Establishing a Presence in China by Acquiring a local listed company

Today with this entry I return to my favorite topic, namely M&A. Having examined all the forms of investment at the disposal of the foreign investor to establish a presence in China, it is now time to spend some more words on an alternative way to conquer a portion of the Chinese market.

Foreign companies wishing to enter the Chinese market can opt for M&A as you already know. No doubt, the M&A approach and the takeover of a listed company will shorten the time needed for their expansion in this territory. However, to make M&A a success and to structure such a transaction, enterprises should have a large amount of funds at their disposal (if the transaction is not structured as a share swap). Second, it is necessary to conduct an in-depth studies and researches on the local companies to be acquired. Third, it is important, as stressed many times in my entries (for example http://blawg.lehmanlaw.com/wordpress/?p=1660) to have a strong understanding of local ways of doing business and an open-minded management to make sure the post-merger integration process will go smoothly, in order not to waste resources and to generate the synergies needed to operate in a profitable way the newly acquired entity.

Along with other laws and regulations already mentioned in other entries (http://blawg.lehmanlaw.com/wordpress/?p=1770) the Measures for regulating Takeovers of Listed Companies (i.e. the so called “Takeovers Code,” available at: http://www.csrc.gov.cn/pub/csrc_en/laws/overRule/Decrees/200910/t20091028_166902.htm) sets up the most comprehensive legal framework for takeovers of Chinese-listed companies. However, in order to acquire a Chinese company through buying its shares, it is not only necessary to fully understand the legal panorama regulating M&As in China, but also all the elements that compose the Chinese bourses. Some elements were already given (http://blawg.lehmanlaw.com/wordpress/?p=1660) but we are going to stress them again.

The Takeovers Code, which was emended in 2012 (http://www.csrc.gov.cn/pub/csrc_en/laws/overRule/Decrees/201203/t20120328_207828.htm) represents the continued efforts of the Chinese government to develop a modernized regulatory system for takeovers. The ongoing revisions are to suit and facilitate the new environment whereby the national economy is facing strategic restructuring. In fact, the Chinese government has viewed M&A activities as a key driver of the accelerated privatization process to enable State-controlled companies to better compete with international entities operating in China. It is worth to note that, until China’s accession to the WTO in 2001, the Middle Kingdom appeared to encourage foreigners to establish Joint Ventures or set up WFOEs while explicitly discouraging M&A (at that time there was not a precise legal framework). Recently China has made explicit moves and drafted several regulations and new Laws to attract FDIs (www. last law blog) and to foster and boost M&A activities, giving particular emphasis to SOEs and state shares in listed companies. It is evident that its purpose is to shunt State-owned enterprises into the private sector, retaining only a tiny core that the Chinese government deems crucial for national security.

Depending on the share classification, foreign investors may acquire shares through a negotiated acquisition, a private placement, an open-market acquisition or a block trade transaction. As it will be discussed later on (in other entries), different rules and restrictions apply to each class of shares, and each class has different ownership and transfer procedures. Valuations (in particular by SASAC if State-owned assets or SOEs are involved) are required for most negotiated acquisitions and statutory lockups are applicable to many types of acquisition. The CSRC (China Securities Regulatory Commission), the already mentioned SASAC and MofCOM may be heavily involved in these transactions.

It must be noted that the CSRC is the securities regulatory authority under the State Council and is charged with implementing centralized and unified regulation of China’s securities market, (in this sense the Securities Law, Article 7). Therefore it has jurisdiction and powers over the takeover of listed companies, in this sense the Takeover Code, Article 10. As a technocrat organ, it is assigned a virtually exclusive dispute resolution role with respect to takeovers. According to Article 10 of the Takeover Code, the CSRC establishes a special internal committee known as the “takeover committee” composed of professionals and relevant experts in the M&A area whose function is to provide preliminary opinions upon reviewing the takeover application.

This was only an introduction of this theme. In the next entry I will examine more in detail this topic adding some more interesting detail.

Cristiano Rizzi

(I did not mentioned before, however, some of my entries are extracted from my work titled M&A and Takeovers in China, so if some of you is interested in having the complete work, please visit: http://www.kluwerlaw.com/Catalogue/titleinfo.htm?ProdID=9041140484).

Published by admin on May 24th, 2013 tagged Uncategorized | Comment now »

Capital markets in China and the role of the so called “Qualified Foreign Institutional Investors”

Foreign investors are granted direct access to China’s capital markets through the so called QFII program, which covers A shares and bonds, and the Renminbi Qualified Foreign Institutional Investors program. The RQFII program enables overseas units of Chinese asset-management companies to invest in yuan-denominated bonds. Substantially the QFII scheme represents China efforts to allow, on a selective basis, global institutional investors to invest in its renminbi capital markets. Early this year (Jun. 22) president of the China Securities Regulatory Commission (CSRC) Guo Shuqing pointed out at the meeting the National Securities and Futures Regulatory Working Conference held in Beijing, that China’s capital market will develop on a more solid basis as it is looking forward to valuable strategic opportunities. Guo said that the CSRC will persist in completely balancing the investing and financing functions of the capital market and closely combining deregulation with supervision enhancement. The CSRC will strive to build a more mature and stronger capital market, so as to let finance directly serve the overall economy in a wider range and higher level (http://www.morningwhistle.com/html/2013/FinanceMarkets_0123/216812.html).

One of the goal of the CSRC is to enhancing the fundamental function of securities firms, through quicker development all types of professional securities-selling institutions, and further improving QDII system, continuing to enlarge the quota of QFII and RQFII. It seems that Chinese capital markets not only are growing of importance, but they are also becoming the new frontier for capital investments. So it is necessary to explain how to invest in the Chinese stock exchanges. In fact a foreign (Institutional) investor needs to become a QFII (i.e. Qualified Foreign Institutional Investors) before to allocate its resources in the Chinese capital markets.

Definition of Qualified Foreign Institutional Investors:

Qualified Foreign Institutional Investors as introduced above are the entities approved by the China Securities Regulatory Commission (i.e. CSRC http://www.csrc.gov.cn/pub/csrc_en/ ) to buy and sell RMB-denominated “A” shares in China’s mainland stock exchanges (Shanghai and Shenzhen).

The CSRC allocates licenses, while the State Administration of Foreign Exchange (i.e. SAFE) decides the size of each investment quota. The program become effective in December 2002 and marked the first time that foreign investors could trade domestic Chinese securities (though indirectly). More specifically a QFII can trade: RMB denominated “A” shares, Treasury, corporate, and convertible bonds, warrants, Securities mutual funds, Initial public offerings, other CSRC-approved financial products. However, limits also exist on the nature of these investments: for example in any single (listed) company, the total combined shares held by foreigner institutions cannot exceed 30% of the total outstanding shares of that company, and an individual QFII can hold no more than 10% of those total outstanding shares. Any foreign asset management company, security house, commercial bank, sovereign fund, insurance company, or pension fund that meets minimum CSRC requirements is eligible to become a QFII. Applicants must obtain license approval from the CSRC and investment quota from SAFE. Foreign Institutions must also meet both qualitative and quantitative requirements to be eligible for QFII status which will be granted, in case, by the CSRC. For example, these candidates must have sound financial and credit status and have received no sanction from regulatory agencies in the past three years. In an effort to encourage long-term investors, the CSRC has indicated preference for asset management Institution. Though all above mentioned Institutions are eligible, asset management institutions are often considered highly in the application process.

It is worth noting that six overseas institutions were allowed to become Qualified Foreign Institutional Investors in December 2012, bringing the total number of QFII in China to 207, according to a list released by the China Securities Regulatory Commission on January 15, 2013.

