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FAQ about investing in China

(china.org.cn )
Updated: 2006-03-13 15:48

1. What are the basic laws and regulations encouraging overseas investors
to invest in China?

In order to create a congenial investment environment and to encourage
overseas firms to invest in China, China has gradually set up a
relatively complete legal system. In 1979 the National People's Congress
issued The Law of the People's Republic of China on Chinese-Foreign
Equity Joint Ventures. In the following 20-odd years, the Chinese
government has promulgated and issued a series of laws and statutes
concerning the establishment, operation, termination and liquidation of
foreign-invested enterprises. The main laws and regulations include the
three basic laws �D The Law of 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, and The Law of
the People's Republic of China on Wholly Foreign-Owned Enterprises;
detailed rules for the implementation of the three basic laws; The
Company Law of the People's Republic of China; The Income Tax Law of the
People's Republic of China for Enterprises with Foreign Investment and
Foreign Enterprises; Interim Provisions for Guiding Foreign Investment;
Industrial Catalogue for Foreign Investment; Interim Provisions
Concerning the Investment within China of Foreign-invested Enterprises,
Provisions Regarding the Merger and Separation of Foreign-invested
Enterprises, and Liquidation Measures for Enterprises with Foreign
Investment. These provide legal bases from which to guarantee the
independent operation rights of foreign-funded enterprises and to protect
the legitimate rights and interest of both domestic and overseas
investors.

Currently, the Chinese government is reexamining its existing laws and
statutes in accordance with the framework of the WTO. It has abolished
certain obsolete laws and regulations, and will gradually revise the laws
and regulations that are incompatible with the rules of the WTO. For
instance, in 2000 China revised The Law of the People's Republic of China
on Chinese-Foreign Contractual Joint Ventures and The Law of the People's
Republic of China on Wholly Foreign-Owned Enterprises, and discarded
certain restrictions regarding the balance of foreign exchange account
and localization of supplies. In 2001 The Law of the People's Republic of
China on Chinese-Foreign Equity Joint Ventures was also revised.

2. What are the formalities for overseas investment to establish
enterprises in China? What departments are involved?

In accordance with the existing laws of China, the establishment of
enterprises with foreign investment is subject to project-by-project
examination, approval and registration by the government. In general, the
following steps should be followed for the establishment of
Chinese-foreign equity joint ventures and Chinese-foreign contractual
joint ventures:

l). Submit the project proposal to the relevant department (planning
department or technological renovation administration) and get approval
before investors can proceed with various jobs centered round the
feasibility study of the project.

2). Submit the feasibility study report to the planning department or
technological renovation administration and get approval before investors
can sign legal documents, such as the contract and articles of
corporation of the enterprise.

3). Submit the contract and articles of corporation of the enterprise to
the examination and ratification department, who shall issue the Approval
Certificate for Enterprises with Foreign Investment after approval by the
Ministry of Foreign Trade and Economic Cooperation.

4). With the Approval Certificate issued by the examination and
ratification authorities, the investors can go through registration
procedures with the administration of industry and commerce.

The procedures for the establishment of enterprises with foreign
investment are quite simple. After the initial project application is
approved in writing by the examination and ratification authorities, the
investors may submit a formal application, with articles of corporation
and other required documents. On receipt of the Approval Certificate,
they can proceed with the registration formalities by presenting the
Approval Certificate.

In accordance with China's existing laws, the state adopts a
classification administrative system for foreign investment. The
provinces, municipalities, autonomous regions and cities listed as
independent units in state plans have the authority to examine and
approve investment of less than US $30 million in areas encouraged and
permitted by the state. When an investment exceeds this amount, the
project application and feasibility study report shall be examined and
approved by the State Development Planning Commission or the State
Economic and Trade Commission, while the contract and articles of
corporation shall be examined and approved by the Ministry of Foreign
Trade and Economic Cooperation.

Many provinces, autonomous regions and municipalities directly under the
central government have established foreign investment service centers,
which offer foreign investors with a one-stop service, ranging from legal
consultation to procurement of project approval. With the improvement of
China's social services system, intermediary service agents, including
consultation companies, lawyers, and accountants, are all expected to
provide investors with efficient and qualified services.

3. What items are encouraged for foreign investment by China, and what
are prohibited?

To direct foreign investment to go along with the development scenario of
Chinese industries, and to avoid blind investment, the Chinese government
promulgated in June 1995 the Interim Provisions for Guiding Foreign
Investment and the Industrial Catalogue for Foreign Investment. The
industrial projects in the catalogue are divided into four categories �D
the encouraged, permitted, restricted, and prohibited. In late 1997, the
Chinese government revised the above-mentioned catalogue in line with the
development of the national economy. The revised catalogue reflects
expansion in the investment scope encouraged by the state and highlights
priority industries. It embodies the principles of compliance with
structural readjustment, of being conducive to the introduction of
advanced technology, and encouragement of foreign investment in China's
central and western areas.

The items in the catalogue encouraged for foreign investment mainly
include: new agriculture technologies, comprehensive development of
agriculture, energy resources, communications, important raw materials,
new and high technologies, export-oriented and foreign-currency-earning
projects, comprehensive utilization and regeneration of resources,
prevention of environmental pollution, and those that give play to the
advantages of China's mid-west areas. Meanwhile, foreign investment is
directed to the technological upgrading of traditional industries and old
industrial bases and to the continued development of labor-intensive
projects that comply with the state's industrial policies.

Foreign investment is prohibited in projects that endanger the state
security and bring damages to public interest; that cause pollution of
the environment and damage natural resources and public health; that use
large farmland and are unfavorable to the protection and development of
land resources; and that endanger the security and normal function of
military facilities.

The state will continue to make appropriate revisions to the Industrial
Catalogue for Foreign Investment and to the Interim Provisions for
Guiding Foreign Investment in accordance with the development need of the
national economy and China's commitment on the entry of the WTO.

4. What are the preferential policies offered to enterprises with foreign
investment?

The Chinese government levies low tax on enterprises with foreign
investment, and preferential tax policies are offered to the sectors and
regions where investment is encouraged by the state.

1). Income Tax

a. Rate of income tax: The income tax on enterprises with foreign
investment is levied at the rate of 33 percent. The income tax on
enterprises with foreign investment located in special economic zones,
state new- and hi-tech industrial zones, or economic and technological
development zones is levied at the rate of 15 percent. The income tax on
production enterprises with foreign investment located in coastal
economic open zones, special economic zones, or in the old urban district
of cities where economic and technological development zones are located
is levied at the rate of 24 percent. And the income tax on enterprises
with foreign investment that are engaged in projects such as energy,
communications, port and dock is levied at the reduced rate of 15 percent.

b. Tax reduction and exemption: The production enterprises with foreign
investment that have an operation period exceeding 10 years shall, from
the year they begin to make profit, be exempt from income tax for the
first two years and allowed a 50 percent reduction for the following
three years. Enterprises with foreign investment engaged in agriculture,
forestry and animal husbandry, and enterprises with foreign investment
established in remote and underdeveloped areas may, upon approval by the
State Bureau of Taxation, be allowed a 15 to 30 percent reduction on the
income tax for a period of another 10 years following the expiration of
the period of tax exemption and reduction as provided for above. The
income tax on enterprises with foreign investment located in mid-west
China that are engaged in projects encouraged by the government shall be
levied at a reduced rate of 15 percent for a period of another three
years following the expiration of the Five-Year period of tax exemption
and reduction. The enterprises with foreign investment that adopt
advanced technology shall be exempt from income tax for the first two
years and allowed a 50 percent reduction for the following six years. In
addition to the two-year tax exemption and three-year tax reduction
treatment, foreign-invested enterprises producing for export shall be
allowed a reduced income tax rate of 50 percent as long as their annual
export accounts for 70 percent or more of their sales volume. The foreign
investor of an enterprise with foreign investment which reinvests its
share of profit obtained from the enterprise in a project with an
operation period of no less than 5 years shall, upon approval by the
State Bureau of Taxation of an application filed by the investor, be
refunded 40 percent of the income tax already paid on the reinvested
amount.

2). Circulation-stage Tax:

Since January 1st, 1994, the Chinese government has levied unified
value-added tax, consumption tax and business tax on enterprises with
foreign investment and domestic enterprises. Technology transfer and
technological development by foreign enterprises and enterprises with
foreign investment are exempted from value-added tax, as a measure to
expand domestic demand and to encourage technological renovation in
foreign-invested enterprises. For foreign-invested enterprises engaged in
projects in the encouraged or restricted-B categories, the value-added
tax on China-made equipment purchased by the enterprises within their
total amount of investment shall be fully refunded if the equipment is
listed under the catalogue offered with income tariff exemption.

3). Import-stage Value-added Tax

a. Tariff rate: Since 1992 the Chinese government has reduced nine times
the tariff rate for imported commodities. The present average tariff rate
is 12 percent.

b. Tax exemption for imported equipment: Equipment imported for
foreign-invested or domestic-invested projects that are encouraged and
supported by the state shall enjoy tariff and import-stage value-added
tax exemption.

