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An Introduction To The Hong Kong Basic Law
Stay of Proceedings - Application of Warsaw Convention, Choice of Law and Forum Considerations
Ship Finance: Financing of Hong Kong Flag Vessels
Security for Costs
Changes to the HK Arbitration Rules
Establishment of Trading Offices in Shanghai

Establishment of Trading Offices in Shanghai

As a general rule, all foreign trade in China is handled by government authorised foreign trade corporations, although some joint ventures ("JV"), have authority to import certain items for their production needs and to export the goods produced. Recent PRC legal developments with respect to Development Zones, in particular, the Waigaoqiao Development Zone in Shanghai's Pudong New Area, indicate that restrictions on the establishment of foreign invested trading companies may be relaxed in the future.

The "Tentative Procedures for the Establishment of Pilot Sino-foreign Foreign Trading Equity Joint Ventures" (the "Procedures"), were published by the Ministry of Foreign Trade and Economic Co-operation ("MOFTEC"), towards the end of last year. The procedures permit foreign trade JV's to engage in import and export trade in the Shanghai Pudong New Zone and the Shenzhen Special Economic Zone. However, the requirements relating to a foreign party are in most cases difficult to meet. Briefly, the foreign party to the JV must have:

a) an annual turnover of over US$5 billion;
b) an annual average level of trade with China of over US$30 million in value (for three years preceding the application); and
c) have a representative office in the PRC established for over three years preceding the application (or have invested US$30 million in the PRC prior to the application).

There are also heavy requirements which the Chinese party must satisfy including rules stipulating Chinese majority ownership and minimum registered capital of RMB100 million relating to the JV. For the majority of interested foreign investors the requirements will prove too difficult to satisfy. Therefore, given the pre-requisites, it is not believed that trading offices are yet viable options. Those investors who have decided to proceed and have established trading JV's will have a vested interest in ensuring that reform does not take place and as such a comprehensive reform of the current system is not considered likely.

However, in contrast, Shanghai's Waigaoqiao Development Zone (the "Development Zone") does appear to offer, at least in theory, an interesting alternative. Adopted by the Shanghai Municipal People's Congress in December of last year, the "Regulations on Shanghai Waigaoqiao Free Trade Zone" (the "Regulations"), regulate foreign trade activities within the Development Zone.

The Regulations permit the establishment of foreign invested trading enterprises within the Development Zone, such enterprises being free to engage in trade between the Development Zone and outside China, free from quotas and licences. Trade with other areas within China is also possible subject to the relevant state regulations. Additionally,

Fstorage periods may be established from where certain storage facilities with unlimited processing activities (such as re-packaging, labelling and marking of goods), may be carried out. Other miscellaneous activities which may be conducted by these enterprises include container transport, forwarding agency, shipping agency and bonded transport entry/exit via the Development Zone. The only specific quotas and restrictions mentioned are those relating to the importation of raw materials and the sale of products manufactured those stipulated with respect to the establishment of wholly

in the Zone. In general, requirements appear similar to foreign owned enterprises in other areas of China. The main requirement specified is that registered capital should not be less than US$200,000. The majority of activities conducted in the Development Zone are tax exempt but where there is a tax liability, the enterprise will usually be subject to a preferential rate. The Regulations have been introduced on an experimental basis and Waigaoqiao, as far as we are aware, is the only area in China in which they have been applied.

For further information contact:
Simon Taylor (Hong Kong)
Stuart McAlpine(Singapore)
Peter Murray (Shanghai)
Stuart Beadnall (London)
Campbell Steedman (Bucharest)

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