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Equity joint ventures are the second most common manner in which foreign
companies enter the China market and the preferred manner for
cooperation where the Chinese government and Chinese businesses are
concerned. Joint ventures are usually established to exploit the market
knowledge, preferential market treatment, and manufacturing capability
of the Chinese side along with the technology, manufacturing know-how,
and marketing experience of the foreign partner.
Normally operation of a joint venture is limited to a fixed period of
time from thirty to fifty years. In some cases an unlimited period of
operation can be approved, especially when the transfer of advanced
technology is involved. Profit and risk sharing in a joint venture are
proportionate to the equity of each partner in the joint venture, except
in cases of a breach of the joint venture contract.
Share holdings in a joint venture are usually non-negotiable and cannot
be transferred without approval from the Chinese government. Investors
are restricted from withdrawing registered capital during the live of
the joint venture contract. Regulations surrounding the transfer of
shares with only the approval of the board of directors and without
approval from government authorities will probably evolve over time as
the size and number of international joint ventures grow.
There are specific requirements for the management structure of a joint
venture but either party can hold the position as chairman of the board
of directors. A minimum of 25% of the capital must be contributed by the
foreign partners. There is no minimum investment for the Chinese
partners.
It
is preferable that foreign exchange accounts are balanced in order to
remit profits abroad so that the repatriated foreign exchange is offset
by exports from the joint venture. With the elimination of foreign
exchange certificates and the further opening of the China market, this
requirement is becoming more and more relaxed.
The permissible debt to equity ratio of a joint venture is regulated
depending on the size of the joint venture. In situations where the sum
of debt and equity is less than US$ 3 million, equity must constitute
70% of the total investment. In joint ventures where the sum of the debt
and equity is more than US$ 3 million but less than US$ 10 million,
equity must constitute at least half of the total investment. In cases
where the sum of the debt and equity is more than US$ 10 million but
less than US$ 30 million, 40% of the total investment must be in the
form of equity. When the total investment exceeds US$ 30 million, at
least a third of the sum of the debt and equity must be equity.
Equity can include cash, buildings, equipment, materials, intellectual
property rights, and land-use rights but cannot include labor. The value
of any equipment, materials, intellectual property rights, or land-use
rights must be approved by government authorities before the joint
venture can be approved.
After a joint venture is registered (click
for registration related authorities), the entity is
considered a Chinese legal entity and must abide by all Chinese laws. As
a Chinese legal entity, a joint venture is free to hire Chinese
nationals without the interference from government employment industries
as long as they abide by Chinese labor law. Joint ventures are also able
to purchase land and build their own buildings, privileges prevented to
representative offices.
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