5. What are the favorable policies for further encouraging foreign
investment in high technology industries?

To encourage foreign-invested enterprises to introduce advanced foreign
technologies and equipment, to promote industrial restructuring and
technological upgrading, and to maintain sustained, rapid and healthy
development of the national economy, the Chinese government has
stipulated in recent years a series of favorable policies to invite
foreign investment in high technology industries. These policies are
mainly as follows:

1). Self-use equipment and supporting technologies, parts and spares
imported for technological upgrading within their previously approved
scope of production and operation by foreign-invested enterprises under
the encouraged or restricted-B categories, foreign-invested research and
development centers, foreign-invested enterprises producing for export
and technologically advanced foreign-invested enterprises shall be
exempted from the import tariff and import-stage value-added tax, if the
equipment and supporting technologies, parts and spares cannot be
produced domestically or the features and functionality of domestic
products cannot meet requirements.

2). Self-use equipment and supporting technology, parts, spares and other
accessories as clarified in the contract, imported by enterprises with
foreign investment for the production of the products listed under the
Catalogue of the State High and New Technology Products, shall be
exempted, in accordance with relevant regulations, from the import tariff
and import-stage value-added tax.

3). Advanced technologies listed under the Catalog of the State High and
New Technology Products introduced by enterprises with foreign
investment, and their outbound payment made on the software in accordance
with the contract shall be exempted from tariff and import-stage
value-added tax.

4). Self-use equipment and supporting technologies, parts and spares
imported by foreign-invested research and development centers within the
total amount of their investment shall be exempted, in accordance with
relevant regulations, from the import tariff and import-stage value-added
tax, if the imports cannot be produced domestically or the features and
functionality of domestic products cannot meet requirements.

5). In cases where the tax refund rate on products listed under the
Catalogue of the State High and New Technology Export Commodities is not
up to the tax rate, a tax refund can be proceeded in accordance with the
tax rate and existing regulations concerning tax refunding on exports,
after the above-mentioned products are exported and upon approval by the
State Bureau of Taxation.

6). If enterprises with foreign investment under the encouraged or the
restricted-B categories purchase within the total amount of their
investment China-made equipment that is listed under imports for import
duty exemption, the enterprises can obtain a full refund of domestic
equipment value-added tax on the equipment they have purchased. When
enterprises with foreign investment purchase China-made equipment for the
purpose of technological upgrading in conformity with the state
industrial policy or for producing high-technology products, the cost of
the equipment can offset the business income tax of these enterprises.

7). The incomes of foreign-invested enterprises and research and
development centers and foreign enterprises and individuals obtained from
technology transfer and development and related technological
consultation and services shall be exempted from business tax.

8). If the expenditure on technology development of enterprises with
foreign investment increases by 10 percent or more over that of the
previous year, the taxable income of the enterprises for the current year
can, with the approval of the taxation authorities, be set off by 50
percent of the actual amount of the spending on technology development.

9). In accordance with the articles concerning donations in the Income
Tax Law of the People's Republic of China for Enterprises with Foreign
Investment and Foreign Enterprises, the foreign-invested and foreign
enterprises who provide financial aid to non-affiliated scientific and
research institutes or schools of higher learning for their research and
development projects can deduct the entire amount of the aid from their
taxable income.

6. What are the specific policies that encourage the development of
software and integrated circuit industries?

In order to promote the development of China's software and the
integrated circuit (IC) industries and increase the creativeness and
international competitiveness of the Chinese information industry, in
June 2000 the Chinese government issued Policies on Encouraging the
Development of Software Industry and Integrated Circuit industry. The
document provides policy support to the software industry in the aspects
of investment, financing, taxation, industrial technology, export,
accreditation of software enterprises, and protection of intellectual
property rights. For investments of certain scales into IC businesses,
the policies offer preferential terms in taxation and other related
aspects. The details are as follows.

The Software Industry

1). Investment and Financing Policies

a. Risk investment mechanism in software industry shall be established to
encourage risk investment into software industry. Risk investment
companies will be supported and set up by the state, and risk investment
fund will be established.

b. In the Tenth Five-Year Plan (2001-2005), an appropriate part of the
capital construction fund in the budget will be allocated for the
infrastructure construction and industrialization projects of software
industry. Software parks will be established under the auspices of the
state in areas where there is concentration of scientific research
forces, such as institutes of higher learning and scientific research
institutions.

c. Efforts will be made to establish as soon as possible the pioneering
board on the stock market. As long as they meet the requirement of
listing on the pioneering board of the stock market, software enterprises
shall be given preferential consideration, irrespective of the nature of
their ownership.

d. In the evaluation of assets of software enterprises that have good
market prospects and human resource advantages, the proportion of
invisible assets to the net assets can be negotiated by investing parties.

e. Software enterprises are encouraged to go public and find financing on
overseas markets. After verification, software enterprises qualified for
being listed on overseas stock markets shall be allowed for getting
listed overseas.

2). Taxation Policies

a. The state encourages the development and production of software
products within the territory of the People's Republic of China. For
general taxpayers selling software products developed and manufactured by
themselves, the added-value tax will be collected, before 2010, in line
with the tax rate of 17 percent set by law. Practically, except for the
part of 3 percent, other part of the tax will be reimbursed after
collection, for the enterprises to use on the research and development of
software products and expansion of reproduction.

b. Software enterprises established within the territory of the People's
Republic of China can enjoy, after verification, an income tax exemption
for the first two years, beginning from the year of bringing in profits,
and a 50-percent tax reduction for the following three years.

c. For key software enterprises within the framework of the state
planning, their income taxes will be collected at the rate of 10 percent
if they do not enjoy income tax exemptions that year.

d. Equipment imported by software enterprises for self use and supporting
technology (including software), parts and spares imported with the
equipment in accordance with the contract shall be exempted from tariffs
and import-stage value-added tax.

e. The actual amount of salaries and training expenses for employees of
software companies can be entered as cost.

3). Technology Policies for the Industry

a. The development of general software of importance and basic software
is supported. The state technology fund shall mainly support the research
and development of basic, strategic, forward-looking and substantial key
software technology of generality, mainly including operational systems,
large-scale database management systems, network platforms, development
platforms, information security and embedded systems, large-scale
applicable software systems and other basic and general software. The
above-mentioned software research and development projects supported by
the state should mainly rely on enterprises, and the project undertakers
shall be selected through open bid.

b. Domestic enterprises, scientific research institutions and institutes
of higher education are supported to cooperate with foreign enterprises
in jointly establishing research and development centers.

4). Export Policies

a. Software export shall be integrated into the business scope of the
Import and Export Bank of China and enjoy credit support with
preferential interest. Moreover, the state export credit insurance
institutions shall provide export credit insurance.

b. The Customs shall provide convenient services for the production and
development of software. When research and development centers are
established within the software parks supported by the state in order to
design software for overseas customers, equipment to create the
environment of virtual users shall be bonded.

c. The examination and approval formalities for the entry and departure
of senior and middle-level managerial personnel and technicians of
software enterprises shall be simplified, and the valid period can be
extended.

d. Foreign exchange control measures in conformity with characteristics
of software trade shall be adopted.

e. Software export enterprises are encouraged to pass the certification
of GB/T19000-ISO9000 quality guarantee system and CMM (Capability
Maturity Model). The certification expenses will be subsidized through
the Central Foreign Trade Development Fund.

5). Accreditation System for Software Enterprises

a. Accreditation standards for software enterprises shall be formulated
by the Ministry of Information Industry, the Ministry of Education, the
Ministry of Science and Technology, the State Bureau of Taxation and
other related departments.

b. Annual assessment system shall be carried out among software
enterprises. Enterprises that fail to pass annual assessment will be
deprived of their identities as software enterprises and can no longer
enjoy related preferential policies.

c. The Ministry of Information Industry and the State Bureau of Quality
and Technical Supervision shall be responsible for the formulation of
national standards of software products.

6). Protection of Intellectual Property Rights

a. The registration of software copyrights is encouraged and key
protection is given to registered software in accordance with the state
laws.

b. No unit is allowed to use unauthorized software products in its
computer system.

c. Crackdown on software smuggling and pirating shall be strengthened,
and making, production and selling of pirated software shall be punished
severely.

Integrated Circuits (IC) Industry

1). Foreign and domestic enterprises are encouraged to establish jointly
invested or wholly foreign-invested IC production enterprises. For
average tax payers selling IC products (including monocrystalline silicon
chips) made by themselves, before 2010 value-added tax will be collected
in line with the tax rate of 17 percent, as set by law. Practically,
except for the part of 6 percent, other part of the tax will be
reimbursed immediately after collection for the enterprises to use in
research and development of new integrated circuits and reproduction
expansion.

2). Preferential tax policies that encourage foreign investment in energy
and communications industries will be adopted for IC manufacturers whose
amount of investment exceeds 8 billion yuan or whose IC wire width is
less than 0.25 �� m.

3). Self-use raw material and consumption goods for production imported
by manufacturers whose amount of investment exceeds 8 billion yuan or
whose IC wire width is less than 0.25 �� m shall be exempted from tariffs
and import-stage value-added tax. The Customs shall provide clearance
convenience for such enterprises.

