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Delegation in Your China Business: Managing Chops and Key Personnel

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arms-crossed-bow-tie-braces-1702By Dezan Shira & Associates 
Legal Editor: Steven Elsinga

In any business, one person delegates power to another to look after his/her interest. But how to ensure the latter doesn’t abuse this power for his/her own benefit is a classic dilemma known as the agency problem. It is as pressing an issue in China as in any other country, but Chinese laws and practices deal with this problem differently than most. For the foreign investor, this brings along a number of issues to be aware of. Continue reading…

China Regulatory Brief: Draft Foreign Investment Law, Tourist VAT Rebates

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China-Regulatory-BriefChina Releases Draft Foreign Investment Law

On January 19, the Chinese Ministry of Commerce (MOFCOM) released the draft of the proposed new Foreign Investment Law to solicit public comments by February 17, 2015. According to the draft, the State Council will publish a negative list of industries in which foreign investment is restricted or prohibited. It is stipulated that most foreign investment, including setting up a new company, will no longer need pre-approval from the State Council unless a foreign party intends to invest in one of the restricted industries on the negative list. In addition, the proposed new law will repeal the Sino-foreign Equity Joint Venture Law, the Wholly Foreign-owned Enterprise Law and the Sino-foreign Contractual Joint Venture Law

Related Link IconRELATED: China Releases Draft Foreign Investment Law

China Expands Tourist VAT Rebate Scheme Nationwide

On January 6, the Ministry of Finance (MOF) released the “Announcement on Implementing Tourist VAT Rebate on Departure Policy to Foreign Tourists (MOF Announcement [2015] No.3),” which took immediate effect. According to the Announcement, foreign tourists (defined foreigners who stay in China for less than 183 days) purchasing goods in certain areas are able to apply for value-added tax (VAT) refunds at the rate of 11 percent. The threshold for VAT refunds is set at RMB 500. In 2011, China launched this policy as a pilot scheme in Hainan. The country is currently looking to expand the tax rebates policy nationwide to boost its domestic tourism industry.  

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Further Signs of Liberalization for E-commerce in the Shanghai Free Trade Zone

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By Rainy Yao and Steven Elsinga E-commerce-legal-and-regulatory_300x230pix

SHANGHAI – Foreign investors looking to enter China’s lucrative e-commerce market are now allowed to set up wholly foreign-owned e-commerce companies on a pilot basis in the Shanghai Free Trade Zone (FTZ), according to an announcement released by the Ministry of Industry and Information Technology (MIIT) on January 13.

According to the announcement, foreign investors engaging in online data processing and transaction processing (for-profit e-commerce) businesses may control 100 percent of the shares, meaning that they are now allowed to set up a wholly foreign-owned enterprise to conduct such activities. Previously, foreign shareholding in online data and transaction processing businesses was limited to 55 percent in the Shanghai FTZ and 50 percent in other parts of China. Continue reading…

China’s Trade With Eastern Europe and the Caucausus

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CDE Op-Ed Commentary

As China and Russia begin to move closer together in terms of mutual trade  and economic support, a related issue is the development of trade between China and Russia’s neighbors along its western border. While some, such as Georgia and the Ukraine have developed relations with the European Union, others are members of the Commonwealth of Independent States, and some of these are part of the new Eurasian Economic Union.

Sitting within Russia’s sphere of influence and at the edge of Europe, these countries constitute a trade border with both. How has China been approaching trade with these hinterland nations, with faces both East and West?

Russia’s new economic problems introduce a sudden new dynamic to China’s relations with these countries. As problems continue in Ukraine, Russia faces sanctions from the E.U. and is beginning to turn its face towards the East. This includes further development emphasis upon its own trade blocs, as well as an interest in how China views the region, and considering developing infrastructure in an increasingly mutual China-Russia development axis. This means that Chinese influence in Russia’s neighboring states will start to have an impact upon future Russian trade, as well as how the region develops up against the borders of the expanding European Union.  

ArmeniaArmenia

Armenian trade with China has reached historic highs, attaining some US$600 million by 2013, against some US$6 million at the turn of the century. Much of this has been driven by Armenia’s status as an iron ore exporter, while imports from China to Armenia are diverse and include clothes, shoes, machinery, chemicals, equipment, construction materials, furniture and food. Armenia’s trade with China, then, is largely reliant on a buoyant Chinese economy. A large synthetic rubber plant has been invested in by both sides in Shanxi, with the Armenian side owning some 40 percent. The plant’s annual capacity reaches 30,000 tons. US$220 million has been invested in its construction, and the enterprise’s annual income is now estimated at US$100 million.

