A Primer for Trading with Hong Kong, China, Taiwan and Beyond
By Daniel C. Fleming, Esq.
Doing Business in Hong Kong
Last summer, on June 30, 1997, 155 years of British colonial rule ended when Hong Kong officially became a Special Administrative Region of the People’s Republic of China. One of the world’s most freewheeling capitalist markets is now paradoxically ruled by the world’s largest communist country.
Hong Kong has a population of approximately 6.5 million people. Its 1,100 square kilometers consists of more than 230 islands and islets and a portion of the mainland east of the Pearl River estuary adjoining the Chinese provide of Guangdong.
Hong Kong’s observance of free trade principles is more complete than anywhere else in the world. The city is a fierce champion of free trade and an enthusiastic support of the free trade aspirations of the General Agreement on Tariffs and Trade (GATT), its successor, the World Trade Organization and the Asia-Pacific Economic Cooperation forum (APEC).
Hong Kong keeps a level playing field and favors no one. It fosters open competition and does not discriminate in favor of local companies, or in favor of British or Chinese companies. Hong Kong does not subsidize any of its industries or services to help protect Hong Kong businesses against outside competition.
Because of its location, Hong Kong is important for U.S. interests. It is ideally located for trade in the Pacific Rim and China. In 1996, nearly fifty percent of U.S. exports to China were routed through Hong Kong. Thus, besides being a good source of new business itself, Hong Kong is an important intermediary to successful trade in China.
II. WHAT YOU NEED TO KNOW ABOUT CHINA’S CONTROL OF HONG KONG
Hong Kong is now a semiautonomous Special Administrative Region of the People’s Republic of China. On December 19, 1984, the British and Chinese governments reached an agreement on the future of Hong Kong. This agreement is known as the Sino-British Joint Declaration on Hong Kong. The Joint Declaration and the Basic Law of the Hong Kong Special Administrative Region guarantee the continuation of Hong Kong’s existing capitalist economic and trade systems, the free movement of goods and capital, and Hong Kong’s status as a free port and separate customs border.
The Chief Executive of the Hong Kong Special Administrative Region (HKSAR) is Mr. Tung Chee Hwa. The Chief Executive replaces the Governor that was formerly appointed by the Queen of England. This is not an elected office. A Selection Committee comprised of Hong Kong citizens selects the Chief Executive, who must be a Hong Kong citizen. China has pledged to maintain Hong Kong’s capitalist economy, currency and free-market policies for 50 years after 1997.
The Basic Law, drafted by the Chinese National People’s Congress, is Hong Kong’s constitution. It provides that Hong Kong SAR will enjoy a “high degree of autonomy” (an ambiguous term that is not defined) and enjoy executive, legislative and independent judicial power. However, Hong Kong will not have any autonomy in matters relating to foreign affairs and defense. The current legal system based on common law will remain essentially unchanged, and Hong Kong will have its own Court of Final Appeal as the ultimate arbiter of Hong Kong’s laws. The Basic Law also promises to protect the continued existence of a free and open press.
Hong Kong will keep its own currency (the Hong Kong dollar), and English and Chinese will continue to be the official languages.
III. THE HONG KONG STOCK EXCHANGE
The Stock Exchange of Hong Kong is the eight largest in the world and second in Asia only to Japan in terms of market capitalization, which has grown from US$78 billion in 1989 to more than US$500 billion today. More than 500 companies are listed on the Stock Exchange of Hong Kong. By comparison to the New York Stock Exchange, Hong Kong’s market is extremely small. Many more companies are listed on the New York Stock Exchange, with market capitalization of approximately US$9 trillion. As of mid-June 1997, 30 Chinese enterprises have listed their H-shares on the Stock Exchange of Hong Kong, raising over US$5 billion.
Trading in Hang Seng Index futures contracts on the Hong Kong Futures Exchange has grown from 235,976 in 1989 to 4,656,084 in 1996. About 1,900 businesses and 17,000 securities and futures intermediaries are registered in Hong Kong.
Hong Kong is Asia’s largest fund management center outside of Japan, with over 1,300 authorized unit trusts and mutual funds from around the world, and 200 fund management companies operating here.
IV. UNDERSTANDING THE EXPORT ENVIRONMENT IN HONG KONG
Many companies are exploring new markets in which to sell their products as competition for local sales intensifies. At the same time, many companies are looking for alternate sources for supply to reduce costs. One way companies are succeeding in these objectives is to expand their overseas markets for both import and export.
A. Selling your products in Hong Kong
Hong Kong represents an ideal market for American companies. The United States and Hong Kong are important trading partners. The United States is Hong Kong’s second largest trading partner, and Hong Kong, the 13th largest trading partner of the United States with bilateral trade volume of US$53.5 billion in 1996. For the first six months of 1997, New Jersey businesses sold US$221 million worth of goods in Hong Kong.
Hong Kong’s economy was built on free enterprise and free trade. It was rated as the freest in the world and one of the most accessible markets in the world with very few barriers to imports and virtually no barriers to foreign investors. However, these views were prior to Hong Kong ceasing to be a British territory and becoming a Special Administrative Region of the People’s Republic of China. Some changes are inevitable, but Hong Kong’s future as a thriving international trading, financial and manufacturing center is guaranteed for at least fifty years under the terms of the Sino-British Joint Declaration of 1984.
The Hong Kong economy is highly externally oriented and dependent on trade with the rest of the world. In 1996, the value of Hong Kong’s total trade amounted to US$376 billion. Within this total, the value of imports amounted to US$197 billion. Hong Kong is the United States’ fifth largest export market in Asia, taking more American goods per capita than almost anywhere else in the world. Values of imports from the United States totaled US$15 billion in 1996. Some of the products sold in Hong Kong by American companies include ginseng roots, plastic scrap, kraft paper or paperboard, silicones in primary forms, diamonds, frozen chicken cuts, jewelry, fresh grapes, integrated electronic circuits, automatic data processing machines, and cellular telephones.
B. Buying your products from Hong Kong
The United States was the second largest market for Hong Kong’s domestic exports, accounting for about US$6.9 billion. Among items imported into the United States from Hong Kong are the following: wearing apparel; electrical machinery; photographic apparatus, equipment and supplies; watches and clocks (this is the 3rd largest manufacturing industry in Hong Kong); office machines; automatic data processing equipment; and toys.
C. Hong Kong as a Gateway to the Chinese market
Because of its location, nearly fifty percent of U.S. exports to mainline China passed through Hong Kong in 1996. For the first six months of 1997, New Jersey businesses sold US$184.41 million worth of goods in China.
V. TARIFFS IN HONG KONG
There is no general tariff on goods entering Hong Kong, but excise duties are charged on four groups of commodities irrespective of whether they are imported or manufactured locally. These are purely revenue raising duties. The commodities are hydrocarbon oil, liquors, methyl alcohol and tobacco.
VI. TAXES IN HONG KONG
Hong Kong is well known for operating a low-tax regime which minimizes the financial burden on wealth-creators. The taxes are low, simple and predictable.
For Americans accustomed to a Byzantine, complex and high tax rate system, Hong Kong’s tax system is extremely straightforward, simple and business friendly. Unincorporated businesses are taxed at the maximum rate of 15 percent on their profits. Incorporated business are taxed at the maximum rate of 16.5 percent on their profits. Virtually all expenses are allowed as tax deductions. Losses may be carried forward indefinitely.
The highest personal income tax rate is 15 percent (starting at HK$444,000 or US$56,923). Expatriate business executives are often given free housing as part of their compensation package. Hong Kong treats the taxable value of the rent-free residence at 10 percent of the employee’s income. Only about two percent of the working population pays the highest rate of 15 percent, and over half pay no salary tax at all.
VII. CURRENCY ISSUES IN HONG KONG
There are no currency exchange problems in Hong Kong. Since October 17, 1983, the Hong Kong dollar has been linked to the US dollar at a fixed rate of HK$7.8 = US$1. Therefore, there is no exchange risk because currency rates do not fluctuate for Americans.
VIII. GETTING YOUR BUSINESS OFF THE GROUND IN HONG KONG
A. Registering your Business in Hong Kong
All companies that do business in Hong Kong must be registered with the local government within one month of commencing business in Hong Kong. The cost is fairly nominal (HK$2,250, or US$288). To register, go to the following address:
Business Registration Office of the Inland
Revenue Tower, 4/F
5 Gloucester Road
You may also call the Business Registration Office at (852) 2594 0888.
B. Incorporating in Hong Kong
Incorporating your business in Hong Kong is straightforward and cost effective. Businesses can be incorporated in Hong Kong in the form of private limited liability companies. These are Hong Kong’s legal equivalent to the standard American corporation and they require minimal capitalization.
The cost to incorporate is fairly nominal. (HK$1,450 or US$185). To apply, go to the following address:
Companies Registry at 13th-14th floors
Queensway Government Offices
You may also call the Companies Registry at (852) 2867 2587.
C. Setting up a Branch Office in Hong Kong
Setting up a branch office in Hong Kong is one of the easiest and cheapest ways to get started there. After registering your business with the Business Registration Office of the Inland Revenue Department, pay them an additional fee of HK$316 (or US$40) to identify your business as a branch office.
D. Setting up a Subsidiary in Hong Kong
A common practice among American companies is to set up a subsidiary in Hong Kong. These subsidiaries usually take the form of a private limited liability company. It is a rather quick process, taking between seven to ten days. The primary benefit of setting up a subsidiary as opposed to creating a separate and independent Hong Kong corporation is privacy. Financial statements need not to be filed with the local government if a U.S. company incorporates as a wholly owned subsidiary in Hong Kong.
Once again, the cost of setting up a subsidiary is fairly nominal. The fee ranges from HK$600 (or US$77) to HK$1,010 (or US$128).
To apply, go to the Companies Registry.
E. Purchasing a “Shelf” Company in Hong Kong
A practice that is unique to Hong Kong is the purchase of so-called “shelf” companies. In Hong Kong, you can purchase an already incorporated private company from a law firm or accounting firm. These types of companies are called “shelf” companies.
It takes a few days to acquire a shelf company (unless the name of the shelf company is being changed) and the cost is HK$6,440 (or US$800).
Hong Kong businessmen like to buy shelf companies for many reasons including privacy, name identification, and length of time that the shelf company has been in existence.
IX. THE LEGAL SYSTEM IN HONG KONG
As a former British colony, Hong Kong continues to be guided by principles of English common law. The common law system is modified through local ordinances and legislation. On July 1, 1997, a Court of Final Appeal was established pursuant to the Joint Declaration and the Basic Law to replace what was formerly the Privy Council as the highest appellate court for Hong Kong.
