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.

1. FDI & China
To Benefit from the Booming Economy of China

2. Speaker: Mr. Shen Linchang
Lawyer of Shanghai Promise Law Firm
Co-founder of Investee SNS Web
.
* Foreign Direct Investment
. * Intellectual Property
. * Corporate General Counsel
* Commercial Litigation/Arbitration
http://www.investee.biz/
Email: lawyer@investee.biz
Mobile: 0086-15000355201
MSN: yzslc@hotmail.com

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. 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. 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. 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. 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. 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. • 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. • 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. 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. • 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. • 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. 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. 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. 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. Introduction to “Investee” SNS Web
http://www.investee.biz/
Investee :Integrating Investment Essential Elements.
Investee SNS Web aims to provide an efficient platform for global businessmen to
communicate and cooperate. Particularly, Investee is dedicated to bridging and
matching investors and investees worldwide.
Besides profile registration, contacts management, group moderation and microblog
release etc, the Investee Web also provides “Projects”, “Investors”, “Events” and
“Jobs” to facilitate users to distribute and share the information in connection with
investment projects, investment intentions, events and job opportunities.

39. Thank you!
Wish you all a happy and prosperous new year!