Chapter 3.2: Foreign Direct Investment Vehicles in China

Edward R. J. Neunuebel, Denton Wilde Sapte, China

Introduction and legislation

This chapter will introduce the reader to the alternative investment formats which are available in the PRC to foreign investors: equity joint ventures (EJV), cooperative joint ventures (CJV), Sino-foreign-invested joint stock companies (SFJSC), wholly foreign-owned enterprises (WFOE), and holding companies (also referred to as investment companies)(HC) and technology transfer. While technology transfer is not, strictly speaking, a separate investment vehicle, it is an investment of sorts and most foreign investments involve technology transfers. We will also look briefly at privatization , the use of stock exchanges as investment facilitators, and mergers and acquisitions as they are intimately related to FDI.

The doors to foreign direct investment (FDI) via the EJV and CJV formats were opened first in 1979 with the enactment of the People's Republic of China Law on Chinese “Foreign Equity Joint Ventures. WFOE investment became possible after the promulgation of the Law of the People's Republic of China on Wholly Foreign- Owned Enterprises in 1986, and the Detailed Implementation Regulations for the Law of the People's Republic of China on Wholly Foreign-Owned Enterprises, which became effective in 1986. FJSC investment became possible in 1985 with the Provisional Regulations on the Establishment of Foreign Invested Joint Stock Companies . HC investment was opened with the 1995 Establishment of Companies with an Investment Nature by Foreign Investors Tentative Provisions . Other important central governmental, as opposed to local, legislation for FDI vehicles and technology transfer are appended to this chapter.

In addition to the above, the 1999 Contract Law of the People's Republic of China and the 1993 People's Republic of China Company Law are also important pieces of legislation. The Company Law as well as the EJV law also apply to WFOEs where the WFOE laws do not cover a particular matter.

The recent accession of China to the WTO will have a massive impact on the economic scene in China and this includes foreign investment. For several years China has been enacting, repealing and amending its legislation to facilitate WTO entry. China has adopted the civil law system rather than the common law. As such its current practice is to adopt statutes and supplement them with implementing regulations and interpretations. While court precedent is somewhat influential, it is not binding law per se.

The goal of the WTO is to promote free and open trade among its member states. This does not directly include investment; however, WTO membership mandates the principle of national treatment and this affects foreign investments. As China is reshaping its laws to unify its bifurcated treatment of domestic and foreign interests, notably in regard to taxation and most contracts, it still treats FIEs separately from domestic investment in the areas of governance.