Pursuant to the Sino-British Joint Declaration, members of the judiciary will remain independent of the executive and legislative branches of government.
X. HONG KONG AIRPORT
Hong Kong is building a new, multi-billion dollar airport at Chek Llap Kok. Along with the airport, Hong Kong is building the Tsing Ma Bridge, which will be the largest suspension bridge carrying a railway and road. The new airport is supposed to handle 35 million passengers a year on opening. An estimated 1.6 million tons of cargo will also be handled annually. Hong Kong International Airport is one of the busiest in the world, regularly used by some 65 international airlines, bringing into Hong Kong more than 35,000 passengers a day.
XI. HONG KONG’S PORTS
Hong Kong is one of the busiest container ports in the world, having handled 12.5 million TEUs (20-foot equivalent units) in 1995. Of these, 8.26 million TEUs were handled at the Kwai Chung/Stonecutters Island Terminals. Customs Officers working at the port keep close control over all imported cargo by processes similar to those used for air cargo and in addition, conduct random checks on export cargo.
English and Cantonese are spoken. Mandarin is becoming more popular.
Hong Kong Economic and Trade Office
1520 18th Street, N.W.
Washington, DC 20036
Telephone: (202) 331-8947
Fax: (202) 331-8958
Information Services Department
5th-8th Floors, Murray Building
Garden Road, Hong Kong
Telephone: (852) 2842 8777
Fax: (852) 2845 9078
One Stop Unit
14th Floor, Ocean Centre, 5 Canton Road
Kowloon, Hong Kong
Telephone: (852) 2737 2434
Fax: (852) 2730 8712
Hong Kong Monetary Authority
28th-30th Floors, 3 Garden Road
Telephone: (852) 2878 8196
Fax: (852) 2878 8197
Hong Kong Trade Development Council
38th Floor, Office Tower
Convention Plaza, 1 Harbour Road
Wanchai, Hong Kong
Telephone: (852) 2584 4333
Fax: (852) 2842 0249
Hong Kong Tourist Association
9th – 11th Floors, Citicorp Centre
18 Whitfield Road, North Point
Telephone: (852) 2807 6543
Fax: (852) 2807 6589
Doing Business in China
A. Country’s Name: The People’s Republic of China. China is the third largest country by area (about 9,571,300 square kilometers).
B. Capital: Beijing. China’s largest city is Shanghai.
C. Population: 1.2 billion people, more than one-fifth of the world’s total population.
D. Ethnic Groups: China has 56 ethnic groups, of which the Han people account for 92% of the nation’s total population. The ethnic groups in China consist primarily of the Han, Mongolian, Hui, Tibetan, Uygur, Miao, Yi, Zhuang, Bouyei, Korean, Manchus, Dong, Yao, Bai, Tujia and Hani.
E. Religion: Buddhism, Taoism, Islam, and, to a lesser extent, Catholicism and Christianity.
F. Languages: The Han language, commonly known as Mandarin, is the official Chinese language, and is widely used across the country. It was based on the northern languages to form a common speech for the entire country and the Beijing residents’ pronunciation is the standard. The simplified Chinese characters are popular on the Chinese mainland. Of the ethnic minority groups in China, the Hui people use the standard Chinese language, and other ethnic minority groups have their own languages, but some do not have written languages.
II. POLITICAL SYSTEM AND ADMINISTRATIVE DIVISIONS
A. Political System: China is a socialist country under the leadership of the Communist Party of China. The Constitution of the People’s Republic of China is the state’s fundamental law. The socialist system is the basic system of China and the people’s congress is China’s political system. China’s economic system is based upon public ownership.
B. State Institutions: China’s state institutions are composed of the following sections:
(a) The National People’s Congress, which is China’s supreme office of state power. It is empowered to pass laws, amend the constitution, and approve the national budget and economic plans. It also has the power to appoint and remove members of the State Council. It regularly holds an annual plenary session, and is elected for a term of five years. Delegates are elected to their present administrative regions through universal suffrage.
(b) President. The president is elected to a five year term by the National People’s Congress. The present  president of the People’s Republic of China is Jiang Zemin, and the vice president is Rong Yiren.
(c) State Council. This is the Central People’s Government. It is the executive and the state’s supreme administrative office. The State Council consists of the premier, vice-premiers, state councilors, ministers of different ministries and commissions, the auditor general and the secretary general. The premier is responsible for the State Council. At present, the premier of the State Council is Li Peng, and vice-premiers are Zhu Rongji, Zou Jiahua, Qian Qichen, Li Lanqing, Wu Bagguo and Jiang Chunyun.
(d) The Chinese People’s Political Consultative Conference (CPPCC). It consists of different political parties and groups, people’s organization and patriotic democratic personages. Its major function is to follow the principle of cooperation between the Communist Party of China (CPC) and different democratic parties and personages in discussing key state political principles, and participating in government affairs.
C. Political Parties and Organizations
(a) The Communist Party of China. It was founded in July 1921 in Shanghai, and is China’s ruling Party. The Constitution has stipulated that the CPC shall hold the leading position in the country. The Party has more than 54 million members. Functional authority over the party machinery resides with the Politiburo and the Standing Committee. The general secretary of the CPC Central Committee is Jiang Zemin.
(b) Non-communist parties with a general designation of democratic parties. They include the Revolutionary Committee of the Chinese Kuomintang, the China Democratic League, the China Democratic National Construction Association, the China Association for Promoting Democracy, the Chinese Peasants and Workers Democratic Party, the China Zhi Gong Party (Public Interest Party), the Jiu San (September 3) Society, and the Taiwan Democratic Self-Government League.
(c) Organizations. They include the All-China Federation of Trade Unions, the Communist Youth League of China, the All-China Women’s Federation, and the All-China Federation of Industry and Commerce.
D. Laws and Jurisdiction
China’s law includes the state’s fundamental law, basic law, administrative laws and regulations and local laws and regulations.
As the legislative body, the National People’s Congress (NPC) formulates the state’s fundamental law, basic law and other laws. All the administrative laws, regulations, resolutions and orders, issued by the State Council, and local laws and regulations, issued by people’s congresses of different provinces, municipalities and autonomous regions, all have the effect of law.
The Chinese legal system has three components: (1) a court system; (2) a public security administration, or police component; and (3) and office of the procurator, or the public prosecutor. The highest office is the Supreme People’s Court, which ensures observance of the constitution and regulations of the State Council. Offices of all three judicial branches are found at the provincial, county, and municipal levels, and the public security offices function at the local neighborhood level.
E. Administrative Division and Local Organizations
Local government in China is organized into three major administrative tiers: (1) provinces, (2) counties, and (3) administrative towns and villages. The provincial administrative unit is the highest local administrative division directly under the jurisdiction of the China State Council. It consists of a province, autonomous region and municipality. At present, China has 33 provinces (excluding Taiwan), five autonomous regions and four municipalities. At the second level are prefectures, counties, and municipalities; at the third are municipal subdivisions, administrative towns, and villages.
A. GDP Growth. In 1997, China’s gross domestic product reached 7,480 Renminbi yuan (about US$901 billion). From 1992 to 1996, China’s GDP maintained double digit growth of around 12% (about 8.8% for 1997).
B. Financial Structure. China’s financial structure includes a central bank system, a financial institutions system and a financial market system. According to the “Law of the People’s Bank,” the People’s Bank of China is the central bank in charge of monetary policy under the leadership of the State Council.
Since 1979, when Hong Kong’s Nanyang Commercial Bank was the first foreign-funded institution to open a representative office in China, foreign-funded financial institutions have become an important part of China’s financial system. They are a key channel for helping China with overseas transactions. The Chinese State Council has approved the establishment of foreign-funded banking businesses in 24 cities. Foreign financial institutions account for 540 representative offices and 162 business entities. Nine of these foreign financial institutions do business in the local currency, the Renminbi.
The “Temporary Provisions for the Establishment of Branch Institutions by Foreign-Funded Banks in China,” issued in 1996, allows foreign banks possessing qualified conditions in Shanghai, Dalian, Tianjin and Guangzhou to set up sub-branches, and banks with solely foreign investment, as well as joint venture banks to establish branches.
China is continuing to open its financial sector to the outside world. Efforts include the following: opening more cities to foreign financial institutions, lifting restrictions on the business of overseas-funded financial institutions, gradually expanding the Renminbi business on a trial basis; and opening up more opportunities in the insurance business.
C. Taxes on foreign-funded enterprises. Since the implementation of China’s unified tax system in 1994, taxes on foreign-funded enterprises, foreign businesses and foreigners are the same as those on Chinese enterprises and citizens except for three tax categories: (1) income taxes on foreign-funded enterprises and foreign businesses, (2) taxes on urban real estate, and (3) taxes on licenses for motor vehicles and ships.
Since September 1983, the Chinese Government has entered into agreements with dozens of countries, including the United States, to avoid dual tax collection.
IV. FOREIGN TRADE
A. Some facts and numbers:
In 1997, China export and import volume reached US$325 billion dollars (US$182.7 billion in exports, and US$142.3 billion in imports).
Products imported into China include industrial finished products (machinery and electronics), steel, plastics, chemical fertilizer, textile machinery, metal processing tools, integrated circuits, micro-electronics components, cereal and cereal powder, crude oil, edible oil, finished oil and raw cotton. Products exported out of China include finished machinery and electronic products, garments and their accessories, yarns and related products, shoes, toys, travelers’ products, briefcases or bags and finished plastic products.
By 1997, China had 220 foreign trade partners. The United States is China’s second largest trade partner, and China is the United States’ fourth largest trade partner. In 1996, total US exports to China reached US$12.5 billion and Chinese imports into the United States reached US$48.6 billion. The most popular Chinese products in the United States include consumer goods such as textiles, garments, footwear, toys, household electrical appliances and other light industrial products and tools and general machinery. China has a growing market for advanced technologies and equipment. American industries involved in aircraft, sophisticated machinery, electronics, chemicals, grain timber and fertilizer are increasing their market share in China.
Trade between New Jersey and China is also expanding rapidly. Exports from New Jersey to China rose 115% in 1995, to US$647 million.
B. Laws and Regulations on Foreign Trade
The Foreign Trade Law took effect on July 1, 1994 and is the basic law guiding foreign trade activities in China. Its stated purpose is to implement a unified national foreign trade system, create a fair and free foreign trade, encourage foreign trade development, and promote trade relations with other countries. Besides regulations of Foreign Trade Law, other main references include “Regulations for issues on approving foreign trade enterprises” issued by the Ministry of Foreign Trade and Economic Cooperation on May 24, 1988.
