Oct. 2, 2006 – Associated Press

BEIJING – The central bank says China’s economy should grow by 10.5 percent this year, state media reported yesterday, even stronger than the 10 percent predicted last week by the National Bureau of Statistics.

The People’s Bank of China also projected growth for the first half of 2007 at 9.5 percent, the official Xinhua News Agency said.

China’s economy grew 10.2 percent in 2005 and surged by 10.9 percent in the first half of 2006.

Growth in domestic investment and exports, however, will ease, Xinhua reported, blaming a slowing global economy and “rising trade frictions” for the impact on exports.

The People’s Bank report also predicted continuing low Chinese inflation rates — 1.5 percent in 2006 and 1.8 percent for the first half of 2007.

Copyright 2006 The New York Times Company

Forming a Wholly Foreign Owned Entity (WFOE) in Chinaby Steve Dickinson

This post focuses on the forming of a Wholly Foreign Owned Entity (WFOE) in China. I am starting with this type of entity because it is the one we do most often. Subsequent posts will detail the steps required to register other forms of entities in China, such as a representative office (RO) or a contractual or equity joint venture (JV). Each of these forms of foreign invested enterprise (FIE) is subject to its own specific laws and to numerous regulations that apply to all FIEs. Every FIE is formed as a Chinese limited liability company (LLC).

Where the special laws and regulations of an FIE do not apply, the provisions of the Chinese Company Law control. The Company Law was recently completely rewritten to conform more closely to international standards for company formation and management.

The steps for forming a WFOE in China typically consist of the following:

• 1. Determine if the proposed WFOE will conduct a business approved for foreign investment by the Chinese government. For example, until recently, China prohibited private entities from engaging in export trade. All export trade was handled through certain large, state owned trading companies.China recently abandoned this system, and now both foreign and domestic companies can set up trading companies. Restrictions on export oriented trading companies have essentially been eliminated, but there are still controls on import oriented trading companies that can increase expense and raise costs. Because these rules were only recently changed, the local regulators who must approve these projects do not have a great deal of experience with the attendant issues. This can lead to some delay in the approval process. It also results in an extremely cautious approach towards adequate capitalization even for export oriented trading companies. I discuss capitalization requirements in greater detail below.
• 2. Determine if the foreign investor is an approved investor. Basically, any legally formed foreign business entity is authorized to invest in a WFOE in China. China especially welcomes investment that promotes the export of Chinese manufactured products. The investor must provide the documentation from its home country proving it is a duly formed and validly existing corporation, along with evidence showing the person from the investor who is authorized to execute documents on behalf of the investor. The investor also must provide documentation demonstrating its capital adequacy in its country of incorporation.To meet these requirements, the following documents are normally needed from the investing business entity:
• a. Articles of Incorporation or equivalent (copy)
• b. Business license, both national and local (if any) (copies)
• c. Certificate of Status (Original)(U.S. and Canada) or a notarized copy of the Corporate Register for the investor or similar document (original)(Civil Law jurisdictions)
• d. Bank Letter attesting to sound banking relationship and account status of the company (original).
• e. Description of the investor’s business activities, together with added materials such as an annual report, brochures, website, etc.

a – d are translated into Chinese.
e is either translated into Chinese or summarized in Chinese.

Many investors created special purpose companies to serve as the investor in China . The Chinese regulators have become accustomed to this process. However, the Chinese regulators will still seek to trace the ownership of the foreign investor back to a viable, operating business enterprise. Investor secrecy is not an option in China. However, the corporate register for the Chinese company will merely state the name of the foreign, special entity investing company as the owner. In that sense, as far as public disclosure is concerned, the investor privacy can be maintained. The foreign investor should also understand that this tracing process will add some time and cost to the Chinese company formation process.