In 2012, the CSRC approved the applications of 72 foreign institutional investors to become QFII in China, and as many as eight QFII applications worth a total of $1.4 billion were approved in December 2012, and as many as 169 QFII were given a total investment quota of $37.44 billion by the end of 2012 (since QFII quotas were launched in 2003), according to data of the State Administration of Foreign Exchange. In 2012 alone, China awarded some $16 billion in quotas for QFII.  As for the RQFII scheme, 24 institutions – including 12 fund companies and 12 securities firms – held a combined quota of 67 billion yuan at the end of last year, according to the SAFE (http://www.safe.gov.cn/).

According to Mr. Guo Shuqing, chairman of the CSRC, early this year i.e. on Monday 14, January 2013 at the Asia Financial Forum in Hong Kong, affirmed that “China can increase by 9 or 10 times the current level of investment quotas for Renminbi Qualified Foreign Institutional Investment, or RQFII, and QFII.”

The government is considering further expanding the schemes to allow all of the institutional investors who meet qualification requirements to take part in the programs, Guo explained. Since first launched in December 2011, China has already twice lifted the quota for the RQFII scheme, which allows yuan funds raised in Hong Kong to be invested in the mainland securities market, with the current ceiling on the program now set at 270 billion yuan ($43.42 billion). Meanwhile, the QFII quota was widened to $80 billion in April 2012, up from $30 billion. Mr. Guo had also said in November (2012) that the upper limit on the QFII scheme was reached.

Prospective of these new forms of financial investments in China

China is one of the world´s leading economic powers today, and confidence in the world’s second-largest economy is still mounting as we can witness from the ever increasing foreign direct investments (FDI), and especially a more interest towards Chinese capital markets. It is foreseeable and predicted China soon will become the new frontier for capital investments. In fact, recently China is bolstering the strength of its capital markets in a move to attract more foreign investments and encourage M&A activity, which serves also to the restructuring of listed companies. Chinese financial centers are among the most competitive financial centers worldwide and their importance it is expected to growth in the near future.

It is also worth stressing that Shanghai is making moves to enhance its mergers and acquisitions market with the aim to make itself a global financial hub by 2020 (an ambition which was approved by the state Council in March 2009). Just to confirm the importance China is giving to its financial markets it is worth reporting that the Shanghai Stock Exchange will implement “round-the-clock trading” by 2020. No Stock Exchange in the world has yet implemented 24-hour trading. Furthermore, the local government is considering setting up a China Mergers and Acquisitions Association in Shanghai. This represents another confirmation of the trend which at present China is experiencing.

Cristiano Rizzi

Published by admin on May 23rd, 2013 tagged Uncategorized | Comment now »

New Visa Laws For China

As reported in an article on the Library of Congress website (http://www.loc.gov/lawweb/), on May 20, 2013, entitled, “China, New Visa System Proposed, Public Opinion Being Solicited”, author Laney Zhang reports:

“On May 3, 2013, China’s State Council published the Regulations on the Administration of the Entry and Exit of Aliens (Draft for Comments) (hereinafter Draft Regulations) online, in order to solicit public opinions on the document. Once the Draft Regulations take effect, a new visa system will replace the existing one regulated by the Rules for the Implementation of the Law on Administration of the Entry and Exit of Aliens (Implementation Rules). (Text of the Draft Regulations [in Chinese], Legislative Affairs Office of the State Council website (May 3, 2013); comments from the public may be submitted until June 3, 2013, online at http://www.chinalaw.gov.cn, by mail, or by email to wgrrjcj@chinalaw.gov.cn.)

Legislative Background

Currently, the primary legislation regulating entry and stay of foreigners in China is the Law on the Administration of the Entry and Exit of Aliens passed in 1985 (hereinafter Aliens Entry and Exit Law) and its Implementation Rules. The exit and entry of Chinese citizens are governed by the parallel Law on the Administration of the Exit and Entry of Citizens. Previously, on June 30, 2012, the Standing Committee of the National People’s Congress passed a “unified” exit and entry law to regulate the exit and entry of both Chinese citizens and foreigners, the Law on the Administration of Exit and Entry (hereinafter Exit and Entry Law).

When the new Exit and Entry Law takes effect on July 1, 2013, it will replace the previous two laws. Relevant administrative regulations and rules, including those on the visa system and the employment of foreigners, are expected to be updated in accordance with the new law. (Zhonghua Renmin Gongheguo Chujing Rujing Guanli Fa [The Law on the Administration of Exit and Entry of the People's Republic of China] (promulgated on June 30, 2012, effective as of July 1, 2013), The Central People’s Government of the People’s Republic of China website.)

Proposed New Visa System

In general, every foreigner will need a visa to enter China, unless otherwise provided by the Exit and Entry Law. (Exit and Entry Law, art. 15.) There are four categories of visas: diplomatic visas; courtesy visas; service visas (issued to foreigners enteringChina for official service reasons); and ordinary visas. The State Council is authorized by the Exit and Entry Law to formulate detailed rules for ordinary visas. Rules for the issuance of diplomatic, courtesy, and service visas will be formulated by the Ministry of Foreign Affairs. (Id. art. 16.)

Under the new visa system proposed by the Draft Regulations, the number of types of ordinary visas would be increased from the current eight to twelve. The most significant change is that the Draft Regulations would add an R visa in accordance with the Exit and Entry Law. As part of China’s efforts in recent years to attract foreign talent, the new Exit and Entry Law adds “attracting talent” as one of the purposes for an ordinary visa. The new R visa will be issued to foreign professionals who are either highly skilled or whose skill is urgently needed by China. (Draft Regulations, art. 5.)

The F visa, the business visa under the current system, would be issued to non-business visitors under the new system; a separate M visa is added and would be issued to foreigners coming for business and trade purposes. (Id.; see chart below.)

(Draft Regulations, art. 5, & Waiguo Ren Rujing Chujing Guanli Fa Shishi Xize [Implementation Regulations of the Law on the Entry and Exit of Aliens] (approved by the State Council on Dec. 3, 1986, last amended on Apr. 24, 2010), art. 4, The Central People’s Government of the People’s Republic of China website.)

“Long term” normally refers to a stay of over 180 days. A stay no longer than 180 days is considered to be “short term.” (Draft Regulations, art. 55.)

Dependent visas would be limited to close family members of foreigners applying for certain long-term visas according to the Draft Regulations, including the J1, R1, R2, X1, and Z1 visas. A dependent visa would have the same visa letter type as that of the primary applicant, with an additional mark “-Y.” Eligible family members include not only spouses and children under 18 years old, but also parents of an applicant and parents of the applicant’s spouse. (Draft Regulations, art. 5.)”

China’s visa laws need to be reformed in order for them attract the “world class” personnel it needs to take itself up to the next level on the world stage. Making it easier for tourists to get here will be good for China’s economy as well.

Hawkeye in China

Lex Smith

Published by admin on May 23rd, 2013 tagged Uncategorized | Comment now »

China outbound investments

In the past I have examined and explained how the legal framework concerning M&A is organized here in China, but I never mentioned what is the situation of the Chinese outward foreign direct investment in the form of M&A. So, today this entry is dedicated to this important theme.

In fact it is necessary to underline that from 2008 to 2011, Chinese companies’ outward foreign direct investment in (OFDI) the form of M&As of totaled $106.3 billion, representing an annualized growth of 44 percent. This is also because the value of the local currency makes these acquisitions for Chinese cheaper than before. In 2011 alone, OFDI in the form of M&As amounted to $27.2 billion, accounting for 37 percent of the total OFDI that year Mining, manufacturing and power generation are among the most favored sectors for Chinese investors. Chinese outbound mergers and acquisitions activity is expected to increase partly supported by the continued implementation of the country’s 12th Five-Year Plan (2011-15). (The goals of the Chinese government on the different sectors are explained exhaustively here: http://www.china-greentech.com/node/1666).

