with the framework of the WTO. It has abolished certain obsolete laws and regulations, and will gradually revise the laws and regulations that are incompatible with the rules of the WTO. For instance, in 2000, China revised The Law of the People's Republic of China on Chinese-Foreign Contractual Joint Ventures and the Law of the People's Republic of China on Wholly Foreign-Owned Enterprises, and discarded certain restrictions regarding the balance of foreign exchange accounts and the localization of supplies. In 2001, The Law of the People's Republic of China on Chinese-Foreign Equity Joint Ventures was also revised.
   
6. Countries with which China Has Signed Investment Protection Agreements and Agreements on Avoiding Dual Taxation
   China has signed investment protection agreements with 41 countries since 1982. These are Sweden, Romania, Germany, France, the Belgium Luxemburg Economic Union, Finland, Norway, Italy, Thailand, Denmark, the Netherlands, Austria, Singapore, Kuwait, Sri Lanka, Britain, Switzerland, Poland, Australia, New Zealand, Pakistan, Bulgaria, Ghana, the former Soviet Union, Turkey, Papua New Guinea, Hungary, Mongolia, the former Czechoslovakia, Portugal, Spain, Uzbekistan, Bolivia, Kirghiz, Greece, Armenia, the Philippines, Kazakhstan and the Republic of Korea.
   
   Starting in January 1981, China began to have talks with foreign countries on matters of taxation, and has signed formal agreements on avoiding dual taxation with 34 countries. These are Japan, the United States, France, Britain, Belgium, Germany, Malaysia, Norway, Denmark, Singapore, Finland, Canada, Sweden, New Zealand, Thailand, Italy, the Netherlands, the former Czechoslovakia, Poland, Australia, Yugoslavia, Bulgaria, Pakistan, Kuwait, and Switzerland, the former Soviet Union, Cyprus, Spain, Romania, Austria, Brazil, Mongolia, and Hungary.

The Demographic Environment

China is one of the largest countries in land size in the world with its 9.6 million square kilometers and is the largest country in the world in terms of population. China's population totals 1.28 billion people, with 70% of them living in the rural areas. There are huge differences between the coastal and the rural areas in terms of development and income. The population density al- so varies from province to province, which undoubtedly also contributes to the choice of localities for investment (please refer to the following list from the official Chinese 2002 population census).

Region Population (million)
Beijing Municipality 11.08
Tianjin Municipality 10.01
Hebei Province 67.44
Shanxi Province 32.97
Inner Mongolia Autonomous Region 23.76
Liaoning Province 42.38
Jilin Province 27.28
Heilongjiang Province 36.89
Shanghai Municipality 16.74
Jiangsu Province 74.38
Zhejiang Province 46.77
Anhui Province 59.86
Fujian Province (excluding the population in 34.71
Jinmen and Mazu and a few other islands)
Jiangxi Province 41.40
Shandong Province 90.79
Henan Province 92.56
Hubei Province 60.28
Hunan Province 64.40
Guangdong Province 86.42
Guangxi Zhuang Autonomous Region 44.89
Hainan Province 7.87
Chongqing Municipality 30.90
Sichuan Province 83.29
Guizhou Province 35.25
Yunnan Province 42.88
Tibet Autonomous Region 2.62
Shaanxi Province 36.05
Gansu Province 25.62
Qinghai Province 5.18
Ningxia Hui Autonomous Region 5.62
Xinjiang Uygur Autonomous Region 19.25
Hongkong Special Administrative Region 6.78
Macao Special Administrative Region 0.44
Taiwan Province and Jinmen, Mazu and 22.28
a few other islands of Fujian Province
Servicemen 2.50

As regards the natural population growth rate, it should be less than 0.9 %; and total population should be no more than 1.33 billion by the end of 2005. The chapter -- Studying in China -- provides lots of facts about the education of the population.

The Economic Environment

The strategic objective for the economic development of China was put forward in 1987. The first step was to double the 1980 GNP (enough food and clothing already attained, l) 3 the end of the 1980s). The second step was to quadruple the 1980 GNP (planned for the end of the century, but already achieved, by the end of 1995, ahead of time). The third step was to increase the per-capita GNP to the level of medium-developed countries. For the first five years of the 21st century, China is to achieve the following goals: average annual economic growth rate of about 7%; GDP of about RMB 12,500 billion by 2005, at the prices of the year 2000; GDP per capita RMB 9,400; employment increase by 40 million; surplus rural laborers to be transferred 40 million; the registered urban unemployment rate controlled at about 5%; price levels as a whole basically stable; and international revenue and expenditure to be basically balanced.

The following environmental goals should also be met by the year of 2005. Forest coverage should be raised to 18.2%; urban green rate increased to 35%; total amount of major urban and rural pollutants discharged reduced by 10% compared with 2000; and significant achievements to be made in the saving and protection of natural resources.

