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Doing Business with China TAGLAW - Berlin 2008 AGM Mark Ho & Blaine Turnacliff.

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Presentation on theme: "Doing Business with China TAGLAW - Berlin 2008 AGM Mark Ho & Blaine Turnacliff."— Presentation transcript:

1 Doing Business with China TAGLAW - Berlin 2008 AGM Mark Ho & Blaine Turnacliff

2 Presentation Points 1.Introduction 2.Legal investment vehicles 3.Outbound investment 4.Real estate business in China

3 China: Big Numbers

4 Coming to Grips with the Numbers and therefore Potentials 1.3 billion people 0.7 billion peasants 0.2 billion migrant workers 200m aspiring middle class 100m middle class as now 14m engineers 140k lawyers

5 Courtesy of The McKinsey Quarterly 2006 special edition: Serving the Chinese consumer

6 China s Comparative Disadvantages: the reality about this economic gorilla 25% of the world s population, 6% of global economic activity (28% for US) At current growth rates, by 2050 China will be the world s largest economy, but the average Chinese will be poorer than the average American was in 2005 Excess labour Innovation gap Governance deficit Commercial immaturity (SOEs)

7 Regional imbalances and movement

8 Six theatres for a China play

9 Foreign Investment Operating Structures in China Representative Office Equity Joint Venture Cooperative Joint Venture Wholly Foreign Owned Enterprise (WFOE) Foreign Invested Commercial Enterprise (FICE) Holding Companies

10 Representative Office Quick (procedure to register is not complicated) and inexpensive way to establish a legal presence in China. Can carry out market research, render advice, collection of information, coordinate company activities in China and hire staff No direct business activities permitted – cannot enter into sales contract, issue invoices, arrange for importing goods no registered capital requirements Do require a leased office before registration

11 Equity Joint Venture In the 80s and early 90s, was the most commonly used foreign investment structure First foreign investment structure allowed in China Benefit to the Chinese economy - foreign party generally provides technology, management expertise & cash Dividends / profits based on equity shareholding of each party

12 Cooperative Joint Venture Similar to Equity Joint Venture in structure but with more flexibilities because Sharing of profits may be governed mostly by JV contract Foreign partner can obtain return of investment in priority to Chinese partner; or early recovery of investment

13 Wholly Foreign Owned Enterprise ( WFOE ) 100% owned by foreign investors More and more industries are open to WFOEs (although still some restricted industries) Complete control of operation – no local partner It is becoming first choice of foreign companies Approval and registration procedure similar to Joint Ventures Minimum registered capital – 4000 USD but should be proportional to scope of business plans

14 Foreign Invested Commercial Enterprise (FICE) Allowed to engage in retail, distribution, agency and franchising First time in modern history foreign companies could undertake trading Become very popular Franchisors need to own / operate two units for one year in order to begin franchise business Lower minimum registered capital (4,000 USD legally but most companies invest much more)

15 Approval Procedures Feasibility study Letter of intent JV contract (for JV only) Audit report of investor Articles of Association Supervisory Board (new) Capital investment requirements – generally 140,000 USD minimum for factory (less for consulting / trading co (new law now says 4,000 USD)

16 Exit Strategy Need to have a plan in place that will allow you to pull out or sell your investment with minimum of difficulties and costs Ten year minimum operational period to enjoy tax incentives Wind up procedures are very onerous and time consuming Offshore vehicle (SPV) enhances flexibility and presents options for both partners liability, sale of company, tax considerations

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

18 The Chinese are Coming! China s appetite for commodities, natural resources, distribution networks for their products, desire to move up the value added chain Over 1.5 trillion USD in foreign currency reserves Fall of USD / appreciation of RMB Government policy of going global outbound M & A investment 4.3 billion USD in billion USD in billion outbound M & A in 2007

19 Outbound M & A Transactions Notable Deals: 2.3 billion USD stake in Nigeria s offshore oilfield by CNOOC 5.6 billion USD of Standard Bank (SA) by ICBC 4.3 billion USD of Canada s Nations Energy s Kazakhstan oil rights Plus: Recent purchase of 50 Airbus A320s for 3.3 billion Expected 280 billion USD for 2,900 planes over next 20 years