Despite the fact that the Chinese economy is undergoing a recalibration, as it looks to move away from an export-led growth model toward a model based on domestic consumption, industry practitioners from across the world expect Chinese overseas investments to continue to grow.

In particular, outbound mergers and acquisition deals by Chinese companies are expected to increase because with the economic crisis in the West there is plenty of High-quality assets available at a lower price. In fact Outbound merger  and acquisition transaction by Chinese companies are expected to increase due to the favorable momentum of the Chinese currency also. (On the appreciation of the RMB, please read this entry: http://blawg.lehmanlaw.com/wordpress/?p=1825).

It is a matter of fact that due to the eurozone debt crisis, many high-quality assets have became available in Europe at very competitive valuations, so Chinese companies have been active in large-scale M&A transactions since 2011.

But what are the main sectors interested by this new trend? Well, the main sectors for M&A activity are expected to be energy, engineering machinery  and infrastructure, which require significant funds and policy support. Chinese companies in these sectors are expected to increase their M&A activity. China is home to a number of industries that turn to inorganic growth abroad. Yet, none do so as obviously and as frequently as the energy and resource sectors. In order to satisfy China’s extensive energy needs, energy and resources corporate are active buyers. This is due to a shortfall in domestic production and China’s turn away from coal to stymie pollution. Energy & resources deals accounted for around a third of deal volume and two-thirds of value in 2012. In absolute terms, the sector totaled 48 outbound transactions in 2012, down 8% from 2011. The sector’s value was also somewhat depressed, amounting to $39.6bn, an 11% drop from 2011. This is likely due to many of China’s state-owned oil and gas operations – some of the sector’s most active acquirers posting falling profits in 2012.

The financial services sector too forms an increasingly significant proportion of Chinese outbound M&A, growing its share of value from 11% in 2007 through 2011 to 12% in 2012 and 2013 YTD, although it dropped from 7% to 5% of volume over the same period. A generator of high-value activity is beleaguered financial institutions from developed markets disposing of assets to pay down debt, with opportunistic Chinese buyers eyeing bargains. Meanwhile, North America is considered the most attractive target for potential deals in the technology, media and telecommunications sectors, as well as for real estate acquisitions by Chinese buyers. From 2005 to the third quarter of 2012, around 41 percent of all outbound technology, media and telecom deals were to buy North American targets. Chinese companies are also interested in buying life sciences and healthcare assets in North America and Europe to complement existing products or to allow them to move into new product areas.

But you might ask who are the main actors in these transactions involving Chinese investors? The answer is easy. The main actors are usually State-owned enterprises, this makes the trade value of these deals extremely considerable. M&A deals by Chinese companies linked to their own industry sector are also becoming increasingly popular in China.

It is also necessary to pose the following question: what are the Regional prospectives for a Chinese company to expand their presence abroad?

In this case we have to answer as follows: Although M&A with regional neighbours is important to many Chinese buyers’ expansion plans, far-flung target markets, including Canada, the USA and the UK are among the most active. This may be down to a scarcity of quality targets in the Asia-Pacific, or an effect of the ample opportunities borne by the crisis in Europe and North America, and the cache (both in terms of profits and brand equity) that often comes with acquiring businesses from these countries. Among target markets, Canada stands out for its concentration of high value deals. This is largely due to a handful of large-cap energy and mining transactions, boosting Canada’s overall value to US$20.9bn, despite a meagre 11 deals. Canada’s strong value figures were undoubtedly boosted by the largest-ever acquisition with a Chinese outbound acquirer, when China National Offshore Oil Corporation (CNOOC) – majority owned by the Chinese government – purchased Canada-based Nexen in 2012. This deal follows CNOOC’s takeover of American Unocal Oil Company blocked by the Securities and Exchange Commission in 2005.

It seems that this trend, i.e. investing abroad through M&A, will continue in the future. In fact, it looks unlikely that strong Chinese outbound growth will abate any time soon. There are several encouraging signs that point to continued M&A in the near future. For starters, attitudes toward takeovers by Chinese companies are changing.

Some developed-market countries were initially put off by Chinese acquirers, particularly those under full or partial state ownership. This trend is particularly evident in the energy sector, with oil giants such as Sinopec, China National Offshore Oil Corporation (CNOOC), the CNPC and PetroChina actively pursuing outbound acquisitions.

However, the point is that Chinese investments abroad not only are growing, but they are also becoming more important for foreign businesses.

It seems that the world economy needs Chinese investments to recover completely from the recent crisis, however one fact must be remembered: to grasp the full potential of an investment structured by a Chinese entity, the foreign counterpart should at least try to become more familiar with Chinese culture and the way of doing business in China to be sure to be effective (http://blawg.lehmanlaw.com/wordpress/?p=1671). Remember differences in culture if not completely understood might cause difficulties to the smooth development of all sort of investment and business adventure.

Cristiano Rizzi

Published by admin on May 23rd, 2013 tagged Uncategorized | Comment now »

IP Portfolio in China: Subsidies and incentives and the use of an HK SPV

Yesterday I exposed the content of the new (draft) Regulations of the State Intellectual Property Office (“SIPO”) governing employment inventions (available at :http://chinaipr.com/2012/11/12/new-draft-of-service-inventor-remuneration-regulations-open-for-public-comment/). Today I would like to complete the theme about the importance of building an IP portfolio in China examining some other aspects starting spending a few words on the role of the IP attorney:

• The job of the attorney is to help the client understand how the product can be protected using the various legal mechanisms and assist in crafting the best combination of mechanisms to provide the proper protection.

To develop a proper portfolio, the IP attorney needs to pay attention to the client’s situation and business model. In fact, many times, clients only think in terms of protecting their own products. However, the client needs to be made aware of uses of IP for other than protecting their own products. That is, a patent that covers only the client’s own product can be used only as a defensive weapon (i.e., defending the product from copying).

Now, it is necessary to point out another aspect: investing in IP can be expensive and if the country in which you are doing business does not provide for an adequate protection there is the risk that you cannot profit substantially from your investment and also your IP rights might be unlawfully exploited. However, the situation in China on both this aspects is continuously improving. China has created a reliable framework for IP rights protection and now is also providing and implementing new policies to subsidize IP. (http://www.gov.cn/zwgk/2012-05/31/content_2149501.htm). The Chinese government has realized that investing in this sector can contribute in the boosting of its economy

Foreign and local companies with investments in China are seeking to adapt and adjust their commercial strategies and adopt effective measures to raise revenue and reduce tax burdens to increase profits.

Shifting a corporate group’s research and development center to China may help companies to generate increased intellectual property assets in China, and also allow multinational companies to take advantage of the Chinese government’s various R&D incentives.

Such incentives reflect the Chinese economy’s gradual shift away from manufacturing toward innovation and the development of intellectual know-how.

In the past, due to a lack of qualified technical personnel and weak intellectual property protection, foreign-invested companies might have had doubts about setting up R&D centers in China. From a tax perspective, before the new Corporate Income Tax Law was implemented in 2008, many of the tax incentives the government granted to foreign invested companies were not related to R&D, giving the enterprises little motivation to set up R&D centers in China.

The situation is now significantly different:

• In recent years multinational companies such as Philips, Nestle, Bosch and Shell have set up R&D centers in China.
• The Shanghai administration of commerce says that by July more than 300 foreign-invested R&D centers have been set up in Shanghai, with many others in economic centers such as Beijing, Guangzhou and Chengdu.
• This represents progress for foreign companies with a production base in China because such R&D centers can improve operational efficiency and increase the speed at which research results are transformed into real-world applications. Moreover, these centers can better cater to the needs of local markets and improve the quality of products and services globally

The implementation of intellectual property policies and guidance, such as the 12th Five-Year Plan (2011-15) on National Intellectual Property Development and the 12th Five-year Plan on Patents, have increased the confidence of foreign-invested companies conducting R&D in China. The current reform of the tax system is another key factor that encourages multinational companies to improve products and processes, enhance productivity and set up R&D centers in China. Though the 2008 Corporate Income Tax Law eliminated tax incentives previously available to foreign-invested companies, the Chinese government has maintained its fiscal support for R&D.

