Foreign Direct Investment & China

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The presentation discusses the inward FDI into China and outward FDI from China;in addition, the presentation briefly introduces Chinese legal system.The presentation was originally deliverd to the delegation of the EMTM Program (Executive Master's in Technology Management — a multidisciplinary master's degree program offered by Penn Engineering and co-sponsored by Wharton )and the delegation members mostly come from USA companies, such as Boeing, Lockheed Martin ,Adobe Systems, Morgan Stanley ,Citigroup and so on.

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  • China New Rules Regulating Foreign M&A Domestic Companies

    Sept. 1, 2011, the Provisions of the Ministry of Commerce on the Implementation of the Security Review System for Mergers and Acquisitions of Domestic Enterprises by Foreign Investors took effect. Although most of the provisions in the Security Review Rules remain the same as or similar to those in the Interim Security Review Rules, some stipulations in relation to pre-review consultation, prohibition of avoidance of the security review, post-transaction review, and confidentiality, etc., are brand new.

    Full article: http://www.fdi-law.com/en/view.php?id=2512
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  • Actually the presentation is not an academic work, it intends to provide basic facts,data, policies etc. relating to Chinese FDI for the audience.
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  • Dear Shen Lin Chang,

    It is an great presentation & has great value addition to each every person who has a interest in china's economy & Very well drafted & summarized iin short.

    Looking forward for many more to know china & its market.

    Great contribution towards the knowledge to hub for every person who keeps interest in china and there people

    With Regards

    SAI.
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Foreign Direct Investment & China