Other social targets should also be reached. Average annual growth rate of the disposable income per urban resident should be 5%; that of the net income per rural resident about 5%; floor space of housing per urban resident increased to 22 square meters; 40% of the total households in China to have cable TV; medical & health services in both urban & rural areas to be further improved; and people's cultural life to be richer and more varied.

Through China's reform and opening to the outside world, a special economic environment has been built. There are special economic zones, coastal open cities, new- and high-tech industrial development zones and free trade zones. All these places have got special conditions and policies for doing business. We will have some discussions about the above-mentioned topics in the following investment sections.

The Political Environment

The political environment of China has a lot of influence on the economy, and foreign investors should understand how these are connected. First of all, stability is the foundation for economic development. Second, reform is the driving force of the economy. Third, to develop is the first priority for the country. The goal is to improve the living standards of the people. But these points have to be balanced, integrated and mutually promoting.

In China, each province, city, town, or county has a People's Congress and an executive body. It is within their authority to adopt issue and decide on plans for the economic and social welfare of their districts. Through this net- work the government is able to put its policies into action and carries out administration. Doing business in China is very much determined by government policies and before entering the Chinese market; it is necessary to establish relationships. Following its entry into the WTO, China has eased restrictions on foreign investment and improved the transparency of the investment policies.

The Investment Environment

The open-door policy and economic restructuring of China began in 1978. The strategy of the then central government under Deng Xiaoping was to establish the Special Economic Zones (SEZs) with special preferential policies as a test ground in order to serve as a model for economic development for the whole country. Therefore, China began by opening the coastal areas first as the priority and then started to open the hinterland step by step, aiming at unveiling a general strategic pattern of gradual progress and coordinated development by making full use of the advantages of the more-developed economic and geographical position in the eastern coastal region, and also the resources in the central and western regions.

1. 1) The Special Economic Zones
   The first step or measure of the open-door policy was to develop the eastern region, that is, the eastern coastal belt of China. In accordance with this strategy, the four SEZs of Shenzhen, Zhuhai, Shantou and Xiamen were established one after another in 1980. In 1988, Hainan Island became a province and also China's largest SEZ. The special economic zones are the first level of opening China to the outside world. At present, Hong Kong Special Administrative Region and Macao Special Administrative Region should be included in the picture as a significant force promoting the economic development of these SEZs.
   
2. The Coastal Open Cities
   In May, 1984, the State Council decided to open 14 more coastal port cities: Dalian, Qinhuangdao, Tianjin, Yantai, Qingdao, Lianyungang, Nan tong, Shanghai, Ningbo, Wenzhou, Fuzhou, Guangzhou, Zhanjiang and Beihai. Towards the end of 1987, another group of cities were opened, and economic and technological development zones were gradually established in these cities where conditions permitted. By 1996, 32 economic and technological development zones had been set up with preferential policies to attract overseas funds, resulting in the introduction of new technologies and new products, and of new industries. The opening of the coastal cities was the second level of China's opening to the outside world.
   
3. The Coastal Economic Open Zones and the Hinterland
   In January 1985, the State Council decided to open the Yangtze River Delta, the Pearl River Delta and the Southern Fujian Triangle as coastal economic open zones. After 1987, the Shandong Peninsula, the Liaodong Peninsula and the Bohai Bay area were listed as the coastal economic open zones. This was the third level of the opening to the outside world.
   
   In this manner, the coastal open zones consisting of the special economic zones, economic and technological development zones and coastal economic open zones were greatly expanded. The number of cities and counties concerned rises from the original 144 to 288, and their combined area rises from 150,000 square kilometers to 320,000 square kilometers, and their population grew from 9 million to 160 million, which has linked all the concerned cities and zones along the coast together into the eastern coastal belt, with comparatively rich human resources, a more developed industry and easy transport system. Situated between the domestic market and the international market, the eastern belt, opened to and ready {or overseas investment, has become the springboard for China's development of its trade, economic relations and economic exchanges, both international and domestic. It also plays a key role in linking the international market and the wide areas of the Chinese hinterland, and the western areas.
   
4. The New and High Technology Development Zones
   The aim of the Chinese government is to industrialize and commercialize the research achievements, and to introduce new and high technologies, and to turn the benefits of the new and high technologies into a competitive advantage. Therefore, the coastal open cities, in accordance with the policies of the state, established 21 national new and high technology development zones with the approval of the State Science and Technology Commission in 1991, following the founding of the new technology and industrial development experimental zone in Beijing in 1988, with the approval of the State Council. Furthermore, 13 free trade zones were established along the coastal municipalities and cities between 1991 and 1993. The free trade zones, operating according to international practice, are specially designated zones adopting more open and flexible measures than the special economic zones.
   
   With over 300 municipalities, cities and counties over an area of half a million square kilometers along the coast, along the Yangtze River and along the borders with a population of over 300 millions, a new pattern of opening China to the outside world has taken shape. With China entering the WTO, the investment environment will surely further improve.

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