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The following information is designed to give you some basic, up-to-date information on what is happening in the business scene in China, as well as some useful information and industry tips. The following information has been compiled from a number of sources, most notably China Briefing, a monthly publication by the Dezan Shira China Group and Business Beijing, another great monthly publication. You can view the China Briefing website at www.china-briefing.com and the Business Beijing website at www.cbw.com/busbj. We have also utilised and compiled information from Beijing Review, whose website can be viewed at www.bjreview.com.cn. We have edited and made articles more concise where necessary and have indicated the original source by each brief.

Click on the links below or scroll down to view a particular topic or news brief.

Huge Increase in Patent Applications

Partners Sought for Silicon Valley Computer Festival

Problem of Suspended Particle Pollution Tops Agenda

Pollutant Beijing Buses to be Banned from Downtown

Beijing Striving to Lessen Burden for Foreign Investors

Greater Access to China for Foreign Publications

China's Electronics Industry Enjoys $70 Billion Investment

Hydrogen Fuel Cell Bus to Appear on Beijing / Shanghai Streets

Sales of Chinese-made Vehicles Continue to Rocket

SAFE Eases Control on Purchase of Foreign Exchange

Tips in Structuring a Joint Venture

How is Your Chinese Partner? Checks that Pay

 

Huge Increase in Patent Applications--reported by Business Beijing, April 2003 (Back to Top)
According to Beijing Youth Daily, there has been a steady increase in the number of applications for patents in Beijing. A total of 1436 was recorded in January and February this year, more than double the number in the same period of 2002. Patent transactions involved a total sum of 150 million yuan, almost double the figure in the first two months of last year. Experts say that with China's entry into the WTO activity in the area of intellectual property rights, which will involve patents and copyrights, will increase. The total number of patent applications in Beijing will increase steadily and continuously, they say, as will the commercialisation of patent science.

Partners Sought for Silicon Valley's Computer Festival--reported by Business Beijing, April 2003 (Back to Top)
The sixth Beijing Zhongguancun Computer Festival, to be held in September, is seeking partners to host the event and help collect the design plan for the high-tech activity. At a previous festival, 559 contracts involving 42.58 billion yuan (US$5.13 billion) were signed. The sum related to computers, software, e-business solutions and technology transfer.

Problem of Suspended Particle Pollution Tops Agenda--reported by Business Beijing, April 2003 (Back to Top)
Beijing has put the issue of suspended airborne particles at the top of its environmental agenda. Shi Hanmin, director of the city's Municipal Bureau of Environmental Protection, says it will work to reduce the density of suspended particles from the current 150 micrograms per cubic metre to 100 micrograms by 2008. He pointed out that pollution caused by the particles has become a bottleneck in improving the Chinese capital's environment. The local government now requires building firms to establish a special dust-control fund in their bids for projects. In an attempt to further curb pollution problems, vehicles transporting garbage, mud and stones are also forbidden from entering the area within the fifth ring road unless the vehicles' rubbish containers are airtight.

Pollutant Beijing Buses to be Banned from Downtown--reported by Business Beijing, April 2003 (Back to Top)
The municipal government has banned passenger buses that fail to meet the Euro I emission standard from entering the downtown area, or into the area within the second ring road. Beijing has also banned sales of light and heavy diesel trucks that fail to meet the country's emission standards. A monitoring system will be set up in August to check emissions by motorcycles, trucks and agricultural vehicles.

Beijing Striving to Lessen Burden for Foreign Investors--reported by Business Beijing, April 2003 (Back to Top)
Beijing Municipal Government is to scrap 175 categories of administrative charges for foreign-funded companies, Beijing vice-mayor Zhang Mao has announced. He said the new Beijing government will work hard to achieve a much better environment for investors over the next five years, adding that its work in 2003 will focus on reducing costs for foreign-funded companies. He noted that the government would crack down on illegal activities like arbitrary charges, quotas and fines levied against enterprises. Meanwhile, Beijing will also adjust its land supply to lower the cost of land use. Land prices in Beijing are well above the national average, especially land designated for commercial use. To further optimise the investment environment, Beijing will continue to operate open and transparent bidding for commercial land trading, said Xie Jingrong, an official of the municipal housing and land management office. He said that land for first-hand development would be open to public bidding, and that developers could acquire the rights for land use through transfers, leasing, assignment and shareholding.