Major laws and regulations regarding the management of import commodities include:
(1) “Provisional Regulations on Import Commodity Businesses,” promulgated on July 19, 1994;
(2) “Interim Provision on Import of Machinery and Electronics Products” and “Provisional Rules on Automatic Registration of Import of Specially Designated Commodities,” approved by the State Council on September 22, 1993;
(3) “Procedures in Handling Imported and Exported Materials Needed by Foreign-funded Enterprises,” issued on June 9, 1995;
(4) “Provision on the Environmental Protection on Import of Waste Products,” issued on March 1, 1996; and
(5) Regulations governing management of export commodities mainly refer to “Interim Provisions on Management of Export Products,” promulgated on December 29, 1992.
The basic law on China’s foreign exchange control is “Regulations for Exchange Control of the People’s Republic of China,” issued on June 20, 1996 by the State Council. Other relevant regulations include:
(1) “Proclamation on Further Reform of Foreign Exchange Control by the People’s Republic of China,” issued on December 28, 1993; and
(2) “Provisions on Settlement, Sales and Payment of Foreign Exchanges Management,” promulgated on March 26, 1994.
China practices compulsory inspection for all export and import commodities. Major laws and regulations include:
(1) “Law on the Inspection of Import and Export Commodities of the People’s Republic of China,” issued on February 21, 1989;
(2) “Provisions on the Inspection of Export and Import Commodities in Border Trade,” promulgated on April 22, 1993;
(3) “Rules on Customs Exemption of Import and Export Commodities,” issued on January 11, 1990;
(4) “Rules for the Reinspection of Import and Export Goods,” issued in 1993;
(5) “Law on Quarantine of Import and Export Animals and Plants,” issued on October 30, 1991.
Customs Supervision and Control and Laws and Regulations on Customs Tariff include:
(1) ”Customs Law of the People’s Republic of China,” passed on January 22, 1987;
(2) “Regulations Governing the Assembling of Imported Parts,” issued in September 1987;
(3) “Regulations of the PRC Governing the Operation and Management of Bonded Factories”;
(4) “Regulations on Bonded Warehouses and Goods Stored Therein,” and “Regulations Concerning the Import and Export of Articles for Processing,” issued in June 1988;
(5) “Regulations Governing Customs Supervision and Control of Export Stocks,” issued in March 1992;
(6) “Rules for the Supervision, Control and Taxation of Import and Export Goods Manufactured by Foreign-Funded Enterprises,” issued in August 1992;
(7) “Import and Export Duty Regulations of the People’s Republic of China,” amended and issued on March 18, 1992.
Provisional Laws and Regulations on Technology Import and Export
The laws and regulations for technology businesses include:
(1) “Procedures Governing the Contract of Technology Imports of the People’s Republic of China,” issued on May 24, 1985;
(2) “Rules for the Implementation of Procedures Governing the Contract of Technology Imports,” issued on January 20, 1988.
Sino-foreign Civil and Commercial Laws
(1) “The Law for Sino-foreign Economic Contracts of the People’s Republic of China,” passed on March 21, 1985;
(2) “Draft of the General Principles of the Civil Code of the People’s Republic of China,” approved on April 12, 1986.
China has signed or participated in up to 100 international economic and trade conventions and recognized the common practice, norms and principles in international trade.
C. Foreign Trade Management
The Chinese government has issued a series of laws, decrees and policy regulations to oversee foreign trade. These provisions fall into the following categories: management of foreign trade business, import and export commodity control, import and export commodity control, customs control, import and export commodity inspection control and foreign exchange control.
a. Foreign Trade Business Management
Enterprises, in accordance with the Foreign Trade Law of the People’s Republic of China, must meet certain requirements when they apply for rights in foreign trade business. The Ministry of Trade and Foreign Economic Cooperation or government departments for foreign economic relations and trade in the provincial level issue licenses upon application.
In China there are three basic forms of foreign trade businesses:
(1) Specialized state-owned foreign trade companies. These companies are the chief undertakers of China’s import and export business. They deal with large designated commodities, and serve as agents in import and export for enterprises without license in foreign trade business.
(2) Manufacturing enterprises and research institutions with import and export for their own products. These enterprises deal with the export of products manufactured in their own enterprises or institutions. They import raw materials and other items, including spare reserved parts, related to their own production and research.
(3) Foreign-funded enterprises. All foreign-funded enterprises can, in accordance with relevant regulations, specialize in the export of products manufactured in their own enterprises and import those items needed for their own production activities.
The foreign trade agent system is a special kind of agency in China. This refers to foreign trade businesses dealing with import and export business under their own names, acting on behalf of enterprises without such rights.
b. Import and Export Control
In China, import and export business control is achieved through (1) the licensing of companies to authorize the import and export of goods and (2) a quota system.
The licensing system is not directed at any country or region; it serves as a way to coordinate and control foreign trade enterprises with import and export rights and which operate in China.
Import Commodity Control
Enterprises ready to import goods under import quotas control should first apply for an import license by presenting import quotas certificates. For commodities under the control of general import license, enterprises can get permission from the appropriate departments concerned. Import licensing is administered by the Ministry of Foreign Trade and Economic Cooperation.
Some commodities are under a general license control by related government departments. For example, chemical products used in the production of chemical weapons must be submitted for approval by the Ministry of Chemical Industry. Imports of grain, edible oil, wine, color sensitive materials and pesticides are handled by applying for import licenses by presenting “Registration of Special Commodity Import” issued by planning commissions in each province.
Export Commodity Control
Control by Quotas License. Commodities whose exports are subject to a control by quota license include:
(1) Major resource export commodities which concern the national economy and the people’s livelihood and major traditional export commodities which play an important part in the country’s export.
(2) Export commodities which dominate the international market or in some particular region of the world, or whose restrictions are requested by foreign countries.
(3) Active quotas controls of export commodities whose import from China is controlled by foreign quotas. Most of these commodities are textile products. The annual amount of export for these products is decided by bilateral agreements.
(4) No export limit is issued for certain brand name products, well-known products, and specialty local products.
The Ministry of Foreign Trade and Economic Cooperation and the analog local government departments at the provincial and municipal level are responsible for the control of quotas commodities.
Export License Control
China practices export license control for the export of commodities affected by planned quotas, active quotas and general licensing control. At present, 114 kinds of commodities are under the control of the export licensing system and they can be divided into 142 smaller categories.
Export licenses are issued by the Ministry of Foreign Trade and Economic Cooperation and local envoy offices. Some licenses are controlled at the provincial level.
Goods Prohibited from Export
No enterprise may export the following products out of China: goods whose export may harm national security, certain ancient relics, animals or plants on the endangered species list, products manufactured in labor camps, goods that will violate international duties of China, musk, natural bazaars, copper and platinum.
c. Customs Control
Customs offices across China control and supervise goods carried by means of transportation entering and exiting China, baggage and handbags, postage parcels and other products, collect tariffs and other taxes, crack down on smuggling and compile customs statistics and handle other related businesses.
Import and export commodities should enter or exit China through ports with customs offices and these goods should be declared with tax paid by customs declaration enterprises approved and registered by customs authorities or foreign trade companies.
The customs supervision procedures towards import and export commodities is as follows: (1) customs declaration; (2) documents check, (3) goods inspection; (4) tax payment, and (5) customs clearance.
Duty Control: Chinese Customs levies taxes in accordance with the Import and Export Duty Regulations of the People’s Republic of China and the Import and Duty Procedures of China Customs.
China practices zero value added tax rate for export goods which means no value added tax is levied on exports.
China has two tax systems for import tax: a general tax rate and a preferential tax rate. The preferential tax rate is for import products manufactured in countries or regions with reciprocity agreements. The general level for import tariffs in China is 17% from October 1, 1997.
The basic procedures for duty collection runs as follow: (1) check customs declaration of import and export goods; (2) decide whether they are within the tax exemption policy; (3) decide tax category; (4) decide tax rate; (5) check prices duty paid; (6) calculate total tax amount.
d. Import and Export Commodity Inspection and Control
The State Administration for the Inspection of Import and Export Commodities is responsible for the inspection of import and export commodities in China. The inspection and quarantine of import and export commodities are implemented by inspection and control agencies attached to relevant departments.
Legal inspection means compulsory inspection of major import and export commodities. These include commodities listed in the Catalogue for Import and Export Commodities under the Inspection by Commodity Inspection Agencies, health quarantine on export of food products; quality appraisals and utilization appraisals on packages and containers for dangerous goods; the worthiness inspection on ships or containers used for carrying perishable food, frozen products, and export commodities whose inspections are required by international conventions.
Persons involved in foreign trade should apply for inspection in commodity inspection agencies when importing and exporting commodities listed in the catalogue or other laws and regulations. The inspection of import and export commodities other than those listed above are checked and inspected by related foreign trade agencies. Commodity inspection institutions can supervise such inspection or conduct random inspections.
The appraisals to import and export commodities are conducted by commodity inspection agencies according to the application by foreign trade related persons or entrusted to domestic and international departments or foreign inspection agencies. These inspection agencies conduct notarized inspections of the import and export commodities.
e. Foreign Exchange Control
On December 28, 1993, the People’s Bank of China decided to practice a unified foreign exchange rate for the Renminbi and a single, managed floating exchange rate system based on market supply and demand. The central bank also decided to participate in the buying and selling of currency on the foreign exchange. Under the current system, domestic firms must sell all their foreign exchange earnings to designated banks. When these firms need foreign currency, they buy the money from banks by presenting import contract and notification for payment issued by foreign financial institutions. The interbank foreign exchange markets are established so that the PBC can announce daily market exchange rates of Renminbi to major foreign currencies according to the prices in different exchanges markets. Foreign currencies are forbidden to be used in evaluation, settlement and circulation. China has also stopped issuing foreign exchange certificates.
D. Import and Export Procedures
Import Procedures: Most of the import businesses in China are transacted in FOB prices. Only a very small minority of the import commodities are transacted on CIF terms. The common method of payment is by letter of credit (L/C).
China’s import business is controlled and regulated by a series of laws and regulations such as the Foreign Trade Law and the Customs Law. Therefore, businesspersons must consult with various laws and regulations issued by the Chinese government before importing commodities from overseas.
Export Procedures: The majority of countries do business on CIF or CFR terms and get paid by way of letter of credit. Export procedure typically includes (1) entering into an export contract; (2) preparing export commodities; (3) papering the transaction; (4) checking and changing documents; (5) booking space on a container; (6) customs declaration; (7) commodity inspection; (8) insurance, and (9) loading.
V. FOREIGN INVESTMENT
Since 1979, China has pursued a policy of encouraging foreign investment. In 1980, the first Sino-foreign joint venture business was established in China. By the end of 1997, China had approved a total of 300,000 foreign-funded projects worth US$510 billion. More than 240,000 foreign-funded enterprises have opened in China, with a workforce of more than 17 million people.
