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19 May at World Expo Shanghai 12 August 2010

On May 19th the Provincie Utrecht will organize a Holland Financial Day.

China Law update – May 2010 12 August 2010

MARKET ACCESS & FOREIGN LISTINGS

Introduction

1.1 In spite of reduced global demand for goods and services, China still achieved 8.7% GDP growth in 2009 and is projected to achieve a 10% GDP growth in 2010.[1] In contrast, China’s utilized foreign direct investment (FDI) dropped by 3.62% in 2009 to USD 91.8 billion.[2] In the first four months of 2010, FDI increased again with 10.74%.[3] This suggests that the Chinese economy is developing independently from foreign investment and (at least partially) from global demand. Also interesting is that overseas direct investment (ODI) from China’s non-financial sectors may reach USD 48 billion in 2010, up approximately 10.8% from 2009 and hitting a new high.[4] Combined, these figures indicate that China continues to provide investment opportunities and is also becoming a global source of capital.

1.2 Regulatory measures that will help to further develop these trends are expected. Chen Deming (the Minister of Commerce) stated that China will “gradually reduce limits on equity proportion of foreign investment . . . and will open and encourage the development of the financial services industry and environmental[ly-friendly] technology” and “improve approval procedures [for foreign investment]“.[5] Furthermore, both official and unofficial sources state that foreign listings on Chinese stock exchanges might be possible as early as 2010.

1.3 In anticipation to these developments, this memorandum sets out the regulatory background and provides some insights on future foreign investment into China and potential listing of foreign companies directly on the Chinese stock exchanges.

Foreign-invested enterprises

2.1 Chinese government policy has been positive towards foreign investment since the 1980s, although its emphasis has changed over time. It encourages foreign investment towards certain industries and market sectors, while at the same time restricts and prohibits foreign investment into others. The policy is best revealed in the Foreign Investment Industrial Guidance Catalogue (“Catalogue“) issued by the Ministry of Commerce (“MOFCOM“), last amended in 2007. According to the statements made by Minister Chen (under 1.2), a further revised version of the Catalogue is expected to be issued in 2010. The revised version would encourage the development of the financial services sector and environmental-friendly technology as well as reduce foreign equity restrictions in certain industries.

2.2 In China, a company is only established upon obtaining the requisite government approvals, completing registration and being issued a business license. Although the approval procedures have been relaxed lately, a substantial number of requirements still exist. Basically, the National Development and Reform Commission (“NDRC“) conducts macro-economic control and the MOFCOM approves the constitutional documents of the relevant enterprise prior to registration with the State Administration for Industry and Commerce (“SAIC“)[6]. Upon registration, the company is considered a legal entity authorized to conduct its business subject to Chinese law. A noteworthy restriction of Chinese law is that the grant of loans from one company to another is generally prohibited[7]. Loans are primarily granted by banks.

2.3 Chinese enterprises may be incorporated as a Limited Liability Company (“LLC“) or a Company Limited by Shares (“CLS“) under the PRC Company Law. One of the main differences between these two forms is that only a CLS is able to list its shares on the Chinese stock markets. Consequently, a CLS has a higher minimum registered capital requirement of RMB 5 million (approximately EUR 500,000), in comparison with RMB 30,000 (EUR 3,000) that applies to a LLC generally. A CLS may be established by way of promotion where all shares are subscribed for by the promoters (or founders), or by way of a share offer where the promoters subscribe for at least 35% of the shares and that the remainder is offered to the public.

2.4 Foreign investment in the equity of a greenfield or existing Chinese company generally requires the target company to be registered as a Foreign-invested Enterprise (“FIE“). There are three basic types of FIEs: Equity Joint Venture (“EJV“), Cooperative Joint Venture (“CJV“) and Wholly Foreign-Owned Enterprise (“WFOE“). The main difference between an EJV and an incorporated CJV lies in the fact that in a CJV, the operational matters and dividend distribution are determined by the provisions in the approved contract between the parties. However, in an EJV, those matters are determined according to the capital contribution ratio of the parties. The WFOE is simply a 100% foreign-owned enterprise. Remarkably, the highest organ in an EJV/CJV incorporated as a LLC, is the board of directors, while in a WFOE (also incorporated as a LLC), the highest governing organ is the general meeting of the shareholders. The largest investor in an EJV or CJV may therefore not necessarily have decisive power over its governance. In contrast, the highest governing organ in a CLS is always the general meeting of shareholders.

