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China Investment Environment


For foreign investors, many problems exist in the Chinese investment environment. However, the government is making efforts to address these problems in order to encourage more foreign investment.

Foreign Economic Policies

China began its economic reforms and open-door policy in December 1978. The aim of China's macro-economic policy is to maintain a steady economic growth, to avoid big economic fluctuation and to enhance the people's living standards. The economic growth rate reached 10.2% in 1995 and 9.7% in 1996. The Chinese economic system is on its way from a centrally planning system to a market oriented one.

Attracting Foreign Investment

During the past twenty years, Chinese government has made great achievements in attracting foreign investments and developing an export-oriented economy. By the end of 1996, 230, 000 FIEs had been established with a total of US$177.1 billion foreign direct investment. Chinese government have promulgated various favorable policies for foreign investment and assigned several special regions.

The favorable policies mainly cover the Hi-tech industry, agriculture, forestry, telecommunication, energy, export-oriented sectors.

The special regions include five Special Economic Zones (SEZ), i.e., Shenzhen, Zhuhai, Xiamen, Shantou and Hainan (Shanghai's Pudong Area isn't an SEZ, but is treated in the same way), 14 coastal cities (Beijing city is treated as a coastal city) and 52 state-level hi-tech development zones or hi-tech bases.

These special regions can provide overseas investors a more advantageous environment in advanced infrastructures, land and qualified human resources.

Promoting Foreign Trade

For foreign trade, the total amount of import and export for the year of 1996 was US$289 billion, the 11th in the world. Although China isn't a member of the World Trade Organization (WTO) now, China's entry into WTO is inevitable. The Chinese government has been actively carrying out necessary steps to promote its foreign trade, including calling off import adjusting tax and export subsidy, cutting tariffs rates. It also promises to reduce the number of goods that need import permit licenses and abolish import quota in the future.

Financial Institutions

The central bank of China is the People's Bank of China (PBOC) that is in charge of approving, regulating and supervising domestic and foreign financial institutions. Other government authorities also play certain roles in the financial system. Those authorities include the Ministry of Finance (MOF) and the State Administration for Exchange Control (SAEC). The latter one is a bureau under PBOC and is in charge of foreign exchange control.

The financial institutions in China can be divided into several groups according to their natures as follows:
1. Policy Banks, such as State Development Bank, China Agriculture Development Bank, etc.
2. Commercial Banks
a. State-owned Commercial Banks (also called Specialized Banks), such as Industrial and Commercial Bank of China, Agricultural Bank of China, Bank of China, China Construction Bank;
b. Regional Bank and Bank with Joint Share, such as Communication Bank, EverBright Bank of China, CITIC Industrial Bank;
c. Co-operative Commercial Bank, such as Urban Cooperate banks, Rural Cooperate banks, etc;
3. Trust and Investment Companies
4. Securities Companies
5. Finance Companies
6. Leasing Companies
7. Insurance Companies
8. Mutual Funds
9. Sino-foreign Financial Institution and Foreign Financial Institutions

Foreign financial institutions may establish representative offices, branches, subsidiaries and joint ventures in approved areas upon the approval of PBOC. The activities of foreign banks are supervised by PBOC and restricted in foreign currency deposit-taking and lending. Foreign banks should obtain special approval to engage in RMB business.

Foreign Exchange Control

The RMB is not a freely convertible currency now, and the foreign exchange rate system is a controlled floating one on the basis of market demand by the State Administration for Exchange Control (SAEC). On December 1, 1996, China announced to accept Article 8 of the International Monetary Funds, that is, RMB can be freely converted under current account.

The major policies and regulations of foreign exchange control on FIEs are as follows:

1. Applying For FIE's Exchange Control Register
Within 30 days from the issuance of business license, FIEs should apply for an Exchange Control Register from the local administration on foreign exchange control.

2. Opening a Foreign Currency Account
FIEs should choose a bank that has the right to undertake foreign currency operations to open their foreign currency account.

3. The government will mainly control the inflow and outflow of FIEs' foreign currency under current account, the use and settlement of foreign currencies under capital account, its deposit and loans denominated in foreign currencies.

4. Annual Foreign Exchange Audit
FIEs should entrust qualified accounting firms (approved by the Administration of Foreign Exchange Control) to conduct annual foreign exchange audit on their use of foreign exchange and to issue audit reports. FIEs should then present the audit reports to local Administrations on Exchange Control to renew their Exchange Control Registers.

5. Favorable Treatments To FIEs
Any foreign investor of an enterprise with foreign investment who reinvests his share of profit directly into the enterprise or uses the profit as capital investments to establish other FIEs can be refunded part of the income tax already paid on the reinvested amount.

Security Markets

China has 2 formal security exchanges, one is Shanghai Security Exchange, the other is Shenzhen Security Exchange. All the listing and trading of securities are operated in those 2 security exchanges.

Initial Public Offering (IPO) in domestic market has 2 forms, one is in A shares, which is denominated in RMB and bought by domestic investors, the other is in B shares, which is denominated in foreign currencies for foreign investors. For IPOs in foreign markets, there are H shares in Hong Kong Security Exchange, N shares in New York Security Exchange and S shares in Singapore Security Exchange.

The most important institutions related to securities are as follows:

* Securities Committee of State Council (SCSC), the highest authority in charge of securities regulation to formulate such policies as the number of enterprises allowed to list and their IPO volumes allowed.

* Chinese Securities Regulatory Commission (CSRC), the executive body of SCSC in charge of drawing regulations and guidelines.

* Security Transaction Executing Commission, the consulting agency for CSRC.

Insurance Market

The Chinese insurance market is now opened not only to domestic companies but also to foreign companies. There are several national-wide insurance companies as well as regional ones. Types of those insurance companies include state-owned, joint stocks and sino-overseas joint ventures.

Labor Management

The major policies and regulations on labor management are as follows:

1. Labor Contract
FIEs must comply with the Labor Law of the People's Republic of China and regulations on the implementation of labor contract system of local governments. The legal representative of the company should sign labor contracts with employees on the day of their employment.

2. Employing and Dismissing

An FIE can self determine its institutional and personnel system, the time, scale, condition, and patterns of its recruitment. However, child labor is prohibited and women are protected from being assigned to do work specified by the State as unsuitable for them.

An FIE can dismiss those who remain unqualified after probation, those who break the regulations of the enterprise, or those convicted of crimes. If the dismissing of the employees is of FIE's reason, the FIE should notify the employees 30 days in advance and pay the dismissed employees two months' salary as compensation.

3. Labor Protection

Work time, holidays, and leave
The work time should not exceed 40 hours per week. An FIE is required to arrange holiday leave for employees in public holidays.

Labor safety and hygiene
FIEs should strictly observe the regulations and standards of labor safety and hygiene in China. Production equipment and installations are required to be accompanied with safety and hygiene facilities. For new projects, expansions and renovations, the safety and hygiene facilities must be designed, constructed, and put into operation simultaneously with the principal parts of the projects.

4. Labor Insurance, Welfare and Salary System
It is stipulated by the government that FIEs are required to appropriate for their employees welfare funds that are calculated on a certain percentage of the employees' total salaries, and to pay medical insurance, unemployment funds and pension for their employees.

Salaries for foreign and domestic employees in an FIE shall be settled and paid according to the labor contract. The salary standard for Chinese employees should not be lower than the lowest living standards set by local governments.

5. Employment of Foreigners in PRC
Under the regulations on employment of foreigners in China, a license system is used to administer the employment of foreigners who come to work in China. The labor department of local government is responsible for the administration of foreigners' employment in China. Foreign employees who work in FIEs must pay individual income tax.


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