Greater Access to China for Foreign Publications--reported by Business Beijing, April 2003 (Back to Top)
According to China Daily, a new set of rules from the State Press and Publications Administration (SPPA), which took effect on May 1, provides specific guidance on the establishment of foreign-funded book, newspaper and magazine distributors. In line with its World Trade Organisation commitments, China was to open its book, newspaper and magazine retail business to foreign investors in December last year, though it is said to still be limited in certain areas of the country. An SPPA official said it would accept and handle applications from overseas investors once the rules are fully in effect. These cover the requirements on application procedures, registered capital, and business scale of foreign-invested distributors. A registered capital of 5 million yuan (US$604,000) is needed by retail companies and 30 million yuan (US$3.62 million) by wholesalers, the newspaper said. Regulations in regard to such companies will take effect on December 1, 2004 when the sector is opened to foreign investors, the SPPA official was quoted as saying.

China's Electronics Industry Enjoys $70 billion Investment--reported by Business Beijing, April 2003 (Back to Top)
China's electronics industry has attracted more than US$70 billion in foreign capital, and seen the creation of more than 10,000 foreign-invested enterprises. The figures represent more than 15 percent of the country's total foreign investment. China has become a strategic market and manufacturing base for many transnational corporations due to funds from overseas and the introduction of advanced technologies. Epson of Japan, for example, has based more than 42 percent of its production in China, while Nokia, Ericsson and Motorola have over 12 percent, almost 10 percent and more than 14 percent respectively of their global business based in China.

Hydrogen Fuel Cell Bus to Appear on Beijing / Shanghai Streets--reported by Business Beijing, April 2003 (Back to Top)
A so-called non-pollutant "hydrogen + fuel cells bus" is expected to be used in Beijing next year, reported Beijing Youth Daily. The vehicle's energy comes from hydrogen stored in special fuel cells designed to discard used water. Meanwhile, a commercially viable hydrogen fuel cell scooter was showcased in the city last month. It was designed and produced under a US$32.36 million project which will bring 12 of the scooters to Beijing and Shanghai. The scooters will be demonstrated for five years over a total distance of 160,000 kilometres. The two cities were chosen for the test after keen bidding from around the world. Chinese officials believe a large fleet of the scooters could provide services at the Beijing olympics in 2008. An official at the project office said the road test will achieve a technical standard for the fuel cell system in buses as well as other vehicles, leading to the establishment of a hydrogen station suitable for the geographic and climatic features of Shanghai and Beijing. After the demonstration, fuel cell technology will be further improved to a degree that lowers the cost of cells and the scooters. To date, China itself has produced a 50kw fuel cell system and a functional scooter that is expected to compete in the bidding for a 'commercial Chinese hydrogen fuel cell scooter.'

Sales of Chinese-made Vehicles Continue to Rocket--reported by Business Beijing, April 2003 (Back to Top)
Sales of vehicles made in China rocketed 71 percent year-on-year during the first two months of 2003, according to statistics from the China Association of Automobile Manufacturers. Sales stood at 584,700 units for the period, while sales of passenger cars made in the country reached 241,000 units during the period--an increase of 140.7 percent against last year. Total vehicle output in January / February increased by 63.8 percent year-on-year to 608,300 units according to the statistics. The output of passenger cars reached 236,900 units during the period, up 135.9 percent from the same period of 2002.

SAFE Eases Control on Purchase of Foreign Exchange--reported by Business Beijing, April 2003 (Back to Top)
The State Administration of Foreign Exchange (SAFE) has issued a circular that releases Chinese importers from the obligation of reporting to SAFE their use of foreign exchange in three categories of foreign trade, reported China Daily. From April 1, importers can, in 'certain trading situations ' that were not revealed, directly purchase foreign exchange from banks on production of required import documents without registering with SAFE offices, the administration said. SAFE said the streamlining could help improve efficiency 'without heightening regulatory risks and reducing regulatory efficiency.'