China is also involved in a variety of different energy projects in Armenia, including the reconstruction and repair of Soviet-era thermo-electric power plants. One such project is in the Armenian capital Yerevan and another is located in the city of Hrazdan, where the Chinese side is carrying out the bulk of the repair and reconstruction work on the Hrazdan Thermo-electric Power Plant. After reconstruction, the natural gas-operated turbine will generate up to 440 MW of electricity, more than produced by Armenia’s Metsamor nuclear power plant.

China is also interested in participating in the building of a railway that would link Armenia with the Iranian ports on the Persian Gulf. Chinese investors, such as the China Communications Construction Company (CCCC), have already announced their readiness to finance 60 percent of this ambitious US$3 billion project. Connecting Armenia to Iran’s ports, roads and railway network will assist the country’s integration into major Asian trade routes.

Related Link IconRELATED: The Man From Ashgabat – Xinjiang’s Key To Central Asia

Chinese companies are also opening up the Armenian market. They are particularly involved in medical supplies, food and beverage, textiles, footwear, household appliances and restaurants.

China’s Confucius Institute has a branch at the University of Yerevan. Meanwhile, Armenia joined the Eurasian Economic Community in January this year, thus cementing its ties with the Russian market. This could see Armenia start to become a conduit for Chinese products into the southern parts of Russia, as Russian President Putin begins to look for alternative low-cost product supply routes in alternative to those from the E.U.    

AzerbaijanAzerbaijan

China-Azerbaijan trade now stands at about US$1.5 billion, and has been rising at a rate of about 15 percent per annum. The country is rich in both oil and gas, and thus has attracted some 70 Chinese investors – mainly in the petrochemical industry and infrastructure development. Some 20 Azerbaijani companies are operational in China. China is particularly interested in the energy aspect of the economy, and Beijing has already carved out a stake in Azerbaijan’s oil sector. China’s energy giant, Sinopec, has invested in two major projects – K&K and Gobustan – injecting a total investment of US$ 250 million.

However, the oil and gas sector is not the only one  in which the two countries are cooperating. China has been involved in developing infrastructure in Azerbaijan, and is reconstructing and repairing old Soviet built thermal and hydropower plants. China National Electric Equipment Corporation (CNEEC) is rebuilding the Azerbaijani Thermal Power Station and modernizing its seven power-generating units. This thermal power station accounts for 45 percent of all the electric power generated in the country. In 2013, the Azerbaijani Thermoelectric Power Station generated 7.63 billion kilowatt-hours of electricity.

In recent years, the trade volume between the two countries has risen dramatically. If these trends continue, China will soon become one of Azerbaijan’s most important trading partners.

The Confucius Institute opened a branch at the University of Baku in 2011.

BelarusBelarus

Belarus remains politically close to Russia and has been enjoying a mini-boom recently as it has become a conduit for sanctions-affected E.U. produce transiting and then entering the mainstream Russian market. Its infrastructure for getting supplies into Russia is generally excellent. With Belarus-China bilateral trade currently sitting at about the US$4 billion mark, the two countries have clearly established strong trade links; and given Russia’s efforts to secure alternative supply routes, China is set to take advantage of this. Minsk already operates repacking and labeling facilities for Chinese products destined for the Russian market, and there are numerous Chinese trading companies operating in the capital. A branch of the Chinese state-owned Beijing Hotel opened in Minsk last September, while three Confucius Institutes are operating in the country. Belarus is very much in the minds of the Chinese government as a key point in the new Silk Road route and a general trade gateway between Russia and China.   

Related Link IconRELATED:The Chongqing-Xinjiang-Europe Railway

GeorgiaGeorgia

Georgia left the Commonwealth of Independent States in 2008 after a brief war with Russia and has replaced these with partnership and cooperation agreements with the E.U. Two of the country’s regions separated after the war to become unrecognized micro-states. While deep mistrust towards Russia remains, Georgia’s bilateral trade with China has reached the US$600 million mark, with growth rates averaging about 15 percent.

Much of the Chinese interest in Georgia lies in its strategic location and as part of the New Silk Road project. Consequently the transportation and communications industries are both key areas of cooperation between the two countries. China is increasingly taking on infrastructure projects in the country, such as the development of a tunnel linking east and west Georgia.