  1. 1. FDI & China To Benefit from the Booming Economy of China
  2. 2. Speaker: Mr. Shen,Linchang Attorney at Law of Shanghai Promise Law Office Founder of China Foreign Direct Investment Forum (CnFDI) . * Transnational Investment Consulting . * IP Legal service . * Corporate Legal Service * International Commercial (Contract) Litigation http://www.FDI-Law.com/ Email: yzslc@yahoo.com.cn Skype: Charlie_soas
  3. 3. DISCLAIMER: • It should be noted that the material in this presentation is designed to provide general information only and should not be construed as legal advice on any particular matter, whether it be legal, procedural or other. The author expressly disclaim all liability to any person in respect of the consequences of anything done or omitted to be done wholly or partly in reliance on the whole or any part of the contents of this presentation. • All rights reserved.
  4. 4. Ⅰ. Inflow of FDI in China A . Overview of Inward FDI in China 1. Inflow of FDI from 1995 to 2006 (Billions of dollars) 80 70 60 50 40 72.4 69.5 30 60.6 46.9 52.7 53.5 20 41.8 10 0 1995-2000 2001 2002 2003 2004 2005 2006 annual average Source: UNCTAD, World Investment Report 2007
  5. 5. 2. The Top Ten Sources of FDI to China,1-11, 2007 (Billion of dollars) 2.154 1.599 1.434 1.046 Hong Kong 2.221 Virgin Island 2.464 South Korea 22.432 2.99 Japan Singapore the US Cayman Islands 3.229 West Samoa Taiwan Province 14.166 Mauritius Source: Ministry of Commerce of P.R.C.
  6. 6. 3.Cross-border M&A in China ,2004-2006 (Billions of dollars) 10 8 6 4 8.25 6.77 6.72 2 0 2004 2005 2006 Source: UNCTAD, World Investment Report 2007
  7. 7. B. Policy Developments • Definitely, governments’ policy towards FDI plays an important role in attracting FDI. Now let’s discuss the policy governing FDI in China. In 1950s and 1960s, due to the well known political reasons, China was isolated from western countries, logically, China shut up the door to western investors. Since 1978 , China has adopted reform and opening up policy. To develop China’s economy, Chinese government encourages FDI. In 1979, China promulgated Sino-China Equity Joint Venture Law; in 1986, China promulgated Foreign Capital Venture Law. In order to attract foreign investment, China gave foreign investors a variety of favorable treatments, such as tax reduction, cheaper land etc. In addition, nearly all local governments set up investment promotion agencies. To compete for foreign investment, many local governments even gave more favorable treatment to foreign investors some of which were illegal. Furthermore, After China joined the WTO in 2001, China reduced or abolished some performance requirements and other restrictions on FDI .
  8. 8. 1. Emphasis on Quality rather than Quantity • Recently, Chinese government is increasingly emphasizing the quality rather than the quantity of inward FDI. China encourages FDI with advanced technology or managerial expertise. At the same time, China increasingly restricts the FDI with high energy- consumption and environment-pollution.
  9. 9. • Why does China alter the policy governing the FDI? • In the past three decades , China has witnessed rapid economic growth, however, such growth was on the cost of natural resources and environment pollution, Chinese government realizes such an economic growth model can not last long. • Additionally, after 30 years of economic development, especially due to the consecutive trade surplus, China has accumulated astronomical foreign reserves. Unlike 30 years ago, the lack of capital is no longer a problem for the development of Chinese economy.
  10. 10. 2. Unification of Two Income Tax Systems • In 2007, China promulgated new corporate income tax law and unified two income tax systems for foreign affiliates and domestic enterprises. The new corporate income tax law took effect in January 1st, 2008.
  11. 11. 3.To Control Cross-border M&A in China • Just as mentioned above, cross-border M&A in China spurred great controversy. Although M&A accounted for a small share of the whole inward FDI to China, the M&A targets were usually the reputable and top Chinese companies in the relevant industries, foreign investors can shape monopoly position in Chinese markets by cross-border M&A. Furthermore, some Chinese traditional famous brands disappeared after M&A.Many people worry about the national economic security and strongly suggest effectively control cross-border M&A of Chinese companies. Consequently, in 2006,six ministries of central government jointly enacted a special regulation to control cross-border M&A in China. According to the regulation, all cross-border M&A of Chinese enterprises are subject to the examination of the Ministry of Commerce.
  12. 12. C. Prospect: Optimistic • Nonetheless, in my view, the prospect of inward FDI to China will still be optimistic. There are several factors to support my judgment.
  13. 13. 1. Globalization • First of all, globalization is an irresistible trend in 21st century, no one can change the trend of it. No country can isolate itself from the world. Every nation can only adapt to the tendency. Globalization will involve all economies and integrate them into a single global economy. Transnational companies in developed countries will continue to invest abroad. What is more, developing countries will become more and more important sources of FDI .
  14. 14. 2.China: A Huge Market with Great Potential • Secondly, China has a huge market with great potential. China has a population which is more than 1.3 billion, and the middle class has grew quickly after 30 years of development of Chinese economy. China will remain a magnet for FDI , especially for market-seeking FDI.
  15. 15. 3.Affluent Human Resources • Furthermore, China has ample human resources. Every year , more than 6 million students graduate from universities and colleges. In rural area, there exist a huge pool of potential labor. Such human resources reserve can meet all demands of FDI.
