1. Regulations on the Administration of Foreign-Invested Financial Institutions

Issue Date: December 20, 2001
Issue Body: State Council
Effective Date: February 1, 2002

Summary

These regulations were issued to keep pace with China's commitments regarding financial services with the WTO. It specifies the requirements of foreign-invested financial institutions for market access.

Foreign-Invested financial institutions are now allowed to establish: 1) subsidiaries of foreign banks and financial companies; 2) branches of foreign banks; and 3) Chinese-foreign joint banks and financial companies. The minimum registered capital for wholly foreign-owned banks and Chinese-foreign joint banks is RMB 300 million of convertible currency, and for wholly foreign-owned financial companies and Chinese-foreign joint financial companies, RMB 200 million of convertible currency.

Foreign-invested financial institutions that have total assets of more than US $10 billion at the end of the year prior to filing the application, plus have had a representative office in China for more than two years, are permitted to establish a subsidiary of a foreign bank or a foreign finance company.

Foreign financial institutions that have total assets of more than US $10 billion at the end of the year prior to filing the application plus have a representative office in China are permitted to establish a Chinese-foreign joint bank or a Chinese-foreign joint finance company in China.

Foreign financial institutions who have total assets of more than US $20 billion at the end of the year prior to filing the application, more than 8% of the Capital Sufficient Rate plus have had a representative office for longer than two years, are permitted to establish a branch of a foreign bank in China.

Subject to the approval of People's Bank of China ("PBOC"), banking services may include the following:

a)Acceptance of deposits from the public;
b)Loans of all types;
c)Acceptance and discount of commercial instruments;
d)Trading of all securities, except government bonds, financial bonds and stock in foreign currencies;
e)Letters of Credit and guarantee;
f)Foreign and domestic clearance;
g)Trading of foreign exchange;
h)Bank card services;
i)Safe services;
j)Credit investigation and consulting services;
k)Other services approved by PBOC.

In order to engage in Renminbi business, foreign-invested financial institutions must have been operating in China for three years and be profitable for the two years before applying for permission to deal in Renminbi business.

2. Regulations on the Administration of Foreign-Invested Insurance Companies

Issue Date: December 12, 2001
Issue Body: State Council
Effective Date: February 1, 2002

Summary

These regulations were issued to keep pace with China's commitments regarding insurance services with the WTO. It specifies the requirements of foreign insurance companies for market access.

Foreign-invested insurance companies are now allowed to establish: 1) subsidiaries of foreign insurance companies (referred as wholly foreign owned insurance companies); 2) joint ventures with Chinese companies; and 3) branches of foreign insurance companies.

The minimum registered capital for wholly foreign-owned insurance companies and Chinese-foreign joint insurance companies is RMB 200 million of convertible currency. The minimum registered capital of a branch of a foreign insurance company shall have at least RMB 200 million of convertible currency as operational capital.

In order to establish a foreign insurance institution, the investor shall be a foreign insurance company with more than 30 years of experience, it shall have had a representative office in China for two consecutive years, and it shall have total assets of more than US $5 billion at the end of the year prior to its application.

Foreign-invested insurance companies may engage in insurance in property (including insurance in property loss, liability and credit) and Insurance in person (including life, health and contingency) and all of the following insurance services and the reinsurance thereof.

Foreign invested insurance companies are not allowed to trade in property trading or trading with its affiliate companies as well as certain aspects of reinsurance.

3. Regulations on the Administration of Foreign-Invested Telecommunications Enterprises

Issue Date: December 11, 2001
Issue Body: State Council
Effective Date: January 1, 2002

Summary

These regulations were issued to keep pace with China's commitments regarding the telecommunication industry with the WTO. It sets up market access requirements for foreign telecom companies.

Foreign telecom companies are now allowed to establish Sino-foreign joint ventures with Chinese investors.

