Regulatory Environment
General Review (Pros and Cons)
When a national government enacts and enforces rules and policies aimed at favoring state entities at the expense of privately held firms, such an environment can be detrimental to initiatives that aim to attract FDI. As such, the regulatory environment can either encourage or impede foreign direct investment in China. Excessive regulations tend to hinder entrepreneurial and commercial activities, as managers and employees must spend more time and money to comply with rules and regulations.
If an investor wants to set up a manufacturing facility in China, high start-up costs, legal exposure and other cumber some compliance items may encourage that investor to set up the facility elsewhere, where the business climate is more conducive to industry.
Other types of regulations include mandatory joint venture partnerships in which, together with the foreign investor, the business is required to have a Chinese government agency or local company as a partner. A judicial system that is biased toward protecting Chinese locals - who conduct what are sometimes perceived as unfair, illegal, or unethical business practices - can also contribute to making China a less favorable investment destination.
Another regulatory determinant involves the government's promotion of investing activities by providing attractive financial incentives in the form of tax breaks, grants, low-cost government loans and subsidies. Government-sponsored financial inducements provide the possibility of making a business more profitable and in a shorter amount of time.
What are the basic laws and regulations encouraging foreign direct investment?
In order to create a congenial investment environment and to encourage overseas firms to invest in China, China has gradually set up a relatively complete legal system. In 1979 the National People‘s Congress issued The Law of the People‘s Republic of China on Chinese-Foreign Equity Joint Ventures. In the following 20-odd years, the Chinese government has promulgated and issued a series of laws and statutes concerning the establishment, operation, termination and liquidation of foreign-invested enterprises.
The main laws and regulations include the three basic laws:
The Law of the People‘s Republic of China on Chinese-Foreign Equity Joint Ventures;
The Law of the People‘s Republic of China on Chinese-Foreign Contractual Joint Ventures;
The Law of the People‘s Republic of China on Wholly Foreign-Owned Enterprises.
The followings are detailed rules for the implementation of the three basic laws:
The Company Law of the People‘s Republic of China;
The Income Tax Law of the People‘s Republic of China for Enterprises with Foreign Investment and Foreign Enterprises;
Interim Provisions for Guiding Foreign Investment;
Industrial Catalogue for Foreign Investment;
Interim Provisions Concerning the Investment within China of Foreign-invested Enterprises;
Provisions Regarding the Merger and Separation of Foreign-invested Enterprises;
Liquidation Measures for Enterprises with Foreign Investment.
These provide legal bases from which to guarantee the independent operation rights of foreign-funded enterprises and to protect the legitimate rights and interest of both domestic and overseas investors.
Currently, the Chinese government is reexamining its existing laws and statutes in accordance with the framework of the WTO. It has abolished certain obsolete laws and regulations, and will gradually revise the laws and regulations that are incompatible with the rules of the WTO. For instance, in 2000 China revised The Law of the People's Republic of China on Chinese-Foreign Contractual Joint Ventures and The Law of the People‘s Republic of China on Wholly Foreign-Owned Enterprises, and discarded certain restrictions regarding the balance of foreign exchange account and localization of supplies. In 2001 The Law of the People‘s Republic of China on Chinese-Foreign Equity Joint Ventures was also revised.
Currently, the Chinese government is reexamining its existing laws and statutes in accordance with the framework of the WTO. It has abolished certain obsolete laws and regulations, and will gradually revise the laws and regulations that are incompatible with the rules of the WTO. For instance, in 2000 China revised The Law of the People's Republic of China on Chinese-Foreign Contractual Joint Ventures and The Law of the People‘s Republic of China on Wholly Foreign-Owned Enterprises, and discarded certain restrictions regarding the balance of foreign exchange account and localization of supplies. In 2001 The Law of the People‘s Republic of China on Chinese-Foreign Equity Joint Ventures was also revised.