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Doing Business with China. TAGLAW - Berlin 2008 AGM Mark Ho & Blaine Turnacliff. Presentation Points. Introduction Legal investment vehicles Outbound investment Real estate business in China. China: Big Numbers. Coming to Grips with the Numbers and therefore Potentials.

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doing business with china

Doing Business with China

TAGLAW - Berlin 2008 AGM

Mark Ho & Blaine Turnacliff

presentation points
Presentation Points
  • Introduction
  • Legal investment vehicles
  • Outbound investment
  • Real estate business in China
coming to grips with the numbers and therefore potentials
Coming to Grips with the Numbers and therefore Potentials
  • 1.3 billion people
  • 0.7 billion peasants
  • 0.2 billion migrant workers
  • 200m aspiring middle class
  • 100m middle class as now
  • 14m engineers
  • 140k lawyers
china s comparative disadvantages the reality about this economic gorilla
China’s Comparative Disadvantages: the reality about this economic gorilla
  • 25% of the world’s population, 6% of global economic activity (28% for US)
  • At current growth rates, by 2050 China will be the world’s largest economy, but the average Chinese will be poorer than the average American was in 2005
  • Excess labour
  • Innovation gap
  • Governance deficit
  • Commercial immaturity (SOEs)
foreign investment operating structures in china
Foreign Investment Operating Structures in China
  • Representative Office
  • Equity Joint Venture
  • Cooperative Joint Venture
  • Wholly Foreign Owned Enterprise (WFOE)
  • Foreign Invested Commercial Enterprise (FICE)
  • Holding Companies
representative office
Representative Office
  • Quick (procedure to register is not complicated) and inexpensive way to establish a legal presence in China. Can carry out market research, render advice, collection of information, coordinate company activities in China and hire staff
  • No direct business activities permitted – cannot enter into sales contract, issue invoices, arrange for importing goods
  • no registered capital requirements
  • Do require a leased office before registration
equity joint venture
Equity Joint Venture
  • In the 80s and early 90s, was the most commonly used foreign investment structure
    • First foreign investment structure allowed in China
    • Benefit to the Chinese economy - foreign party generally provides technology, management expertise & cash
    • Dividends / profits based on equity shareholding of each party
cooperative joint venture
Cooperative Joint Venture
  • Similar to Equity Joint Venture in structure but with more flexibilities because
    • Sharing of profits may be governed mostly by JV contract
    • Foreign partner can obtain return of investment in priority to Chinese partner; or early recovery of investment
wholly foreign owned enterprise wfoe
Wholly Foreign Owned Enterprise (“WFOE”)
  • 100% owned by foreign investors
  • More and more industries are open to WFOEs (although still some restricted industries)
  • Complete control of operation – no local partner
  • It is becoming first choice of foreign companies
  • Approval and registration procedure similar to Joint Ventures
  • Minimum registered capital –4000 USD but should be proportional to scope of business plans
foreign invested commercial enterprise fice
Foreign Invested Commercial Enterprise (FICE)
  • Allowed to engage in retail, distribution, agency and franchising
  • First time in modern history foreign companies could undertake trading
  • Become very popular
  • Franchisors need to own / operate two units for one year in order to begin franchise business
  • Lower minimum registered capital (4,000 USD legally but most companies invest much more)
exit strategy
Exit Strategy
  • Need to have a plan in place that will allow you to pull out or sell your investment with minimum of difficulties and costs
  • Ten year minimum operational period to enjoy tax incentives
  • Wind up procedures are very onerous and time consuming
  • Offshore vehicle (SPV) enhances flexibility and presents options for both partners
    • liability, sale of company, tax considerations
outbound investment

Outbound Investment

Start of trend to invest overseas by Chinese companies that will continue for many years to come

the chinese are coming
The Chinese are Coming!
  • China’s appetite for commodities, natural resources, distribution networks for their products, desire to move up the value added chain
  • Over 1.5 trillion USD in foreign currency reserves
  • Fall of USD / appreciation of RMB
  • Government policy of “going global”
  • outbound M & A investment
    • 4.3 billion USD in 2004
    • 16 billion USD in 2006
    • 24.6 billion outbound M & A in 2007
outbound m a transactions
Outbound M & A Transactions
  • Notable Deals:
    • 2.3 billion USD stake in Nigeria’s offshore oilfield by CNOOC
    • 5.6 billion USD of Standard Bank (SA) by ICBC
    • 4.3 billion USD of Canada’s Nations Energy’s Kazakhstan oil rights

Plus:

  • Recent purchase of 50 Airbus A320s for 3.3 billion
  • Expected 280 billion USD for 2,900 planes over next 20 years
governmental approval
Governmental Approval
  • Generally 3 or 4 step process
    • State Development and Reform Commission (SDRC)
    • Ministry of Commerce (MOFCOM)
    • State Administration of Foreign Exchange (SAFE)
    • If State Owned Enterprise, also State Assets Supervision and Administration Commission
bank financing issues
Bank Financing Issues
  • Chinese domestic companies cannot borrow from offshore so must obtain funding in China
  • Can be easy if borrower is large co, but difficult if smaller
  • Foreign competitors often label the Chinese financing as government subsidies
  • In future, will likely see the rules on overseas borrowing loosen
legal services in china
Legal Services in China
  • Legal Services are relatively new in China
    • 1989 was first year private law firms allowed
    • mainly very young, inexperienced lawyers, mostly 20 or 30s
    • Few have experience dealing with western companies
real estate business in china

Real Estate Business in China

Chinese real estate sector is increasingly attracting foreign investment (300% property appreciation in the past 10 years or so); plus

Foreign business requires acquisition of real estate properties for operations

property ownership in china
Property Ownership in China
  • No private land ownership, Only:

(i) State or (ii) Collective Ownership

    • Collective – rural areas or countryside
    • State – urban areas or cities
    • Concept that land ownership is separate from land use rights; types of use rights:
      • Allocated land use rights
      • Granted land use rights
different types of land use rights

Allocated Land

Granted

Land (introduced post-1988)

Term

Indefinite term

Set term – usually 40 to 70 years

Use

Granted for designated purpose – usually agricultural or military or infrastructure use

Granted for a range of designated uses

Consideration

normal or nil consideration paid to the State

Land grant premium to be paid to the local Land and Property Bureau

Transferability

Not transferable (and therefore technically cannot be mortgaged)

Transferable subject to restrictions

Different Types of Land Use Rights
ownership of buildings
Ownership of Buildings
  • May be privately owned
  • May be mortgaged, sold or leased
  • May be for an indefinite term
  • Subject to a term of land use rights
  • Subject to registration and certification
  • Subject to zoning regulations
property protection and risks
Property Protection and Risks
  • Recording, Registration and Certificates
    • property ownership is recorded at different levels of government and there may be discrepancies in records for old buildings (municipal vs. district)
    • Most cities have open records to the public
    • Shanghai is at municipal level
    • Foreign ownership permitted but restricted
new law
New Law
  • July 2006 Regulations–Opinion on Regulating Entry Requirements and Administration of Foreign Investment in the Real Estate Markets (Circular No. 171)
implications of new laws
Implications of New Laws
  • Can no longer use offshore company to directly purchase RE in China
    • So must pay China taxes on sale or transfer
  • If want to invest in Chinese RE, must set up a RE Development Company
    • Total Investment minimum – 10 million USD
    • 5 million USD to be invested upfront
establishing a foreign invested re development company
Establishing a Foreign Invested RE Development Company
  • Essentially two methods:
    • Project Development Company
      • bid and purchase land use rights
    • Acquire / merge with an existing Chinese Property Development Company
project development company
Project Development Company
  • Must participant in a public auction to obtain land
    • Generally pay bond to be eligible to participate
  • If win the bid, sign a Land Grant Contract with local government (Land Bureau)
  • Land Use Certificate is granted for a term depending on types of development purposes (40-70 years)
  • Set up WFOE / JV
merge acquire property development company
Merge/Acquire Property Development Company
  • Due diligence and deal documentation
    • Financial and legal
    • Execution of M&A documentation
  • Application to Ministry of Commerce for approval
  • If approved, share transfer will be registered with local government
  • A Business license is issued
use of non re fie to invest
Use of non-RE FIE to Invest
  • Foreign Entities established in China can purchase RE only for “self use”
  • Self use means business or housing for staff/employees
  • Purchase of “excessive” residential units become grey area
  • Purchase of 100 units likely “excessive”
lease of chinese real estate
Lease of Chinese Real Estate
  • Office Lease: typical 2 year term
  • Facilities Lease: 20 year maximum
  • Retail Lease: 20 year maximum
  • Housing Lease: typical 1 year subject to renewal
  • Leasing Pitfalls: zoning, granted land; existing mortgage, etc.
slide35
Q & A

Mark Ho mark.ho@jzfz.cn

Blaine Turnacliff blaine.turnacliff@jzfz.cn

Address: 10/F, Longfeng Tower

No. 1566 Yan’an W. Road

Shanghai 200052, ChinaTel: (86 21) 5258-2666

Fax: (86 21) 5258-7968Website:www.jzfz.cn

THANK YOU!