The United States is the second largest investor in China, with 23,000 projects worth US$36.8 billion.
Foreign investment in China covers a wide range of fields, covering oil, coal, communications, telecommunications equipment, metallurgy, machinery, electronics, chemicals, building materials, light industry, textile, medicine, plantation, animal husbandry, real estate, tourism and hospitality services, aeronautics, cargo transportation, and insurance.
China’s foreign exchange reserve is about US$140 billion. Its foreign debt is about US$118.6 billion.
A. Advantages of the Investment Environment in China
Enormity of the Market: China is a country of 1.2 billion people, with a vast potential for consumption. The China market is regarded by investors as the last enormous market that has not been developed in the world. Over the past decade, the scale of China’s economic reconstruction has expanded rapidly. Purchasing power has also increased.
Number of Business Opportunities: The rapid growth of the Chinese economy has created numerous investment and development opportunities for investors. Because of the rapid economic growth, numerous construction projects and technical transformation projects have opened up in all parts of China.
Low Cost of Labor: With the world’s largest population, China has rich resources of labor, with average salaries of workers remaining at a relatively low level. China’s labor force is becoming increasingly educated. China has a nine-year compulsory education system.
Preferential Policies on Foreign Investment: In an effort to attract foreign investment to China, the Chinese Government has made many preferential policies on taxation, and import and export trade.
B. Special Economic Zones and Coastal Open Cities
In August 1980, China created the four special economic zones of Shenzhen, Zhuhai, Shantou and Xiamen. In 1988, Hainan Province was defined as another special economic zone. The special economic zones are comprehensive experimental sites for China’s economic restructuring and opening to the outside world. They also serve as a special channel for China to use foreign investment, import advanced technology and enter international markets.
The Chinese Government has implemented special economic policies and an economic management system in the special economic zones that are different from those exercised in other parts of China. These special economic policies include the following:
(1) The special economic zones depend on the use of foreign investment. Firms located in these zones include State-run enterprises, collectively-owned enterprises, private businesses and foreign-funded enterprises.
(2) Preferential treatment for overseas investors are more available in the zones. The income tax on foreign-funded enterprises is levied at a reduced rate of 15%. For businessmen and foreigners entering and exiting special economic zones, procedures have been simplified to provide convenience for their traveling.
(3) The State has formulated policies inclined to support the growth of the special economic zones, including the expansion of bank loans for projects in the zones.
(4) The government of the special economic zones is granted the power of economic management analogous to that of a province.
Pudong New Area: In June 1990, the Chinese Government approved a plan to authorize the municipality of Shanghai to develop and open the Pudong New Area, and to exercise some policies in the area analogous to those applied in the special economic zones.
The Coastal Open Cities: In April 1984, the Chinese Government identified a total of 14 cities as coastal open cities: Tianjin, Shanghai, Dalian, Qinhuangdao, Yantai, Qingdao, Lianyungang, Nantong, Ningbo, Wenzhou, Fuzhou, Guangzhou, Zhanjiang and Beihai. In an effort to support the economic, cultural and educational growth of these cities, the Central Government has offered these cities (1) the ability to independently make decisions on foreign economic and trade activities, (2) preferential treatment for foreign-funded enterprises, and (3) assistance on technical transformation of old enterprises. In investing in these cities, foreign investors can enjoy preferential treatment on taxation, e.g., the income tax on enterprises with foreign investment is levied at a reduced rate of 24%, and the income tax on foreign-funded enterprises undertaking projects encouraged by the State is levied at a reduced rate of 15%.
Coastal Open Areas: Since 1992, the Chinese Government has established and opened a series of “coastal open areas” and has introduced the policy of opening cities on rivers and borders. Consequently, six port cities on the Yangtze River as well as 13 inland border cities and capitals of provinces and autonomous regions have been opened, and they have been offered preferential policies analogous to those for coastal open cities.
C. Legal Guarantee of Legal Rights of Foreign Investors
China has strengthened its legislation on foreign economic affairs, and has established a basic system of law on direct foreign investment. More than 500 statutes concerning foreign economic affairs have been promulgated.
The Constitution of the People’s Republic of China, the Law on the People’s Republic of China on Chinese-Foreign Equity Joint Ventures, the Law of the People’s Republic of China on Chinese-Foreign Contractual Joint Ventures, the Law of the People’s Republic of China on Chinese-Foreign Enterprises and other Chinese laws and regulations all contain provisions on protecting the legal rights of foreign investors.
No Nationalization or Requisition of Foreign-Funded Enterprises: Article 5 of the Law of the People’s Republic of China on Foreign-Capital Enterprises states as follows: “The State shall not nationalize or requisition any enterprise with foreign capital. Under special circumstances, when public interest requires, enterprises with foreign capital may be requisitioned by legal procedures and appropriate compensation shall be made.”
The Law of the People’s Republic of China on Chinese-Foreign Equity Joint Ventures contains similar provisions.
Power of Self-Management: Foreign-funded enterprises fully enjoy the power of self-management. The Board of Directors is the highest decision-making body of a Sino-foreign joint venture, which maintains the power to make decisions on all major issues concerning the operation of the joint venture. Foreign-funded enterprises, within the framework of relevant contracts approved, maintain the power to make their own plans on production and management, raise and use funds, purchase means of production, market products, set their own standards on salaries and forms of payment, establish and manning quotas, and decide the employment or dismissal of their personnel.
International Remittance of Capital and Gains: Foreign partners in Sino-Foreign joint ventures may take the net proceeds of their ventures and remit them to other countries in other currencies (such as U.S. dollars).
D. Preferential Policies
Since 1978, to encourage foreign investment and introduce technological cooperation, the Chinese Government has made a series of preferential policies, particularly with respect to taxation.
Under the Law on Income Tax for Foreign-Funded Enterprises and Foreign Enterprises and the Detailed Regulations for Implementation of the Law on Income Tax for Foreign-Funded Enterprises and Foreign Enterprises, adopted in 1991, the enterprise income tax on foreign-funded enterprises and wholly foreign-owned enterprises is generally levied at a rate of 30% while the local income tax on them is levied at a rate of 3%. However, under the following circumstances, these enterprises can pay the income tax at reduced rates or can be exempted from paying it:
1. For foreign-funded enterprises established in the special economic zones of Shenzhen, Zhuhai, Shantou, Xiamen and Hainan and for productive enterprises with foreign investment established in the economic and technological development areas in coastal port cities, they can pay at a reduced rate of 15% tax on the enterprise income from their production and operation in the areas concerned.
2. For enterprises with foreign investment established in coastal economic open areas and special economic zones as well as in old urban areas of the cities in which economic and technological development areas are located, they can pay at a reduced rate of 24% on the enterprise income from their production and operation in the areas concerned.
3. For foreign-funded enterprises established in coastal economic open areas and special economic zones as well as in old urban areas of the cities in which economic and technological development areas are located, or established in regions otherwise defined by the State Council, they can pay the enterprise income tax at a reduced rate of 15% if they are undertaking projects of energy, communications and reconstruction of ports and wharves or other projects encouraged by the State.
4. For foreign-funded enterprises with 10 years of operation or more, they will be exempted from paying the enterprise income tax for the first and second years following the year in which they begin to gain profits, and can pay the enterprise income tax at half the required rate for a period between the third and fifth years starting from the year in which they begin to gain profits. But if they are undertaking projects of exploration of resources, including oil, natural gas, or rare and precious metals, their payment of the enterprise income tax is governed by other official regulations.
5. For Sino-foreign joint ventures undertaking projects of reconstruction of ports and wharves with 15 years of operation or more, upon application, they will be exempt from paying the enterprise income tax for a period between the first and fifth years starting from the year in which they begin to gain profits and they can pay the enterprise income tax at half the required rate for a period between the sixth and tenth years starting from the year in which they begin to gain.
6. For foreign-funded enterprises undertaking projects of reconstruction of infrastructure facilities, including the airport, seaport, wharf, railway, highway, power station, coal mine and water conservancy as well as undertaking agricultural development and operations which are established in the Hainan Special Economic Zone and which have 15 years of operation or more, they can be exempted from paying the enterprise income tax for a period between the first and fifth years starting from the year in which they begin to gain profits, and they can pay the enterprise income tax at half the required rate for a period between the sixth and tenth years starting from the year in which they begin to gain profits.
7. For foreign-funded enterprises undertaking projects of reconstruction of infrastructure facilities, including the airport, port, railway, highway, power station and other facilities related to energy as well as communications which are established in the Pudong New Development Area of Shanghai and which have 15 years of operation or more, they can be exempted from paying the enterprise income tax for a period between the first and fifth years starting from the year in which they begin to gain profits, and they can pay the enterprise income tax at half the required rate for a period between the sixth and tenth years starting from the year in which they begin to gain profits.
8. For foreign-funded enterprises undertaking the industry of services established in special economic zones with 10 years of operation or above whose foreign investment has each exceeded the level of US$5 million, they can be exempted from paying the enterprise income tax for the first year starting from the year in which they begin to gain profits, and they can pay the enterprise income tax at half the required rate for a period between the second and third years starting from the year in which they begin to gain profits.
9. For foreign-funded enterprises undertaking the manufacture of export-oriented products, when the period for their tax exemption or reduction expires in accordance with relevant official regulations, they can pay the enterprise income tax at half the required rate for the same year in which the period for tax exemption or reduction expires if the output value of their export-oriented products accounts for 70% of the total output value of all their products for the same year. For foreign-funded enterprises undertaking the manufacture of export-oriented products established in special economic zones and economic and technological development areas as well as other enterprises of the same category which have finished the payment of enterprise income tax at the rate of 15%, they can continue to pay the enterprise income tax at a rate of 10% if they meet the above-mentioned requirements.
10. For foreign-funded enterprises of advanced technology, if they continue to be enterprises of advanced technology when the period for their tax exemption or reduction expires in accordance with relevant official regulations, they can continue to pay the enterprise income tax at half the required rate for an extended period of three additional years.
11. For foreign-funded enterprises undertaking the production of agriculture, forestry and animal husbandry as well as those established in underdeveloped remote areas, when the period for their tax exemption and reduction expires in accordance with relevant official regulations, they can continue to pay the enterprise income tax at reduced rates ranging between 15% and 30% for an extended period of ten additional years if they apply for the reduction and if relevant tax authorities under the State Council approve the application.
