There are primarily three types of enterprises with foreign investment (foreign-invested enterprises) in China: wholly foreign-owned ventures, contractual joint ventures and equity joint ventures. As of the end of 1991, there were about 42,000 approved foreign-invested enterprises in China. Representative offices are also popular vehicles for establishing ties between foreign firms and the Chinese market. Other types of business establishments include consignment sales and service centers established to market foreign company products and to service those products, and foreign bank branches.

Representative Offices: For foreign companies, the most common way to establish a permanent presence in China is to register as a representative office. Registration legitimizes business operations in China and allows a foreign company to establish a permanent presence in the Chinese market. Although representative office personnel cannot directly sign contracts or receive fees or
income in China, they can perform market research, consulting, or liaison type work. A foreign company must first find a sponsor organization that will approve its application to establish an office. An application is then submitted to the State
Administration for Industry and Commerce (SAIC) for review and registration.

Equity Joint Ventures: Under Chinese law, equity joint ventures are limited liability companies. Normally, the foreign partner of an equity joint venture must contribute at least 25 percent of the capital although there are no limitations on the number of partners in a venture. Profits are distributed according to each partner’s capital contribution. Upon successful completion of the pre-approval screening, the Ministry of Foreign Economic Relations and Trade (MOFERT) or a corresponding authority will normally make a decision on approval within 90 days. Depending on the scope of the venture, the contract period may be decided by negotiation among the parties or in accordance with sector specific regulations. The foreign investor may not recover its investment until liquidation or sale of the venture.

Contractual Joint Venture: Under the law governing contractual joint ventures, often called cooperative joint ventures, the parties determine the form of operation through the negotiation of a contract. Generally, the parties agree to operate jointly like partners or to form a new limited liability company. There are no set government requirements on the duration of the venture, on the amount of capital the foreign investor must contribute, or on how profits are to be distributed. If ownership of the fixed assets of the venture reverts to the Chinese partner at the end of the contract term, the foreign investor may recover its share of the investment during the term of cooperation. Assuming successful
completion of the required pre-approval procedures, MOFERT or a corresponding local authority will make a decision on approval within 45 days.

Wholly Foreign-owned Ventures: Approval of a wholly foreign-owned venture depends on whether the enterprise is deemed to benefit the development of China’s national economy. The Chinese government prefers enterprises which employ advanced technology and equipment to manufacture products that are important to the national economy and are not produced in China. Ventures which export a large portion of their products also are more likely to be approved.
MOFERT is responsible for approval of wholly foreign-owned ventures, although other national and local authorities typically participate in the pre-approval screening steps required before the application documents are forwarded to MOFERT for approval. Because the foreign investor is the sole operator of a wholly
foreign-owned venture, it is responsible for guiding its application through the Chinese bureaucracy.

Note: The article above may not contain current information.

See also…

Doing Business in China (Law Forum)

Essential Advice for Doing Business in China