20 Governmental Approval Generally 3 or 4 step process State Development and Reform Commission (SDRC) Ministry of Commerce (MOFCOM) State Administration of Foreign Exchange (SAFE) If State Owned Enterprise, also State Assets Supervision and Administration Commission

21 Bank Financing Issues Chinese domestic companies cannot borrow from offshore so must obtain funding in China Can be easy if borrower is large co, but difficult if smaller Foreign competitors often label the Chinese financing as government subsidies In future, will likely see the rules on overseas borrowing loosen

22 Legal Services in China Legal Services are relatively new in China 1989 was first year private law firms allowed mainly very young, inexperienced lawyers, mostly 20 or 30s Few have experience dealing with western companies

23 Real Estate Business in China

24 Chinese real estate sector is increasingly attracting foreign investment (300% property appreciation in the past 10 years or so); plus Foreign business requires acquisition of real estate properties for operations

25 One Big Project

26 Property Ownership in China No private land ownership, Only: (i) State or (ii) Collective Ownership Collective – rural areas or countryside State – urban areas or cities Concept that land ownership is separate from land use rights; types of use rights: Allocated land use rights Granted land use rights

27 Different Types of Land Use Rights Allocated LandGranted Land (introduced post-1988) TermIndefinite termSet term – usually 40 to 70 years UseGranted for designated purpose – usually agricultural or military or infrastructure use Granted for a range of designated uses Considerationnormal or nil consideration paid to the State Land grant premium to be paid to the local Land and Property Bureau TransferabilityNot transferable (and therefore technically cannot be mortgaged) Transferable subject to restrictions

28 Ownership of Buildings May be privately owned May be mortgaged, sold or leased May be for an indefinite term Subject to a term of land use rights Subject to registration and certification Subject to zoning regulations

29 Property Protection and Risks Recording, Registration and Certificates property ownership is recorded at different levels of government and there may be discrepancies in records for old buildings (municipal vs. district) Most cities have open records to the public Shanghai is at municipal level Foreign ownership permitted but restricted

30 New Law July 2006 Regulations – Opinion on Regulating Entry Requirements and Administration of Foreign Investment in the Real Estate Markets (Circular No. 171)

31 New Laws (July 2006) Increased down payments (capital) to at least 30% for residential projects larger than 90 sq metre /unit Business Tax of 5.5% of total transaction price for residential units sold within 5 years of date of purchase Capital gains tax of 20% Local Restrictions on Development Projects set aside 70% of annual supply of residential land for low-rent housing Ensure 70% of residential units built are not larger than 90 sq metres

32 Implications of New Laws Can no longer use offshore company to directly purchase RE in China So must pay China taxes on sale or transfer If want to invest in Chinese RE, must set up a RE Development Company Total Investment minimum – 10 million USD 5 million USD to be invested upfront

33 Establishing a Foreign Invested RE Development Company Essentially two methods: Project Development Company bid and purchase land use rights Acquire / merge with an existing Chinese Property Development Company

34 Project Development Company Must participant in a public auction to obtain land Generally pay bond to be eligible to participate If win the bid, sign a Land Grant Contract with local government (Land Bureau) Land Use Certificate is granted for a term depending on types of development purposes (40-70 years) Set up WFOE / JV

35 Merge/Acquire Property Development Company Due diligence and deal documentation Financial and legal Execution of M&A documentation Application to Ministry of Commerce for approval If approved, share transfer will be registered with local government A Business license is issued

36 Use of non-RE FIE to Invest Foreign Entities established in China can purchase RE only for self use Self use means business or housing for staff/employees Purchase of excessive residential units become grey area Purchase of 100 units likely excessive

37 Lease of Chinese Real Estate Office Lease: typical 2 year term Facilities Lease: 20 year maximum Retail Lease: 20 year maximum Housing Lease: typical 1 year subject to renewal Leasing Pitfalls: zoning, granted land; existing mortgage, etc.


39 Mark Blaine Address: 10/F, Longfeng Tower No Yan an W. Road Shanghai , China Tel: (86 21) Fax: (86 21) Website: THANK YOU! Q & A

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