Location first when setting up in China

PUBLISHED : Thursday, 30 June, 2005, 12:00am
UPDATED : Thursday, 30 June, 2005, 12:00am

WHILE CHINA LEADS the world in attracting foreign direct investment (FDI), the legal and regulatory environment confronting international investors remains complex and, all too frequently, subject to a great deal of misinformation.

'We still get calls from people who assume you must come to China in the form of a joint venture if you are setting up an FDI project, despite the fact that international investors have been able to go it alone for many years in most industries,' said Jeremy Sargent, a partner in the Guangzhou office of law firm Stephenson Harwood & Lo.

'There is so much information about investing in China, and while some of it is accurate, a lot of it is not,' he said.

One of the most important legal issues that any foreign investor had to confront was where to set up operations, Mr Sargent said.

'If somebody is coming to China to set up an FDI project, depending on the industry they are in and whether it's their first project or they are seeking to expand an existing investment, the main legal issue is location. China is a big country, and even from a legal perspective it needs to be seen as a collection of separate markets.'

The presence of special economic zones or investment areas adds yet another layer of complexity to the location decision.

Some of these areas can be large and well-known, such as Shenzhen or Hainan.

'Then you may get down to a particular area within a city itself that might be an export processing zone or a hi-tech zone, and so on,' Mr Sargent said.

One must understand what a particular zone can offer in preferential treatment and verify that offer.

Investors need to know if what is on offer is lawful, whether the offer will be delivered on in practice, and whether it is the type of preferential treatment or benefit you would want in relation to a particular business.

How to structure an investment project is another complex legal issue foreign investors face in China.

'Foreign investors are now targeting existing Chinese companies for acquisition. Such acquisitions are now allowed depending on the business scope of the target of acquisition,' Mr Sargent said.

Some figures suggest that as much as 25 per cent of all foreign investment in China takes the mergers and acquisitions route.

While wholly owned foreign investments account for up to 80 per cent of all new set-ups, some people still come to China to establish joint ventures.

Some industries, such as insurance and certain media, however, remain closed to wholly owned foreign investments and foreign companies may invest only through a joint venture partner.

'There are legal and practical challenges to be faced in doing business in China,' Mr Sargent said.

'China has had a reputation for being a place where it is difficult to enforce legal rights and contracts, and to some degree that is true. But I think it's important to be as detailed as you can and to do things, as far as you can, as you would anywhere else.

'I think a lot of foreign investors have come in the past and said: 'This is China, it's different from everywhere else and we can apply different standards.' But I don't think that model works very well any more,' he said.