• 3. Chinese government approval for the project. In China, unlike in most countries with which Western companies tend to be familiar, approval of the project by the relevant government authority is an integral part of the incorporation process. If the project is not approved, no incorporation is permitted. The two are inextricably linked. The following documents must be prepared for incorporation/project approval:
• a. Articles of Association. This document will set out all of the details of management and capitalization of the company. Nothing can be left for future determination; all basic company and project issues must be determined in advance and incorporated in the Articles. This includes directors, local management, local address, special rules on scope of authority of local managers, company address, and registered capital.
• b. Feasibility Study. The project will not be approved unless the local authorities are convinced it is feasible. This usually requires a basic first year business plan and budget. We typically use the client produced business plan and budget to draft up the feasibility study (in Chinese) that will satisfy the requirements of the Chinese approval authority.
• c. Leases: An agreement for all required leases must be provided. This includes office space lease and warehouse/factory space lease. It is customary in China to pay rent one year in advance and this must be taken into account in planning a budget because the governmental authorities will be expecting this.
• d. Proposed personnel salary and benefit budget. If the specific people who will work for the company have not yet been identified, one must specify the positions and proposed salaries/benefit package. Benefits for employees in China typically range from 32% to 42% of the employee base salary, depending on the location of the business. Foreign employers are held to a strict standard in paying these benefit amounts. The required initial investment includes an amount sufficient to pay salaries for a reasonable period of time during the start up phase of the Chinese company.
• e. Any other documentation required for the specific business proposed. The more complex the project, the more documentation that will be required. All of the above documents must be prepared in Chinese.
• 4. It usually takes three to six months for governmental approval, depending on the location of the project and its size and scope. Large cities like Shanghai tend to be slower than smaller cities. The investor must pay various incorporation fees, which fees vary depending on the location, the amount of registered capital and the any special licenses required for the specific project. Typically, these fees equal a little over 1% of the initial capital.

On large and/or complex projects, the approval process often involves extensive negotiations with various regulatory authorities whose approval is required. For example, a large factory may have serious land use or environmental issues. Thus, the time frame for approval of incorporation is never certain. It depends on the type of project and the location. Foreign investors must be prepared for this uncertainty from the outset.

Every company in China must have a stated registered capital. This amount is provided in the Articles of Association of the company and is also noted on the company register. Beginning in 2006, this company register is available to the general public. The registered capital includes all of the components of the initial investment in the company, including its start up cash, contributed property, and transferred intellectual property. Where the registered capital is small, the entire amount must be contributed immediately upon formation of the company. A certified public accountant must be engaged to provide certification of the contribution of registered capital. If the amount is large, it may be contributed in installments. There are a number of schedules for the percentage and timing of large amounts of registered capital. It is a crime to state a registered capital amount and then fail to contribute. It is also a crime to withdraw registered capital after it has been contributed. The purpose of registered capital is to provide some notice to creditors of the capital adequacy of the company. Because of this, Chinese regulators take very seriously the rules regarding registered capital.

Registered capital is an initial investment that is intended to be immediately used in the operation of the company. It is not a deposit that must just sit in a bank and never be touched. It can be used to pay salaries and rent, to purchase product, or for any other normal start up operating expense. Registered capital may include contributed real and personal property used in operating the business. Many foreign investors think registered capital is some sort of security deposit that they can never utilize. This is not true. On the other hand, some foreign enterprises believe they can simply withdraw their registered capital after the Chinese company begins normal business operations. This also is not true. Once the capital is contributed to the Chinese company, it can never be withdrawn. The only way to get funds from the Chinese company out of China is by repatriating profits or by liquidating the Chinese company. Both of these methods will work, but they both require paying Chinese taxes and meeting other requirements under Chinese law. Investors should also note that the RMB is not a freely convertible currency. For companies that will earn RMB income, the issue of conversion to U.S. dollars or other foreign currency should be carefully considered.

We are frequently asked about the legal minimum capital requirement for a WFOE. The answer to this question is clear as a matter of law, but is essentially meaningless in actual practice. Under the new Chinese Company Law, the minimum capital requirement for multiple shareholder companies has been reduced to 30,000 RMB (less than $4,000 US). For single shareholder companies, the amount is 100,000 RMB (a bit over $12,000 US). However, these numbers have no real meaning for the formation of a WFOE in China.

The real question is what the Chinese authorities will consider as adequate capitalization for the specific project. Of course, that answer varies by type of business and location. For example, it is very expensive to operate a business in Shanghai. On the other hand, it is may be very inexpensive to operate the same business in a rural area of China. It is expensive to operate a capital intensive business like manufacturing, but relatively inexpensive to operate a knowledge based consulting business.

