China to Enhance Management of Foreign Companies’ Representative Offices

With the continuous economic development, the Chinese government is implementing stricter regulation rules over the representative offices of foreign companies in China.

China is going to have stricter regulations over foreign invertment

China continuously launched the new regulation rules to attract more investments from the foreign investors. Meanwhile, China also plans to have stricter regulations over these investors. The news has stirred up the international business field.

From the beginning of this year, China has published a series of favorable policies for the investments into the service-oriented enterprises – trade companies, consultancy companies, lawyer offices, architect offices and investment companies. That means that the Chinese government has intentionally led the foreign investments into these industries featured with smaller resource consumption and more environment-friendly production methods. Therefore, the large manufacturing enterprises, which employ a lot of employees and a group of production lines, will be less and less popular among the foreign investors.

According to the Chinese government, its measures mainly target at retaining the normal administration over these enterprises in taxation, visa and operation rules. For example, this January the Ministry of Commerce of China issued the note about the restriction over the foreign companies’ representative offices in China. It was said that the action is to reinforce the management over these offices.

As introduced by the General Administration of Industry and Commerce of China, the “fake files”, “violation against the law” and the other behaviors can bring about great damages to the Chinese watchdog’s power of supervision.

One clause of the note mentioned above said that the number of staff in a representative office should not exceed four. This will influence as many as 70,000 representative offices run by foreigners in China. This stipulation may force these foreign representative offices with more than four people to spend money (usually more than 1 million US dollars) in turning themselves into corporate legal representatives, i.e. the foreign-funded enterprises or subsidiary companies.

Siva Yam, chairman of US-China Chamber of Commerce, said: “We know that the (Chinese) government prefers the full-grown businesses to the simple representative offices.” From the viewpoint of the government, the representative offices don’t stand for a long-term promise of investment. Meanwhile, it can not create a large number of new positions and, worst of all, it has no requirement of capital.

In January, England Logistics under Utah-based C.R. England Inc. conducted a restructuring over a 20-year-old company which it acquired 2 years ago in China, turning it an exclusively foreign-funded company. The change endowed this US company with the right to sign the contract to deliver goods to the USA in China. However, this change costs the company 700,000 US dollars which is invested in its core business as well as a relatively smaller amount of money in three subsidiary institutions in China. Building a new company took six months.

Charles F. Meyers, director of international business development department of this non-listed company, said: “When you plan to enter China, you have to make a promise.”

The process of building a legal entity in China is expensive and complicated. This means that the foreign investors have to make a big commitment in amount of capital, number of employees, property rents and technological support and transfer. The identity of legal entity must be confirmed by China’s watchdog. The legal entities are under administration in taxation, visa and annuities.       

Fortunately, what China’s government offers are not only various limitations and regulations. Some favorable policies can also be seen. For example, the Beijing municipal government provides the foreign lawyer offices and private equity investment companies with the opportunity to found cooperative enterprises in Beijing.

Agitated by that, more and more professional companies started their businesses in China but they usually register their companies in the districts with lower or more favorable taxes.

This March, Carlyle Group LP became the first foreign company to build a cooperative financial enterprise in China. As promised by this company, the initial investment amounts to 50 million US dollars. Its Chinese partner is Shanghai Fosun Group. From then on, Carlyle Group LP can get engaged in financing in China. David M. Rubenstein, co-founder of Carlyle Group LP, said: “This facilitates our business in China.”

In these years, China is a place of interest for the foreign investments. Last year this country saw the foreign direct investment amounting to 90.03 billion US dollars. From 2000 to 2009 China received foreign direct investment totaling 635 billion US dollars.

Notable is the fact that 42% of the foreign direct investment last year came from the service-oriented enterprises. In comparison, the proportion was 30% five years ago. Such a proportion in 2009 decreased by 0.6% compared with 2008 while the proportion of FDI in manufacturing in 2009 decreased by 6.3% year on year, which reflected the depressed global economy and the rise of China’s salary level.

China earns the rights to give out orders and regulations for the investors with its amazing economic growth and enormous domestic market. Now, more and more service-oriented enterprises are benefiting from the increasing demand of China. In exchange, they have to obey the rules and regulations on taxation, visa, license and so on issued by the Chinese government.

The analysts said that the ways China use to treat the foreign companies is not only for filling up the loopholes. According to an insider from an international pharmaceutical company, the relevant administration department in China once hinted to them that they will have an easier access to drug-launching license if they invest in building a research laboratory in China.

The Chinese government iterates that China welcomes legal and stable foreign investments.

Last year, 70% of China’s exported electric products, whose total value was 500 billion US dollars, were produced by foreign-funded plants. A source from the Shanghai municipal government said that one third of its income in 2009 came from the foreign companies and 31% of the employed people in Shanghai were working for the foreign companies.

China has strict requirements for the capital commitments. Some banks and insurance companies are required to contribute nearly 150 million US dollars. Even the small-sized institutions are required to have registered principal from 100,000 yuan to 1 million yuan (USD 14.64 thousand to 146.4 thousand). Cash payment is necessary and the patent commission fees, lawyer charges and other preparation fees are excluded.

Li Jun, a consultant from Shanghai-based Path To China Ltd, said that this can be said to be an obligation required by the Chinese government.