4). Enterprises whose amount of investment exceeds 8 billion yuan or
whose IC wire width is less than 0.25 �� m are permitted to deposit their
after-tax profit intended for reinvestment within the territory of the
People's Republic of China in a special account in the form of foreign
currencies. These deposits are subject to the supervision of the foreign
exchange administration department.

5). The minimum depreciation period for production equipment of IC
manufacturers is three years.

6). IC technology and complete sets of production equipment imported by
IC manufacturers and special IC equipment and apparatus imported as
separate items shall be exempted, in accordance with relevant
regulations, from import tariffs and import-stage value-added tax.

7). Chips of integrated circuits designed by domestic IC designing
enterprises can be manufactured abroad if they cannot be manufactured
domestically. After the processing contract (including specifications and
amounts) is approved by the department in charge, tariffs shall be levied
according to the interim preferential tax rate for their import.

8). The examination and ratification department in charge of IC projects
is responsible for recognizing IC enterprises after soliciting opinions
from the taxation department at the same level.

9). IC designs are regarded as software products and enjoy the protection
of laws concerning intellectual property rights. The state encourages the
evaluation and registration of IC designs.

10). IC designing is regarded as software industry and enjoys policies
concerning software industry.

7. What are the regulations regarding foreign investment in the
establishment of research and development centers? What preferential
policies are offered?

To encourage foreign investment to establish R&D centers in China, the
Ministry of Foreign Trade and Economic Cooperation issued the Circular
Concerning Issues Related to Foreign Investment in the Establishment of
Research and Development Centers in 2000. It includes the form and
business scope of a foreign-invested R&D center, conditions for
establishment, the procedure and relevant preferential policies.

1). Form and Business Scope of a Foreign-invested R&D Center

a. A foreign-invested R&D center may take the form of a Sino-foreign
equity or cooperative joint venture or wholly foreign-owned enterprise
established according to law by foreign investors (including investment
companies established with foreign investment), or an independent
department or branch within a foreign-invested enterprise.

b. An R&D center is to serve as an institution engaged in the R&D and
experimental development (including intermediate experiments that serve
R&D activities) in natural sciences and related scientific and
technological fields. The contents of R&D may be basic research, product
application research, high-tech research and research for social
benefits. The R&D projects shall not include those listed under the
prohibited category in the Industrial Catalogue for Foreign Investment,
nor can the center conduct any trade of technological results that are
not generated by the R&D center itself or manufacturing activities other
than intermediate experiments. An R&D center may transfer its own R&D
results and commission R&D projects to, or undertake cooperative projects
with domestic scientific research academies and institutes. A training
center cannot be classified as an R&D center.

2). Conditions for the Establishment of a Foreign-invested R&D Center

a. There are clear-defined R&D fields and specific R&D projects, a
permanent location, instruments and equipment needed in scientific
research and other conditions necessary for scientific research. The
total investment of the R&D center devoted to research and development
shall not be lower than US$2 million.

b. An R&D center shall be staffed with full-time managerial and R&D
personnel, of whom those possessing the bachelor's degree or above and
directly engaged in R&D activities, as a percentage of the total staff,
shall not be lower than 80 percent.

3). Procedures for the Establishment of a Foreign-invested R&D Center

a. An R&D center established by foreign investors in the form of an
equity joint venture, a cooperative joint venture or a wholly
foreign-owned enterprise is subject to the examination and approval of
the examination and ratification authorities at the provincial level.

b. An R&D center established under a foreign-invested enterprise
(including an investment company)

(1) To establish an R&D branch or an independent R&D department, the
examination and approval shall be conducted by the examination and
ratification authorities for the foreign-invested enterprise within its
power; however, should the enterprise be a restricted category A
enterprise below the ceiling, the examination and approval shall, without
exception, be conducted by the examination and ratification authorities
at the provincial level.

(2) If an existing foreign-invested enterprise whose scope of business
includes "research" or "development" establishes an independent R&D
department, it should submit relevant documents on the independent R&D
department to the previous examination and ratification authorities. If
the enterprise's scope of business does not include the above-mentioned
operations, its contract and articles of corporation shall be revised and
submitted to the previous examination and ratification authorities for
approval.

4). The application submitted to the examination and ratification
authorities shall include the following:

a. The direction, field, major task and implementation plan of R&D;

b. Information on the location, personnel and relevant conditions for
scientific research;

c. The source, specific purpose and amount of the funds needed for R&D
and the corresponding financial budget report;

d. The list of self-use equipment imported within the scope of the total
investment or financed with equity funds, and supporting technology,
parts, spares and research samples and chemical agents used in the
process of R&D; and

e. Notes on the advanced nature of the R&D contents and the owner of the
R&D results.

5). Other relevant provisions:

a. The expenditure needed by the R&D center in the form of an independent
department or a branch shall be separately listed on the annual financial
budget of the enterprise that has set up the center, with separate
accounts to be kept.

b. For a foreign-invested enterprise that falls in the restricted
category A, its investment in an R&D center established in the form of an
independent department or a branch shall not exceed 50 percent of the
enterprise's total investment.

c. An R&D center shall, on an annual basis and prior to March 31, submit
to the examination and ratification authorities information on its R&D
progress and business operations in the preceding year.

6). Preferential Policies for Foreign-invested R&D Centers

a. Self-use equipment and matching technology, parts and spares
(excluding the commodities specified in the Catalogue of No-Tax-Exemption
Import Commodities for Foreign-invested Enterprises, vessels, aircraft,
special kinds of vehicles and construction machinery) imported within the
total amount of investment shall be exempted from the import tariff' and
the import-stage taxes, if they are used only by laboratories that do not
reach a production scale or fall into the scope of intermediate
experiment.

b. For technical renovation by way of using their own funds, imports of
self-use equipment and matching technology, parts and spares within the
previously approved scope of business that meet the conditions specified
in the preceding paragraph shall be exempted from the import tariff and
import-stage taxes.

c. Proceeds obtained from transfer of technology developed as a result of
their own research and development shall be exempted from the business
tax.

d. If the expenditure for technology development increases by over 10
percent (including 10 percent), 50 percent of the actual amount of
technology development expenditure can be used to deduct the current
year's amount of taxable income with the approval of the taxation
authorities.

e. Other incentives provided for by the state.

8. What are the favorable policies for foreign investors to central and
western China?

In order to coordinate economic development in different areas, the
Chinese government is encouraging foreign investment in central and
western China. Key measures being taken are as follows.

1). The state has approved and issued the Catalogue of Advantageous
Sectors for Foreign investment in Central and Western Regions. Projects
included in this catalogue enjoy the same policy as offered to projects
of encouraged category in the Industrial Catalogue for Foreign
Investment, and favorable tax policy applies to the import of necessary
equipment, parts, spares and technology used in such projects.

2). There will be fewer restrictions in investment fields, and on the
conditions for establishment of foreign-invested enterprises in central
and western China, as well as on the proportion of shares owned by the
foreign contingent of the foreign-invested enterprises in these areas.

3). Encouraged Projects in central and western China shall pay income tax
at the reduced rate of 15 percent for three years on expiry of the
current favorable tax period.

4). If foreign-invested enterprises reinvest in central and western China
with foreign capital accounting for 25 percent or more of the project,
the new project will enjoy policies offered to enterprises with foreign
investment.

5). Trial projects approved by the central government should, in
principle, be carried out simultaneously in eastern, central and western
China. On approval from the state government, provincial and autonomous
regional capitals and municipalities may open the fields of commerce,
foreign trade and banking to foreign investment on a trial basis.
Foreign-funded banks in western China may embark on RMB business
gradually. Foreign investors may invest in telecommunications and tourism
insurance in accordance with relevant regulations, and set up
Sino-foreign joint venture accounting firms, engineering design
companies, railway and highway freight transport and public utility
companies, and other fields open to foreign investment.

6). Provinces, municipalities and autonomous regions in central and
western China may select a built-up development area in the provincial or
regional capital and apply for the status of a national economic and
technological development zone.

7). Enterprises with foreign investment engaged in energy and
transportation infrastructure will pay income tax at the reduced rate of
15 percent with approval from the State Bureau of Taxation.

8). In the interests of protecting the ecological environment, income
from special products reverting cultivated land to forestry and grassland
is exempt from special agricultural product tax for a period of ten years.

9). There are also preferential policies for land use and mineral
resource exploration, promoting forest farming and grass planting on
barren mountain slopes and fields, and the reverting of cultivated land
to forest and grassland. Those who revert cultivated land to forest and
grassland enjoy land use rights, as well as rights of ownership of forest
or grassland. Economic entities and individuals may apply to utilize
barren mountain slopes and fields according to legal procedures, plant
trees and grass, and practice ecological environmental protection.
Alternatively, they can be granted the land use rights directly from the
state, in which case the land utilization fee will be either exempted or
reduced. Land use rights will remain unchanged for a period of 50 years.
On expiration of this period, application may be made for renewal of
these rights. The granted rights of land use may be inherited, or
transferred on payment of a transfer fee. The government supports
activities involving mineral resource exploration, evaluation, rational
utilization and protection.