The Chinese regulators usually consider all of these issues. To complicate matters, each local regulator has its own basic standards on what constitutes adequate capital for certain types of business activities. These numbers are not published, but when asked they will almost always be provided. They can only be determined through direct contact with the regulator and only after providing a clear explanation of the project. The local regulator virtually never considers the statutory minimum in making a determination regarding adequacy of capital. Rather, the local regulator will determine what it believes is an adequate amount of capital based on all the circumstances. Once the investor has a clear idea of the outlines of a project, it is usually a good idea to engage an attorney to contact the local regulator to see what their response will be to the proposed amount of investment. This initial screening can save a lot of time if the investor’s idea of the proper amount of capitalization is dramatically different from that of the local regulator.

In determining what constitutes adequate capital, one needs to consider the peculiar situation in China that all rents are paid in advance, that payment for products for sale are paid in advance, and that a reasonable advance reserve for salaries is also required. Thus, the initial start up cost is much higher than in a location like the United States, where credit and time payments are more common. In addition, the foreign investor needs to take into account the risk aversion of the Chinese regulator. The Chinese regulator will not approve a project that looks risky or under-funded. The regulator has no incentive to do this, especially for a 100% foreign owned entity.

Sept. 25, 2006 – Reuters

SHANGHAI (Reuters) – Toys R Us will launch its first store on the Chinese mainland in November, drawing on an increasing demand for educational toys from middle-income consumers, its top Asia executive said on Monday.

The U.S. toy retailer, owned by a private equity group including U.S. property developer Vornado Realty Trust (VNO.N: Quote, Profile, Research) , would set up shop in Shanghai’s Lujiazui financial district, Pieter Schats, chief executive officer of Toys R Us in Asia, told Reuters in an interview.

“We’re currently focused on getting the one store up and running and the opening of that store will be in mid-November,” Schats said. Toys R Us plans to launch an expansion plan it after examining Chinese consumers’ buying patterns.

“Early next year we’ll sit back and review, and decide how to expand the footprint both in Shanghai itself and in some other cities in China,” the Hong Kong-based executive added.

Toys R Us and its competitors chase a Chinese market where consumers are expected to spend about 100 billion yuan ($12.6 billion) on toys by 2010, driven by the country’s 300 million children below the age of 14, according to official forecasts.

Schats said the firm would target middle-income consumers, staying out of the brand-focused top-end of the market, where Walt Disney Co. (DIS.N: Quote, Profile, Research) and Time Warner Inc.’s (TWX.N: Quote, Profile, Research) studio division Warner Bros. are among the most recent big players.

“There doesn’t seem to be a huge amount of retailers that are occupying middle-income mass-market toy retail,” Schats said, adding that he saw a strong demand for safer toys and toys with educational features, he added.

Toys R Us now has over 50 stores in Asia and more than 1,200 stores in 34 countries or regions worldwide. Its operations in Asia are a franchise business, wholly owned by Hong Kong’s Lee & Fung Group and its Convenience Retail Asia (8052.HK: Quote, Profile, Research) unit.

($1=7.92 Yuan)

Sept. 21, 2006 – STEVEN R. WEISMAN, The New York Times

BEIJING, The United States and China, struggling to surmount the discord in their economic relations, established high-level teams in each country on Wednesday to conduct a “strategic economic dialogue” to be led on the American side by Henry M. Paulson Jr., the Treasury secretary.

Mr. Paulson said that while some might be disappointed that he did not resolve several irritants in the Chinese-American relationship on his trip this week, only a sustained high-level dialogue would produce progress in the disputes over trade, currency values, piracy of movies and software and other matters.

“What we’ve done here is put a process in place that gives us the best chance of getting us the results that we need to get,” Mr. Paulson told reporters. “To me the key thing always in working with the Chinese is to be able to get access to all the right people at the right level and have a process where there’s a real discipline.”

But it is unclear whether Mr. Paulson’s move would satisfy critics of China who have grown weary of appeals for patience and more dialogue.