foreign exchange control

3.1 The State Administration of Foreign Exchange (“SAFE“) oversees foreign exchange administration in China and hence regulates financial activities undertaken by foreign investors in China. The requirement to separate ‘current’ and ‘capital’ account items means an entity must open different bank accounts at designated banks for specific uses. Capital account transactions, such as foreign exchange capital injections in FIEs and revenue derived from the share issuance of Chinese companies, are still highly regulated as they require prior SAFE approval. Current account transactions, such as ordinary trade-related transaction items involving receipts and payments, may generally be conducted freely, allowing foreign exchange conversion into Renminbi for daily business operational use.

3.2 Despite recent relaxations, China still restricts entities in China from retaining, or transferring, foreign exchange revenue outside China without authorization. This requirement, known as the repatriation requirement, applies equally to current and capital account items.

3.3 Recently, a pilot Renminbi cross-border trade settlement system has been introduced to allow a special settlement bank (and in some cases also a clearing bank) in specific jurisdictions to facilitate Renminbi/foreign exchange conversion. Furthermore, a PRC company may now invest overseas with the foreign exchange funds it owns, foreign exchange it purchases with RMB and other sources approved by SAFE. SAFE has also removed the prior verification requirement in respect of the sources of foreign exchange funds used for overseas investments or the remittance of funds from China. Instead, a comprehensive registration system will be put in place. .

3.4 Furthermore, Chinese investors are allowed since 1 August 2009 to extend shareholder loans up to an approved lending quota the shareholder’s equity to their overseas invested entities.[8] Prior approval of SAFE of the loan amount is required, which will not be given if the loan exceeds 30% of the shareholder’s equity.

Stock Markets

4.1 There are two types of shares that are traded on the stock exchanges in Mainland China, namely A-shares and B-shares. A-shares are listed shares of Chinese companies denominated in Renminbi, which are only tradable between Chinese entities/nationals and/or certain government-approved foreign investors (Qualified Foreign Institutional Investors or ‘QFIIs’). B-shares are shares of Chinese companies denominated in foreign exchange (US dollars and Hong Kong dollars) tradable between Chinese and foreign investors.

H-Shares are shares of the companies incorporated in China but listed in Hong Kong.

4.2 As China transforms into a market-oriented economy, state ownership gradually becomes less prominent in certain industries. Many Chinese listed companies used to have a substantial amount of non-tradable shares held by different state departments or other state-owned entities. Under the State-share reform plan implemented since 2005, China has been converting non-tradable State shares, worth a collective USD 250 billion, or about two-thirds of the total capitalization of China’s two stock markets, into regular tradable A-shares.[9]

4.3 Listing is subject to the approval of the China Securities Regulatory Commission (“CSRC“) as well as the Shanghai or Shenzhen stock exchanges, as may be appropriate. Only a CLS with more than RMB 30 million in share capital may be listed. Further requirements include that the CLS must have been in independent operation for at least three years and during those three years it must:

(a) have made profits every year and in total more than RMB 30 million; and

(b) have an aggregate net cash flow from operating activities higher than RMB 50 million (or more than RMB 300 million if gauged by aggregate operating income);

Upon listing, at least 25% of the issued shares must be in the hands of the public, or at least 10% if the issued share capital must be over RMB 400 million.

4.4 With respect to the possibility for a foreign company to list its shares in China, the CSRC has given a positive sign by issuing the Strategic Considerations for Foreign Companies Listing on China’s Securities Exchange in 2008. In fact, it is commonly understood that the PRC Securities Law does not prohibit foreign companies from issuing securities in China. Still, an explicit regulation issued by the State Council or the CSRC is required to specifically allow for listings by foreign companies on the Chinese stock exchanges.