12. For foreign investors participating in foreign-funded enterprises with no less than five years of operation, if they re-invest the profits gained from a foreign-funded enterprise in the same enterprise to increase its registered capital, or if they use the profits gained from it and reinvest the money to establish other foreign-funded enterprises, they will be refunded 40% of the enterprise income tax already paid on the proportion of their re-investment if they apply for the refunding and if relevant tax authorities approve the application.
13. For industries and projects intended to encourage foreign investment, the governments of provinces, autonomous regions and municipalities directly under the Central Government may exempt or reduce taxes.
The Chinese Government has gradually shifted the preferential treatment in various tax policies toward particular industries.
E. Guide to Industries for Investment
The “Directory of Industries for Foreign Investment” forms the basis for the guidance and approval of foreign-funded projects, which carry four classifications: (1) encouraged, (2) permitted, (3) restricted, and (4) forbidden. Projects with foreign investment which fall into these categories are listed in the Directory.
F. Forms of Investment
The forms of direct foreign investment most often adopted in China are (1) Sino-foreign joint ventures, (2) Sino-foreign cooperative ventures, (3) wholly foreign-owned ventures and (4) cooperative exploitation. As China continues to open the country to the outside world, there has been a gradual increase in the forms of investment in the country, including that of foreign-funded financial institutions. Recently, BOTs (Build-Operation-Transfer) have been introduced into China.
Sino-Foreign Joint Ventures
Sino-foreign joint ventures also refer to Chinese-foreign equity joint-venture enterprises. They are the enterprises established in China with joint investment from foreign companies, enterprises and other economic organizations or individuals as well as from Chinese companies, enterprises or other economic organizations. Enterprises of this category have the characteristics of joint effort and participations: all parties participate in the joint venture jointly, offer joint investment in it, jointly operate it, share the risks of it in accordance with their different proportions of investment, and are jointly held responsible for the profits and losses of it. All parties participating in the joint venture can offer their investment in the form of currency, or with buildings, machinery, equipment, the right to use the work site, industrial property and exclusively-owned technology. The proportions of investment offered by all the parties participating in the joint venture are accordingly converted into ratios of investment. Generally, the ratio of investment offered by the foreign party participating in the joint venture is not lower than 25 percent. The corporation form of the Sino-foreign joint venture is the limited liability company, with the Board of Directors being its supreme body of power. Along with the development of China’s experiment to introduce the system of joint stock liability partnerships, a small number of Sino-foreign joint ventures have adopted the corporate form of joint stock limited companies.
Sino-Foreign Cooperative Ventures
Sino-foreign cooperative ventures also refer to Chinese-foreign contractual joint ventures. They are enterprises established in China with investment or conditions for cooperation jointly offered by foreign companies, enterprises, other economic organizations or individuals as well as by Chinese companies, enterprises or other economic organizations. Their main difference from Sino-foreign equity joint ventures is that the investment from the Chinese and foreign parties participating in the cooperative venture will not generally be converted into ratios of investment. The rights and obligations of all parties participating in the cooperative venture, including the provision of investment and conditions for cooperation, the distribution of profits or products, the sharing of risks and losses, the form of operation and management, and the ownership of property at the termination of the contracts, are all defined in the contracts signed by all parties. In establishing a Sino-foreign cooperative enterprise, the foreign party will generally provide all or most of the funds while the Chinese party will offer land, workshops, usable equipment, facilities, and sometimes a certain proportion of funds. Normally, the Chinese and foreign parties participating in the cooperative venture will define in their contract that when the duration of cooperation ends, all the assets of the cooperative venture will be owned by the Chinese party, and that the foreign party can first recoup its investment within the duration of cooperation. Such a form of cooperation can not only meet the needs of Chinese enterprises for sources of investment, but is also greatly attractive to many foreign investors who are eager to recoup their investment.
Foreign enterprises in China also refer to wholly foreign-owned enterprises, they are the enterprises established in China by foreign companies, enterprises, or other economic organizations or individuals in accordance with Chinese law with all the investment solely offered by foreign investors. According to China’s law on foreign enterprises, the establishment of foreign enterprises in China must be conducive to the development of China’s national economy, and must meet at least one of the following requirements: (1) that they will apply internationally advanced technology and equipment, (2) and that all or most of their products will be export-oriented. The corporate form of foreign enterprises in China is generally the limited liability company. Along with the development of China’s experiment to introduce the system of joint stock partnership, a small number of foreign enterprises in China have adopted the corporate form of the joint stock limited company. Although China was relatively late in introducing the system of establishing foreign enterprises, the establishment of wholly foreign-owned enterprises in the county has developed relatively rapidly over recent years.
Foreign-Funded Financial Institutions
Foreign-funded financial institutions in China refer to (1) branch offices established in China with investment from foreign financial institutions that are designed to engage in financial operations, (2) wholly foreign-owned financial institutions with the Chinese legal person status, and (3) Sino-foreign joint venture financial institutions. They are foreign-funded enterprises in the field of finance in China. Compared to general foreign-funded enterprises, the main difference with foreign-funded financial institutions in China is that most of them are established in the country as branch offices of foreign financial institutions, e.g. branch offices of foreign banks and insurance companies, without the Chinese legal person status. Foreign-funded financial institutions already established in China include foreign-funded banks, foreign-funded financial companies and foreign-funded insurance companies. So far, the operations of foreign-funded banks and foreign-funded companies in China have been restricted within the framework of foreign exchange operations, mainly including foreign exchange deposits, foreign exchange loans, foreign exchange clearing and money remittance as well as officially-approved operations of foreign exchange investment. Their main business customers are foreign-funded enterprises, foreign companies and foreigners. For foreign financial institutions applying for the establishment of foreign-funded financial institutions in China, their total assets must have reached a required scope, and their countries of origin must have had a strict system of supervision and control over financial operations and must have been operating representative institutions in China for more than two years. The application for establishing foreign-funded financial institutions in China must be made in accordance with relevant Chinese law and regulations, and is subject to approval of competent State financial authorities.
BOT is the abbreviation for Build-Operation-Transfer. In a typical form of BOT investment, the government signs a contract with a private project company (a foreign-funded project contractor in China) to define that the latter will be responsible for raising funds and building a particular infrastructure facility. During the duration of cooperation set forth in the contract, the project company owns, operates and maintains the facility, and recoups the investment and gains appropriate profits by means of collecting utilization fees and service charges. When the duration of cooperation ends, the ownership of the facility will be transferred to the Chinese Government gratis. BOTs are popular when developing toll-charge highways, power plants, railways, sewage treatment plants, urban subway systems and other infrastructure facilities. BOTs are still in their exploratory stage.
This is a form of investment integrating technology trade, commodity trade and credit. Foreign investors provide directly, or on the basis of credit, machinery and equipment for Chinese enterprises. With product manufactured with the equipment and technology provided, the Chinese enterprises concerned will compensate by installments for the cost of the equipment and technology provided and the interest arising from it. Major forms of compensation trade include direct compensation, indirect compensation, comprehensive compensation and labor compensation. In the form of direct compensation, the Chinese enterprises concerned will compensate for the cost of the equipment and technology provided by foreign investors and the interest arising from it with products directly manufactured with the equipment and technology provided, the Chinese enterprises concerned will compensate by installments for the cost of the equipment and technology provided and the interest arising from it. Major forms of compensation trade include direct compensation, indirect compensation, comprehensive compensation and labor compensation. In the form of direct compensation, the Chinese enterprises concerned will compensate for the cost of the equipment and technology provided by foreign investors and the interest arising from it with products directly manufactured with the equipment and technology provided. Direct compensation is the most basic form of compensation trade. In the form of indirect compensation, the Chinese enterprises concerned will compensate for the cost of the equipment and technology provided and the related interest with products manufactured otherwise by them instead of those produced with the equipment and technology provided. Comprehensive compensation means that the Chinese enterprises concerned will compensate for the cost of the equipment and technology provided and partially with products generated otherwise. Labor compensation means that the Chinese enterprises concerned will compensate for the cost of the equipment and technology provided and the related interest with services of labor rather than products. In this form, the Chinese enterprises concerned will make compensation by undertaking the processing of materials supplied and assembling of components supplied by the particular foreign investors.
Processing and Assembling
The export-oriented operation of processing and assembling is a general term for the processing of materials supplied, the assembling of components supplied and the processing with designs supplied by foreign investors. Processing and assembling are a form of foreign economic cooperation, in which Chinese enterprises concerned will undertake the operation of processing and assembling with raw and auxiliary materials, parts and components as well as packaging materials supplied by foreign investors in accordance with their requirements concerned. The foreign investors concerned will be responsible for marketing the products manufactured. The Chinese side will collect service charges in foreign exchange.
The contracts on export-oriented operation of processing and assembling become valid with the approval of competent authorities of the government concerned. The State has adopted preferential policies on taxation, customs supervision and import-export management concerning the export-oriented operation of processing and assembling.
Processing of Materials Imported
Processing of materials imported refers to the domestic processing of materials imported from international markets into semi-finished or finish products, which will then be exported to international markets.
This refers to a form of economic cooperation in which the lessor, through a contract for lease, leases machinery, equipment and other supplies to the lessee for a relatively long period of time, who will use them for activities of production and business operation. During the term of the lease, the lessor enjoys the ownership of the leasehold while the lessee enjoys the right to use the leasehold and is under an obligation to regularly pay a fixed rent. When the term of the lease ends, the leasehold will be disposed of in a way agreed upon by both parties. One example of leasing is in the civil aviation aircraft industry.
G. Procedures for the Establishment of Foreign-Funded Enterprises in China
In making investment in China, foreign investors need to understand the procedures governing the establishment of foreign-funded enterprises in China, which consists of the following regular steps:
1. The Choice of Projects and Cooperation Partners as well as Relevant Official Approval
The first step is to choose appropriate projects. For foreign investors wishing to establish joint ventures and cooperative ventures in China, they also need to consider the choice of appropriate cooperation partners.
In choosing investment projects, foreign investors have two options: (1) to choose investment projects proposed by enterprises or institutions across China, and (2) to propose investment projects by themselves.
When investigating a project proposed by a Chinese company, foreign investors should be mindful that the Chinese company may not have received official approval for the proposed project. It is thus advisable to verify that the project has received official approval. Otherwise, applying for the establishment of a foreign-funded enterprise for the project will be a waste of time, effort and money.
When investigating a project that has not been proposed by a Chinese company, check to make sure that the proposed project will conform to China’s industrial policies, and whether these projects are in fact authorized at all.
For foreign investors and their Chinese cooperation partners applying for the establishment of Sino-foreign joint ventures and cooperative ventures, it is the responsibility of the Chinese cooperation partner to submit the application for the establishment of investment projects to competent authorities of the Chinese Government for approval.