Tips in Structuring a Joint Venture--reported by Chris Devonshire-Ellis, China Briefing, March 2003 (Back to Top)
The number of joint venture partnerships is on the rise in China, due in great part to the desire to take advantage of cheap manufacturing facilities and the chance to capitalise on China's vast market. It is encouraged by Chinese factories who desire long term security in foreign sales from an overseas partner, and by foreign partners who want an opportunity to break into the market using existing infrastructure owned by the Chinese without the need to duplicate this at their own expense. Unfortunately, although this sounds great in theory, the past is littered with unhappy partnerships and those that simply did not work. Prudence is crucial in any business, but especially in China; if you don't know Chinese law you are taking a huge risk by making assumptions. Professional advise is well worth the up front cost--don't make the mistake of assuming that just because you are in international business you know all the answers in China, as this can be very costly. Why a JV partner? A partner should have something tangible to offer, either as an entry vehicle in an area otherwise restricted to 100% foreign investment, or in other assets such as a distribution network or quality manufacturing premises. Using a JV partner to lessen your overall cost of market entry in China due to the so-called 'shared costs' is a common mistake. If you can, go it alone.

Management: Many companies let the Chinese parnter run all operations, which is a crucial mistake. A new business needs all the support it can get, and it is important to invest in a foreign manager to keep an eye on things, especially during the early stages. Correct systems, accounting, and quality control should all be put in place to ensure your standards are all operational in your JV. The ideal solution is an expatriate manager, if not long term then at least for the initial stages. The Chairman position--the legally responsible person--is probably best left to the Chinese side. It is wise, however, to make the general manager one of your personnel as he or she will be responsible for operations. Leaving both to your Chinese partner effectively gives them control of the business.

Capital Investment: When negotiating the amount make sure that the Chinese partner's investment really is worth that amount of money. Asset and stock valuations to verify these are a pre-requisite. This means having property valuations placed on machinery (the Chinese tend to quote the original purchase price with no depreciation); buildings are frequently valued at the price it would cost today to build and don't actually reflect the fact that it may well be a 15 year old shack that cost US$ 10,000 to put up in 1988. Also, check the Land Use Rights certificate--if your partner can show these are granted rights then he or she owns the land. If they are just allocated then the right to use the land should just be the rental value.

Royalties: This can be incorporated as part of your investment. Patents and trademarks should be properly registered in China as being your property if you want to retain control over these. Technology Transfer can be paid in the form of royalties from the JV, but ensure contracts are in place and that you understand the legal and tax implications; don't just assume it will be 'taken care of.' Withholding tax applies on royalty contracts at a lower rate than profits tax so taking care of these agreements saves money.

Profits Repatriation: It is important to make sure this is properly addressed as your Chinese partner is not so concerned about this and won't be familiar with the procedures in any event. It's your problem, not your partner's and he or she will not have any experience in this matter. You can draw money out of the business in pre-tax expenses (see the December 2002 and March 2002 issues of China Briefing at www.china-briefing.com in the Archives section for further information or contact Dezan Shira & Associates for advise). Also ensure that you know the mechanisms and have enhanced your ability to repatriate funds as much as possible.

Mergers / Acquisitions: Not covered in basic drafts, be sure to build into the contract and articles proper mechanisms outlining exactly the procedures and protocol for changing ownership, buying and selling shares in the company, share valuations and so on. Amendments to articles require government approval. Highlighting your intentions later on may result in problems with getting amendments considered to be in your favour approved, so it is better to build these mechanisms from the beginning.

Exit Strategy: Clearly define what are considered to be unacceptible levels of business (losses in consecutive years, production below targeted levels, etc.) and have these agreed upon and set in the contract and articles. Often they are not and this can lead to problems getting you out of a JV if the government does not agree with your assesment of what is and is not a viable business. Make sure economic performance is properly identified as a clear reason to effect closure if things go badly.

