The Legal Environment and Risks for Foreign Investment in China

The Legal Environment and Risks for Foreign Investment in China

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It is my great pleasure to introduce The Legal Environment and Risks for Foreign Investment in China by Shoushuang Li, a star young lawyer in Beijing. Mr. Li has a wealth of experience in foreign investment law and joint ventures, which he brings to bear in his analysis of this dynamic and critical field. China’s investment climate continues to evolve. Less than thirty years after the introduction of market reforms, China has become one of the world’s most attr- tive investment locations. The legal system has developed a good deal, although there are still plenty of pitfalls that await investors who are not sufficiently careful. Foreign observers of the legal system remain divided as to whether the proverbial glass is half full, or rather half empty—some believe that China’s efforts to - velop the rule of law have already born fruit while others are more skeptical. Li’s strength is to combine the specific details of the various regimes governing investment in China with a broader perspective on risk management. He begins with an introduction to general issues related to foreign investment, tax law, land use right and labor law. These are likely to be of concern to investors in a wide array of fields. He then goes on to provide a wealth of detail on particular sectors of education, water, and insurance.

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Published 08 March 2007
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EAN13 9783540483779
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Table of Contents
Foreword .................................................................................................... VPreface...................................................................................................... VIIAcknowledgements.................................................................................. XIAbbreviations......................................................................................... XXI
1Introduction: The Legal Risks of Foreign Investment in China ................................................................................................. 11.1....................................... 1Definition of Legal Risk of Foreign Investment 1.1.1Risk and Legal Risk....................................................................... 11.1.2Types of Legal Risks Embedded in Chinese Legal System........... 31.1.3Legal Risks for Foreign Investment in China ................................ 41.2Macro-analysis of Legal Risks in Investment Institutions ........................ 51.2.1Macro-analysis of the Legislation Regarding Foreign Investment and Its Risk ................................................................. 51.2.2China’s Commercial Law and Its Legal Risks for Foreign Investment ........................................................................ 71.3Macro-analysis of the Risks Arising from Foreign Investors Behavior.................................................................................................. 231.3.1The Risks from the Authorities.................................................... 241.3.2Risks Arising From Foreign Investors’ Behaviors ...................... 25
Part One:Legal Risks of Foreign Capital Entry
2The Legal Risks of Green Field Foreign Investment ...................... 292.1Case Study: Legal Risks Behind the Curtain of Carley .......................... 292.2The Risk in Partners Choosing ............................................................... 332.3Risks of Registered Capital Contribution ............................................... 372.3.1Legal Rules Regarding Registered Capital Contribution of Foreign-Invested Enterprises................................................... 372.3.2Some Special Risks with Contributions ...................................... 39
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3The Legal Environment and Risks for M&A by Foreign Investors in China........................................................... 473.1Macro-Analysis of Current Legal Environment for M&A by Foreign Investors in China...................................................................... 473.1.1Insight into the Macro Legal Environment for M&A by Foreign Investors from the Perspective of Legal Rules............... 473.1.2Insight into Macro Legal Environment for M&A by Foreign Investors from the Perspective of Market Access .......... 513.2Micro-analysis of Current Legal Environment of M&A by Foreign Investors in China................................................................. 573.2.1Industrial Policies for Market Access.......................................... 573.2.2Governmental Approval Procedures............................................ 583.2.3Asset Appraisal............................................................................ 603.2.4Transaction Pricing for State Assets Transfer ............................. 623.2.5Forms of Payment........................................................................ 633.2.6Time Limits of Payment .............................................................. 643.2.7Anti-trust Approval ..................................................................... 653.2.8Labor Issue .................................................................................. 663.3The Legal Risks of Foreign-Funded M&A............................................. 683.3.1Institution Risks........................................................................... 683.3.2Risks with Property Rights Transfer............................................ 693.3.3Operational Risks ........................................................................ 693.3.4Risks Arising from Change of Enterprise Ownership ................. 723.3.5Other Risks .................................................................................. 73Appendix: Laws and Regulations Regarding M&A by Foreign Investors in China .............................................................................. 74
4Modes and Risks for Foreign Investments in Restricted Industries ..................................................................... 854.1Industry Entry Rules for Foreign Capital................................................ 854.1.1........................................................................ 85Basic Regulations 4.1.2Rules of Entry to Specific Industries by Foreign Investors ......... 864.1.3Other Specific Arrangements ...................................................... 914.2Dancer in Shackles: Modes of Foreign Investment in Restricted Industries ........................................................................... 914.2.1Case Study: Shanda’s Contractual Control Mode ....................... 914.2.2Modes for Foreign Investments in Restricted Industries ............. 93