As stressed, encouraging and fostering R&D activities is also now a national policy, and is a key tenet of the 12th Five-Year Plan. Such R&D incentives include:

• A 50 percent R&D “super deduction” in addition to the actual expense deduction for R&D spending. So if a company spends 10 million yuan ($1.6 million; 1.26 million euros) on eligible R&D it will receive a net benefit of 1.25 million yuan (12.5 percent benefit for every eligible cost);
• A preferential corporate income tax rate of 15 percent (the standard rate is 25 percent) for companies recognized as a High New Technology Enterprise;
• A preferential corporate income tax rate of 15 percent for companies recognized as an Advanced Technology Service Enterprise, with qualified incomes exempt from business tax;
• Exemption from import customs duty and value-added tax on qualified R&D equipment imported by R&D centers.

It is also necessary to highlight that on April 14, 2012, China’s Ministry of Finance issued the new “Measures for the Administration of Special Funds for Subsidizing Foreign Patent Applications,.”

The regulation outlines policies for financial assistance for Chinese who file patent applications abroad. Under the new Measures, patent applications can benefit from subsidies when officially prescribed charges occur for the process of filing and searching, service expenses paid to patent agencies, and fees paid for patent examination. To qualify for the subsidy, applicants must be domestic small and medium sized enterprises, public institutions or scientific research institutions. The measures does not define what constitutes a Chinese applicant and may be intended in part to address the dominant role a few Chinese enterprises played in foreign patent filings, especially Patent Cooperation Treaty (PCT) filings (Huawei and ZTE). Under the new Measures, patentees can be subsidized only after the patent is issued. The new regulation also requires novelty, inventiveness, utility, and a stable legal status of the foreign patent. The qualified patent applications under the new regulation also include those made under the Paris Convention, in addition to the PCT. The requirement of the prior rule that the SIPO will “act[] as the PCT receiving office” has been dropped

(http://chinaipr.com/2012/06/12/china-to-provide-financial-incentives-for-filing-patent-applications-abroad/).

Why to use an Hong Kong (Special Purpose Vehicle) as a licensing and IP rights transfer jurisdiction?

• TAX reasons:
  • Low tax rates
  • No capital gains tax
  • No tax on dividend and other unearned income
  • Profits tax chargeable only when the profits arise in or are derived from Hong Kong
  • Royalty income subject to profits tax when:
    • IP rights are used in Hong Kong or the manufacturing or sale of goods in relation to the IP rights takes place in Hong Kong, or when the payer of the royalty can claim tax deductions (Section15(1)(ba) Inland Revenue Ordinance)
• Royalty income not subject to profits tax (unless the payer of the royalty can claim tax deductions) when:
  • IP rights used outside Hong Kong and the manufacturing and sale of goods in relation to the IP rights takes place outside Hong Kong

Use of the SPV:

-            Parent company transfer all IP rights to Hong Kong SPV subsidiary.

-            Hong Kong SPV licenses IP rights to licensees and receives royalties.

-            Benefits of using Hong Kong SPV.

-            Payment of dividends to parent company is tax free under the current tax system.

-            Easy to set up SPV and bank accounts.

-            Low maintenance costs of SPV (filing annual return and tax return, preparing audited accounts for tax return filing).

-            Hong Kong does not practice foreign currency control.

-            The CEPA arrangement between Hong Kong and PRC allows for possible benefits in entry into the PRC market.

The intent of this entry today was to introduce the new policies about incentives for IP and how to manage your IP asset through an HK SPV. The use of IP rights in China is of basic importance and to develop an IP portfolio has become a priority especially for businesses developing new products.

Cristiano Rizzi

Published by admin on May 21st, 2013 tagged Uncategorized | Comment now »

The importance of building an IP Portfolio

Today this entry is about the importance of building an IP portfolio in China. In fact legal protection of intellectual property (IP) is of extreme importance when doing business in China. This legal protection is provided by four mechanisms, namely: 1) patents (both utility and design), 2) trademarks, 3) copyrights, and, 4) trade secrets.

To develop and maintain an effective IP portfolio, one must carefully consider protection under each of these mechanisms.

The IP strategy the company adopts needs to be tailored to the particular business model the company follows at a particular time.

An effective IP portfolio may include any combination of elements of the four legal mechanisms of IP protection. Since much of the decision on building the proper IP portfolio depends on the market, the value and importance of each element may differ from one company to another or even from one product to another.

It is important to keep in mind that the features do not need to be technologically complicated to justify spending the resources to obtain the legal protection. Rather, the features should be such that the customers consider them to be valuable.

A patent portfolio strategy may vary from company to company: for example large companies that have significant financial resources often pursue a strategy of procuring and maintaining a large quantity of patents.

In contrast, for SME, developing and building a comprehensive patent portfolio can be prohibitively expensive. However, with an understanding of some basic principles of patent strategies and early planning, small and medium companies can devise and execute a patent strategy to develop a cost-effective patent portfolio. For example SME can develop an effective patent portfolio by focusing on obtaining a few quality patents that cover key products and technologies, in alignment with their business objectives.

Organizing intellectual assets involves working with key company executives to ensure that the patent strategy closely links with the company’s business objectives.

Often, these individuals assist with developing a budget for the patent  strategy, as well as making arrangements to get access to resources for executing the patent strategy.

Organizing intellectual assets also involves gathering key company documented materials. Examples of documented materials include business plans, company procedures and policies, investor presentations, marketing presentations and publications, product specifications, technical schematics. It may also include contractual agreements such as employment agreements, license agreements, non-disclosure and confidentiality agreements, investor agreements, and consulting agreements.

Such materials provide information used to determine ownership  issues and the scope of patent or other intellectual property  rights that are available for the company

Chinese IP environment

China in 2011 surpassed the United States and Japan in terms of patent filing.

Although China is a patent champion it is only ranked 29^th on the 2011 Global Innovation Index (a ranking that measures innovation in each country), but it has progressed 14 places in one year and has taken the lead for emerging markets.

Since 2006, State Intellectual Property Office (SIPO) registrations have increased by 16.7% on average per year (climbing from 171,000 to nearly 314,000 (in 2010).

This shows exceptional growth, which should continue over the next years to reach 500,000 patents filed in 2015 in China.

The new (draft) Regulations from the State Intellectual Property Office (“SIPO”)

Only a few months ago, On November 12, 2012, China’s State Intellectual Property Office (“SIPO”) released for public comment a draft regulation governing employment inventions (the “Draft Regulation,” an English version is available at the following web-site: http://chinaipr.com/2012/11/12/new-draft-of-service-inventor-remuneration-regulations-open-for-public-comment/). The term “employment invention,” sometimes translated as “service invention,” is defined similarly as in the Patent Law and the Implementing Rules of Patent Law. If implemented in its current draft version, the Regulation on Employment Inventions would affect all companies conducting research and development in China. The Draft Regulation would apply not only to patentable inventions, but also to other types of intellectual property, including trade secrets and Integrated Circuit layout design, among others.

