Annex A
MAIN BARRIERS AFFECTING UK COMPANIES IN CHINA
FINANCIAL SERVICES
Insurance
There are restrictions on the number of insurance
licences granted to foreign insurance companies in China, on the
type of business they may do and on the locations within China
where they may operate. At present, foreign companies have only
been allowed to establish in Shanghai and Guangzhou. Foreign insurance
companies operating in China generally have minority joint ventures
without formal management control. In addition, newly established
companies are unable to have freedom in choosing an appropriate
Chinese partner.
With respect to brokering, foreign insurance
brokers can generally only have a presence in China through a
representative office. For re-insurance, cross-border activity
is prohibited.
After WTO accession, foreign non-life insurance
companies will be permitted to establish as a branch or as a joint
venture with 51 per cent foreign ownership. Within two years of
accession they will be able to establish as a wholly-owned subsidiary.
Life companies on accession will be permitted 50 per cent foreign
ownership in a joint venture with a partner of their choice. For
brokerage companies (dealing with large scale commercial risk
or re-insurance) they will be permitted to establish 50 per cent
joint venture companies. Within three years the foreign equity
can increase to 51 per cent and within five years wholly foreign
owned subsidiaries will be permitted.
In terms of geographic coverage foreign life
and non-life insurers will be able to provide services in Shanghai,
Guangzhou, Foshan, Shenzhen and Dalian upon accession. Beijing
will be open after two years and within three years of accession
there will be no geographic restrictions. In terms of business
scope non-life insurers will be able to provide master policy
insurance on accession without geographic restriction. Within
two years non-life insurers will be able to provide the full range
of non-life services to domestic and foreign clients. Life insurers
will be able to provide individual (non group) insurance to foreigners
and Chinese citizens on accession. Within three years of accession
foreign insurers will be able to provide health insurance, group
insurance and pensioners/annuities insurance to foreigners and
Chinese.
Licences for foreign insurers will be granted
subject to prudential criteria. An insurance company will need
to have three years of established experience, have a representative
office for two consecutive years in China and have total assets
of more than USD 5 billion.
Banking
Licences should be awarded against transparent
and prudential criteria with no quantitative restrictions. This
does not happen in China at present. Shanghai and Shenzhen are
the only centres where foreign banks can conduct RMB banking business.
Branches and joint ventures are currently only allowed in 24 cities
throughout China.
The activities of foreign banks are limited
in order to protect domestic banks. Only a select few are able
to offer RMB loans, savings accounts and to participate in China's
primary and secondary Treasury bond market. Even these are unable
to lend RMB to Chinese companies (other than in syndicated loan
with Chinese banks); accept RMB deposits from Chinese citizens
or Chinese domestic companies; handle Chinese securities sold
to mainland investors or RMB hedging; underwrite or trade A shares;
or underwrite government bonds. In addition, the total amount
of loans and other facilities granted by foreign banks is limited
to multiples of their local paid-in capital.
When China accedes to the WTO, foreign banks
will be able to conduct foreign exchange business without geographic
or client restriction. In respect of RMB business only Shanghai,
Shenzhen, Dalian and Tianjin will be open upon accession. Geographical
restrictions will be removed slowly with all restrictions removed
within five years of accession. Foreign institutions will be able
to provide RMB services to Chinese enterprises within two years
of accession and within five years will be able to provide RMB
business to all Chinese nationals. Foreign banking licences will
be authorised on prudential criteria. A bank will be able to establish
a subsidiary if it has total assets of more than USD 10 billion
and will be able to establish and branch if it has assets in excess
of USD 20 billion.
Securities
Foreign securities companies are restricted
to investing in China's small and illiquid B share market. They
are not permitted to establish subsidiaries or branches in China
and are therefore restricted to representative status. After WTO
accession they will be permitted to hold up to 33 per cent in
joint ventures and able to invest in the main A share market.
There is currently no foreign involvement permitted in the fund
management industry.
Many of the above financial services restrictions
will be lifted when China is formally accepted as a member of
the WTO. However some restrictions will not be lifted immediately
upon accession, as some of China's commitments will be introduced
in stages over a number of years. Upon accession, representative
offices in China of foreign securities institutions may become
special members of all Chinese stock exchanges. Foreign service
suppliers will be permitted to establish joint ventures with foreign
investments less than 33 per cent to conduct domestic securities
investment fund management. Within three years of accession the
foreign stake can increase to 49 per cent. Also within three years
of accession foreign securities institutions will be permitted
to establish joint ventures with foreign minority ownership limited
to 33 per cent. They will be able to engage in underwriting A
shares and underwriting and trading B and H shares as well as
government and corporate debt.