If it is a telecommunications business that provides nationwide telecommunications services, or services in areas that straddle provinces, autonomous regions, and municipalities under the Central Government's direct jurisdiction, it shall have a minimum registered capital of RMB 2 billion. A business that provides value-added services shall have a minimum registered capital of RMB 10 million.

If it is a telecommunications business that provides basic telecommunications services within a province, autonomous region, or municipality under the Central Government's direct jurisdiction, it shall have a minimum registered capital of RMB 200 million. A business that provides value-added telecommunications services shall have a minimum registered capital of RMB 10 million.

The foreign investor's investment in telecommunications business that provides basic telecommunications services (except radio paging services) may not exceed 49 per cent of the business' total registered capital.

The foreign investor's investment in value-added services in the telecommunications industry (including radio paging services) shall not exceed 50 per cent.

4. Decision on the Amendment of Rules on the Merger and Division of Foreign Investment Enterprises

Issue Date: December 22, 2001
Issue Body: Ministry of Foreign Trade and Economic Cooperation State Administration of Industries and Commerce
Effective Date: December 22, 2001

Summary

The Rules on the Merger and Division of Foreign Investment Enterprises ("Merger and Division Rules") was first issued in 1999, which regulated the merger and division activities between foreign investment enterprises ("FIEs"). However, it left out regulations concerning the merger of a FIE and a domestic company. This Decision has been issued to supplement the original rules and regulate the merger between a FIE and a domestic company.

In total, there are six amendments in this Decision. The most important amendments are those made to Article 9 and Article 18 in the Merger and Division Rules.

It is provided that FIEs may merge with Chinese domestic enterprises after the investors of the FIEs have paid the contracted capital and provided the cooperation conditions as determined in the contract. If after the merger, the new company remains a FIE, the total investment of the new company shall be the former FIE's total investment plus the total assets of the Chinese domestic enterprise recorded on the company financial audit reports. The registered capital of the new company shall be the sum total of the former FIE and the Chinese domestic company.

If a FIE becomes the shareholder of those companies invested in by the Chinese domestic enterprises after the merger, the FIE shall apply the national policies of the industry access requirements for foreign investments. The new FIE shall not hold any shares of a company in an industry where foreign investment is not allowed.

5. Measures on Chinese Foreign Contractual Audio-Visual Products Distribution Enterprises

Issue Date: December 10, 2001
Issue Body: Ministry of Foreign Trade and Economic Cooperation Ministry of Culture
Effective Date: January 10, 2002

Summary

These regulations were issued to keep pace with China's commitments on audio-visual services upon access to the WTO. It sets up market access requirements for foreign audio-visual services.

Under the Measures, foreign service suppliers are permitted to establish contractual joint ventures with Chinese partners to engage in the distribution of audiovisual products. The Ministry of Culture and the Ministry of Foreign Trade and Economic Cooperation are responsible for the approval and supervision of such distribution companies.

In order to establish a Sino-foreign contractual audiovisual products distribution company, such distribution company shall be an independent legal person. An audiovisual product distribution enterprise must have competent capital matching its scale of operation, the Chinese partners shall hold no less than 51% of the equity and the duration of the contract shall be less than 15 years.

In order to establish a Sino-foreign contractual audiovisual products distribution company, the Chinese partners shall apply to the culture administration authority for approval. After obtaining approval from the cultural administration authority, the Chinese partners shall apply to the Ministry of Foreign Trade and Economic Cooperation ("MOFTEC") for approval. Subsequently, with the approvals from the Ministry of Culture and MOFTEC, the Chinese partners shall apply to the Ministry of Culture for Audiovisual Product Operation Permits. Such Audiovisual Product Operation Permits shall be reviewed by the Ministry of Culture every other year.

6. Category of Encouraged Industries in the Mid-West Region (Continued)

Issue Date: November 29, 2001
Issue Body: Ministry of Foreign Trade and Economic Cooperation State Development and Planning Commission State Economics and Trade Commission
Effective Date: as of issue date.