Redevelopment of Georgia’s creaking hydropower infrastructure has been another investment focus. China’s Sichuan Electric Power Import and Export Company built the Khadori Hydropower Plant on the Pankisi River, the largest hydropower plant built in Georgia since it declared independence.

The Confucius Institute has also opened a branch in the University of Tbilisi.    

MoldovaMoldova

China-Moldova trade remains relatively small at just under US$200 million, but it has been growing rapidly. Moldova’s main export to China is wine, where the country has managed to capture a small but nonetheless significant market share. Chinese products tend to be low-end trade related.

Moldovan trade overall tends to be weighted on the side of the E.U., while nonetheless maintaining a healthy balance with Russia. This has made Moldova a new entry point for E.U. goods under sanctions to be transshipped to Russia, and as Russia turns its face towards the East and its neighbors once again, this trade can be expected to continue. Chinese infrastructure investment into the supply chain to deepen both Moldovan trade links to Russia and the E.U., as well as back to China, can therefore be expected.    

The Confucius Institute has a presence at the University of Moldova.

Related Link IconRELATED: South Caucasus – China Bilateral Free Trade

UkraineUkraine

Ukraine enjoys bilateral trade with China of some US$11 billion, which has been increasing at rates of about 9 percent per annum.

According to the Ukrainian Foreign Ministry, the main items exported to China during 2013 were minerals (at 67 percent) – mainly iron, titanium, and zirconium ore -, fats and oils of animal or vegetable origin (14 percent), and equipment and machinery (10 percent) – mainly gas turbines. The main imported items from China during 2013 were machinery, equipment and tools (36 percent), base metals and metal products  (12 percent), textiles and textile products (10 percent), footwear, headgear, and umbrellas (9 percent), and plastic and rubber (7 percent).

However, China has been making significant new steps in investment policy in Ukraine, most notably in food supply. China has leased 3 million hectares of land from Ukraine to be used for the production of grains and meat products, mainly pork.

Given the ongoing conflict in Ukraine, and the fact that China will be unwilling to take an opposing stance against Russia, it should not be a surprise to note that bilateral trade can be expected to have dropped off during 2014. Nonetheless, China, with 20 percent of the world’s population and just 10 percent of its arable land, will be looking to secure similar agricultural deals to both help rebuild Ukraine and provide itself with a new supply of foodstuffs once hostilities cease. There are five Confucius Institutes in Ukraine.

Summary  

As can be seen, China has been active in developing trade links with these former Soviet nations. Relations between China and these countries started off slowly, as they became independent after the disintegration of the Soviet Union. Given China was faced with its own internal development issues at that time, it is no surprise that Chinese investments into the region have tended to take a lesser importance. This is now changing. 

In addition to this, China wishes, along with Russia, to see its political allies deepen their own trade links. These former Soviet nations represent a border of sorts, and with Chinese assistance offer both an injection of goods and products into Russia from China, but also strategically important control of some of the E.U. supply chain accessing the country. They also act as a potential conduit for Chinese goods, travelling along the ancient Silk Road, to later end up in E.U. markets.

Related Link IconRELATED: China’s Trade With Russia To Boom in 2015

Given the economic collapse that occurred after the fall of the Soviet Union, China has a critical role to play in reinvigorating the old Soviet-era supply chain as well as act as a well-meaning partner when it comes to repairing and upgrading much of the old Soviet built energy plants.

China’s trade window with the Caucasus and Russia’s western borders may be small in comparison to larger trade volumes elsewhere. But in uniting and integrating a region left somewhat backward by the collapse of the USSR, China’s involvement is now re-energizing these Eastern European countries. The implications for the E.U. and the access to E.U. markets for cheaper, more “eastern” goods, both made by China as well as along the Central Asian and Caucasus trade routes, and especially consumables, should not be underestimated.        

Chris Devonshire-Ellis is the Chairman of the Dezan Shira Asian Alliance and Publisher of Asia Briefing. Chris can be followed on Twitter at @cde_asia. Dezan Shira & Associates have a strategic relationship with Russia Consulting of Moscow. The two firms provide foreign direct investment, strategic advisory, legal, tax and accounting services to foreign investors in their respective regions. Please contact the practice concerning the China-Russia and China-Caucasus trade at china@dezshira.com or visit the practice website at www.dezshira.com 

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Using China’s Free Trade & Double Tax Agreements 
In this issue of China Briefing, we examine the role of Free Trade Agreements and the various regional blocs that China is either a member of or considering becoming so, as well as how these can be of significance to your China business. We also examine the role of Double Tax Treaties, provide a list of active agreements, and explain how to obtain the tax minimization benefits on offer.