According to SIPO’s explanation accompanying the draft (the Chinese version is available at the following web-site: http://www.amchamchina.org/article/10705) , the Regulation on Employment Inventions is designed to encourage the discovery and exploitation of employment inventions and protect and balance the rights of employers and employees by providing detailed rules and adding process requirements governing employment inventions. SIPO began working on the regulation in late 2010 and completed a draft for discussion in late 2011. In mid-2012, SIPO released a preliminary draft of the regulation to a select group of stakeholders, including industry groups representing foreign companies conducting research in China. The preliminary draft granted significant rights to employee inventors, prompting several industry stakeholders to submit comments, some of which were incorporated into the new draft.

Main features of the SIPO’s new Regulations:

Employer’s freedom to contract out of the default regime limited:

As under the existing patent regime, the Draft Regulation would allow the employer and employee to agree to an amount of reward and remuneration that would supersede the regulatory default minimums.

However, the Draft Regulation adds a new limitation that the agreement may not “eliminate” or “limit” the employee’s rights under the regulation. It is unclear what level of reward and remuneration would be considered to “limit” the employee’s rights under the Draft Regulation. The draft only provides a general guideline that in setting the amount of reward and remuneration, the employer must take into account the employee’s opinion and the potential profit from the employment invention.

Increased default amount for reward and remuneration:

Under the current Patent Law and Rules for the Implementation of the Patent Law, in the absence of an agreement, employers are required to provide a default minimum of between RMB 1000 and 3000 (approximately $160 and $480) to the employee inventor as a reward for his or her patented invention, plus a default minimum of between 0.2% and 2% of the operating profit from exploiting such patent, or a comparable lump sum, as remuneration.

The Draft Regulation would increase the default minimum reward for patentable employment inventions to twice the average monthly salary of the company’s employees. The draft would

also increase the default minimum remuneration for a patentable invention to 5% of the operating profit earned from exploiting such invention, or 0.5% of sales revenue from exploiting the invention, or a comparable lump sum or multiple of the employee’s salary.

A report/response regime for inventions imposed:

The Draft Regulation creates a default notice scheme, under which the employee is first required to report the invention to the employer within two months of discovering the invention (unless otherwise stipulated by the employer or agreed with the employee). In this notice, the employee must disclose whether he or she believes the invention is an employment invention (and thus belongs to the employer) or whether he or she believes that the invention is unrelated to the employment (and thus belongs to the employee).

If the employee claims that the invention is not an employment invention, and the employer does not respond within two months, the invention is deemed to be a non-employment invention belonging to the employee.

The employer should decide, within six months after the receiving the invention report from the inventor, whether to apply for IP protection in China, protect as trade secret or publish, and should notify the inventor of the decision.

While SIPO maintained some employee entitlements from the preliminary draft, it considerably scaled back others, apparently in response to comments from industry groups:

Unregistered IP is automatically protected as a trade secret:

Unregistered IP (such as patentable inventions for which a company has not applied for a patent) is protected as a trade secret without the company having to give any formal notice to the employee inventor. The preliminary draft required the employer to inform the employee within a certain period of time whether the employer would register the IP, keep the IP as a trade secret, or disclose the IP to the public. If the employer failed to provide such notice, the IP rights would be deemed assigned to the employee.

An abandoned patent does not automatically revert to the employee:

If the employer intends to abandon a patent application or patent relating to an employment invention, it must give the employee inventor one month’s notice, and the employer and the employee inventor should negotiate the ownership of the rights related to the invention. The preliminary draft provided that the employee inventor may claim all rights relating to abandoned patent applications or abandoned patents.

The employer does not automatically lose rights to an invention not exploited within three years:

The new draft also amends a provision addressing an employer who does not exploit the invention within three years of being granted intellectual property rights over the invention. Under the preliminary draft, all employers who did not exploit the invention within three years were required to pay compensation to the employee or else face the automatic transfer of the implementation rights to the employee. Under the new draft, this provision applies to state-owned employers only and allows the employee, in accordance with his or her agreement with the employer, to implement the invention if the employer is not prepared to exploit the invention within three years.

(See also the following web-site for further explanatory notes: http://www.employmentlawalliance.com/firms/junhe/articles/China-draft-regulations-employee-created-inventions).

The aim of this entry was to highlight the importance of building an IP portfolio for companies doing business in China. IP is a very important aspect of all businesses so a reasoned and well planned strategy to protect these rights it is a must when entering this particular market. Just to complete the description of this theme, in the next entry it will be exposed the policies adopted by the Chinese government in order to favor IP in China.

Cristiano Rizzi

Published by admin on May 20th, 2013 tagged Uncategorized | Comment now »

East and West Roll Together in Detroit

It seems that automakers in Detroit are garnering growing interest from investors and a variety of companies from China.  What is drawing Chinese interest to Detroit?  Well, the New York Times posted an article on their website (http://www.nytimes.com) on May 12, 2013 by Bill Vlasic which throws some headlights on the subject.  Mr. Vlasic writes:

“Dozens of companies from China are putting down roots in Detroit, part of the country’s steady push into the American auto industry.

Chinese-owned companies are investing in American businesses and new vehicle technology, selling everything from seat belts to shock absorbers in retail stores, and hiring experienced engineers and designers in an effort to soak up the talent and expertise of domestic automakers and their suppliers.

While starting with batteries and auto parts, the spread of Chinese business is expected to result eventually in the sale of Chinese cars in the United States.

“The Chinese are well behind the Japanese when they hit our shores 30 years ago,” said David E. Cole, a founder of the Center for Automotive Research in Ann Arbor, Mich. “They lack the know-how, and they’re coming here to get it.”

As businesses sprout up with little fanfare, Chinese companies seem to be trying to avoid the type of public opposition experienced by the Japanese automakers Toyota and Honda in the 1980s, when the sudden influx of foreign cars competing head-on with cars from General Motors, Ford and Chrysler was perceived as a threat to American jobs.

In contrast to the Japanese, Chinese auto companies are assiduously avoiding the spotlight. Last year, the biggest carmaker in China, Shanghai Automotive Industries, opened in suburban Detroit without any publicity, which is almost unheard-of in an industry that thrives on media coverage.

But China’s growth in the American auto industry is drawing notice in Washington. Last year, the Obama administration filed a complaint with the World Trade Organization that China’s government was unfairly subsidizing the production of some parts shipped to America. And the country’s inroads into American-made batteries and electric vehicleshave drawn scrutiny because that sector of the industry has been heavily subsidized by the United States government.

The American industry’s overall resurgence has drawn a growing Chinese population to Detroit, with Chinese-owned suppliers bringing executives from their country and American automakers adding new talent. About 50,000 Chinese, many of them engineers and other professionals who work at General Motors and the Ford Motor Company, live in the metropolitan area.

Business networks are growing too. The Detroit Chinese Business Association boasts a flourishing membership, and counts about 100 Chinese-owned businesses, mostly auto-related, in the region.

The Ford Chinese Association, with 650 white-collar workers, predominantly from mainland China, has become one of the largest employee groups at the company. Its president, Raymond Xu, recalled that in 1999, when he came to Detroit to attend college, there were very few Chinese in the area.

“I think people are going to get more and more comfortable with it,” Mr. Xu said.

Typical of the Chinese expansion are the nondescript offices of Changan Automotive in an industrial park in the suburban city of Plymouth. Changan, a major carmaker in China, set up a research center to better understand the structural chassis of a vehicle — then hired about 20 Detroit engineers, some of whom had been laid off from Detroit’s auto companies, to staff the project.

“Most of the engineers are very young in China,” said Hong Su, the Changan executive heading the American facility. “They know how to make vehicles, but they don’t know how to develop them.”One of his employees is Alan Wall, 54, a former contract engineer at Chrysler who lost his job during the recession.

“It was an opportunity,” he said. “And those tend to come from a company that is trying to expand.”

Last year, China exported about $13 billion in automotive goods to the United States — tires, wheels and radios that are sold as replacement parts — according to AlixPartners, a consulting firm.