Indeed, the pact probably clears the way for the Senate to vote for imposition of nearly 30 percent tariffs on Chinese goods if it does not act to raise the value of its currency against the dollar, making exports more expensive. The bill, sponsored by Senator Charles E. Schumer, a New York Democrat, and Senator Lindsey Graham, a South Carolina Republican, could pass the Senate as early as next week, its supporters say. Mr. Schumer and Mr. Graham had said that they would pull it back only if Mr. Paulson obtained concessions from China this week.

The bill has dimmer prospects in the House, and President Bush is considered certain to veto it if it passes. But the bill by itself could become yet another irritant with the Chinese, who American officials say have trouble understanding that Congress can act against the wishes of a president.

Mr. Paulson said he hoped that Congress would “judge me by the results that I get and this administration gets over a period of time” and warned Congress not to have a short-term mentality on issues as complex as Chinese economics.

“If they do, heaven help this country,” he said.

The leading industrial nations of the West have contended for years that China is suppressing the value of its currency to pump out exports and curb imports. The American trade deficit with China has ballooned over the last few years to about $200 billion annually, alarming labor unions, manufacturers and many in Congress.

Mr. Paulson’s appointment as Treasury secretary in July raised expectations that he could use his long experience with China as the former head of Goldman Sachs to make headway with China. But in recent weeks, and at the start of this trip, he has been cautioning against quick remedies and counseling patience.

The problem of China’s low currency value, its closed economy and aggressive economic practices needs to be fixed slowly as China achieves an internal consensus, Mr. Paulson said. Slowing exports to the West, for example, is opposed by many Chinese leaders who fear that a loss of jobs in China could lead to instability.

Patience was also the mantra of Mr. Paulson’s predecessor, John W. Snow, but Mr. Paulson may have more credibility because of the bipartisan support he has in Congress. While counseling patience, Mr. Paulson acknowledged that at least some short-term progress on the issues would be needed to instill confidence in the United States.

“I’m not going to take any victory laps over a process,” he told a small group of reporters at his hotel after the announcement. He promised that the “dialogue meetings” would be substantive, adding: “We don’t plan to sit around tables and write communiqués.  We intend to get things done.”

What officials say is new about the task force is that Mr. Paulson persuaded Mr. Bush soon after taking office in July to put him in charge of economic relations with China and oversee a “dialogue” involving other agencies, steps aimed at nudging the consensus along in China.

A noteworthy aspect of the announcement was that Mr. Paulson would be more in charge and oversee the process of making policy among commerce, trade, energy and other agencies, a step Treasury officials said he undertook over the summer by building his own form of consensus in the Bush administration, with the help of Mr. Bush.

One reason the announcement is likely to be greeted with skepticism is that there have been past “dialogues” with China announced over the years, also with some fanfare. The former deputy secretary of state, Robert B. Zoellick, headed a “senior dialogue” on several economic, political and security issues until he left earlier this year. Mr. Paulson said his new dialogue would subsume Mr. Zoellick’s.

China will be expected to raise its own issues with the United States. In the economic sphere these include Chinese complaints of American barriers to textile imports, curbs on sharing of high technology with the Chinese and a campaign to get Europe to ban certain military sales.

“I wouldn’t want to predict when there should be concrete results,” Mr. Paulson said. “But I’m not famous for being patient.”

Sept. 20, 2006 – Jessica Holzer, Forbes.com

Washington, D.C. – Having set foot in China on a three-day official visit, U.S. Treasury Secretary Hank Paulson gave a first glimpse of what looks to be patient strategy of pressing China to reform its economy and loosen its grip on its currency.

Paulson told reporters on Wednesday that a stronger yuan was in China’s best interest and that he didn’t care how the Chinese arrived at greater currency flexibility.

“I’m going to know flexibility when I see it,” he said.

He added that he didn’t support the approach of Senators Lindsay Graham, R-SC, and Charles Schumer, D-NY, who are threatening legislation that would slap a 27.5% tariff on Chinese imports unless the Chinese allow the yuan to appreciate significantly.

Coinciding with Paulson’s visit, China and the U.S. announced they would begin to hold regular discussions of their long-term economic relationship.