10). Foreign investment is encouraged in agriculture, water conservancy,
transportation, energy, ecological and environmental protection, tourism,
mining, municipal engineering and other infrastructure projects in
western China. The establishment of foreign-invested research and
development centers are also encouraged, and will be given support in
terms of funding for accessory projects and pertinent policies.

11). Trials in western China to utilize foreign capital through BOT and
TOT methods are encouraged. The state supports enterprises in the
encouraged and permitted categories in the west to attract foreign
investment through assignment of operation right, offering equity
interests and enterprise merger and reorganization.

9. What major achievements has China made in attracting foreign
investment during the Ninth Five-Year Plan period (1996-2000)?

Attracting direct foreign investment is an essential component of the
cardinal state policy of opening up and reform. China has made globally
recognized achievements in attracting foreign investment since its reform
and opening up. Since 1993 China has remained No. l destination for
foreign investment among developing countries for seven years running.
During the Eighth (1991-1995) and Ninth Five-Year Plan periods, the work
of attracting foreign investment entered a new state, which featured high
speed, large scale, and improved industrial structure and utilization of
the investment.

Direct foreign investment has played a positive role in promoting China's
economic development and opening up and reform. The contributions of
foreign investment are as follows:

1). Bringing about rapid and sound development of the national economy.
From 1996 to 2000, China cumulatively approved 104,621 foreign-invested
enterprises, with a total foreign commitment of US$279.984 billion, of
which US$213.480 billion was utilized, accounting for 28.75 percent,
41.41 percent and 61.28 percent of their respective total for the past 20
years since China's reform and opening up. The realized input of foreign
investors accounted for 12.72 percent of China's total investment in
fixed assets for the same period. The increased value of foreign-invested
enterprises (this statistic started in 1998) reached 1,336.9 billion yuan
(1998-2000), accounting for 20.87 percent of China's industrial increased
value of the same period. The taxes derived from foreign-invested
enterprises (exclusive of tariffs and land-use fees) amounted to 683.6
billion yuan, accounting for 12.54 percent of China's total industrial
and commercial tax income, making these enterprises the fastest growing
tax source since 1992. Foreign-invested enterprises have maintained as a
whole a favorable foreign exchange balance, contributing to the
improvement of balance of payment and stable increase of China's foreign
exchange reserve. Currently, about 180,000 foreign-invested enterprises
are in operation, employing around 20 million people, equivalent to 10
percent of China's non-agriculture labor force. Foreign-invested
enterprises have become a key component, an increase point and a driving
force of China's national economy.

2). Propelling emancipation of the mind, renovation of modes of thinking,
reform in China's economic system and formation of China's market economy
system. The inflow of foreign investment has brought in with it brand new
business concepts and advanced managerial methods, and has helped break
the traditional economic mold and injected vitality to the old economic
system.

3). Introducing into China advanced and applicable technologies and
managerial know-how, and accelerating the readjustment of economic
structure and optimization of industrial structure. The advanced
technologies, skills, equipment and products imported by foreign-invested
enterprises have advanced the technological innovation of Chinese
industries, and speeded up the readjustment of China's industrial
structure and product patterns. The absorbed foreign investment has
helped upgrade the products and improve the technology and production
technique of Chinese industries, including machinery, electronics,
communications, automobile, chemistry, light industry, textile, building
materials, medicine and foodstuff. On the strength of foreign investment,
some sectors have forged a number of new- and hi-tech industries in a
short period, narrowing the gap between China and advanced countries in
terms of product and technology. In the sectors concentrated with foreign
investment, the foreign-invested enterprises excel their domestic
counterparts in all key performance indexes.

4). Accelerating the integration of Chinese economy into the world
economy, and promoting the establishment and development of an open
economy. Foreign investment has helped sharpen the edge of China's import
and export products in international competition, broaden the trade
channels and speed up the growth of import and export trade. Since 1996
the export volume of foreign- invested enterprises has continued to
account for above 40 percent of China's total export value. For the
period from 1996 to 2000 the import and export value of foreign-invested
enterprises stood at US$858.634 billion, making up nearly 50 percent of
China's total foreign trade. The continuous import and export increase of
foreign-invested enterprises has much bearing on the improvement of
China's trade environment and balance between China's import and export.

5). Promoting China's bilateral and multilateral trade relations.

10. What impact may China's accession to the WTO have on foreign
investment in China?

After joining the WTO, China will adapt its laws and regulations to
conform to the WTO's fundamental rules, improve and develop China's
socialist market economy, and create suitable conditions for fair
competition between domestic and foreign enterprises. The Chinese
government has committed itself to continuing opening its commodities
market to the outside world, while simultaneously pushing forward the
opening of its service industries. Technological innovation and the
Western Development strategy provide a solid foundation for further
improvement of foreign-invested industries and regional industrial
structures. The policy series issued by the state government in 1999 to
encourage foreign investment and increase export will also bring obvious
results in foreign capital utilization. China's WTO access will provide
more market opportunities and greater stability for foreign investment in
China and a larger scope of economic and trade cooperation, as well as
exerting a positive influence on future exploration and absorption of
foreign capital.

11. What measures will the Chinese government take to expand the scale
and enhance the level of foreign investment introduction in the Tenth
Five-Year Plan (2001-2005)?

11. What measures will the Chinese government take to expand the scale
and enhance the level of foreign investment introduction in the Tenth
Five-Year Plan (2001-2005)?

In its Tenth Five-Year Plan period, China will enter a new stage of
reform and opening. On gaining WTO access, China will have still more
opportunity to introduce foreign capital, technology and managerial
experience, upgrade and optimize its industrial structure, and expand
export. Meanwhile, China will face the severe challenge of fierce
international competition. The Chinese government will continue to adopt
measures to absorb foreign capital, in still larger amounts and for even
better utilization, and continue to promote readjustment of its
industrial structure and balance in regional economic development. The
state will further regulate government administration and enterprise
operation in line with international practice, and improve and optimize
investment environment. The Chinese government will take the following
steps to expand the scale and enhance the level of foreign investment
introduction.

1). Foreign capital introduction will be closely linked with Western
Development. In implementing the Western Development strategy, there will
be more opportunity for foreign investment within infrastructure
construction, environmental protection and technological development. The
government will coordinate and encourage foreign-invested companies in
China to re-invest in central and western regions. State level economic
and technological development zones will fulfill a demonstration role in
promoting successful working exchanges between the east and west. The
state will push forward projects for piping gas and transmitting
electricity from the west to the east, and meanwhile propel foreign
investment input in accessory infrastructure facility construction.
Various methods will be adopted to help people in western China be more
open to new ideas and concepts and improve their investment environment.

2). Transnational companies will be encouraged to invest in high-tech
industry and infrastructure. Effective measures will be adopted to
encourage transnational companies to invest in the construction of R&D
centers and regional headquarters. Foreign-invested enterprises will be
encouraged to carry out technological innovation, improve their
technological level and capacity for independent exploration, and train
scientific and technological talent. Efforts will be also made to explore
the utilization of risk investment, set up a Sino-foreign risk investment
fund, promote the utilization of foreign capital in high technology, and
advance China's industrial restructuring.

3). In accordance with China's commitment upon the entry of the WTO,
China will push forward, step by step, the opening of banking, insurance,
telecommunications, domestic and foreign trade and tourism to the outside
world.

4). In the interests of keeping pace with the trend of global investment,
China will explore the involvement of foreign investment through
acquisition and merger in the reorganization and transformation of
state-owned enterprises. International experience in acquisition and
merger applied to state-owned enterprises will be studied for the
formulation of rules and regulations regarding foreign purchase and
merger of state-owned enterprises. The experience of foreign companies in
participating in the transformation of state-owned enterprises by setting
up joint ventures and introducing technology will be utilized to enhance
modes of cooperation between state-owned enterprises and foreign
businesses, particularly large transnational companies.

5). Existing economic rules and regulations will be re-examined, revised,
improved and made more transparent. China will study carefully WTO
regulations and take active moves to meet changes brought about by
China's WTO membership on its legal system, management system, import and
export administration and foreign exchange balance. Laws, regulations and
policies on foreign investment will be re-examined in accordance with WTO
requirements; the foreign investment approval and administration process
will be upgraded in order to simplify the approval procedure and raise
working efficiency. A new foreign investment industry policy will be
formulated as soon as possible.

12. What are the changes in the new versions of the Law of the People's
Republic of China on Chinese-Foreign Equity Joint Ventures, Law on
Chinese-Foreign Contractual Joint Ventures, and Law on Wh

The Law of the People's Republic of China on Chinese-Foreign Equity Joint
Ventures was adopted and promulgated by the second session of the Fifth
NPC on July 1,1979. It was revised by the third session of the Seventh
NPC in April 1990. The Law of the People's Republic of China on
Chinese-Foreign Contractual Joint Ventures was adopted and promulgated by
the first session of the Seventh NPC on April 13,1988. The Law of the
People's Republic of China on Wholly Foreign-Owned Enterprises was
adopted and promulgated by the fourth session of the Sixth NPC on April
12,1986. The three laws have played a significant role in implementing
the opening policy, attracting foreign investment, and expanding economic
cooperation and technology exchanges with foreign countries since they
were issued.