  16. 16. 4. The Investment Environment will Continue to Be Improved • In addition, the investment environment will continue to be improved. In foreseeable future, Chinese government will hold the policy of utilization of FDI.Although China will control cross-border M&A, (Actually, it is international customs in FDI regime, even USA, the only economy superpower, still restricts some cross-border M&A by the reason of national security), China regards cross-border M&A as a higher form of FDI and welcome the M&A without harm to Chinese economy. To attract FDI, it is reasonably expected Chinese government will continue to improve governance and legal environment .
  17. 17. Ⅱ .Outflow of FDI from China • A. Overview of outward FDI in China 1. FDI Outflow from China 1995-2006 (Billions of dollars) 18 16 16.1 14 12 12.3 10 8 6.9 6 5.5 4 2.5 2.9 2 2 0 1995- 2001 2002 2003 2004 2005 2006 2000 annual average Source: UNCTAD, World Investment Report 2007
  18. 18. 2.The Top Ten Recipients of FDI from China ,2006 (100 million of dollars) 80 78.3 70 69.3 60 50 40 30 20 10 5.38 4.52 1.98 1.32 1.17 0.99 0.88 0.87 0 Ca Ho Vi Ru US Si Sa Al Au M ng rg gir on ud ym ng str ssi A ap in go u ia a ali an Ko or Is l Ar lia a Is l e ng an ab an ds ,C ds hi na Source: Ministry of Commerce of P.R.C.
  19. 19. 3.China’s FDI Outflow to USA , 2003-2006 (Millions of dollars) 250 231.82 198.34 200 150 119.93 100 65.05 50 0 2003 2004 2005 2006 Source: Ministry of Commerce of P.R.C.
  20. 20. 4.Cross-border M&A by China, 2004-2006 (Billions of dollars) 16 14 12 10 8 14.904 6 4 2 5.279 0 1.125 2004 2005 2006 Source: UNCTAD, World Investment Report 2007
  21. 21. • In fact, most cross-border M&A were carried out by state- owned enterprises, they mainly invested abroad in primary sectors, such as oil , gas, metal mineral and so on , to meet the thirsty demand of domestic rapid growing economy. However, Some M&A has caused great sensation abroad. • Currently, the outward FDI carried out by state-owned enterprises accounted for the bulk of the whole outward FDI of China, however, some private-owned companies have begun to expand abroad in past several years, and more and more private-owned enterprises will consider to invest abroad.Recently,lots of private-owned enterprises , especially in Zhejiang Province,Jiangsu Province ,have consulted us about overseas expansion.
  22. 22. B.China’s Policy towards Outward FDI • 1. “Going Global” Strategy • In 2000, China outlined the “ going global” strategy. Under the strategy, Chinese government encourages Chinese enterprises to expand abroad to make good use of both domestic and overseas markets and resources. Correspondingly, Chinese government dismantled some outward FDI barriers and loosened some restriction on outward FDI. The Chinese Government has abolished quotas on the purchase of foreign exchange for overseas investment since 1 July 2006. It is becoming easier and easier for Chinese domestic enterprises to obtain approval from authorities to invest abroad.
  23. 23. • In my view, such a strategy is necessary and reasonable. To cope with the globalization, China’s government should encourage domestic enterprises to expand overseas and actively participate in the global competition. After three decades of opening up ,especially after the entry into WTO, China’s market is quite open to foreign enterprises. Indeed , China’s market has became the integral part of the whole world market. Secondly, after 30 years of rapid economic growth, the natural resources have become the bottleneck of further economic development, so it essential to expand abroad to safeguard raw material provision. • In addition, Chinese enterprises have accumulated some international market knowledge's and experiences, they are capable of overseas expansion now.
  24. 24. 2. To Induce State-owned Enterprises to Expand abroad in Primary Sectors to Secure Domestic Natural Resources Provision • Some Chinese state-owned enterprises have become the important players in the cross-border M&A markets, In China, the largest and most active buyers are in the oil and gas industry. China National Petroleum Corporation acquired PetroKazakhstan for $4.1 billion in 2005, and Sinopec bought the Russian- United Kingdom joint venture Udmurtneft for $3.5 billion in 2006.
  25. 25. 3. Encourage Private-owned Enterprises to Invest abroad • Private-owned enterprises now are easy to access foreign exchange and can easily get the approval from the authorities to invest abroad. Some local governments improve their public service for these outward FDI enterprises and even provide some stimulus measures for them. Additionally, Chinese government also seeks to improve the overseas investment environment for Chinese enterprises by diplomatic ways . In the past decade or so , China has signed a good number of International Investment Agreements ( IIA ) with other countries.
  26. 26. C. Prospect :Continue to Increase Quickly • I am confident that China’s outwards FDI will continue to rise quickly. There are many factors supporting this judgment.
  27. 27. 1. To Expand abroad in the Extractive Industries to Meet the Huge Demand of Natural Resources in China • Firstly, to safeguard the further economic development, state- owned enterprises will continue to expand abroad in the extractive industries to meet the huge demand of natural resources in China, such as oil, gas, metal mineral etc. Chinese state-owned enterprises will continue to merger or acquire overseas enterprises in these sector. Such deal is usually high risky and need astronomic capital injection. However, such cross-border M&A is sensitive, Chinese government and state- owned enterprises should carefully handle them.