Summary

All foreign invested projects included in this category will enjoy all the favorable policies of encouraged projects specified in the Interim Rules on the Guideline of Foreign Investment and the Opinion on Further Encouragement of Foreign Investment (1999). All pending projects before the issuing of this category are also able to enjoy these favorable policies.

Shanxi Province

1. Storage, refrigeration, drying and process of grains, vegetables, fruits, meat and aquatic products;
2. Forest planting and the introduction of improved tree varieties;
3. Manufacturing of non-phosphorus detergents;
4. Cotton spin and technology reform of printing and dyeing enterprises;
5. Manufacturing of new-type looms;
6. Construction and operation of highways, independent bridges and tunnels;
7. Development of coal processing technology and the manufacturing of such products;
8. Deep processing of coal tar;
9. Surveying and development of coal bed gas;
10. Construction and operation of thermal power stations having a unit capacity of 300,000 KW or more;
11. Exploration of copper resources (wholly-foreign investment not allowed);
12. Development and manufacture of high quality neodymium, iron, boron and rare earth electromagnets.

Inner Mongolia

1. Storage, refrigeration, drying and process of grains, vegetables, fruits, meat and aquatic products;
2. Forest planting and the introduction of improved tree varieties;
3. Manufacturing of health care alcohol;
4. Post processing of leather and manufacturing of high-quality leather;
5. Processing of milk products;
6. Technological reform of wool spin enterprises;
7. Construction and operation of highways, independent bridges and tunnels;
8. Development of coal processing technology and the manufacturing of such products;
9. Surveying and development of coal bed gas;
10. Construction and operation of thermal power stations having a unit capacity of 300,000 KW or more;
11. Construction and operation of wind power stations;
12. Processing of rare earth and its products;
13. Surveying and exploration of copper resources (wholly-foreign investment not allowed);
14. Process of Chinese and Mongolian medicine.

6. Implementation Regulations for the Law of the People's Republic of China on Sino-Foreign Equity Joint Venture (Amended 2001)

Revised: July 22, 2001
Effective date of the revision: As of the date of revision
Issuing Authority: The State Council

Summary

A total of 45 changes were made to the Implementation Regulations for the following reasons:

1)Conformity with WTO rules and the PRC's related international commitments. Provisions in the "Old" Implementation Regulations in conflict with Most-Favored Nation treatment and WTO rules have been deleted or changed. For example, two provisions regarding the "Domestic Substitution" and "Export-oriented Investment" requirements for foreign investment have been abolished. The list of specific industries in which foreigners are permitted to invest has been changed in order to conform with the PRC's promises of opening more investment areas during its WTO accession negotiations.
2)Conformity with the Law of the PRC on Sino-Foreign Equity Joint Ventures (the "EJV Law") amended by the National People's Congress on March 15, 2001. Provisions in the Implementation Regulations inconsistent with the New EJV Law have been abolished.
3)Conformity with other laws and regulations of the PRC. Some provisions in the "Old" Implementation Regulations have been revised in order to keep up with other laws and regulations in the areas of taxation, JV terms, land use rights, reduction of registered capital, accounting, and MOFTEC's interpretation rights.
4)Conformity with reform and development in recent years to eliminate the "department in charge" of the JV and update provisions in relation to foreign exchange controls. Other provisions that represent a planned economy in nature and hinder market economic development have also been deleted.

7. Notice on Relevant Issues Concerning Expanding the Import-Export Right of Foreign Investment Enterprises ("FIEs")

Issued: July 18, 2001
Effective date of the revision: As of the date of issue
Issuing Authority: MOFTEC

Summary

Extended import-export rights are granted to FIEs under two circumstances. First, manufacture-oriented FIEs are allowed to carry out the export of commodities that are not subject to a quota license and do not fall in the monopoly category. Quota bidding for product manufactured by FIEs is allowed under the following conditions: (1) the value of the exported products is over US $10 million; (2) FIEs have no record of legal violations in paying tax, foreign exchange and import-export operation in the preceding two years; and (3) FIEs must have professional staff engaging in the international trade business.