In view of the continued reform and opening up and steady development of
the national economy, and in order to adapt to the process of China's
entry into the WTO, to make the three laws more in conformity with
China's reform and opening up, and to establish a socialist market
economy legal system within the framework of international practices and
rules, after examination and approval by the NPC Standing Committee in
2000, the following revisions were made to the Law of the People's
Republic of China on Chinese-Foreign Contractual Joint Ventures and the
Law of the People's Republic of China on Wholly Foreign-Owned Enterprises:

1). Articles about the balance of foreign exchange account

a. Article 20 of the Law of the People's Republic of China on
Chinese-Foreign Contractual Joint Ventures was deleted, which says: "A
contractual joint venture shall keep balance between its foreign exchange
income and expenses. It may apply to the relevant authorities for
assistance in accordance with the state provisions if it has difficulty
in balancing its foreign exchange account."

b. Section 3, Article 18 of the Law of the People's Republic of China on
Wholly Foreign-Owned Enterprises was deleted, which says: "Wholly
foreign-owned enterprises shall reach by themselves the balance of
foreign exchange receipts and disbursements. In case that the relevant
authority in charge approved the sale in China of the products of the
enterprises which results in an imbalance of foreign exchange receipts
and disbursements of such enterprises, the authority that has approved of
the sale shall be responsible for resolving such imbalance."

2). Article about "localization of supplies"

Article 15 of the Law of the People's Republic of China on Wholly
Foreign-Owned Enterprises is changed to: "Supplies, such as raw materials
and fuel, required by wholly foreign-owned enterprise within the approved
scope of operation may be purchased, according to the principal of
fairness and justice, on the domestic or the international market." The
previous stipulation, "may be purchased in China to the extent possible,"
is deleted.

3). Requirement on export achievement

Section 1, Article 3 of the Law of the People's Republic of China on
Wholly Foreign-Owned Enterprises is changed to: "The establishment of
wholly foreign-owned enterprises must be beneficial to the development of
the Chinese national economy. The state encourages the establishment of
export-oriented and technologically advanced wholly foreign-owned
enterprises." The stipulation on the establishment of wholly
foreign-owned enterprises which must "use advanced technology and
equipment and export all or a greater portion of their products" is
deleted.

4). Articles on recordation of enterprises' production plans

Section 1, Article 11 of the Law of the People's Republic of China on
Wholly Foreign-Owned Enterprises is deleted, which says: "A wholly
foreign-owned enterprise shall report their production and operation
plans to the department in charge for record."

The Law of the People's Republic of China on Chinese-Foreign Equity Joint
Ventures was revised in March 2001. Changes are made to eight places. In
one revision, the original stipulation said, "In its purchase of required
raw and semi-processed materials, fuels, auxiliary equipment, etc., an
equity joint venture shall give first priority to Chinese sources, but
may also acquire them directly from the international market with its own
foreign exchange funds." The new stipulation says, "Supplies, such as raw
materials and fuel, required by an equity joint venture within the
approved scope of operation may be purchased, according to the principal
of fairness and justice, on the domestic or the international market."

13. What are the regulations concerning labor management of
foreign-invested enterprises?

In order to guarantee the legitimate rights and interests of
foreign-invested enterprises and their employees, the Chinese government
has formulated the Regulations of the Labor Management in
Foreign-Invested Enterprises, making stipulations concerning employee
recruitment and training, vacation and leave, and salaries, etc.

1). Protecting the Legitimate Rights and Interests of Foreign-invested
Enterprises

According to relevant state laws and administrative regulations, these
enterprises can make autonomous decisions regarding the timing,
conditions, methods and size of employment. These enterprises can recruit
their employees from employment service centers recognized by local labor
authorities where the enterprises are located, or, with the approval of
local labor authorities, may recruit employees directly or from other
regions.

These enterprises shall recruit Chinese employees within the territory of
China. In case where employment of foreign nationals or residents from
Taiwan, Hong Kong and Macao is necessary, approval from the local labor
administration shall be obtained, and formalities, including an
employment certificate, shall be completed in accordance with the
relevant state regulations.

The enterprises should establish the labor contract in a written form
with individual employees. The enterprises may terminate the labor
contract if an employee does not meet the job qualifications during the
probation period, or fails to execute the labor contract, or severely
violates labor disciplines or other bylaws of the enterprises, or
receives sentences for imprisonment or labor education.

2). Protecting the Legitimate Rights and Interests of the Employees of
Foreign-invested Enterprises

These enterprises must participate in social insurance scenarios for
pension, unemployment, health care, work-related injuries, and maternal
leave in accordance with relevant state regulations. They must pay the
full amount of social insurance premiums to social insurance agencies in
time. The accounting of expenses on social insurance shall follow
relevant state regulations. Individual employees are required to pay
pension premium accordingly.

These enterprises should establish the Employment and Pension Manuals to
record their employees' length of employment, salary, and premium and
insurance payment on pension, unemployment, work-related injuries, and
health care.

These enterprises should set up a professional training scenario for
their employees. Employees cannot start on a technical job, or a job
requiring special skills unless properly trained and holding a
certificate.

The trade union (or employees' representatives in the absence of the
former) may establish a collective contract with the enterprise through
consultation and negotiation on such matters as work remuneration, work
hours, vacations, workplace safety and hygiene, and insurance and welfare
on behalf of the employees. The contents of labor contracts and
collective contracts shall not contradict the state's laws and
regulations. The enterprise shall pay a one-time subsistence allowance to
an employee whose labor contract is terminated, and provide medical
subsidies in addition to the one-time allowance in certain special
circumstances.

In the following conditions, an enterprise cannot terminate the labor
contract of an employee: (a) the employee is confirmed of loss or partial
loss of working ability due to an occupational disease or work-related
injury; (b) the employee's specified treatment period has not expired; or
(c) a female employee is in pregnancy, maternal leave or breast-feeding
period. In case the employee intends to terminate the contract due to an
occupational disease or work-related injury, the enterprise shall pay the
social insurance agency an employment rearrangement fee for work-related
disabilities according to local regulations.

When an enterprise terminates a labor contract according to relevant
regulations or when the two parties agree to cancel the labor contract
through negotiation, the enterprise should, in accordance with relevant
regulations of the local people's government, pay in a lump sum to the
social security agencies living and social security expenses for the
following cases: (1) the employee who suffers from a work-related injury
or occupational disease, or, as verified by a letter from a hospital, is
receiving medical or recuperation treatment; (2) the employee who has
been determined by the labor appraisal committee as being partially or
completely disabled after the end of medical treatment; (3)
pension-receiving dependents of an employee who has died on duty; (4) a
female employee who is in the pregnant, lying-in or lactation period; and
(5) an employee who has not participated in any type of social insurance.

An employee is entitled to vacations, public and general holidays, home
leave and wedding, bereavement and maternity leave as stipulated by the
state.

Welfare treatment of an employee during his/her active term of employment
shall follow relevant regulations of the state. The enterprise shall
utilize housing funds for Chinese employees in accordance with the
regulations of the local people's government.

For working compensation of its employees, an enterprise shall follow the
principle of equal pay for equal work. Salary level of the enterprise
shall increase gradually on the basis of its profit growth. The minimum
salary for legal work hour shall not be lower than the local minimum
salary level.

14. What are the specific regulations concerning the investment within
China of foreign-invested enterprises? Will they continue to enjoy the
preferential treatment given to foreign-invested enter

According to the Interim Provisions Concerning the Investment within
China of Foreign-invested Enterprises jointly issued by the Ministry of
Foreign Trade and Economic Cooperation and the State Administration for
Industry and Commerce, investment within China of foreign-invested
enterprises refers to Sino-foreign equity joint ventures, Sino-foreign
contractual joint ventures and wholly foreign-owned enterprises which are
established within China according to law in the form of a limited
liability company, as well as the establishment of enterprises in their
own name, or purchase of equity shares from other enterprises
(hereinafter referred to as "invested companies") within China by
foreign-invested joint stock companies limited.

1). Conditions for a foreign-invested enterprise to make investment in
China

a. Its registered capital has been paid off;

b. It has started to make profits;

c. It has been conducting business operations according to law and has no
track record of illegal business operations.

d. The cumulative amount of investment within China made by a
foreign-invested enterprise shall not exceed 50 percent of its net
assets; in the wake of investment, the amount of the capital increase
from the profits of the invested company is not included here.

e. For investment within China, foreign-invested enterprises should, for
reference, consult the Interim Provisions for Guiding Foreign Investment
and the Industrial Catalogue for Foreign Investment. Foreign-invested
enterprises shall not make investments in the fields in which foreign
investment is prohibited.