Paulson’s soft touch befits a statesman who does not need to grandstand before voters and who may possess a measure of insight into the opaque decision-making process of Chinese officials.

As the former chief of Goldman Sachs, Paulson successfully cajoled Beijing into allowing the investment bank to skirt stringent ownership rules to become the first foreign company to buy a Chinese investment house. Paulson has made roughly 70 trips to China, including some as a tourist.

For their part, Chinese officials seem curious about the new Treasury secretary. Among other Communist Party bigwigs, Paulson was granted an audience with the Chinese President himself.

“They’re very interested in Paulson, not just because he’s connected to senior political leaders but also to senior business leaders through his Wall Street background,” says Ben Carliner, the director of research at the Economic Strategy Institute in Washington.

Through their policy of keeping the yuan cheap to boost exports, the Chinese central bank has racked up nearly $1 trillion in foreign exchange reserves. And last year, the Chinese trade surplus ballooned to a record $200 billion.

Sunday, September-16, 2006 – Associated Press

BEIJING — Chinese law enforcement agencies destroyed nearly 13 million pirated compact discs, DVDs and computer software Saturday in the government’s latest campaign to curtail rampant theft of intellectual property, state media reported.

The destroyed items were confiscated in the first half of an ongoing 100-day nationwide campaign against piracy, the Xinhua News Agency said. Police seized the items in raids that took in the scope of pirated goods networks, from unlicensed factories to street vendors, Xinhua said.

Among the seized goods, according to the report, nearly half came from Guangdong, the economically dynamic southern province that abuts Hong Kong.

Over the past two years, China has ratcheted up efforts to stamp out the rampant theft of intellectual property, partly in response to pressure from the United States and European Union and partly to protect new Chinese companies that are starting to produce their own competitive goods. Still, illegally produced CDs, DVDs and computer software are widely available on city streets, and Chinese leaders acknowledge that it will take years to eliminate the practice.

In enforcing the latest crackdown, police and copyright officers closed down 8,907 shops and street vendors, 481 publishing companies and 942 illegal Web sites, Xinhua said. Police have uncovered ten illegal production lines for CDs and DVDs, four of them in Guangdong, the report said.

Wednesday, August 16, 2006 – Xinhua – Shanghai Daily

THE World Bank predicted yesterday that China’s economy will grow 10.4 percent this year and 9.3 percent in 2007.

The country’s gross domestic product expanded 10.9 percent in the first half of the year, implying second-quarter growth of 11.3 percent, a pace not seen since 1996. Even so, the economic outlook remains “favorable,” the bank said in a quarterly report released in Beijing.

With production capacity continuing to expand in line with demand, inflation low and the current account in surplus, the economy does not threaten to overheat at present, the bank said.

In the long term, however, the continued investment boom warrants concern and makes more moderate growth desirable, the report said.

The bank projected a mild slowdown in exports and fixed-asset investment for the second half, which would imply a slight fall in GDP growth to below 10 percent, resulting in the 10.4 percent rise for the entire year.

Bert Hofman, the bank’s lead economist for China, stressed that the country’s investment is increasingly driven by corporate profits rather than administrative agendas.

Industries such as transport equipment, machinery and textiles, which were identified by China’s National Development and Reform Commission as having witnessed rapid growth in fixed asset investment, also posted high profit growth.

The only exceptions, Hofman said, were sectors outside core manufacturing where government policies on pricing and other elements have a big influence.

Among the report’s other findings, investment growth tended to be higher in industries dominated by the private sector. State-owned enterprises, in contrast, appear to have displayed a negative relationship with fixed-asset investment growth, the report said.

The bank also attributed fixed-asset investment growth to the behavior of local governments, saying local officials have strong incentives for promoting an increase as their performance is often rated on GDP growth and foreign direct investment. In addition, local governments benefit from land sales associated with investment projects as well as value-added tax revenues on the production of goods.

The World Bank also reported that 6 million urban jobs were created in the first half, 60 percent of the government’s target for the year. The private sector created 5.9 million jobs in the first quarter, far more than the number of jobs shed by state-owned and collective enterprises, 2.6 million.