2. The Signing of Contracts and Charters of Association as well as Relevant Official Approval
After the feasibility study report is officially approved, the foreign investors and their Chinese cooperation partners applying for the establishment of Sino-foreign joint ventures and cooperative ventures can proceed to discuss the signing of contracts, charters of association and other legal documents concerning the establishment of the projects. Competent authorities of the Chinese Government require that the contracts and charters of association for foreign-funded enterprises in China must conform to the following principles:
(1) content must be complete, terms must be specific, language must be careful and precise, and the responsibilities of all parties must be clearly defined.
(2) rights and obligations of all parties concerned with the contracts must be provided for on a equal footing.
(3) content of the contracts and charters of association must conform to relevant provisions of Chinese law and regulations.
Competent authorities of the Chinese Government have prepared reference samples of the standardized style of contracts and charters of association for foreign-funded enterprises in China, which can be consulted in relevant negotiations as well as in drafting contracts and charters of association.
For foreign investors and their Chinese cooperation partners applying for the establishment of Sino-foreign joint ventures and cooperative ventures, it is the responsibility of the Chinese cooperation partner to submit the contracts and charters of association for the ventures to competent authorities of the Chinese Government for approval. When the contracts and charters of association concerned are approved, competent authorities of the Chinese Government will issue certificates of approval for the establishment of foreign-funded enterprises.
For foreign investors applying for the establishment of wholly foreign-owned ventures, when their initial applications for the establishment of ventures are approved by competent authorities in written replies, they can proceed to submit formal applications, charters of association and other documents concerned to authorities for approval. After these formal documents are approved, the authorities will issue certificates of approval for the establishment of foreign-funded enterprises.
In an effort to simplify the procedures, the Chinese Government has adopted a stipulation that, for foreign investors and their Chinese cooperation partners applying for the establishment of small-sized projects, they can simultaneously submit the applications, the feasibility study reports and the contracts and charters of association together to competent authorities for overall approval.
During the application process, foreign investors and their Chinese cooperation partners should take two steps for registration: (1) have the name of the foreign-funded enterprise registered after the application for its establishment is officially approved, and (2) have the establishment of the foreign-funded enterprise registered after the contract and charter of association are officially approved.
The registration of the name of the venture to be established is intended to protect the name to be used, to avoid the possible use of an identical or similar name, and to avoid the possibility that the name chosen in negotiations and in the process of approval could be used by someone else for registration. Therefore, before the whole procedure for the registration of the venture is completed, no party concerned with the venture is allowed to use the name registered to conduct business operations.
After the contract and charter of association are officially approved, foreign investors and their Chinese cooperation partners, with the certificate of approval and other document concerned with the establishment of the foreign-funded enterprise, should proceed to apply for the registration to administrative authorities for industry within a period of 30 days. When the registration is made and checked by competent authorities, the foreign investors and their Chinese cooperation partners concerned will be issued a business license. The date of issuing the business license means the date of the establishment of the foreign-funded enterprise concerned.
H. Management of Foreign-Funded Enterprises in China
Managers of foreign-funded enterprises will often have to deal with issues relating to the legal and regulatory system in China. An understanding of these systems is crucial for a smooth and effective management of the enterprise at issue.
Use of Land
China has adopted the system of public ownership of land, which covers the State-owned and collectively-owned land. Land in urban areas is owned by the State while land in rural and suburban areas is owned collectively except for those portions which are owned by the State in accordance with applicable laws and regulations.
Foreign-funded enterprises can obtain the right to use State-owned land in China mainly in the following five forms:
1. Transfer with Compensation: As owner of the land, the State transfers the right to use a certain piece of land for a fixed period of time to a foreign-funded enterprise, which will pay one lump sum the compensation for the transfer of the land-use right. A foreign-funded enterprise may obtain the right to use a certain piece of land by making tenders, by auction or by signing an agreement. After signing the contract on the transfer of land-use right with land administration authorities and after paying off compensation for the transfer in line with the contract, a foreign funded enterprise can go through the procedure for the registration of land and get a land-use certificate. The land-use right obtained in this form is transferable, leasable and pledgeable.
2. Administrative Transfer: A foreign-funded enterprise signs the contract on land-use with land administrative authorities, goes through the procedure for the registration of the land, and gets a land-use certificate. In addition, the user of the land is responsible for paying in one lump the compensation for exploiting the site, and pays annually compensation for using land.
3. Chinese Participation in Joint or Cooperative Ventures with Land-Use Right: A Chinese enterprise participates in ventures by buying shares with the workshops, equipment and land which are in its possession, in order to form a joint-venture or cooperative-venture enterprise with foreign investors.
4. Lease of Buildings with Land: A foreign-funded enterprise directly leases buildings together with the site from Chinese enterprises owned by the State, urban collectives or townships, and pays a fixed rent.
5. Foreign-funded enterprises may also, in accordance with relevant official regulations, obtain from other users of land the right to use the latter’s land for a fixed period of time in the form of transfer.
Foreign-funded enterprises can obtain the right to use collectively-owned land in China mainly in the following two forms:
(1) State Appropriation for Transfer: The State first appropriates land owned collectively to turn it into State-owned land before transferring it to foreign-funded enterprises. In China, collectively-owned land may not be directly transferred or leased.
(2) Local Participation in Joint or Cooperative Ventures with the Right to Use Collectively-Owned Land: A rural collectively-run economic organization or township enterprise participates in ventures by buying shares with the land collectively-owned, in order to form a joint-venture or cooperative-venture enterprise with foreign investors. However, any operation of such a nature is subject to the approval of the local county-level government.
Import and Export
Foreign-funded enterprises may import machinery, equipment, raw materials, fuel, spare parts, accessories, components and transport tools as well as office equipment and other supplies which are needed for their production and operation; and may also export products manufactured by themselves. They may also entrust other foreign trade enterprises to import supplies of the above-mentioned categories and export products on behalf of them. Presently, China does not allow foreign-funded enterprises to import supplies that are not needed for their production and operation, and to export products that are not actually manufactured by them. However, certain exceptions apply in connection with foreign exchange problems that such enterprises may encounter.
Foreign-funded enterprises in China enjoy the full decision-making power in labor management, and no departments, institutions or individuals may interfere with them. However, China had adopted the Labor Law of the People’s Republic of China and the Decisions of the State Council on the Work House of Staff and Workers as well as other relevant laws and regulations to guarantee the legal rights and interests of workers and staff members, which include the following:
1. Enterprises can make their own decisions to employ workers and staff members, but they may not use child labor, and they may not hire women for work restricted by the State.
2. It is a legitimate right of enterprises to dismiss workers and staff members in accordance with law. But, in an effort to prevent enterprises from dismissing workers and staff members at will, the State has at the same time provided for a restriction on the dismissal of workers and staff members; e.g., workers and staff members who have suffered injuries on the job may not be dismissed during a prescribed period of medical treatment, and female workers and staff members may not be dismissed during period of pregnancy, child-bearing and breast-feeding, etc.
3. Salaries paid by enterprises to workers and staff members may not be lower than the minimum salary standard provided for by local authorities.
4. Workers and staff members work eight hours per day, and 40 hours per week.
Because of the necessity of production and operation, employers may prolong the work hours after consulting with the trade union and workers association, but not for more than one hour a day generally. For those needing to prolong the work hours because of special reasons, they may prolong the work hours on the premise that the health of workers has been properly guaranteed, but not more than three hours a day and not for more than 36 hours a month.
For employers who have prolonged the work hours of workers, they are liable to pay the workers with compensation that may not be lower than 150% of their wage. For those who engage employees to work on holidays and can not make them up by offering other days off, they are liable to pay the employees with compensation that may not be lower than 200% of their wage. For employers who engage employees to work on official holidays, they are liable to pay the employees with compensation that may not be lower than 300% of their wage.
Foreign Exchange Control
The Chinese yuan, or Renminbi, has so far not been a freely usable currency. Therefore, in accordance with the Regulations on Foreign Exchange Control of the People’s Republic of China and the Rules for the Implementation of Foreign Exchange Control Regulations Relating to Enterprises with Overseas Chinese Capital, Foreign-Capital Enterprises and Chinese-Foreign Equity Joint Ventures, as well as other official regulations, the government exercises supervision and control over foreign exchange.
For foreign-funded enterprises whose establishment has been approved by competent authorities, when they have obtained the business license issued by the authorities for industry and commerce, they are required to contact local authorities for foreign exchange control to have their foreign exchange registered. Then, the local authorities for foreign exchange control will examine and check the basic conditions of the foreign-funded enterprises concerned, including their investment forms and ratios, sources of funds, sources of revenue and expenditure of operating foreign exchange, proportions of products for domestic sales and exports, forms to share the foreign exchange profits and measures to reach the foreign exchange equalization. After examining and approving all these conditions, the local authorities for foreign exchange control will go through the procedure for the enterprises concerned to register their foreign exchange before issuing them the Certificate on Foreign Exchange Registration for Foreign-Funded Enterprises.
With a Certificate on Foreign Exchange Registration for Foreign-Funded Enterprises, foreign-funded enterprises may directly open their foreign exchange accounts with a foreign exchange bank designated by Chinese authorities or a foreign-funded bank in China. According to relevant official regulations, all activities of foreign exchange receipts and disbursements of a foreign-funded enterprise must be conducted through its foreign exchange account with a bank in China, except for those otherwise approved by the State.
Overseas-funded ventures can still trade their foreign exchange at swap centers. Foreign banks, their branches and Sino-foreign joint ventures are allowed to act as designated banks, buying or selling foreign exchange from or to overseas-funded ventures.
Foreign-funded enterprises are also required to thoroughly understand and abide by China’s systems governing the management of financial affairs, business accounting, taxation and industrial and commercial affairs, etc.
The Establishment of Representative Offices in China
In applying for the establishment of representative offices in Beijing, foreign investors are required to supply the following documentation:
1. An original copy of the written application addressed to the Chinese Ministry of Foreign Trade and Economic Cooperation.
2. An original copy of the written application addressed to the China Council for the Promotion of International Trade. In the written applications addressed to the Chinese Ministry of Foreign Trade and Economic Cooperation and China Council for the Promotion of International Trade, the applicants must specify separately the business scope of their companies, the reasons for opening the representative office in Beijing, the full name of the chief representative to be dispatched, the desired location of business of the representative office in Beijing, major planned business operations in China (restricted within the framework of liaison and consultation operations), and the planned duration of operation of the representative office.