2). Examination and Approval Procedures

a. To establish a company in the encouraged or permitted categories, a
foreign-invested enterprise shall file an application with the company
registration authorities in the locality where the invested company is to
be located. The company registration authorities shall, in accordance
with the relevant stipulations of the Company Law and the Rules for the
Administration of Company Registration of the People's Republic of China,
decide whether to grant registration or not. Should registration be
granted, a Business License of the Enterprise Legal Person is issued, and
the note of "investment by foreign-invested enterprise" is added in the
column of enterprise classification [hereinafter abbreviated as
(annotated) Business License].

b. To establish a company in the restricted category, a foreign-invested
enterprise shall file an application with the authorities for foreign
trade and economic cooperation at the provincial level in the locality
where the invested company is to be located. Upon receipt of the
above-mentioned application, the examination and ratification department
at the provincial level shall, in line with the invested company's scope
of business operations, consult the opinion of the regulatory authorities
at the same level or at the national level.

If the examination and ratification department at the provincial level
gives permit to a foreign-invested enterprise, the enterprise shall, upon
presentation of the permit, file an application for registration with the
company registration department in the locality where the invested
company is to be located.

The company registration department shall, in accordance with the
relevant stipulations of the Rules for the Administration of Company
Registration, decide whether to grant registration or not. Should
registration be granted, a (annotated) Business License will be issued.

c. In cases where a foreign-invested enterprise purchases equity shares
from the invested company whose scope of business falls into the
encouraged or permitted categories, the invested company shall file an
application for registration alteration with the previous registration
department.

In cases where the invested company's scope of business involves fields
in the restricted category, the foreign-invested company shall go through
the procedures specified in Item b. The invested company shall, upon
presentation of the permit by the examination and ratification department
at the provincial level, file an application with the previous company
registration department for registration alteration.

The company registration department shall, in compliance with the
relevant stipulations in the Rules for the Administration of Company
Registration, decide to grant registration or not. In cases where
registration is granted, a (annotated) Business License will be issued.

d. Should the invested company be a foreign-invested enterprise,
procedures should follow the Provisions on the Alteration of Investors
Equity of Foreign-invested Enterprises.

e. Investment within China made by investment companies established with
foreign investment shall follow the state laws and regulations concerning
foreign investment as well as the Provisional Regulations Concerning the
Establishment of Foreign-funded Investment Companies.

f. Investment within China made jointly by foreign investors and
foreign-invested enterprises shall follow the state laws and regulations
concerning foreign investment. In such an investment project, the
percentage of investment contributions by foreign investors shall
generally not be lower than 25 percent of the registered capital of the
invested enterprise.

3). Treatments for Foreign-invested Enterprises Which Make Investment in
China

The state encourages foreign-invested enterprises to invest in the
central and western regions. If the percentage of foreign investment in
the registered capital of the invested company is not lower than 25
percent, the invested company can enjoy the treatment available for
foreign- invested enterprises.

An invested company in the central and western regions shall, upon
presentation of the Approval Certificate for Enterprises with Foreign
Investment and the (annotated) Business License, enjoy the treatment
available for foreign-invested enterprises as provided for by laws and
regulations.

15. What are the rules for foreign businesspeople to invest in investment
companies?

To encourage transnational companies to invest in China and attract
advanced foreign technology and management experience, the Ministry of
Foreign Trade and Economic Cooperation promulgated in April 1995
Provincial Regulations Concerning Establishment of Foreign-funded
Investment Companies (hereafter referred to as the Provisional
Regulations), permitting foreign investors to establish investment
companies in China. In August 1999, the Ministry of Foreign Trade and
Economic Cooperation made amendments to the Provisional Regulations in
order to expand the functions of such investment companies.

1). Conditions for Establishing Investment Companies

a. An applicant foreign investor should have sound credit and economic
strength required for the establishment of an investment company. Its
total assets in the year prior to the application should be no less than
US$400 million. In addition, the foreign investor should have already
established a foreign-funded enterprise within the territory of China,
have paid in a minimum of US$10 million in registered capital, and
receive approval for a minimum of three of its investment project
proposals.

Or, the applicant foreign investor, with sound credit and economic
strength required for the establishment of an investment company, has
already established a minimum of 10 foreign-funded enterprises engaged in
manufacturing or infrastructure construction within the territory of
China and has paid in a minimum of US$30 million in registered capital.

b. For a joint venture investment company, the Chinese investor should
have sound credit and economic strength required for the establishment of
an investment company. Its total assets should be no less than 100
million yuan.

c. The registered capital of an investment company should be no less than
US$30 million.

2). Regulations on Registered Capital

The foreign investor should make its investment in convertible currency
for registered capital. The Chinese investor can use Renminbi yuan. The
investors should pay off the registered capital within two years
beginning from the issuance date of the business license.

3). Business Scope

An investment company can embark on the following operations, entirely or
partially, upon approval:

a. Make investment in industry, agriculture, infrastructure and energy
encouraged and permitted by the state for foreign investment;

b. Assist or act as an agent of its invested enterprises to purchase
domestically or internationally machines and office equipment for use by
the invested enterprises, and raw materials, components and parts needed
in the production activities of the invested enterprises;

c. Sell, as agents or distributors, domestically or internationally,
products produced by the invested enterprises, and provide after-sale
services;

d. Purchase and export commodities from within Chinese territory that are
not subject to export quotas or the export permits;

e. Provide comprehensive services, such as transportation and storage,
for the invested enterprises, and assist them in recruiting personnel,
providing technical training, market development and consultation;

f. Set up research and development centers or offices in China to develop
new products and high and new technologies, transfer its research and
development achievements, and provide related technological services;

g. Balance foreign exchange among its invested enterprises under the
permit and supervision of the foreign exchange administration;

h. Assist its invested enterprises in finding loans and provide
guarantee, and the amount of loans to an investment company should not
exceed four times the registered capital the company has paid in;

i. Provide consultation for its investors; and

j. Provide financial support to its invested enterprises with the
approval of the People's Bank of China.

4). Examination and Ratification Procedures and Documents Required

The investor applying for the establishment of an investment company
should submit required documents to the foreign trade and economic
cooperation department of the locale province, autonomous region,
municipality directly under the central government, or the city listed as
an independent unit in the state plan. Upon approval, the said foreign
trade and economic cooperation department will forward the documents to
the Ministry of Foreign Trade and Economic Cooperation for final
examination and approval. The documents required include:

a. Project proposal for the establishment of the investment company, and
feasibility study report, contract and articles of corporation signed by
all the parties involved;

In the case of a wholly owned investment company, the documents required
include a project proposal for the establishment of an investment company
signed by the foreign investor, application form for foreign-invested
enterprises, feasibility study report, and articles of corporation;

b. Credit status, registration and legal person documents of various
parties;

c. Approval Certificate, business license, credit status report from a
Chinese certified public accountant for the enterprises that the foreign
investor has already established in China;

d. Balance sheets for the latest three years of various parties; and

e. Other documents required by Ministry of Foreign Trade and Economic
Cooperation.

16. What are the rules for foreign shipping companies to set up their
solely owned companies in China?

To regulate investment and operation of foreign shipping companies in
China and protect the legitimate rights and interests of investors, the
Chinese Ministry of Communications and the Ministry of Foreign Trade and
Economic Cooperation have promulgated the Provisional Regulations on the
Examination and Approval of Wholly Foreign-funded Shipping Companies,
permitting foreign shipping companies to set up wholly owned shipping
companies in China. Major stipulations are as follows:

1). An applicant for the establishment of a wholly owned shipping company
must meet the following requirements:

a. It should have experience of no less than 15 years in shipping
business;

b. It should have had a permanent representative office approved by the
Ministry of Communications for no less than three years in the port city
where the solely owned shipping company is to be located;

c. Its regular passenger or cargo ship should call no less than once a
month at a harbor in the city where the solely owned shipping company is
to be located (those who operate shipping routes in the forms of joint
consignment, shipping space swap and joint operation and who have
obtained operation permits for such routes are deemed to have met the
relevant requirements);

Foreign shipping businesses that are engaged in tramp transport should
have a stable source of shipment in China.

d. Its operations in China are free for two successive years from any
violation of the Chinese laws, administrative statutes and relevant
regulations.

2). To apply for the establishment of a wholly owned shipping company,
the applicant should submit the following documents:

a. Application;

b. Feasibility study report;

c. Articles of corporation;

d. Legal documents and credit status documents of the applicant;

e. A letter of entrustment from the legal representative of the wholly
owned shipping company and the name list and resume of the members of the
Board of Directors;

f. Sample of the bill of lading;

g. Xeroxed copy of the permit for operating shipping routes and documents
approving the permanent representative office; and

h. Other documents requested by the Ministry of Foreign Trade and
Economic Cooperation and the Ministry of Communications.

3). Rules and Procedures for Examination and Approval

a. The application by a foreign shipping business for the establishment
of a wholly owned shipping company in China must be examined and approved
in accordance with the shipping agreement between the Chinese government
and the government of the foreign shipping business and pertinent legal
documents.

b. The Ministry of Foreign Trade and Economic Cooperation and the
Ministry of Communications are authorized to examine and approve foreign
shipping companies' applications for the establishment of wholly owned
shipping companies in China.

c. Applicants should submit required documents to the responsible
department of foreign trade and economic cooperation in the host
province, autonomous regions and municipalities directly under the
central government, which will conduct a preliminary examination of the
submitted documents and then forward the applications that have passed
the preliminary examination to the Ministry of Foreign Trade and Economic
Cooperation for further examination and approval, with a copy to the
Ministry of Communications.

d. The Ministry of Foreign Trade and Economic Cooperation will examine
the forwarded documents and consult with the Ministry of Communications.
After reaching a consensus, the Ministry of Foreign Trade and Economic
Cooperation will issue a permit, by means of which the applicant receives
the Approval Certificate for Enterprises with Foreign Investment.

e. After the application is approved, the applicant should register with
and get a business license from the administration of industry and
commerce within the stipulated period of time and obtain an operation
permit from the Ministry of Communications for a wholly foreign-funded
shipping company prior to commencing its operations.