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The Legal Risk of the Modes for Foreign Investment in Restricted Industries ........................................................................... 984.3.1Risks with Effectiveness of Contracts ......................................... 994.3.2Risks in the Administration of Foreign Exchange..................... 100The Outline of Anti-risk Measures for Foreign Investment in Restricted Industries ......................................................................... 1034.4.1Draft the Contracts to Be Perfect............................................... 1044.4.2Risk Evasion by an Offshore Company..................................... 1044.4.3Reversion Clause ....................................................................... 105
Part Two:Legal Risks in Operation of Foreign-Invested Enterprises5Changeable Government: Political Risks for Foreign Investment .......................................................................... 1095.1Nationalization and Expropriation ........................................................ 1095.1.1History of Nationalization and Expropriation ........................... 1095.1.2Nationalization .......................................................................... 1125.2.......................................... 115The Risk of Changes to Economic Policies 5.2.1....................................................................... 115Huang Qiao Case 5.2.2Types of Change in Government Policy.................................... 1165.2.3Suggestions for Combating Political Risks ............................... 1245.3The Risks Coming from Local Government......................................... 1255.3.1Localized Policy when Inviting Foreign Investment ................. 1255.3.2The Legal Risks of Localized Policy......................................... 126
6Corporate Governance Troubles in Sino-foreign Joint Ventures ............................................................................................ 1296.1Difficulties in Managing Legal Entities Shown in the Upsurge of Foreign-Invested Enterprises ................................................................ 1296.2General Situation of Corporate Governance Modes of Joint Ventures................................................................................................ 1326.2.1Corporate Governance of Joint Ventures Review ..................... 1326.2.2Survey of Sino-foreign Joint Venture Corporate Governance................................................................................ 1376.3Review of Legal Risks Arising from Sino-foreign Joint Venture Corporate Governance .......................................................................... 139
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6.3.1Risks of Existence Reliance: Review from the Aspect of Imbalance Between the Control Right and Residual Claim Right ............................................................................... 1396.3.2System Risks in Contorted Sino-foreign Joint Venture Management Structure............................................................... 1436.4Can Sino-foreign Joint Ventures Tend Towards Harmony? ................. 1456.4.1Failure in Dong Feng Nissan Joint Venture and Born of the Fundamental Law of Dong Feng Nissan ................................... 1456.4.2Way for Joint Ventures to Go Toward Harmony as Shown in the Dong Feng Nissan Basic Law.......................................... 1476.4.3Political Policy Being the Essential Reason for Joint Venture Governance Troubles................................................... 148
Tax Risks Under the New Tax Law Environment .......................... 1517.1Introduction .......................................................................................... 1517.2..... 151Cat and Mouse Game Between Tax Evasion and Anti-tax Evasion 7.2.1Black Hole in Foreign-Invested Enterprises’ Tax ..................... 1517.2.2Road Map for Tax Evasion by Foreign Investors...................... 1527.3Anti-tax Evasion Action Upgrading in China....................................... 1567.3.1Spread of ‘Anti-tax Evasion Storm’ .......................................... 1567.3.2APA Limits Transfer Pricing..................................................... 1577.3.3Prevention of Weakening Capital Started by the Enterprise Income Tax Law (Draft) .......................................... 1597.4Unification of Income Tax and Its Risks for Foreign Investment......... 1607.4.1Income Tax Reform Coming ..................................................... 1607.4.2Games on Unification of Income Tax Reform .......................... 1607.4.3Unification of Income Taxes Moving Ahead Under Debating ......................................................................... 162Appendix I: Tax Law Applicable to Foreign-Invested Enterprises............... 163Appendix II: Current Chinese Foreign-Invested Enterprise Income Tax System ..................................................................... 170
8Land Use Right Risks in Foreign Investment................................ 1758.1Introduction .......................................................................................... 1758.2Legal Issues in Foreign-Invested Enterprises’ Use of Land ................. 1768.2.1Policies Change ......................................................................... 1768.2.2Ways for Foreign-Invested Enterprises’ to Obtain Land Use Right.......................................................................... 178
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8.2.3Fee for Land Use Right ............................................................. 1808.2.4Term for Land Use Rights ......................................................... 181Land Risks in Foreign Investment ........................................................ 1818.3.1..................... 181Legal Risks in Developing Zones’ Land Transfer 8.3.2Legal Risks in Land Requisition ............................................... 1848.3.3Legal Risks in Contribution with Collectively Owned Land..... 1888.3.4Legal Risks in Land Offered by Local Governments for Free ...................................................................................... 1908.3.5Lack of Judicial Remedy to Land Disputes ............................... 191