 
RB_2014_4_issue_cover_250x350Structuring the General Director Position during Crisis Time 
In this issue of Russia Briefing we focus on a true revolution that is occurring in Russia- the ongoing transformation of the role of General Director in Russia. We focus not only on the legal changes that have occurred, but also on the consequences for management and the new options available for structuring signature rights. Additionally, intercultural aspects are considered since the new structures may be difficult for employees to be comfortable with at first. Finally, the possibility of fully outsourcing the General Director role is explored. 

Sanctions Affecting International Business
This current issue of Russia Briefing gives you an overview of the regulations on US and EU sanctions and also goes beyond this by trying to find out the potential effects they have and – most important for you – what to do in order to find out whether or not your business is affected by the sanctions.

 

China Releases Draft Foreign Investment Law, Signaling Major Overhaul for Foreign Investment

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By Dezan Shira & Associates 
Legal Editor: Steven Elsinga

The Chinese Ministry of Commerce released the draft of the proposed new Foreign Investment Law to solicit public opinions. The proposed law will significantly reduce barriers to foreign investment, whilst at the same time increasing scrutiny of foreigners trying to evade the regulations on investing in restricted industries. The new law introduces five major changes.

1. Foreign-invested company laws repealed

When the law comes into effect, it will repeal the Sino-foreign Equity Joint Venture Law, the Wholly Foreign-owned Enterprise Law and the Sino-foreign Contractual Joint Venture Law. Foreign-invested companies will largely be subject to the legal treatment same as domestic companies. WFOEs, foreign-invested equity JVs and contractual JVs will no longer have separate legal regimes. Continue reading…

Zhuhai: An Emerging Force in South China

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Panorama of Guangzhou in daytime, Zhujiang New Town.By Rainy Yao

Located in the center of the Pearl River Delta (PRD), Zhuhai is one of China’s four original Special Economic Zones (SEZs) established in 1980. The city borders Macau to the south and is about one hour away from Guangzhou and Shenzhen by car. In the past three decades, Zhuhai has experienced strong economic growth due to its geographical proximity to Hong Kong and Macau, and is the only deep-water port on the western side of the Pearl River. In this article, we take a closer look at this emerging force in South China. Continue reading…

China Regulatory Brief: Shanghai FTZ Allows Foreign E-commerce Companies, Consumption Tax Raised on Fuel Oil

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China-Regulatory-BriefWholly Foreign-owned E-commerce Companies Allowed in the Shanghai Free Trade Zone

On January 13, China’s Ministry of Industry and Information Technology released an announcement allowing foreign investors to set up wholly foreign-owned e-commerce companies to conduct online data processing and transaction processing (for-profit e-commerce) businesses in the Shanghai FTZ. Previously, the shares a foreign party was permitted to own in such businesses was limited to 55 percent in the FTZ and 50 percent in other parts of China. Meanwhile, foreign investors may now provide call center, domestic multi-party communication, internet access and domestic VPN services as cooperative joint ventures with a Chinese partner, also within the Shanghai FTZ.

China Grants Tax Exemptions for Elderly Care, Traditional Medicine and Protecting Historical Relics

China’s Ministry of Finance and State Administration of Taxation recently released the “Circular on Business Tax Policies to Support the Export of Cultural Services and Other Services (Cai Shui [2015] No.118),” which took effect on January 1, 2015. The circular exempts companies and individuals from business tax if they restore or protect cultural and historical relics, provide traditional health care (included in the national directory of intangible cultural heritage) or elderly care in China.

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New Draft of Charity Law Submitted to China’s National Legislature

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By Chris Devonshire-Ellis

China has been drafting a new version of its Charity Law that will significantly impact upon the manner in which foreign charities and NGOs operate in the country. The new law, the drafting of which has been in the pipeline for several years now, is understood to now be in bill format and was introduced to the NPC last month. This new draft makes significant improvements and clarifications on previous attempts, reflecting a more pragmatic approach to the status of charitable organizations by the Chinese State.

The draft includes recommendations from the Chinese Ministry of Public Security, Ministry of Civil Affairs, and crucially, guidance from the State Administration of Taxation for charity certification and determination of tax status for charities. Previously, applications from charities for legal status in China were extremely difficult to obtain due to conflicts within the registration system, notably with systematic problems taxing not-for-profit entities.

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