Considerations for Chinese Enterprises Investing Abroad
-------Q. H. Charles Duan

China's WTO working group has already drafted the multi-lateral documents for China's accession to the WTO, expected this November. WTO accession will integrate China into the world's multi-lateral trade system, bringing with it the obligation of market openness, but also the right to enjoy similar openness in other markets across the globe.

Many discussions on China's WTO entry focus on aspects of domestic competition and what it will mean for PRC companies who may not be used to such competition. Certainly, many Chinese enterprises will be greatly challenged by incoming foreign-based competitors. Far fewer discussions however pay attention to other side of the equation: other WTO member nations will equally open their markets to China, which will present many business opportunities and potential profits. The key for Chinese enterprises is in how they grasp this opportunity. Basically, there are two approaches for Chinese enterprises to pursue: foreign trade, and overseas investment.

Although China now plays an important role in global trade, PRC foreign commerce remains unbalanced due to the traditional "Planned Economy". Today, I would like to air my opinions on these matters within the context of Chinese law.

Foreign Trade Following China's Membership in the WTO

1. Legal Standing for Chinese Enterprises will Improve.

Economic trade relationships between China and other countries have previously been regulated through bilateral trade agreements. These have been problematic because of the complications associated with the requirement to conclude bilateral agreements with each country individually. Not only has this been time-consuming, but also agreements and policies have not been uniform. As a result, Chinese enterprises developing business abroad confronted more and varying legal risks, which impeded their foreign trade operations. Upon accession to the WTO, China will become more influential in global trade. The ability to conclude reciprocal trade agreements with many WTO member states simultaneously will level the playing field for all, and will allow Chinese businesses to streamline their foreign trade operations because the rules will not vary from nation to nation.

There are two main principles associated with WTO membership. These are most favored nation treatment, and national treatment. For the first principle, China's export products will enjoy the same treatment as those of others nations. That is to say, any favorable measure one member state gives to another will be given to China automatically and unconditionally. This promotes equal competition among various countries. Under national treatment, foreign products will be treated the same as domestic ones (after Customs clearance). Following the structure mandated by the WTO, policies and dispute resolution procedures are coordinated within the rules of the WTO. This will further reduce risks that Chinese enterprises may encounter, and is also beneficial to Chinese enterprises' foreign trade operations because they will be aware of a single set of procedures with multiple member states around the world.

2. Legal Issues that Chinese Enterprises Should Pay Attention to When Engaging in Foreign Trade

The improvements of the external legal environment will help stimulate the development of domestic enterprises' foreign trade business. Chinese businesses, however, will need to be able to take advantage of this. In my opinion, there are several areas that PRC domestic enterprises should pay attention to:

1) Take active measures against potential anti-dumping actions. Due to low labor costs, Chinese products are sometimes sold at low prices in overseas markets. This can result in anti-dumping complaints from foreign markets because they cannot compete due to their higher labor；

2) Secondly, learn the international practices and be more conscious of law and regulation. This is important because a market-oriented economy is normalized under law. Some PRC companies may be used to planned economy practices, and to participate in global trade under market economy rules, it will be important for PRC domestic enterprises to research the legal provisions under the framework of the WTO.

3) Make effective use of the law for one's own sake. Preparation for greater participation abroad under market economy rules doesn't mean that PRC companies need to sacrifice their rights on the global stage. International legal disputes or actions are inevitable. Remember to take measures against risks in advance, and don't release you own rights rashly simply because a litigation matter may move abroad.

4) Attach importance to the protection of intellectual property. Just as foreign corporations do in other markets, PRC domestic enterprises will need to establish and protect their own brands and technological secrets.

Overseas Investment by Chinese Enterprises

1. Chinese Companies may Actively Make Investments Abroad

China has now grown to be the second largest capital-importing country after America, and yet its growth in overseas investment has remained static. To be considered by PRC companies however, is that overseas investment is very viable form of entry into a foreign market and a primary form of international economic trade.

In actual fact, international investment has been the paramount form of international economic expansion due to its outstanding advantages. Although some trade barriers still exist and there are WTO rules that govern the process, overall it is a very reasonable method of expanding business abroad. One advantage relates to anti-dumping. Developed countries often make anti-dumping claims against Chinese products. Other countries who have also had such claims against them (such as Japan, Korea and Taiwan District) have often adopted one of two measures to combat these charges: one has been to actively respond to these actions, and the other, more direct method has been to invest abroad. Products manufactured by a local foreign-invested mill belong to nation in which they were produced and localized trade barriers can't be applicable to them any more.

Also to consider is that as a developing country, China is rapidly achieving prosperity. Chinese companies making investment in other developing countries is useful in occupying the markets of developed countries directly and consolidating market quotas. Competition between Chinese and other local enterprises is also beneficial to enhance competitive power.

Investments in China by overseas entities are approaching maturity. China's foreign exchange reserve has reached 160 billion USD, and it is anticipated to reach 200 billion USD in the near future. Permitting powerful Chinese enterprises to invest abroad will be an effective use of the reserves, one that could continue to reap significant profits.

2. The Current Legal Environment for Overseas Investment Needs Improving

At present, China still focuses more on absorbing foreign investment and less on capital-export. This may be because there are still several legal obstacles that work against companies making overseas investments. Development of business abroad becomes limited when conducted through administrative measures rather than being based on market factors.

One of the limiting factors is that governmental legislation and support for overseas investment is still somewhat imbalanced. Legislation concerning foreign investment is plentiful, whereas there are only a few departmental regulations for overseas investment, which is far from enough. This makes the appropriate legal procedures less clear to companies considering overseas investment.

Another obstacle is the requirement for PRC companies to obtain a permit approving their decision to invest overseas. There are too many examination and approval procedures for companies to go through. These formalities can cause delay and loss of profitable business opportunities for PRC companies. There are also many other limits to investing abroad for domestic enterprises. They shall not use other exchanges, but must use self-arranged foreign currency unless approved by the National Foreign Exchange Bureau. Companies also have difficulties in delivering managers from parent companies to serve abroad on behalf of the overseas companies.

3. Domestic Enterprises Shall Invest in Accordance with Law

Considering making investment abroad is a wise choice for Chinese companies in the era of China's accession to the WTO. As with any business decision however, enterprises shall need to make adequate investigation and estimates of the local legal environment before they decide to invest in a particular country. Chinese enterprises shall also rely on the developed overseas markets to realize their own promotion, and may find it useful to create overseas research centers to improve their own technologies through establishment of subsidiary companies abroad. All of these decisions need to be made through the looking glass of the applicable laws.

Making overseas investment is not to be taken lightly, but if considered within the context of applicable law (whether Chinese law, WTO regulation, or the laws of the country being considered), the venture can be very profitable for the Chinese company establishing or acquiring overseas operations.

More importantly, a shift in thinking with respect to what WTO entry means to China could be useful. Many people focus on concerns over the competition expected from foreign companies coming into the Chinese market. What is so often overlooked is that for PRC companies, China's accession to the WTO will bring great opportunity.