3. A certified copy of the certificate of registration of the company (Hong Kong-based companies are required to simultaneously supply a certified copy of the business registration certificate);
4. An original copy of the written statement of the Board of Directors of the company on the establishment of the representative office in Beijing;
5. A copy of introduction of the company (including information on the basic conditions, business operations and the annual business turnover, etc.);
6. An original copy of the certificate of appointment of the chief representative to Beijing issued by the Board of Directors of the company;
7. An original copy of the certificate of financial standing of the company issued by the bank with which the headquarters of the company has opened an account;
8. An original copy of the resume of the chief representative to Beijing (including information on the background of education and work experience);
9. A photocopy of the passport of the chief representative to Beijing (for foreign nationals). For those from Taiwan, Hong Kong, and Macao, the company concerned is required to simultaneously supply a photocopy of the homeland-visiting certificate, or “Huixiangzheng” in Chinese. If the chief representative to Beijing will be a Chinese national, the company concerned is required to supply an original copy of the certificate (or “Zhengmingxin” in Chinese) issued by the Foreign Enterprises Services Company, and a photocopy of the person’s Resident ID Card (or “Juminshenfenzheng” in Chinese).
10. Three identically filled application forms for the establishment of the foreign enterprise representative office in Beijing; and
11. Three identically filled forms to declare the personnel of the foreign enterprise representative office in Beijing (attached with six passport-size photos of the chief representative).
VI. SETTLEMENT OF DISPUTES
Disputes are unavoidable. Foreign businessmen who are operating in China and involved in a dispute can seek resolution of their disputes by the following three means: (1) arbitration, (2) mediation and (3) civil proceedings.
There are two arbitration organizations that handle cases involving foreign elements in China. One of them is the China International Economic and Trade Arbitration Commission (for disputes arising from the international economic and trade activities) and the other is the China Maritime Arbitration Commission (for maritime disputes). The China International Economic and Trade Arbitration Commission has opened two branches in Shanghai and Shenzhen.
Scope of cases: Disputes occurring not only between Chinese and foreign parties or between foreign parties, but also between Chinese parties with foreign interests involved, such as disputes with foreign-invested enterprises in China.
The arbitration organizations also handle disputes involving economic and trade activities may be submitted to an arbitration commission for arbitration.
Article 257 of the Civil Procedure Law of the People’s Republic of China, promulgated on April 9, 1991, stipulates: “In the case of a dispute arising from the foreign economic, trade, transport or maritime activities of China, if the parties have had an arbitration clause in the contract concerned or have subsequently reached a written arbitration agreement stipulating the submission of the dispute for arbitration to an arbitration organization in the People’s Republic of China handling cases involving a foreign element, or to any other arbitration body, they may not bring an action in a People’s Court.”
2. How to Apply for Arbitration
An arbitration application shall explicitly carry the names and addresses of both the claimant and respondent, the claimant’s requests, the arbitration agreement invoked by the claimant, as well as the facts and proofs relied upon by the claimant. A power of attorney shall be required if a party wants to appoint an agent to carry out arbitration activities. The claimant and respondent shall be parties who have set forth an arbitration clause in a contract or have subsequently reached an arbitration agreement. Those who are not parties to the dispute shall not be listed as the second claimant or the second respondent even if they are involved in the dispute. Documentation of change shall be required if the names of the parties concerned are changed. The arbitration requests of the claimant shall be concrete and explicit.
The part of an arbitration claim containing reasons or arguments shall briefly describe, based upon facts and proofs, the time, place, details and causality of the dispute in time order. It shall also be examined minutely and proven in line with relevant legal clauses, regulations stipulated in a contract and international practice. The arbitration application shall be signed or sealed.
Submission of documents of proof with supporting proofs in application for arbitration
When submitting an arbitration application, the applicant shall produce proofs supporting his/her ideas and requests. Evidence includes written material and audio-video.
Appointment of an arbitrator
The parties concerned may have the right to choose from the register of arbitrators of an arbitration commission an experienced arbitrator that has their confidence. They may also entrust the chairman of the arbitration commission to appoint an arbitrator on their behalf.
Arbitration fees are calculated in inverse proportion to the amount in dispute on a percentage basis and a 10,000 Yuan filing fee. If the amount in dispute is not determined at the time when an arbitration application is accepted, the secretariat of the branch of an arbitration commission shall decide the sum of arbitration fees.
Submitting a Defense
The arbitration commission, upon receiving an arbitration application and its appended documents, shall immediately serve by mail a copy of the arbitration application and its appended documents presented by the claimant, together with the arbitration rules of the arbitration commission and a copy of the register of arbitrators, on the respondent, if the commission decides after examination and verification that the claimant has gone through the required arbitration formalities. The respondent shall appoint an arbitrator from the register of arbitrators of the arbitration commission or entrust the chairman of the arbitration commission to appoint an arbitrator on his or her behalf within 20 days from the date of receiving the arbitration application made against him or her. He or she shall also submit to the arbitration commission his statement of defense and other related documents within 45 days from the date of receiving the arbitration application.
A counter-claim shall be made within the period of the submission of a defense in accordance with arbitration rules. The arbitration commission shall not accept the counterclaim if the specified time limit expires. The respondent, while submitting his counter-claim, shall pay in advance for the arbitration proceedings.
The Arbitration Process
An arbitration commission shall establish an arbitration tribunal to handle the case after it accepts an arbitration case. The arbitration tribunal shall open a hearing on the case in conformity with the arbitration rules of the arbitration commission. At the request of or with the consent of both parties concerned, the tribunal may waive the need for a hearing and simply try the case on the basis of written documents before making an arbitration award.
If both parties concerned have reached reconciliation over a case handled by the arbitration commission, the claimant shall apply in time for withdrawing the case in question. The withdrawal of an arbitration case, if made before an arbitral tribunal is formed, shall be decided by the chairman of the arbitration commission. If the withdrawal is made after an arbitral tribunal is formed, the arbitral tribunal shall make a decision. If a party makes a second application to the arbitration commission for arbitration of the same case that has been withdrawn by the party concerned, the chairman of the arbitration commission shall decide whether to accept or not accept the case.
The Arbitration Award
An arbitration tribunal shall make an arbitration award within nine months from the date when the tribunal is formed. If an arbitration award is a ruling of final instance, none of the parties concerned shall bring an action in a people’s court, nor shall they request other organizations or courts to alter the award.
Execution of an Arbitration Award
The losing party is supposed to voluntarily satisfy the award after an arbitration award is rendered. If the losing party fails to pay the award, the winning party may apply to a people’s court for compulsory execution.
If the losing party is a Chinese company or a foreign company which has property within the territory of China and fails to voluntarily pay the arbitration award rendered by a Chinese arbitration commission, the winning party may apply, in accordance with Chinese laws, to the intermediate people’s court in the place where the person subjected to enforcement has domicile or his property is located for compulsory execution. If the person subjected to enforcement or his or her property is not within the territory of China, the winning party may apply to a competent foreign court that has jurisdiction for recognition and execution. As China has acceded to the 1958 New York Convention, the arbitration award made by a Chinese arbitration panel may be recognized and executed in more than 80 countries or regions in the world which have acceded to the Convention without considering whether those countries or regions have concluded treaties of judicial assistance with China or not.
If an award made by a foreign arbitration panel requires the recognition and enforcement by a people’s court of the People’s Republic of China, the party concerned shall directly apply to the intermediate people’s court of the place where the party subjected to enforcement has his domicile or where his property is located. The people’s court shall deal with the matter in accordance with the international treaties concluded or acceded to by the People’s Republic of China or with the principle of reciprocity.
Mediation by Arbitration Organizations. The two arbitration commissions in China handle not only arbitration cases but also mediation cases. In those cases which are applied for mediation instead of arbitration, the general secretary or deputy general secretary of an arbitration commission shall normally act as the mediator, or the two parties concerned shall jointly appoint an arbitrator of the arbitration commission as the mediator. If mediation fails, the mediator may be appointed as the arbitrator in future arbitration proceedings.
C. Civil Procedure for Cases Involving Foreign Elements
Disputes arising from Sino-foreign economic, trade, transport and maritime activities may be brought to a people’s court in a civil action for settlement if the parties concerned have had no arbitration clauses in their contract or have not consequently reached a written arbitration agreement.
Doing Business in Taiwan
The original inhabitants of Taiwan were aborigine tribes of southeast Asia who share certain physical, cultural and linguistic traits with other peoples of Malay decent around the Pacific Rim. They are referred to as “aborigines.” Taiwan became a protectorate of China in 1206 AD and immigrants of Han descent, mostly from the Fukien province, began entering Taiwan in large numbers around 1660. Descendants of these immigrants are referred to as “Taiwanese.” In 1895 Taiwan was ceded to Japan at the end of the Sino-Japanese war and remained under its occupation until the end of World War II.
Because Japanese language and customs were taught in schools during those years, many vestiges of the occupation can be seen in the culture even now. International trade with Japan is second only to that with the United States, and Japanese is the second most popular foreign language studied in Taiwan after English.
The Communist government took over the Chinese mainland in 1949 and the Nationalist government fled to Taiwan. Though democratic in name, the Nationalist government kept tight control in Taiwan. Martial law was enforced and for a few years the Nationalist government focused on regaining the mainland. But by the mid 1950s the government had swung its focus to building Taiwan into a “model province” and with substantial assistance from the United States Taiwan experienced an economic miracle over the next three decades. It became known as one of the four Tigers, a quartet of Asian countries that had enormous development in the years following World War II.
In December 1978, the United States decide to terminate the U.S.-ROC Mutual Defense Treaty and sever diplomatic relations with the Republic of China [Taiwan], but passed the Taiwan Relations Act, which allowed for a continuing commercial relationship. The Act declares that the Unites States will “preserve and promote extensive, close and friendly commercial, cultural and other relations” and will “consider any effort to determine the future of Taiwan by other than peaceful means, including boycotts or embargoes, as a threat to the peace and security of the Western Pacific area and of grave concern to the United States.”
Martial law was lifted in 1987 and Taiwan began to exhibit all the characteristics of a truly democratic government. The ban on travel to mainland China was lifted, control of the press was loosened and increased travel into other countries as well as increased tolerance for opposing political philosophies allowed for the influx of new ideas and the birth of new political parties. All vestiges of what had previously been a benevolent dictatorship were dispelled in 1995 when Taiwan held its first ever open general elections.
In severing diplomatic relations in 1978, the United States had joined the majority of the members of the United Nations in recognizing Communist China as a nation. Both the Communist government and the Nationalist government in Taiwan proclaimed China as one nation, and both claimed to be the true government of China. Accordingly, the world has had to choose between the two governments in its recognition of the Chinese nation. Based on the size and influence of the Chinese mainland, it is not difficult to understand why the Communist government has become the recognized Chinese government.