Second, export rights are granted to foreign investment holding companies whose parent company is manufacture oriented.

Third, foreign investment R&D centers are allowed to import and sell small amounts of hi-tech products manufactured by its parent company for the purpose of market testing.

8. Interim Regulations on the Establishment of Foreign-Invested Start-up Investment Enterprises ("FISIEs")

Issued: Aug 28, 2001
Effective: As of the date of issue
Issuing Authorities: MOFTEC, Ministry of Science & Technology

Summary

This Regulation allows foreign investors to establish FISIEs in China alone or with Chinese investors. According to the Regulation, start-up investment refers to equity investment of non-listed high-tech enterprises and providing start-up management services. The Regulation sets forth strict requirements for both foreign and Chinese investors, including amount of capital contribution, net assets, ability to undertake risk, and previous performance on capital management. In FISIEs, foreign investors' capital contribution shall be no less than 25% of the total amount of capital. The establishment of FISIEs shall be approved by both MOFTEC and the Ministry of Science & Technology. FISIEs are allowed to engage in the following business: (i) investing in high-tech fields that are open to foreign investment and other fields approved by the State; (ii) providing start-up consultation; (iii) providing management consultation to the invested enterprises; (iv) other business approved by MOFTEC. FISIEs are not allowed to invest in securities, futures, or other financial instruments and to provide loans or guarantees. Enterprises invested by FISIEs are treated as foreign investment enterprises, but the investment by FISIE or together with other foreign investors shall normally be no less than 25% of the total capital of the invested enterprises.

9. Interim Measures on the Approval and Administration of Foreign Investment Leasing Companies (the "Measures")

Issued: August 14, 2001
Effective: September 1, 2001
Issuing Authority: MOFTEC

Summary

These Interim Measures are formulated in order to regulate the business action of foreign investment leasing companies ("FILCs"). According to the Measures, FILCs refer to companies approved by MOFTEC to deal with financial leasing ("Financial Leasing Companies") and other non-financial leasing businesses ("Other Leasing Companies"). FILCs must be either equity joint ventures or contractual joint ventures.

To apply to establish Financial Leasing Companies, the Chinese participant must have at least RMB 400 million in total assets in the year before the application, and the foreign participant must have at least US $400 million in gross assets plus 5 years experience in financial leasing. A Financial Leasing Company shall meet the following requirements: (i) registered capital no less than US $20 million; (ii) capital subscription of Chinese participant no less than 20% of the registered capital; (iii) operating period not exceeding 30 years; (iii) competent professional management talents.

As for other leasing companies, the figures mentioned above shall be changed respectively to RMB 100 million, US $50 million, 3 years experience at leasing, US $5 million, 20%, and 20 years.

Financial Leasing Companies can engage in various financial leasing activities, such as direct leasing, subleasing, back-leasing, leverage leasing, entrust leasing, and joint leasing of various equipment.

10. Regulations on Administration of the Market of Human Resources promulgated by Ministry of Personnel and State Administration of Industries and Commerce

Issued: July 11, 2001
Effective: October 1, 2001
Issuing Authority: Ministry of Personnel and State Administration of Industries and Commerce

The Regulations set legal criteria to the activities of recruiting companies and employment agencies. For the first time, the Regulations allow foreign investment to enter China's enormous human resources market by establishing joint ventures with Chinese employment agencies.

The requirements for setting up an employment agency is not high. It requires RMB 100,000 of registered capital plus at least 5 professionals with Human Resources Services Certificates. Foreign investment employment agencies shall be subject to State joint venture laws and regulations and shall be approved by the competent local Personnel Administrative Authorities.

The employment agencies may engage in business such as employment consultation, employment information online services, recruiting, training and evaluation, etc. The Personnel Administrative Authorities will conduct an annual inspection of the employment agencies.

Lehman Lee & Xu

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