But many Chinese suppliers are pursuing direct business with the Detroit car companies, which now get many of their most common parts from low-wage nations like Mexico. One supplier, Brilliance Auto, an industrial giant with about 500,000 employees in the city of Shenyang in northeast China, is still an underdog in Detroit, trying to crack an intricate network of suppliers that have long relationships with G.M. and the other carmakers.

“We have been exporting our parts to North America for 15 years for the aftermarket,” said Dongbin Chen, a Brilliance executive, referring to retail sales of replacement parts. “Now our biggest opportunity is with G.M. and the other big companies.”

Brilliance scored a coup last year by supplying lightweight engine mounts for the new Cadillac ATS sedan made by G.M. in Lansing, Mich., which has whetted the company’s appetite for more.

At a United States-China conference held here in November, Brilliance displayed a large exhibit showcasing a range of mundane parts — including seat belts, steering wheels and shock absorbers — that it hopes to export to America.

“We have the ability and the capacity to supply these kinds of parts,” Mr. Chen said. “And I think right now, it is very important for us to be here.”

In addition to Chinese companies locating in Detroit, a cottage industry of lawyers, accountants and corporate advisers has grown up to assist them. Their numbers are small now, but the impact of the Chinese on the local economy is slowly expanding.

Industry analysts are hard-pressed to put a number on the Chinese suppliers operating in the United States. “We simply don’t know how many there are,” said David Andrea, an official with the Original Equipment Suppliers Association, a trade organization for auto parts makers.

In one of the more prominent deals, the Wanxiang Group bought most of the assets of the battery maker A123 Systems, which filed for bankruptcy last year despite receiving $132 million of $249 million in federal grants to build two factories in Michigan.

Congressional Republicans criticized the deal, saying A123’s technology could support military applications in China. Still, the buyout was approved this year by the Committee on Foreign Investment in the United States, a federal government panel.

Wanxiang, which has its United States headquarters near Chicago, has acquired several American auto parts and solar companies in recent years. But it attracted little attention until it took an interest in A123 Systems.

“I wasn’t surprised by the negative reaction,” said Pin Ni, president of the company’s American unit. “The reality is we grow here like a small seed into a bigger tree, and we cannot avoid this type of response.”

He said that Wanxiang employed several thousand American workers, and kept local management in place at companies it had bought. “We act, talk and walk like an American company,” Mr. Ni said. “In the end, it’s all about making money.”

Other Chinese companies are averse to publicity. Shanghai Auto is the largest carmaker in China and has major joint ventures there with G.M. and the German automaker Volkswagen. But when the company opened its new Detroit-area offices last year, even G.M. was surprised.

“Since we do not do business with SAIC in the U.S., there is no connection between G.M. and the SAIC office in the U.S.,” said Dayna Hart, a G.M. spokeswoman.

The arms-length reaction underscores the sensitivity surrounding China’s presence in the American industry. Only about 4 percent of Chinese-made light vehicles are exported now, mostly to countries in Africa and the Middle East. But the Detroit automakers are bracing for the day when competitive Chinese cars hit the American market.

“The Chinese have a lot of money and they are moving fast,” said Mr. Cole. “We’re going to see a lot more of them here.”

The growth in the Chinese professional class has had a ripple effect on the broader community, as well, with Chinese community groups sponsoring youth soccer leagues, basketball tournaments and musical performances at Detroit Tigers games. One organization runs a Chinese soup kitchen every year at a local homeless shelter.

Frank Chiu was an engineer for an auto supply company when he saw the growing number of Chinese professionals entering the industry and saw an opportunity. He left his job to open a Chinese grocery store in Canton, Mich, a bedroom community not far from Ford headquarters.

“The timing was very good for this type of business,” said Mr. Chiu, whose store features Chinese delicacies like chicken feet, snow fungus and pork uterus.

As customers roamed the store around him, Mr. Chiu reflected on how much had changed since he moved from Taiwan more than 20 years ago. “What was it like then?” he said. “Lonely is the first word that comes to mind.”

At Ford, Chinese employees play an integral part in the company’s expansion in China, where it is building several new factories. They also help prepare American executives for transfers to China, and play host to Chinese car dealers when they visit Ford’s headquarters.

On Feb. 14, hundreds of Ford employees celebrated the Chinese New Year at the stately Dearborn Inn, which was conceived by Henry Ford in the 1930s as a replica of an early American village, with guest cottages that copied the homes of historical figures like Walt Whitman and Patrick Henry.

“We definitely see more openness to the Chinese culture,” said Mr. Xu, the Ford Chinese Association president. “We started small here, but we are coming on strong.”

This influx of new capital and new thinking bodes well for Detroit. I am sure other U.S. cities will be watching with great interest, and no doubt, great envy.

Hawkeye in China

Lex Smith

Published by admin on May 15th, 2013 tagged Uncategorized | Comment now »

Appreciation of the Yuan and its impact on Foreign Direct Investments (FDI)

As just yesterday I talked about the new initiative by the Chinese legislator to simplify the rules (http://blawg.lehmanlaw.com/wordpress/?p=1821) for the realization of Foreign Direct Investments (FDI), today I would like to spend a few words about the impact of the appreciation of the yuan (also known as RMB) on FDI.

First, let me begging giving you some data:

China has been the developing world’s largest recipient of inflow FDI since the mid-1990s, attracting US$95 billion in 2009 (for more info please visit the following web-site: http://stats.unctad.org)

The most notable and immediate effect of the appreciation of the local currency (i.e. yuan or RMB) is that this situation will make a new foreign investment more expensive for foreign firms to establish themselves (or expand their presence) in China (which remain the world’s most dynamic market), giving an advantage to foreign firms already established there over new entrants.

At the same time, for Chinese companies to export abroad it will become less competitive, although the increased costs will be partly offset by lower costs of imported goods. Another side effect is that foreign companies doing business here expect to repatriate higher profits from sales in China in terms of their own currencies.

This situation also is allowing Chinese companies interested in investing abroad and acquiring foreign entities to conquer a larger portion of international markets at a discounted price. In fact the so called “going out policy” or “go global policy” is favored by the appreciation of the local currency because the purchasing power of the RMB has increased substantially. Thanks to this particular situation China’s Outbound FDI have continued to grow in these years, in line with the latest Five Year Plan, which came into effect in 2011, in which it is underlined the commitment to promote the “going global” policy.

Naturally a renewed yuan appreciation would boost China’s OFDI growth even further by lowering the cost of overseas assets for Chinese firms, which have strong cash reserves from both retained earnings and large-scale state credit allocations that put them in a position to invest internationally. Like competitors elsewhere, they need to invest abroad to acquire a portfolio of locational assets to protect and increase their international competitiveness through better access to skills, technology, natural resources, and markets. China, moreover, is using outbound FDI as a key mechanism for integrating itself into the world economy and making it a prominent stakeholder in it and gaining at the same time more influence at international level.

However, all this has an impact also on the daily fixing of the RMB against other foreign currencies. (http://usa.chinadaily.com.cn/business/2013-05/09/content_16486402.htm).

For example just to give you an idea of the “performance” of the yuan recently, the People’s Bank of China on Wednesday May 8, 2013 set the daily reference rate of the yuan against the dollar at 6.1980, the highest in 19 years since China unified the official and market exchange rates at the end of 1993. Later, the yuan closed at 6.1410 against the dollar in Shanghai, according to the China Foreign Exchange Trade System. It touched 6.1396 earlier, the strongest level since the end of 1993. The daily fixing of the yuan rose 1.41 percent since the beginning of the year against the dollar, as indicators show that capital flows into the world’s second-largest economy accelerated in recent months. The yuan is allowed to trade within 1 percent in each direction around the daily reference rate.