Although for all intent and purposes, Taiwan is treated economically and commercially as a separate nation, it has not declared itself an independent nation and therefore has not been given its own seat in the United Nations or many other international organizations. Today, both Communist China (the People’s Republic of China or PRC) and Taiwan (the Republic of China or ROC) publicly espouse a commitment to reunification and endeavor to continue negotiations towards that end. Nevertheless, there is a growing interest in independence among the inhabitants of Taiwan and political rhetoric is peppered more and more with this philosophy. The next few years will prove telling to the true possibility of the reunification of Taiwan and China, as Taiwan and the rest of the world keep a close watch on the mainland’s handling of its recovery of Hong Kong from Great Britian.
II. TAIWAN GOVERNMENT AND INTERNATIONAL RELATIONS
The government of Taiwan is based upon the Three Principles of the People, a philosophy espoused by Dr. Sun Yat-sen, who is considered to be the Father of Modern China. These three principles include nationalism, democracy and social welfare. Although the ROC was under martial law for a number of years after the flight of the Nationalist Government to Taiwan, in the last 10 to 15 years sweeping reforms have created one of the most comprehensive democratic nations in Asia.
The structure of the national government is built on a five-segmented system called Yuans which are headed by the President. Originally members of the National Assembly, which were chosen by means of a general elections with all adult citizens having the right to vote, were responsible for electing the President and Vice-President. But in 1995 the first open general elections were held for the election of the President and Vice-President. Although the Communist government threatened military retaliation if Taiwan went through with its general elections, an outpouring of support from the international community, including the deployment of United States warships in the area, prevented any bloodshed and President Lee Teng Hui was re-elected through general elections.
The Executive Yuan resembles the cabinets of Western governments and includes eight ministries and other offices and departments. Lawmaking is the function of the Legislative Yuan which consists of 392 members elected by direct suffrage. The 74 member Control Yuan has powers of consent, impeachment, censure and audit. Under the Judicial Yuan are the Courts, Council of Grand Justices and other offices that uphold and interpret the law. Finally, the Examination Yuan supervises the Ministries of Examination and Personnel.
The national government is empowered by the Constitution to delegate a considerable amount of administrative power to lower levels of government. The Taiwan Provincial Government includes a provincial assembly of 77 members elected every four years by direct election. The city governments of Taipei and Kaohsiung, as special municipalities, are equal in status within their jurisdictions to the provincial government. There has been some discussion on changing the governorship of Taiwan and the mayorships of the island’s two biggest cities from appointed county and municipal levels which are in large part responsible for the police and fire protection, maintenance of public property, sanitation, education, and licensing systems.
Since 1971 the ROC has retained diplomatic relations with fewer and fewer countries. However, great strides have been made with trade and economic relations.
Doing Business in Indonesia
The President of Indonesia is Suharto (he uses only one name). He is 76 years old and in poor health. He has ruled over Indonesia for over 30 years. The Capital of Indonesia is Jakarta, and the population of the country is 202 million (fourth most populous country in the world). The Indonesian currency is the Rupiah, and its value has plunged by more than 70 percent recently.
Indonesia has numerous problems. Some of the most pressing are:
1. No level playing field. Monopolies are granted to individuals if they are related to the president or Indonesia or are good friends with him;
2. The government tightly controls information in a closed political system. Suharto has been the only person to control the government for the last 30 years;
3. There is the real potential of civil unrest if financial problems are not addressed and resolved soon;
4. Indonesia’s President is 76 years old and ailing, with no apparent successor to follow and too many Indonesian business leaders and others in government care more about his successor than implementing what the IMF requires to provide money to rescue the country;
5. With the crash of the country’s currency, local businesses have stopped paying back their bank loans;
6. Indonesian banks are insolvent; and
7. Foreign banks will not finance Indonesian businesses.
The Clinton Administration (including Deputy Treasury Secretary Lawrence Summers) and International Monetary Fund officials (including managing Director Michel Camdessu and Deputy Stanley Fisher) went to Indonesia to meet with President Suharto. The purpose of the trip was to warn Indonesia to get its financial house in order and implement the austerity plans that the United States and the International Monetary Fund required to make the $40 billion IMF rescue package to Indonesia.
The International Monetary Fund seeks to improve the financial crisis in Indonesia by forcing the government to:
1. Achieve a budget surplus;
2. Raise taxes;
3. Postpone infrastructure projects;
4. Restructure the financial sector; and
5. Phase out import and marketing monopolies, many of which are controlled by Suharto’s family and friends.
Mastering the Export Process and Getting Paid
A. The Export Process
International trade is simply translated to mean the buying and selling of goods between companies from different countries. To make international trade work, you need more than a buyer and a seller. You need a team that will help you complete your transaction so that you can make money. This team includes the following persons:
Buyer: Places the orders and imports goods
Seller: Exports the goods
Manufacturer: If the seller does not make the goods
Shipping Company: Transports the goods overseas and issues bills of landing as a receipt for the goods
Insurance Company: Insures the goods against risk
Governments and Embassies: Gives permission to import or export specific types of goods by issuing import and export licenses
Customs and Excise: Levy import duty and issue customs invoices
Professional Inspectors: Issue inspection certificates
Agents: Represent either the buyer or seller overseas
Shipping Registries: Ensure that the ship carrying your goods is seaworthy
Banks: Participate in most trade transactions
Lawyers: Help close transactions and resolve disputes
Most of the time, international trade is handled through a party’s broker, known as a freight forwarding agent, who takes care of much of the above.
B. Na Chian Lai Tang Shen Yi (Show me the Money!)
Today, many smaller companies are exploring new markets in which to sell their products as competition for local sales intensifies. As a result, these companies are interested in expanding their overseas markets for export. The Far East represents such a market. For these companies, getting paid is just as important as getting into the business.
International trade to the Far East is handled in a similar fashion to other overseas countries. The players are virtually the same. You still have a buyer and seller, a shipping company to transport the goods overseas and issuance of bills of landing as a receipt for the goods and an insurance company to insure the goods by issuing import and export licenses and, in most cases, banks to participate in trade transactions.
While this many participants may serve to confuse you, most of the time you would contract with a freight forwarding agent who takes care of much of the above. In time, you will gain the experience necessary to handle most of the above aspects.
The most common methods of getting paid in international trade are as follows:
1. Advance Payment;
2. Open Account Trading;
3. Documentary Collections; and
4. Letter of Credit.
Getting paid for your goods in advance would be the best way to do business in overseas markets, especially in the Far East under the current economic circumstances. Advance payment occurs only when a buyer absolutely needs your goods and is unable to obtain any bank credit or there is a large cash discount available.
For open account trading, the buyer will pay the exporter only after receiving the goods. You, the exporter, must be willing to extend credit to the buyer.
Both of the above methods of payments involve trust and risk for both the buyer and the seller. In fact, direct trading between two companies who don’t know each other would be difficult.
What role can a bank, your bank in particular, play in your international sale of goods? Under normal economic circumstances, most exporters will ship to the Far East against a letter of credit. The buyer will ask their bank to open a letter of credit in favor of the exporter. The buyer’s bank will usually send the letter of credit to the exporter through their United States branch or through a corresponding bank.
This is where your bank can help. Your bank acts as a trustworthy intermediary between you and the buyer’s bank. Why? Because you are familiar with your bank, a bank usually has the necessary expertise in handling international trade transactions, a bank can supply trade and credit information to you, and a bank is ready to provide finance to help fulfill your overseas sales. The two payment methods handled by a bank are documentary collections and letters of credit.
In the case of a collection, there is no letter of credit issued and the bank is not involved in any undertaking to pay the seller. The bank only acts as an agent for the sale. The collection cycle starts when the seller, having already shipped the goods, obtains the necessary documents and presents them with payment instruction to his or her bank. The bank will then send the documents to its branch or correspondent in the buyer’s country for payment. There is greater risk to the exporter in this case as he or she does not have control over the goods through the collecting bank. For example, the documents needed to pick up the goods will not be released to the buyer by the collecting bank until payment is made.
The safest method for an exporter is obtaining payment through a letter of credit. In a simple form, a letter of credit is a written guarantee by the issuing bank which is issued on the instructions of the buyer of the goods (the applicant) in favor of the seller of the goods (the beneficiary). Payment under a letter of credit will only happen when all terms and conditions of the letter of credit have been satisfied, which means all supporting documents are required by the issuing bank before the issuing of payment. The goods will not be released until payment is made. If the exporter fulfills all of the requirements of the letter of credit, which is usually received before shipment, he or she is guaranteed payment by the issuing bank.
Now, while shipping goods against a letter of credit seems to be the safest way to transact overseas sales, you now have the unstable Far East economic situation to deal with. Under normal circumstances, an exporter could go to his or her bank and ask for financing against a letter of credit issued in his favor by an overseas bank. Both the exporter and his banker would feel confident that the trade transaction would be completed as no payment is made until the proper documents are presented. However, many banks are now concerned about some banks in the Far East being able to honor their obligations. How can you transact business in these countries?
Exports to the Far East can be supported by organizations such as the United States Export-Import bank, Eximbank, the United States Small Business Administration, and closer to home, the New Jersey Economic Development Authority.
Eximbank can provide direct loans, loan guarantees to the foreign buyer enabling him or her to obtain credit, loan guarantees to a bank to provide working capital to the exporter, and insurance policies for exporters to eliminate both political and commercial risk of payment by the foreign buyer.
The United States Small Business Administration, known as SBA, can provide guarantees for both working capital loans and fixed asset loans. The export working capital program was developed to provide short-term working capital to the exporter.
The New Jersey Economic Development Authority can provide a combination of funding and guarantees up to 50% of a bank supplied resolving line of credit up to an amount of US$1 million to provide finance of confirmed foreign orders. And for smaller concerns, the Economic Development Authority will provide a one-year revolving line of credit for up to US$250,000 for the purchase of materials and production costs for confirmed foreign orders.
Eximbank recently stated that it is prepared to offer insurance to United States banks for confirming letters of credit issued by some Korean and Indonesian banks. This increases the exporter’s ability to obtain local financing as the foreign risk is minimized.
Nobody wants to take any risks if you don’t have to. As mentioned above, there are some ways to minimize your risk. Beside Eximbank, the SBA and the New Jersey Economic Development Authority, there are insurance companies who not only are prepared to insure your export transaction, they could be a valuable source of information to the exporter.
In many cases, however, transacting business through your bank is probably the best way to get paid. Earlier I mentioned the role your bank can play in international transactions. I highly recommend that you use your banker as much as possible in your future export transactions. If your bank cannot seem to help you or does not have an international department, it may be time to find a bank that will help your future growth by assisting you in your exporting.
Copyright © 1998 Wong Fleming, P.C.