Table of Contents

  • Foreign investment absorption is a key component of China’s basic state policy of opening to the outside world. During its nearly twenty-five-year-long reform and opening up, China has steadfastly adhered to its opening-up policy, vigorously developed foreign trade and actively absorbed foreign investment, having made world-renowned achievements. After being the largest FDI (foreign direct investment) recipient among all the developing countries for nine consecutive years since 1993, China ranked the first in the world in terms of FDI inflow in 2002. By the end of April 2003, 436 394 foreigninvested enterprises had been established in China, with actually utilized foreign investment of over US$460 billion. Investors come from over 180 countries and regions. Over 400 multinational companies out of the world’s top 500 have made investment to establish their operations in China...

  • China has made progress in providing a business environment conducive to foreign direct investment (FDI). The challenge now is to move towards a more rules-based policy framework that will attract high-quality FDI from OECD countries. The OECD proposes a number of policy options for the Chinese government to consider in further developing such a framework. These include additional streamlining of the investment project approval process, reconsideration of unnecessary sectoral restrictions on foreign investment, and measures to increase transparency and strengthen the rule of law...

  • Attracting foreign direct investment (FDI) is a major component of the policy of opening up China’s economy to trade and investment that was initiated in the late 1970s. FDI inflows have increased rapidly over the past quarter of a century. These inflows are largely concentrated in Eastern China, particularly in Guangdong province. FDI has played an important role in China’s economy, for example by stimulating trade growth and promoting productivity improvements in the domestic economy. Hong Kong remains the largest source of FDI. Measured by the size of its population and other objective factors, China’s potential for attracting more FDI from OECD countries remains underexploited...

  • A body of legislation relating to foreign direct investment (FDI) and foreign-invested enterprises (FIEs) has been passed since 1978. Separate laws govern FIEs of different forms. These laws specify the procedures for examining and approving FDI projects as well as some incentive measures. Major changes resulted from China’s accession to the World Trade Organisation (WTO) in 2001, including the opening up to foreign investment of several services sectors. FDI is guided into or away from specific sectors of the economy by four Catalogues for Guidance of Foreign Investment Industries: prohibited, restricted, permitted and encouraged. Incentives are provided to encourage investment in the Central and Western regions. One result of WTO entry was the removal of traderelated investment measures (TRIMs) such as local-content requirements and export performance requirements, and the requirement that FIEs balance their foreign exchange receipts and expenditures...

  • Laws relating to FDI have become increasingly precise. Moves towards strengthening judicial independence and training more judges are to be welcomed. Improvements could be made in consulting stakeholders, including foreign investors, during the process of drafting legislation. Available legal recourses include conciliation and arbitration both within and outside China. Intellectual property rights (IPR) protection was introduced into Chinese law after economic reform began in 1978. IPR laws, which give equal rights to domestic and foreign-invested enterprises, protect patents, trademarks and copyrights. Progress has been made in providing such protection, though enforcement remains incomplete. Corruption persists, despite legislation against it, and the Chinese government is working with the OECD on improving enforcement.China has made progress in providing a business environment conducive to foreign direct investment (FDI). The challenge now is to move towards a more rules-based policy framework that will attract high-quality FDI from OECD countries. The OECD proposes a number of policy options for the Chinese government to consider in further developing such a framework...

  • State-owned enterprises (SOEs) are playing an increasingly smaller role in the Chinese economy. They no longer employ most of the workforce; their share of output has fallen to less than half the total; they appear on average to be less profitable than all other enterprises. The reform of SOEs has been slow to start but is now accelerating. Domestically-owned private enterprises, once banned, are now being encouraged. SOE reform offers opportunities to foreign investors, including the possibility of acquiring SOEs or their assets, improved corporate governance and accounting in domestic partners of FIEs, a reduction of unfair competition, stronger competition and a growing market for consultancy and other business services. Although cross-border mergers and acquisitions (M&A) have become the main form of FDI flow between developed countries, crossborder M&A still plays a negligible role in China’s FDI inflows, largely because the legal status of M&A there remains uncertain and several regulatory obstacles continue to impede M&A involving FIEs. Recent measures to improve corporate governance are welcome, but problems such as high state ownership of shares, related party transactions and inadequate transparency and disclosure have yet to be fully addressed...

  • Tax legislation regarding foreign-invested enterprises (FIEs) consists of a complex system of tax incentives to attract foreign direct investment (FDI). It is not easy to obtain complete information on the tax liability of an FIE, partly because of regional differences in incentives. FIEs contribute about 10 per cent of all tax revenue. Separate laws govern income taxation of domestic enterprises (which are subject to a 33 per cent corporate income tax rate) and FIEs (which are subject to a 15 or 24 per cent rate, depending on factors including location). There are plans to merge the two tax régimes. The effect of such a merger would depend on the level of the single rate of tax that would then apply to both domestic enterprises and FIEs. Domestic enterprises would no longer be able to benefit from “round-tripping”, i.e. the practice of investing in China via shell companies in Hong Kong or other foreign locations...

  • China has signed bilateral investment treaties (BITs) with more than 100 countries. These mostly adopt the so-called European BIT model based on the 1967 OECD Draft Convention on the Protection of Foreign Property whose provisions apply only to investment and investors after establishment...