“Appreciation expectations and onshore demand for the currency still dominate the market as capital inflows continue, and the authorities are working to make the pricing of the yuan more flexible and market-oriented,” said Guo Tianyong, a professor at the Central University of Finance and Economics in Beijing.

The State Council, China’s cabinet, said this week it will draft an operational plan to achieve full convertibility of the yuan and establish a comprehensive system for individuals’ outbound investments. The central bank data showed that banks brought in nearly 236.3 billion yuan ($38.25 billion) worth of foreign exchange in March on a net basis, boosting the total yuan holdings for purchasing foreign currency to nearly 27.1 trillion yuan. Apart from international “hot money” inflows, the rising willingness of Chinese companies, especially property developers, to sell dollar-denominated bonds in overseas markets also contributed to increasing cross-border money inflows, said Ding Zhijie, dean of the School of Banking and Finance at the University of International Business and Economics in Beijing.

Expectations of the yuan’s appreciation have also strengthened as China’s band-widening discussions have been rekindled following recent comments from PBOC officials indicating that the yuan trading band will be further widened “in the near future”.

No doubts that the yuan is going to be accepted internationally but before to achieve a full convertibility the Chinese government has still to implement a detailed “operational plan” as stressed in my previous entry.

Cristiano Rizzi

Published by admin on May 15th, 2013 tagged Uncategorized | 1 Comment »

Factory Women; Chinese “Girl Power”

The times they are a changing within the pool of available workers in China, and women are rising to the top.  An article posted on the “Economist” website (http://www.economist.com) entitled simply, “Girl power”, on June 19, 2013, details what is happening in Chinese factories today.  The article reports:

“SITTING around a restaurant table, six workers discuss the progress of their labor action. Five of them are women, as are most of their several hundred colleagues who have been occupying the toy factory since mid-April. They have been sleeping on floors, braving rats and mosquitoes, to stop the owner shutting down the factory without giving them fair compensation. Those at the table are all migrants from the countryside. A couple are tearful. All are angry and determined not to give way.

In Guangdong province, where nearly 30% of China’s exports are made, women usually far outnumber men on labor-intensive production lines such as those at the toy factory in the city of Shenzhen, next to Hong Kong. Rural women are hired for their supposed docility, nimble fingers and attention to mind-numbing detail.

But in recent years Guangdong’s workforce has changed. The supply of cheap unskilled labor, once seemingly limitless, has started to dry up. Factory bosses are now all but begging their female workers to remain. At the same time the women who have migrated to the factory towns have become better-educated and more aware of their rights. In labor-intensive factories, stereotypes of female passivity are beginning to break down.

Over the past three decades the migration of tens of millions of women from the countryside to factories in Guangdong and other coastal provinces has helped to transform the worldview of an especially downtrodden sector of Chinese society (the suicide rate among rural women is far higher than for rural men). Conditions in the factories have often been harsh—poor safety, illegally long working hours, cramped accommodation, few breaks and little leave—but for many it has also been liberating and empowering, both personally and financially. Leslie Chang, an American journalist, spent three years reporting on women workers in Dongguan, a city near Shenzhen. In her 2008 book “Factory Girls” Ms Chang wrote that, compared with men, the women she encountered were “more motivated to improve themselves and more likely to value migration for its life-changing possibilities.”

They are still not as well-educated as men (about a year less in school on average, with most having only primary- or junior secondary-school education). But the gap has been narrowing.

Crucially, China’s changing demography has been shifting in their favor. Labor shortages that began to hit low-skilled manufacturing in the second half of the past decade have driven up wages and forced factories to improve working conditions. Once all but unthinkable (for both sexes), strikes have become increasingly common. Anecdotally at least, women appear as likely to take part as men.

Strikes in 2010 affecting factories in Guangdong owned by Honda, a Japanese car firm, helped to galvanize labor activism. One of them occurred in the city of Zhongshan, where the workers were mostly female. The unrest there resulted in pay concessions and set a precedent for collective bargaining led by representatives chosen by the workers themselves, rather than government-controlled trade unions. At the Shenzhen toy factory, the workers have chosen five representatives to negotiate with management. Three of them are women. A male worker says the women are more aware of their rights.

China Labor Bulletin, a Hong Kong-based NGO, reported on March 19th that about a fifth of strikes in Guangdong since the beginning of the year had been in factories and other workplaces with largely female staff. It said that women were also “some of the most active workers posting information online about strikes and protests, and in seeking out legal assistance for problems at work.” The protesting toy-workers offer evidence of this. They have posted photographs on microblogs of protesting female workers clad in red jackets opposite lines of police. One of their slogans reads: “Bad boss—give us back our youth”.

Wiggle room for NGOs

Guangdong is a little more forgiving of protest than many other parts of the country, but still not that tolerant. In July the authorities relaxed controls on the registration of NGOs. But those involved in labor issues rarely get official approval, apparently because of fears that they might help organize strikes. Only a handful of such groups in the province is openly engaged in work to help the female labor force. The leader of one, who asked that she and her organization not be named, is herself a former migrant worker. She and a few dozen volunteers (mostly women from factories) give advice on collective bargaining. They recently helped some 60 female workers at a jewellery factory secure better severance pay. Negotiations took just a week. She says it would have been “very difficult” to achieve that through government channels.

In the coming years Guangdong’s industrial transformation is likely to even out the sex ratio in some cities where it has been skewed towards women. In the township where the NGO works, there are about 30,000 female workers and few men. But the group’s leader says this is changing fast as labor-intensive manufacturing moves out and gives way to an emerging logistics hub. Dongguan, a city once highly unusual in China for having many more women than men, had a male majority by 2010.

So desperate have some factories become for cheap labor that they are allowing men to work on production lines once exclusively reserved for women. But this does not mean China’s factory women are giving up and going home. The toy workers, many of them in their 30s or 40s, who have been working at the factory since it opened some 20 years ago, are typical of their generation of migrants. They have become urban and their children know nothing else. “We can’t plant fields now”, says one. No, agrees another, “We can’t go back.”

And so the Chinese “revolution” continues.

Hawkeye in China

Lex Smith

Published by admin on May 14th, 2013 tagged Uncategorized | Comment now »

Simplified rules on Foreign Direct Investment (FDI)

Today with this entry I would like to present briefly the new initiative by the Chinese legislator in order to simplify the rules for the realization of foreign investments in China. Substantially China is trying to reduce bureaucracy in order to render more attractive its investment environment to foreign investors. (Some interesting data on FDI in China are available at the following web-site:http://www.fdi.gov.cn/pub/FDI_EN/Statistics/FDIStatistics/StatisticsofForeignInvestment/default.htm).

Therefore, to encourage foreign direct investment into China, the country’s State Administration of Foreign Exchange (SAFE) has released the “Regulations on the Foreign Exchange Administration of Domestic Direct Investment Conducted by Foreign Investors (Huifa [2013] No. 21, hereinafter referred to as “Circular 21” (in effect from May 13, 2013).

Before to start with this new theme it is necessary to stress that China’s foreign direct investment topped $116 billion in 2012. This is a record according to the Commerce Ministry which aims to attract an average of $120 billion in each of these years from 2013 to 2015. China’s economy is acutely sensitive to external demand, despite a gradual rebalancing towards domestic consumption.

Government simplifies rules on foreign direct investment to attract more investors

China’s foreign exchange regulator with the above mentioned “Circular 21” has simplified the rules governing foreign direct investment (FDI). This represents the latest step towards deregulation and market reform under China’s new leadership. Substantially the State Administration of Foreign Exchange (SAFE) will abolish 24 regulations regarding foreign exchange registration, account openings, remittance, and conversions, the agency said in an announcement posted to its website on Saturday. It seems that this decision is part of the efforts to reduce bureaucracy, boost transparency and therefore improve FDI environment.

