The past few months have seen the Chinese Government release of a
wide range of new regulations favouring foreign investment in
China. These new regulations are designed to respond to China's
accession to WTO and the need of sustainable economic development.
Among other things, these changes open up more industries to
foreign investors, introduce the possibility of establishing
foreign-funded venture investment enterprises, and open the door to
foreign-invested enterprises ("FIE") listing on China's stock
The Door Opens Wider
In February 2002, China's State Council released
new Regulations on Foreign Investment Guidelines (the
"Regulations"), repealing the 1995 version. These Regulations
together with the new Industrial Guidance Catalogue for Foreign
Investment (the "Catalogue") in March, 2002, further open the
market for foreign investment. The Catalogue classifies projects
for foreign investment purposes as "encouraged", "restricted" and
"prohibited" with projects not included in the list being treated
as "permitted". Generally speaking, projects classified as
"encouraged" or "permitted" face fewer obstacles at the approval
stage than projects regarded as "restricted" and may be eligible
for preferential treatment.
Of a total of 371 items under the new Catalogue, 75
items fall into the restricted category - a substantial reduction
from 112 items under the old Catalogue. Sectors such as
telecommunications, construction and operation of urban water
supply and sewage, gas and thermal energy supply networks that were
prohibited previously are now open to foreign investment. However,
limits are placed on foreign ownership in these projects. As far as
venture capital is concerned, with limited exceptions, new and high
technology industries in China are regarded as either "encouraged"
or "permitted". For example, in the electronic and communications
industries, foreign investment is "encouraged" in the production of
29 specific items of electronic and communications equipment.
Satellite navigation and positioning systems and their key
components that were "restricted" previously are now "encouraged".
Handsets, base stations and switching equipment for GSM, CDMA and
other mobile communications systems and digital truck system
equipment now all fall within the "encouraged" category.
Under the new Catalogue, 34 items are prohibited
for foreign investment e.g. processing of Chinese medicine
materials listed as national protected resource (such as musk,
licorice root etc), application of preparation techniques for
traditional Chinese medicinal drinks and tablets and production of
Chinese medicine with secret recipes. No foreign investment is
allowed in various sectors of media including radio, film,
television and publishing, with limited exceptions.
New Investment Model
Following the issuance of the Tentative Provisions
on Establishment of Foreign-funded Venture Investment Enterprises
(the "VC Provisions") which came into effect on 1 September 2001, a
new investment model is now available for foreign venture
capitalists investing in China. Foreign venture capitalists are now
permitted to set up in China a corporate vehicle primarily for the
purposes of investing in new and high- tech companies in China.
Such a vehicle, which is called foreign-funded venture investment
enterprise ("FFVIE") under the VC Provisions, is permitted to
engage in the following businesses:
> Investing all its own funds in new and
high-tech industries and such other sectors as approved by the
> Providing consultancy services in relation to
venture capital investment;
> Providing management services to its
> Any other businesses that the government may
A FFVIE is generally prohibited from investing in
any securities, options, commodity futures or other financial
derivatives or real estate (other than properties for self-use),
either directly or indirectly, and it should not take out loans or
use funds other than its own capital to make investments.
The VC Provisions provide three clear routes by
which FFVIEs may exit their investments in Chinese companies. They
> Transfer or assignment of all or part of its
equity interests in the investee to other entities;
> Buy-back by the investee of the equity
interest held by FFVIE; and
> Initial public offering (IPO) and listing on
domestic or overseas stock exchanges.
In the past, only domestically funded companies are
eligible to list on China's stock exchanges. PRC government policy
did not permit the listing of FIEs in the past. However, the
Ministry of Foreign Trade and Economic Cooperation ("MOFTEC") and
China Securities Regulatory Commission ("CSRC") issued the Several
Opinions Concerning the Listed Companies Involving Foreign
Investments (the "Opinions") in November 2001 marking a significant
step forward in this area. The Opinions not only provide strong
support for the notion that foreign-invested companies are
permitted to list on domestic exchanges, but also set out
relatively concrete prerequisites and procedures for the listing
domestically of new shares or existing unlisted shares issued by
PRC law provides that FIEs must be converted to
Foreign-invested Joint Stock Companies ("FIJSCs") in order to list.
Apart from the conditions specified in the PRC Company Law and
other regulations issued by CSRC that applicable to domestically
funded companies, FIJSCs are also required to meet the following
additional preconditions for the new issue of shares (either A
shares (note 1) or B shares (note 2)) in China:
i. FIJSCs must have passed their annual inspections
in the three years preceding the application for listing;
ii. FIJSCs must have their scopes of business in
conformity with the foreign investment policies;
iii. the proportion of their foreign-invested
shares should account for not less than 10 per cent of the total
share capital after the listing;
iv. where the law requires Chinese parties to be
controlling shareholders or there is special requirements on
Chinese shareholdings, such requirements should be complied with
after listing; and
v. the FIJSCs must meet other requirements laid
down in the relevant regulations applicable to public issuance and
listing of shares.
Where FIJSCs has issued B shares that are unlisted,
they may also apply to list such B shares domestically upon the
approval of the MOFTEC and CSRC. To be eligible for listing, the
unlisted B shares must have been in existence for more than one
year after the issuance, and the current holder must hold the B
shares for at least one year after the listing of such shares.
Currently, only a limited number of high-tech
companies would be able to satisfy the onerous preconditions for
listing set out above. However, the result of these recent changes
in PRC law would appear to be a move toward providing a more
favourable environment for foreign venture capital activities in
1. "A" shares: Shares that can be bought in the
China securities market. They can only be subscribed for, traded in
and purchased by domestic investors. "A" shares are denominated and
paid in RMB, and dividends are paid for in RMB. They are ordinary
shares issued by Chinese companies that are listed on either the
Shanghai or Shenzhen Stock Exchange.
2. "B" shares: Shares that can be bought and traded
by both domestic and foreign investors. They are subscribed for and
traded in Hong Kong Dollars or US Dollars; and denominated in RMB.
They are ordinary shares (in parallel with "A" shares) issued by
Chinese companies that are listed on either the Shanghai or
Shenzhen Stock Exchange.
For more information about Foreign Venture Capital
investments in China, please contact Chris Southorn on +852 2846
9137 or email@example.com.
We offer more information about China and the WTO on our website at