4.5 It seems plausible that this year a pilot project may be launched which allows for one or two foreign companies to list their shares on a Chinese stock exchange. The latest news is that Shanghai Stock Exchange is finalizing plans to create an international board this year. Xu Quan, deputy director of the Shanghai Financial Services Office, said on 14 April 2010 that “Once the regulations are completed, the international board will be launched”.

Conclusion and Observations

5.1 There are positive signs that the Chinese economy is further opening up to foreign investment and will enable foreign listings in the future. On the basis of Minister Chen’s comments, another round of amendments to the (investment guiding) Catalogue is expected. This version would allow further foreign investment in the financial services sector and encourage the development of environmentally friendly technologies. In addition, measures are expected to be taken to further streamline the process for obtaining government approvals for foreign investment.

5.2 Caution must be given to statements that foreign listings on China’s stock exchanges might be possible as early as 2010. Although regulations have been issued that indicate China’s intention to allow foreign listings, the complexities of the required governmental approval procedures have yet to be specifically addressed in a regulation to be issued by the State Council or the CSRS.

5.3 In the meantime, foreign companies may seek to acquire investments from Chinese companies, including from those companies that are already listed on China’s stock exchanges.

We will continue to monitor the regulatory developments in Chinese law and keep you updated as it progresses.

Should you have any questions or preliminary inquiries, please do not hesitate to contact us.

Kind regards,

Gerard van Swieten

[1] Source: IMF: World Economic Outlook April 2010 http://www.imf.org/external/pubs/ft/weo/2009/update/02/pdf/0709.pdf

[2] Source: Ministry of Commerce of China http://www.fdi.gov.cn/pub/FDI_EN/Statistics/FDIStatistics/StatisticsofForeignInvestment/t20100118_117104.htm

[3] Source: Ministry of Commerce of China

http://www.fdi.gov.cn/pub/FDI_EN/Statistics/FDIStatistics/StatisticsofForeignInvestment/t20100517_121750.htm

[4] Zhang Xiaoqiang, vice minister of the National Development and Reform Commission (NDRC) on January 17, 2010

[5] When addressing the China International Fair for Investment and Trade (CIFIT), 2009

[6] In general, MOFCOM’s approval can be avoided if the enterprise is not a foreign-invested entity.

[7] Under certain circumstances, inter-company loans (e.g. a loan made by a foreign investor to its subsidiaries incorporated in China and registered with Chinese authorities in charge of foreign exchanges) are exempt from the said general prohibition.

[8] See the Circular on Foreing Exchange Control Issues Relating to Loans Extended Overseas by Enterprises in China issued on 1 June 2009 (often referred to as “Circular 24″)

[9] Source www.China-briefing.com

Negotiating confidentiality letters and letters of intent in the Netherlands 22 July 2010

Negotiating confidentiality letters and letters of intent in the Netherlands

Mainland China, Taiwan Sign ECFA 29 June 2010 08 July 2010

On 29 June 2010, China and Taiwan signed the Economic Cooperation Framework Agreement (ECFA) in Chongqing, China. The Agreement will cut or remove tariffs for hundreds of products on both sides. The tariff of 539 Taiwanese products and 267 Chinese products are reduced. Regarding the service market, Taiwan opened up nine service industries for Chinese to enter into the Taiwanese market and China opened up 11 service industries for Taiwanese to enter into the Chinese market. The Agreement will take effect on January 1, 2011.

For more information, we refer to the following:

ECFA in English: http://www.mac.gov.tw/public/data/051116322071.pdf

ECFA in Chinese: http://www.ecfa.org.tw/ShowNews.aspx?id=1048

两岸签署经济合作架构协议

中国和台湾于2010年6月29日在中国重庆签署了两岸经济合作架构协议，该贸易协定将削减或取消对双方数百种产品的关税。中国开放台湾539项产品降税，台湾开放给中国267项产品，服务业部分，台湾开放中国9项服务业的市场，中国准许台湾11项服务业进入中国市场。该协议将于2010年1月1日起正式生效。

详细信息请见：

英文版ECFA: http://www.mac.gov.tw/public/data/051116322071.pdf

中文版ECFA: http://www.ecfa.org.tw/ShowNews.aspx?id=1048