4). Business Scope and Registered Capital

The approved wholly foreign-funded shipping company or its branch is
allowed to conduct the following business activities for its parent
company: cargo solicitation, signing the bill of lading, freight
clearance, and signing service contracts.

The registered capital of a wholly foreign-funded shipping company should
be no less than US$1 million.

5). A wholly foreign-funded shipping company is allowed to establish
branches in other port cities, as long as the following requirements are
met:

a. The registered capital of the wholly foreign-funded shipping company
has been paid off and the company has been in operation for a full year;

b. The parent company has liners (including joint consignment, shipping
space swap and joint operation) that call the port city where the branch
is to be located;

c. The parent company has had a permanent representative office approved
by the Ministry of Communications for no less than a year in the port
city where the branch is to be located;

d. The operations in China of the wholly foreign-funded shipping company
and the parent company are free for one year from any violation of the
Chinese laws, administrative statutes and relevant regulations; and

e. The wholly foreign-funded shipping company should add US$120,000 to
its registered capital for each branch it establishes.

17. What are the conditions for establishing Chinese-foreign equity and
contractual joint venture medical institutions within Chinese territory?

To meet the needs of the reform and opening-up, and to promote healthy
development of Chinese medical and public health undertakings, the
Ministry of Health and the Ministry of Foreign Trade and Economic
Cooperation have promulgated Provisional Measures for the Administration
of Chinese-Foreign Equity and Contractual Joint Venture Medical
Institutions, in accordance with laws and regulations concerning foreign
investment and the Administrative Regulations of Medical Institutions.
The Measures permit foreign medical institutions, companies, enterprises
and other economic organizations to cooperate with Chinese medical
institutions, companies, enterprises and other economic organizations to
set up medical institutions in form of equity and contractual joint
ventures.

Conditions for the establishment of Chinese-foreign equity and
contractual joint venture medical institutions:

1). The establishment and development of Chinese-foreign equity and
contractual joint venture medical institutions must be in conformity with
the regional public health planning and medical institution establishment
planning of the area concerned, and must follow the Basic Standards for
Medical Institutions, stipulated by the Ministry of Health.

2). The Chinese and foreign parties applying for the establishment of
Chinese-foreign equity and contractual joint venture medical institutions
should be legal persons or entities capable of independently assuming
civil liabilities. The said Chinese and foreign parties should have
direct or indirect experience in the investment and management of medical
and health undertakings and should meet one of the following requirements:

a. The capacity to provide world-advanced medical institution management
experience, and management and service models;

b. The capacity to provide world-advanced medical technologies and
equipment; and

c. The capacity to supplement and improve the medical services,
capabilities, technologies, funding and facilities of a given area.

3). The Chinese-foreign equity and contractual joint venture medical
institution to be established must meet the following requirements:

a. It must be an independent legal person;

b. The total investment should be no less than 20 million yuan;

c. The Chinese party involved should hold an equity share of no less than
30 percent in the Chinese-foreign equity and contractual joint venture
medical institution;

d. The period of the joint venture or cooperation should not exceed 20
years; and

e. Other conditions set by the health administrations at and above the
provincial level.

4). The Chinese party involved that makes its investment in the form of
state assets (including evaluation-based contribution or using the state
assets as conditions for cooperation) must obtain approval from the
relevant departments and must, in accordance with the regulations
concerning the state assets assessment management, have the state assets
to be invested evaluated by an evaluation agency recognized by the state
assets management authorities. The result of an evaluation confirmed by
the state assets management authorities at the provincial level or higher
may be used as the basis of the pricing of the state assets to be
invested.

18. What are the rules for establishing foreign-funded commercial
enterprises in China?

To expand the opening-up drive, to promote the reform and development of
Chinese commercial enterprises and construction of the domestic market,
and to facilitate the experiments with the utilization of foreign
investment in the commercial sector, the State Economic and Trade
Commission and the Ministry of Foreign Trade and Economic Cooperation
have worked out and promulgated Experimental Measures for Foreign-funded
Commercial Enterprises. Currently, the Measures only permit foreign
companies and enterprises to set up with Chinese companies and
enterprises Chinese-foreign equity and contractual joint venture
commercial enterprises in China. Wholly foreign-invested commercial
enterprises are not allowed yet. Major stipulations are as follows:

1). The equity and contractual joint venture commercial enterprises to be
established must comply with the commercial development plan of the
locale city and should have the capacity to introduce world-advanced
marketing techniques and management experience, advance local commercial
modernization, propel exportation of domestic products and produce good
economic and social results.

2). As stipulated by the State Council, the areas where equity and
contractual joint venture commercial enterprises may be established are
limited temporarily to provincial capital cities, capitals of autonomous
regions, municipalities directly tender the jurisdiction of the central
government, cities listed as independent units in the state plan, and
special economic zones (hereafter referred to as pilot areas).

3). Investors in commercial joint ventures should meet the following
requirements:

a. Foreign joint ventures or main foreign joint ventures (hereafter
referred to as foreign joint ventures) should have comparatively high
economic strength, advanced management experience and marketing
techniques in commercial operations, broad international distribution
channels, sound credit and good performance. In addition, they should
help promote Chinese exports through the establishment of their joint
ventures.

Foreign joint ventures applying foe' the establishment of joint ventures
operating retail business should record all average annual sales volume
of US$2.0 billion or more in the three years prior to the year of the
application and should have assets of no less than US$200 million in the
year prior to the year of the application.

Foreign joint ventures applying for the establishment of joint ventures
operating wholesale business should record an average annual wholesale
volume of US$2.5 billion or more in the three years prior to the year of
the application and should have assets of no less than US$300 million in
the year prior to the year of the application.

b. Chinese joint ventures or main Chinese joint ventures (hereafter
referred to as Chinese joint ventures) should be distribution enterprises
with comparatively high economic strength and operation capacities. The
amount of their assets in the year prior to the application should be
more than 50 million yuan (30 million yuan for central and western
regions). For Chinese joint ventures who are commercial enterprises, the
average annual sales volume in the three years prior to the application
should be no less than 300 million yuan (200 million yuan for central and
western regions). For foreign trade enterprises, the average annual
self-operated export and import volume should be no less than US$50
million (exports should amount to no less than US$30 million).

4). Equity and contractual joint venture commercial enterprises should
meet the following requirements:

a. Compliance with the relevant Chinese laws, statutes and regulations;

b. Compliance with the commercial development plan of the locale city;

c. The registered capital of the joint ventures engaged in retail
business should be no less than 50 million yuan, and for central and
western regions, no less than 30 million yuan. The registered capital of
the joint ventures engaged in wholesale business should be no less than
80 million yuan, and for central and western regions, no less than 60
million yuan.

d. For equity and contractual joint venture commercial enterprises
operating in the form of more than three chain stores (excluding
neighborhood, specialized and exclusive-right stores), the proportion of
the Chinese parties' investment should reach a minimum of 51 percent. For
chain equity and contractual joint venture commercial enterprises which
record a good performance, whose foreign joint ventures have purchased
Chinese products in large quantities, and which can help expand the
export of Chinese products through the international distribution
channels of their foreign joint ventures, the foreign joint ventures
involved are allowed to hold a controlling share upon approval by the
State Council.

For equity and contractual joint venture commercial enterprises with
three or fewer chain stores and neighborhood, specialized and
exclusive-right chain stores, the Chinese joint ventures should own no
less than 35 percent of the total investment.

For wholesale equity and contractual joint venture commercial enterprises
(including concurrent retail and wholesale businesses), the Chinese joint
ventures should own more than 51 percent of the total investment.

e. Branches of equity and contractual joint venture commercial
enterprises are confined to the form of chain stores directly invested
and operated by the Chinese and foreign parties. Other forms, such as
free and franchised chain operations, are not allowed for the time being.

f. The period of operation must be less than 30 years, and for central
and western regions, less than 40 years.

g. Foreign joint ventures who sign contracts with equity and contractual
joint venture commercial enterprises on the use of trademarks and names
or technology transfer, the total mount of relevant charges drawn by the
foreign joint ventures cannot exceed 0.3 percent of the current year
sales value (excluding value-added tax) of the commercial enterprises,
and the withdrawal period cannot exceed 10 years.

5). Business Scope

Retail

a. Retail operations (including commissioned and postal retail);

b. Organization of domestic products for export;

c. Self-initiated commodity export and import; and

d. Pertinent supporting services.

Wholesale

Wholesale of domestic products, domestic wholesale of self-initiated
imports and organization of domestic products for export.