  28. 28. 2. Market-seeking • Market-seeking will drive Chinese enterprises to expand abroad. The competition in Chinese market is now quite heated, to survive and develop, Chinese enterprises ,both state-owned enterprises and private enterprises, will consider to explore overseas market, and the outward FDI is one of the effective way to seek overseas market.
  29. 29. 3. Bypassing Trade Barriers • Bypassing trade barriers is another important factor driving Chinese enterprises to invest abroad. Due to the consecutive trade deficit and trade imbalance with China, some countries, Especially some developing countries, impose severe restriction against Chinese exports. For example, Mexico has laid astonishingly high anti-dumping tariff on some Chinese goods , such as shoes and garments. Under such high tariff, it is virtually impossible to enter the market for Chinese goods. Trade barriers will drive Chinese enterprises to shift their production in other countries by the way of outward FDI.
  30. 30. 4. The Rising Production Cost • The rising production cost will force Chinese enterprises to expand abroad. In China, the production cost is rising quickly. Actually, some enterprises in coastal area consulting us about overseas investment now are facing such difficult position, many an enterprise in labor-intensive industries are considering to shift their production in less developed countries, such as Viet Nam,Laos ,Cambodia etc.
  31. 31. 5. Market Network Seeking , Technology and Managerial Expertise Seeking etc. • Of course , there exist some other factors stimulating Chinese enterprises invest abroad. Such as market network seeking , technology and managerial expertise seeking , such outward FDI will usually be located in developed countries. Actually, there have already existed such outward FDI in USA, including Lenovo acquiring IBM’s computer sector, and Hair establishing plants in USA.
  32. 32. Ⅲ China’s Legal System • Part three , I will briefly introduce Chinese legal system .Although China has opened up for accurate 30 years, I guess most of my American friend are not familiar with the legal system of China . Additionally, legal environment plays an important role to attract FDI .I will introduce two major differences between Chinese and American legal system.
  33. 33. A. Written Law Tradition • Firstly, unlike America China is traditionally a written law country. USA inherited the case law tradition from England , and precedents are the most important source of law . Judge in America should follow precedents when trying cases. In contrast, the most important source of law in China is written law,including NPC Statutory Law , Administrative regulations enacted by the State Council. Theoretically, The precedents are not binging for Chinese judges. However, Chinese judges will respect the precedents, especially those delivered by higher courts. The reason is simple: the decision of a case will be supervised by the higher court, if the judge did not take into account the relevant precedents, he will face the risk his judgement will be altered or remanded.
  34. 34. • In general, Chinese legal system belongs to the continental law system, quite close to the ones of France and Germany,. In the first half of 20th century, China consistently studied the law from Western countries ,especially from Germany. After the establishment of the People’s Republic of China, the former Soviet Union exerted huge influences on Chinese legal system. Since 1978, American law influenced China a lot . For example, the IPR law, the promulgation and implementation of Patent Law, Trade Mark Law ,Copy Right Law etc can be attributed to the influence of USA government to a certain extent.
  35. 35. B. One System of Court • Second , USA is a federalist countries, there exist two parallel systems of court: the federal court system and state court system. By contrast ,China has only one system of courts. The court system has four levels. The highest one is the Supreme Court, followed by higher court, intermediate court and basic court. According to the Civil Procedural Law, generally, cases involving foreign interest should be tried in the intermediate court for first instance.
  36. 36. Court System Structure in China Supreme People’s Court Maritime Court Railway Court Military Court Forest Court Higher People’s Court Intermediate People’s Court Basic People’s Courts
  37. 37. C. Commercial Law is Close to Western Countries’ • Although there exist great difference in constitutional law ,criminal law ,administrative law and so on between China and USA , the commercial law of China is quite close to the western countries'. Since the adoption of reform and opening up policy, China has promulgated successively a series of commercial laws to construct and regulate the market economy. China has primarily formed a whole system of commercial law, including contract law , company law, security law and so on .Such law are mainly transplanted from Western countries, naturally, Chinese commercial law is quite similar to the western countries’. I am confident that it will be quite beneficial to USA investors to do business in China, USA investors needn’t worry too much about the difference between America and China in the field of commercial law.
  38. 38. Introduction to China Foreign Direct Investment Forum (CnFDI) China Foreign Direct Investment Forum (CnFDI) is dedicated to be the leading organization bridging and matching transnational investment cross China border. CnFDI is dedicated to help overseas investors seek investment projects in China; and introduce foreign investment opportunities to Chinese investors as well. In addition, CnFDI is designed to facilitate negotiations, help conclude a deal and provide follow-up necessary professional service. You may also read/download the Profile of CnFDI here: http://www.slideshare.net/ShenLinChang/invest-in-china-clubiic-profile
  39. 39. Thank you! Wish you all a happy and prosperous new year!

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