A: Equity joint ventures are the second most common manner in which foreign
companies enter the China market and the preferred manner for cooperation where
the Chinese government and Chinese businesses are concerned. Joint ventures are
usually established to exploit the market knowledge, preferential market
treatment, and manufacturing capability of the Chinese side along with the
technology, manufacturing know-how, and marketing experience of the foreign
partner.
Normally operation of a joint venture is limited to a fixed period of time
from thirty to fifty years. In some cases an unlimited period of operation can
be approved, especially when the transfer of advanced technology is involved.
Profit and risk sharing in a joint venture are proportionate to the equity of
each partner in the joint venture, except in cases of a breach of the joint
venture contract.
Share holdings in a joint venture are usually non-negotiable and cannot be
transferred without approval from the Chinese government. Investors are
restricted from withdrawing registered capital during the live of the joint
venture contract. Regulations surrounding the transfer of shares with only the
approval of the board of directors and without approval from government
authorities will probably evolve over time as the size and number of
international joint ventures grow.
There are specific requirements for the management structure of a joint
venture but either party can hold the position as chairman of the board of
directors. A minimum of 25% of the capital must be contributed by the foreign
partner(s). There is no minimum investment for the Chinese partner(s).
It is preferable that foreign exchange accounts are balanced in order to
remit profits abroad so that the repatriated foreign exchange is offset by
exports from the joint venture. With the elimination of foreign exchange
certificates and the further opening of the China market, this requirement is
becoming more and more relaxed.
The permissible debt to equity ratio of a joint venture is regulated
depending on the size of the joint venture. In situations where the sum of debt
and equity is less than US$ 3 million, equity must constitute 70% of the total
investment. In joint ventures where the sum of the debt and equity is more than
US$ 3 million but less than US$ 10 million, equity must constitute at least half
of the total investment. In cases where the sum of the debt and equity is more
than US$ 10 million but less than US$ 30 million, 40% of the total investment
must be in the form of equity. When the total investment exceeds US$ 30 million,
at least a third of the sum of the debt and equity must be equity.
Equity can include cash, buildings, equipment, materials, intellectual
property rights, and land-use rights but cannot include labor. The value of any
equipment, materials, intellectual property rights, or land-use rights must be
approved by government authorities before the joint venture can be approved.
After a joint venture is registered, the entity is considered a Chinese legal
entity and must abide by all Chinese laws. As a Chinese legal entity, a joint
venture is free to hire Chinese nationals without the interference from
government employment industries as long as they abide by Chinese labor law.
Joint ventures are also able to purchase land and build their own buildings,
privileges prevented to representative offices.
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