Law
Licences for foreign firms are issued in small
numbers every year. They are also limited in geographical scope.
Non Chinese lawyers are not able to offer formal advice on Chinese
law to their clients. Foreign law firms therefore have to instruct
Chinese law firms to act on their client's behalf or to employ
registered Chinese lawyers, and must limit their own activities
to giving informal advice to foreign companies.
Retailing
Retailing is only permitted on a joint venture
basis. Hitherto, licences have been strictly limited both in numbers
and geographical area. Direct sales activities are banned under
Chinese law. However, this is a sector in which significant concessions
were made by the Chinese in the EU-China negotiations in May.
It was agreed that the size of Chinese/foreign joint venture stores,
and the geographical areas in which foreign retailers could operate,
could be significantly increased.
Distribution
Import/export business lies exclusively in the
hands of State owned import/export corporations. This is to be
phased out under WTO accession terms. Similarly, international
shipping companies are limited to operations in the main ports.
In the past, one or two licences have been issued for freight
forwarding or freight consolidation activities and permission
to open branches further afield. There are also significant restrictions
on the ability of companies manufacturing in China to set up efficient
networks to distribute their own product. Advertising and market
research are strictly regulated, and after-sales service must
be performed by Chinese companies. The WTO negotiations have addressed
all of these issues to some extent.
Telecoms
No foreign company is allowed to operate telecoms
networks or provide domestic services within China. Many foreign
companies have been involved in the setting-up of mobile telephone
systems (principally GSM) and in joint venture manufacturing of
telecoms equipment.
The Internet
The above-mentioned restrictions on telecoms
mean that foreign involvement in Internet services has been confined
to investing in an existing Chinese company. Under the WTO agreement,
foreign service providers will on China's accession be permitted
to establish joint venture value-added teleccommunications enterprises
without quantitative restrictions, and to provide services in
the cities of Beijing, Shanghai and Guangzhou. The foreign partner's
stake can be no more than 30 per cent. Within two years of accession
the stake can be increased to 50 per cent and geographical restrictions
will be removed.
In December 1999 the Chinese State Encryption
Management Commission issued regulations requiring all users of
encryption systems to register with them. This provoked serious
complaints from foreign companies, particularly from the US, since
it put at risk a number of their commercial and technical secrets.
The requirement is now in abeyance. Meanwhile a number of new
e-commerce regulations are also being drafted which include rules
on internet advertising and on the taxation of on-line businesses
in China. It is not clear how restrictive these will be. The main
concern of foreign companies is the lack of consultation on the
drafting of regulations.
State Monopolies
The Chinese government maintains a number of
state monopolies. For example tobacco, gold mining, silk production
and trading, oil and gas. The government may retain some of these
under WTO accession terms, but there is already significantly
more involvement by foreign companies in the oil and gas sector
(BP Amoco and Shell onshore as well as offshore) and in mining
concessions (for example the Billiton zinc projection Yunnan).
Government tenders
China does not yet conform to international
standards on government tenders. EU funded advisory projects however
have made progress in drawing up regulations in this area, and
it is scheduled to open up after WTO accession.
Agriculture/land
As in many developing countries, it is not possible
for foreign companies or individuals to buy land, though joint
ventures are able to take out long leases of 40-50 years and,
depending on land use approvals, this can include activity in
the agriculture sector.
Investment
All commercial and industrial investment is
subject to project approval. The Ministry of Foreign Trade and
Economic Co-operation issues strict guidelines on sectors in which
investment is encouraged, permitted or prohibited. All projects
require a complex approval process either at provincial level
(below USD 30 million) or at central government level, involving
not only MOFTEC but also the State Development Planning Commission,
the State Economic and Trade Commission, and (for major projects)
approval by the State Council. Investments are often subject to
requirements for minimum local content, minimum export performance
or foreign exchange balancing. These specific requirements will
be eliminated upon accession to the WTO.
Intellectual Property Rights
Lastly, although the Chinese government is acutely
aware of the problems and sympathetic, there remains serious difficulties
in the implementation of intellectual property rights particularly
at a local level. The laws are in place, but enforcement is the
problem.
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