9Labor Legal Risks of Foreign-Invested Enterprises ..................... 1959.1Labor Legal Risks Shown in Trade Union Disputes............................. 1959.1.1Widespread Foreign Enterprises’ Refusal of Establishing Trade Unions ............................................................................. 1959.1.2Risks Increasing in Refusal to Establish Trade Unions ............. 1969.1.3Reflection of Tense Employer-Employee Relation by Refusal of Establishing Trade Unions ....................................... 1989.2Overview on Foreign-Invested Enterprise Labor Law Rules................ 1999.2.1Foreign-Invested Enterprise Labor Legislation ......................... 1999.2.2Provisions on Labor Contracts of Foreign-Invested Enterprises ................................................................................. 2009.3Insight into Foreign-Invested Enterprises’ Labor Risks ....................... 2039.3.1.... 203Case Analysis of Foreign-Invested Enterprises’ Legal Risks 9.3.2Brief of Labor Legal Risks in Foreign-Invested Enterprises ..... 2049.4Legal Risks Arising from Controversial China’s Draft Labor Contract Law ........................................................................................ 2099.4.1Highlights of the Draft............................................................... 2099.4.2Implications of the Draft............................................................ 212
Part Three:Legal Risks for Foreign Investment in Specific Industries
10Modes and Legal Risks of Foreign Investment in Non-governmental Education in China .................................................. 21710.1Introduction .......................................................................................... 21710.2............... 219Foreign Investment Modes of Non-governmental Education 10.3.............. 224Summary of Legal System for Non-governmental Education
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10.4Legal Risks for Foreign Investment in Non-governmental Education in China ............................................................................... 22910.4.1Legal Risks Shown by Ren Jingxi’s Withdrawal ...................... 22910.4.2Insight into Legal Risks for Foreign Investment in Non-governmental Education................................................ 230
11Legal Risks for Foreign Investment in China’s Water Market ..... 24111.1Introduction .......................................................................................... 24111.1.1Basic Information of Foreign Investment in China’s Water Market ............................................................... 24111.1.2Big Events in Foreign Investment in the Chinese Water Market............................................................................. 24411.2BOT Mode of Foreign Investment in Water Industry........................... 24511.2.1BOT in China ............................................................................ 24511.2.2Case Study: Chengdu Sixth Waterworks................................... 24711.3Insight into Legal Risks for Foreign Investment in Chinese Water Market Under BOT Mode..................................................................... 24911.3.1Foreign Water Companies’ Failures Under a Flawed BOT Legal Environment .................................................................... 24911.3.2Detailed Analysis on Legal Risks for Foreign Investment in the Chinese Water Market Under BOT Mode ....................... 251Appendix: Laws and Regulations on Foreign Investment in China’s Water Market ................................................................................................ 264
12... 267Legal Risks for Foreign Investment in the Insurance Industry 12.1Introduction of Foreign Investment in China’s Insurance Industry ...... 26712.1.1Brief View on China’s Insurance Industry ................................ 26712.1.2Brief View of Foreign Investment in China’s Insurance Industry ..................................................................... 26912.2Laws and Regulations on Foreign Investment in China’s Insurance Industry ................................................................................ 27212.2.1Participation in Insurance Companies ....................................... 27212.2.2.................................................................... 276New Establishment 12.2.3Specialties of Capital Contribution............................................ 27812.3Legal Risks for Foreign Investment in China’s Insurance Industry...... 27912.3.1Withdrawal of Foreign Insurance Companies Signals Risks..... 27912.3.2Insight into Legal Risks for Foreign Investment in Insurance Industry ................................................................. 280Appendix: List of Chinese Insurance Laws and Regulations ........................ 288
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13An Insight into Foreign Investment Dispute Resolution in China ............................................................................................. 29113.1Insight into Commercial Dispute Resolution in China ......................... 29113.1.1Introduction ............................................................................... 29113.1.2............................. 291Assessment of China’s Civil Justice System 13.1.3Current Reform and Further Proposals...................................... 29413.1.4Alternative Dispute Resolution (ADR) ..................................... 29513.1.5China’s Perspective on Commercial Dispute Resolution .......... 29613.1.6Conclusion: How to Choose an Ideal Commercial Dispute Settlement Mechanism in China................................................ 29813.2Characters of a Chinese-Style Judicial Decision-Making Process........ 29913.2.1The Government-like Judicial System and Judicial Decision-Making ....................................................................... 29913.2.2Decision-Making by the Judicial Committee ............................ 30113.2.3Local Governments and the Peoples’ Congress’ Influence on Decision-Making of Localized Courts.................................. 30213.2.4CPC’s Committees or Committees of Political and Legislative Affairs’ Influence on Judicial Decision-Making..... 30213.2.5Lobbying and Judicial Decision-Making................................... 303Appendix: A Typical Chinese Judicial Process............................................. 30413.3Insight into Chinese-Style Arbitration .................................................. 30613.3.1A Crisis in China’s Arbitration History..................................... 30613.3.2Chinese Characters of Arbitration ............................................. 30713.3.3................................... 309The Root of Risk in Chinese Arbitration 13.4Mediation in China ............................................................................... 31013.4.1Mediation in the Litigation Process ........................................... 31013.4.2......................................... 311Mediation in the Arbitration Process 13.4.3Mediation in the Mediation Center............................................ 311
14Managing the FutureThe Strategy for Foreign Investment Under Power-Oriented Economy.................................................... 313
References ............................................................................................. 317
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