Equity and contractual joint venture commercial enterprises that are
engaged in retail business can handle wholesale upon approval, but cannot
conduct agent business for import and export.

6). Examination and Approval Procedures

a. The Chinese joint venture should submit the feasibility study report
(in place of project proposal) and relevant documents to the economic and
trade commission of the locale pilot area, which will handle the report
in cooperation with the responsible domestic trade department and forward
it to the State Economic and Trade Commission in accordance with
stipulated procedures. On receipt, the State Economic and Trade
Commission will examine the report and decide whether to approve it or
not after consultation with the Ministry of Foreign Trade and Economic
Cooperation.

b. After the feasibility study report (in place of project proposal) is
approved, the foreign trade and economy department of the locale pilot
area will submit, in accordance with stipulated procedures, the contract
and articles of corporation of the applicant joint venture to the
Ministry of Foreign Trade and Economic Cooperation for approval.

c. The approved joint venture should go through registration formalities
with the State Administration for Industry and Commerce within a month of
the issuance of the Approval Certificate.

d. For existent equity and contractual joint venture commercial
enterprises that apply for concurrent wholesale business, opening of
branches, or change of partners, the Ministry of Foreign Trade and
Economic Cooperation will examine such applications and decide whether to
approve or not after consultation with the State Economic and Trade
Commission. Other alterations should be examined and sanctioned by the
previous examination and ratification authorities, in accordance with
existent laws and regulations concerning foreign investment.

7). Others

a. State-owned commercial enterprises in equity and contractual joint
venture commercial projects shall put their physical and non-physical
assets to scientific and just assessment by an evaluation agency
recognized by the state assets management authorities in accordance with
Administrative Measures on the Evaluation of State-owned Assets. The
result of an evaluation confirmed by the state assets management
authorities at the provincial level or higher may be used as the basis
for the pricing of the state assets to be invested.

b. The equity and contractual joint venture commercial enterprises that
deal in commodities subject to special state regulations, or in import
and export commodities subject to quotas or permit requirements should go
through examination and approval procedures in accordance with relevant
regulations.

c. The total value of import commodities of an equity or a contractual
joint venture commercial enterprise cannot exceed 30 percent of its
current year sales value.

19. What are the regulations concerning taxes for enterprises with
foreign investment and foreign enterprises engaged in consultation
business?

In recent years more and more foreign accounting offices, auditing
companies, law firms and consulting companies (hereinafter referred to as
consultation enterprises) have come to China to conduct taxation,
accounting, auditing, law and consulting businesses (hereinafter referred
to as consultation business or services). Some overseas consultation
enterprises have set up in China enterprises with foreign investment that
are engaged in consultation business, and some have set up representative
offices in China. In some cases, overseas consultation enterprises
participate in consultation business in China by sending personnel
directly to China to do the business, or cooperating with consultation
enterprises with foreign investment or representative offices in China.
To standardize taxation management, the State Bureau of Taxation issued
on May 12, 2000 the Circular concerning Taxes for Enterprises with
Foreign Investment and Foreign Enterprises Engaged in Consultation
Business (Guo Shui Fa [2000] No.82), which regulates the taxation on
incomes obtained by foreign-invested enterprises, representative offices
and overseas consulting businesses from consulting activities in China.

1). Taxation on incomes obtained from consulting activities by
enterprises with foreign investment and representative offices in China

All the income from consultation business based on individual contracts
between enterprises with foreign investment, or representative offices,
with their customers (including those signed by a representative office
on behalf of its head office, but actually fulfilled by the
representative office) shall be entered as the income of the said
enterprises or representative offices, and shall be reported for business
and income taxes at the place where the said enterprises and
representative offices are located.

2). Taxation on incomes obtained from consultation services provided to
customers on individual basis by overseas consultative enterprises

All the income obtained by an overseas consultative business from
consultation services that take place in China and based on individual
contracts with its customers shall be reported and levied with business
and income taxes in China. When the services provided take place both
inside and outside China, the income shall be segmented into a domestic
and an international part according to the places where the services
occur, and the domestic part of income shall be reported in China for
taxation. Generally, when the customer of the said consultative business
is within the territory of China, the domestic part of the income should
be no less than 60 percent of the total.

If all the consultation services take place outside of China, no taxes on
the income will be levied in China.

3). Taxation on incomes from consultation business jointly conducted by
overseas consultation companies and enterprises with foreign investment
or representative offices in China

When an overseas consultation company signs a contract and conducts
consulting business jointly with a domestic foreign-invested enterprise
or representative office in China, the income so obtained should be
segmented in accordance with the individual involvement of each party or
stipulations of the contract. The foreign-invested enterprise or the
representative office shall report its share of the income for business
and income taxes. In cases where the customer of the joint consultation
conducted by the overseas consultation enterprise and the domestic
foreign-invested enterprise, or the representative office, resides within
the Chinese territory, the share of income taken by the domestic
foreign-invested enterprise and the representative office shall not be
lower than 60 percent of the total income.

In cases where the overseas enterprise sends personnel to China to
participate in the said consultation business, its income share shall
again be segmented according to places of occurrence into a domestic
part, which should be no less than 50 percent of its total share and
should be reported for business and income taxes in China.

20. Are foreign businesses allowed to invest in cinemas? What are the
relevant regulations?

In the interests of opening up and reform, attracting foreign capital,
importing advanced technology and equipment, and invigorating China's
film industry, the State Administration of Radio, Film and Television,
the Ministry of Foreign Trade and Economic Cooperation, and the Ministry
of Culture promulgated in October 2000 the Interim Provisions on Foreign
Investment in Cinemas. This was executed in line with relevant laws and
regulations, including the Law of 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, and the Film
Administration Regulations. According to the Interim Provisions, foreign
companies, enterprises and other economic organizations or individuals
(the foreign partner) are permitted to establish with Chinese companies
and enterprises (the Chinese partner) Chinese-foreign equity joint
ventures and Chinese-foreign contractual joint ventures in China to
engage in the construction and renovation of cinemas and in film
projection business. For the time being, wholly foreign-owned cinemas are
not permitted in China.

1). Foreign-invested cinemas are subject to the following requirements:

a. They must conform to the planning and overall arrangement of the local
cultural facilities;

b. Their registered capital must be no less than 10 million yuan;

c. They must have fixed business (projection) premises;

d. No Chinese-foreign equity or contractual joint venture cinemas shall
be named after a foreign film and television (media) business or cinema;

e. The proportion of the Chinese investment in the registered capital of
an equity joint venture cinema should be no less than 51 percent. For a
contractual Sino-foreign joint venture cinema, the Chinese partner should
have the leading operation right.

f. The duration of the Chinese-foreign equity or contractual joint
ventures shall be no longer than 30 years;

g. They must conform to the relevant laws and regulations of China.

2). The following procedures shall be followed for the establishment of
foreign-invested cinemas:

a. The Chinese party of the joint venture should file an application with
the provincial-level foreign trade and economic cooperation department of
the locality where the joint venture is to be located and submit the
following documents:

(1). Project application;

(2). Legal status and credit status documents of the Chinese partner and
documents on the land-use rights of the joint venture cinema;

(3). Legal status document, credit status document provided by a bank and
financial status document provided by an accounting firm of the foreign
partner;

(4). Notice of approval of the name of the foreign-invested cinema issued
by the administrative department for industry and commerce;

(5). Feasibility study report, contract and articles of corporation;

(6). Other documents as required by relevant laws, regulations and the
examination and ratification authorities.

b. The locale provincial-level authorities of foreign trade and economic
cooperation shall, after soliciting the opinions of the provincial-level
film administration, submit its approval to the Ministry of Foreign Trade
and Economic Cooperation.

c. After soliciting the opinions of the State Administration of Radio,
Film and Television and the Ministry of Culture, the Ministry of Foreign
Trade and Economic Cooperation shall carry out an examination in line
with the relevant laws and regulations concerning foreign investment,
and, upon approval, shall issue an Approval Certificate for Enterprises
with Foreign Investment confirming the eligibility of the relevant
venture.

d. The approved foreign-invested cinema shall, within one month from the
date of receipt of the Approval Certificate for Enterprises with Foreign
Investment issued by the Ministry of Foreign Trade and Economic
Cooperation, undergo registration formalities with the state
administrative department for industry and commerce.

e. When construction or renovation of a foreign-invested cinema has been
completed and passed acceptance check by relevant departments, the
foreign-invested cinema shall, with its Approval Certificate for
Enterprises with Foreign Investment, and its business license, apply with
the film administration department of the locale provincial government
for a film projection business permit before commencing film projection
business.

3). Other stipulations

a. Foreign-invested cinemas shall comply with relevant laws and
regulations of China, operate according to the Film Administration
Regulations, and be subject to the supervision and administration of the
relevant departments of the Chinese government. A permit for public film
projection is prerequisite for all films screened. The cinemas are not
allowed to show pirated or smuggled films, nor to show videos, VCDs and
DVDs for profit.

b. State-owned assets contributed in the form of investment by the
Chinese partner in the joint venture shall be assessed according to the
relevant regulations of the state-owned assets assessment administration,
and reported to the state-owned assets management authorities at or above
the provincial level for confirmation.

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