How is Your Chinese Partner? Checks that Pay--reported by Chris Devonshire-Ellis, China Briefing, March 2003 (Back to Top)
Due diligence on the Chinese partner is a much neglected area of planning. Cases of the 'international businessperson' who 'has been involved with foreign contracts before' but who then proceeds to completely mess up in China are legion. Due diligence must be a matter of course and if necessary should be extended to seeking greater information if you can't get clear answers from your basic checks. While it may cost money it is money well spent if you can avoid problems later on. The following is an outline of the minimum levels of checks you should be considering. You should be conducting these checks on your Chinese partner if you are fulfilling any of the following roles: potential joint venture partner, sales agent or distributor, contract manufacturer, or other supplier.

Chinese business licence: You should ask for a copy of this. It will list (in Chinese) the details of the legally responsible person,registered address, amount of registered capital (which is also the limited liability) and the period of the licence. This basic information should be compared with what you know and if there are any discrepancies find out the reasons why. It is relatively common for the person you are dealing with not to be the person legally responsible for the business. Licence periods may not be consistent with liabilities they are entering into--such as the case of the ten year projected joint venture with a Chinese partner whose licence was due to expire in three months time!

Capital Verification Report: This is issued by an independent CPA firm confirming the fact that the registered capital as identified on the business licence was in fact paid up. Often it is not. Not only does this indicate that your partner has not actually capitalised his business, it also means that he has not complied with the limited liability (the amount of registered capital is also the extent of limited liability) requirements but will also be in breach of his own articles of association, which could lead to termination of his company. This could cause serious problems in the event of a failure or other legal issues. Land Use Rights: What is the status of the land on which your Chinese partner has his premises? Allocated rights are issued to a venture for a period of years (check the timeframe) but only give the right to use the land. This is okay, but means that any development (i.e. buildings) that is erected on the land will ultimately benefit the landowner and not your company. In addition, if the land agreement is between your Chinese partner and the landlord directly, if your Chinese partner defaults on the rental agreement you can be thrown off the premises. Investigate this and make sure that you have agreements in place in terms of letters of intent from the landlord directly to circumnavigate this eventuality. It is also important to ascertain whether or not your intended Chinese JV partner actually owns the land he claims to be 'injecting' as part of his capital in any potential JV. Contrary to allocated rights, granted rights are issued for a period of years but give title to the land during this timeframe. If you are in China for the long haul and plan to have significant investment on the site you may want to consider having granted rights. It costs more for granted rights, but if such rights are in your JV name you may use these to raise loans in China (giving the granted rights as security) and even profit from any sale of the rights later on. In the long term strategy this secures your China future. If your Chinese partner injects land as part of JV equity, he must provide granted land use rights, otherwise the gesture is meaningless.

Copies of Filed Accounts: These can be difficult to extract from your partner because often they have been operating two sets of books--one set internally, which shows true position, and one officially, which provides the 'official' position! Of course this is illegal but in China it is extremely common. Official accounts may seriously understate profitability and inflate overheads and business costs to reduce tax liabilities. For this reason your Chinese partner may not want to expose these to you, especially if you have already seen his 'real' version of the events. If in doubt, ask a CPA firm to conduct an 'asset appraisal report,' which will provide a private confirmation of assets and the close-to-true picture. This probably should not be conducted by the partner's usual accountants. Alternatively, ask a firm to evaluate any books as presented to you and ask for a professional opinion. At the very least you will have an idea of where discrepancies lie and can then talk about these matters in private, frank talks with your partner without making him feel as if he is in any danger of being under official scrutiny.

Summary: Don't be surprised if these basic checks reveal irregularities--they probably will. At least then you are in the position to understand whether or not this is a critical problem or is just a 'Chinese' issue. These checks are, however, the first basic steps and represent the absolute minimum checks you should be undertaking. Contact a professional firm for more assistance.