The move inches China closer to making its currency, the yuan, convertible under the capital account, and follows a previous round of FDI-related deregulation by SAFE in November last year.

“The abolished regulations were not in line with China’s economic development and were the target of complaints from overseas investors” as pointed out Mr. Lu Jinyong, director of the China Research Center for FDI at the University of International Business and Economics. “The changes will improve the FDI environment and facilitate the business operations of foreign companies” Mr. Lu Jinyong stressed also. China drew $29.9 billion in foreign direct investment in the first three months of 2013, up 1.4 percent from a year earlier, according to figures from the Ministry of Commerce. Deputy Commerce Minister Wang Chao said in the late April that China retains a comprehensive advantages in attracting FDI despite external uncertainties. It seems that the Chinese market has huge potential for FDI, but the key is to lift market obstacles and policy restraints.

The decision to introduce these new measures (i.e. “Circular 21”) comes after the Chinese regulator’s resolution in December (2012) to remove a ceiling on investments by overseas sovereign wealth funds and central banks in capital markets to promote long-term foreign ownership and shore-up the country’s slumping equity markets.

To be more specific on the content of this “Circular 21” it is also worth stressing that it abolishes 24 foreign exchange administrative regulations that are out of date or no longer applicable in order to clarify the regulation system. In particular the abolished regulations are listed as follows:

1. Interim Measures for the Administration of Foreign Exchange Registration for Foreign-Invested Enterprises ([96] Huizihanzi No. 187)
2. Reply on Issues Concerning the Foreign Exchange Administration of Foreign Enterprises Undertaking Domestic Projects ([98] Huizihanzi No. 204)
3. Notice of the State Administration of Foreign Exchange on Authorizing Local Offices to Handle Foreign Exchange Services Related to Equity Transfer and Liquidation of Foreign-Invested Enterprises (Huifa [1999] No. 397)
4. Reply of the State Administration of Foreign Exchange on Issues Concerning the Foreign Exchange Control for Foreign Investors’ Reinvestment with Renminbi Amount (Huifu [2000] No. 129)
5. Notice of the State Administration of Foreign Exchange on the Reform of the Administrative Method for the Settlement of Foreign Exchange Capital Funds Under Foreign-invested Projects (Huifa [2002] No. 59)
6. Reply of the State Administration of Foreign Exchange Concerning Domestic Residents’ Purchase of Foreign Exchange to Pay Equity Transfer Price to Foreign Investors (Huifu [2002] No.231)
7. Notice of the State Administration of Foreign Exchange on Issues Concerning Improving the Annual Foreign Exchange Inspection of Foreign Invested Enterprises (Huifa [2004] No.7)
8. Notice of the State Administration of Foreign Exchange on Improving the Work on Administration of Examination and Verification of Foreign Exchange Settlement and Registration of Foreign Debts under the Capital Accounts of Foreign-Invested Enterprises (Huifa [2004] No. 42)
9. Notice of the State Administration of Foreign Exchange on Capital Verification Inquiry into Foreign Direct Investment and Registration of Foreign Investment and Foreign Exchange in Export Processing Zones, Bonded Areas and the Shanghai Diamond Exchange (Huifa [2004] No. 108)

10.  Notice of the General Affairs Department of the State Administration of Foreign Exchange on Issues Concerning the Opening of Foreign Exchange Capital Accounts of Insurance Intermediary Institutions (Huizongfa [2006] No. 6)

11.  Notice of the General Affairs Department of the State Administration of Foreign Exchange on Releasing the List of the 1st Batch of Foreign Invested Real Estate Projects Approved by the Ministry of Commerce (Huizongfa [2007] No. 130)

12.  Notice of the General Affairs Department of the State Administration of Foreign Exchange on Implementing Online Release of the List of Foreign Invested Real Estate Projects Approved by the Ministry of Commerce (Huizongfa [2007] No. 138)

13.  Reply of the General Affairs Department of the State Administration of Foreign Exchange on Issues Concerning Foreign Exchange Settlement of the Fund used in Purchasing Commodity Premises by Foreign Individuals (Huizongfu [2007] No. 86)

14.  Notice of the State Administration of Foreign Exchange on Issues Concerning Nationwide Expansion of Information System for Foreign Exchange Business of Direct Investment (Huifa [2008] No. 16)

15.  Notice of the General Affairs Department of the State Administration of Foreign Exchange on Issues Relating to the Operation of the Information System of Foreign Exchange Transaction in Direct Investment and the Foreign Exchange Account System (Huizongfa [2008] No. 129)

16.  Notice of the General Affairs Department of the State Administration of Foreign Exchange on Delegation of Examination and Approval of Special Foreign Exchange Deposit Account for Land Use Right Auction of Foreign Investors and Special Foreign Exchange Deposit Account for Equity Transaction of Foreign Investors to Lower Administrative Levels (Huizongfa [2008] No. 130)

17.  Reply of the General Affairs Department of the State Administration of Foreign Exchange on Issues concerning the Use of Foreign Exchange Capital Settled by Foreign-invested Venture Capital Investment Companies for Investment in Domestic Equity (Huizongfu [2008] No. 125)

18.  Notice of the General Affairs Department of the State Administration of Foreign Exchange on Issues Concerning Foreign Exchange Registration of Foreign Invested Real Estate Enterprises (Huizongfa [2009] No. 42)

19.  Reply of the General Affairs Department of the State Administration of Foreign Exchange on Issues Concerning Foreign Exchange Registration of Receiving Foreign Exchanges by Foreign Shareholders in Cross-Border Share Swap (Huizongfu [2010] No. 5)

20.  Notice of the State Administration of Foreign Exchange on Printing and Distributing the “Operating Rules for Foreign Exchange Administration Concerning Financing and Round-Trip Investment by Domestic Residents through Overseas Special-Purpose Companies” (Huifa [2011] No.19)

21.  Reply of the General Affairs Department of the State Administration of Foreign Exchange on Issues Concerning Capital Verification Inquiry Involved in Capital Contribution by Foreign Investors with Non-Priced Equipment of Enterprises Engaging in Businesses of Processing with Materials Supplied by Clients, Manufacturing Products according to Samples Provided by Clients, Assembling Parts Supplied by Clients, and Compensatory Trade (Huizongfu [2011] No. 155)

22.  Notice of the State Administration of Foreign Exchange on the Issues Related to the Administration of Foreign Exchange of Foreign-Invested Partnerships (Huifa [2012] No. 58)

23.  Notice of the General Affairs Department of the State Administration of Foreign Exchange on Payment of Abandonment Fees for Offshore Cooperative Oil and Gas Fields with Funds within the Special Foreign Exchange Accounts of Foreign Investors after Exchange Settlement (Huizongfa [2012] No. 126)

24.  Reply of the General Affairs Department of the State Administration of Foreign Exchange on Issues Concerning Alteration of Foreign Exchange Registration Involved in Share Reduction of Foreign Shareholders of Neusoft Corporation (Huizongfu [2012] No. 34)

It seems that all this ferment is also aimed at render the yuan (or RMB) more accepted internationally. Premier Li Keqiang told a meeting of the State Council, China’s cabinet, that the government would produce a detailed “operational plan” to achieve capital account convertibility this year (i.e. 2013), though he did not offer a timeline for convertibility.

So, we only need to sit and wait, in fact it is only a matter of time, and when the local currency will become fully convertible, there is no doubt China will attract more foreign investments not only in the form of FDI but also in the form of financial investments (allocated in its emerging capital markets) which influence of course  M&A transactions and the market for corporate control in China.

Cristiano Rizzi

Published by admin on May 14th, 2013 tagged Uncategorized | 1 Comment »