European exports to China


European exports to China	March 2007

This interview with Amanda Yao a Consultant with Pinsent Masons appeared in Business Money in March 2007. Amanda, there should be more European companies exporting to China? Are European importers into China welcomed? Yes, definitely. The decrease in China’s tariff rates and the appreciation of Chinese Renminbi over the past years are encouraging import. Statistics over the past years shows that both China’s import and export are in stable increase. Mr. Gao Hucheng, deputy minister of the Ministry of Commerce, said on the International Trade Dispute Analysis Conference in April 2006 that China will target to increase its import in the next 5-6 years to keep foreign trade in healthy growth. Chinese official statistics indicate that China’s general tariff rate decreased gradually from 12% to 9.9% from 2002 to 2006. Following the tariffs decrease on 44 items of imported goods, from 1 Jan 2007, China’s average tariff is further reduced to 9.8%, the average tariff rate for agricultural products are 15.2% and 8.95% for industrial products. According to the statistics provided by General Customs of China, China’s total import and export reached USD 1.76069 trillion with USD 177.47 billion trade surpluses in 2006. The total import and export between EU and China reached USD 272.3 billion in 2006 at a growth of 25.3% compared to USD 217.3 billion in 2005. Export from EU to China reached USD 90.32 billion in 2006 at a growth of 22.7% against the amount in 2005. Machineries and electrical equipments and hi-tech products account for 90% of such export. EU is the third biggest trade partner of China followed by US and Japan. How do they ensure that they will be paid? The banks in China have an integrated cross-border payment system in consistence with international practice, for instance, bank collection, remittance and letter of credit (L/C). Some of the payment methods, such as L/C, are quite reliable to ensure that the seller will be paid. How are disputes handled? Chinese companies are becoming more mature in handling disputes. In most cases, usually the parties will try to settle disputes through amicable negotiations and make reasonable compromise. In term of last resort, arbitration is more popular than litigation for settling disputes of international trade. The parties can choose any arbitration institutions (other than an ad hoc arbitration panel) to resolve their disputes. China and most European countries are members of the Convention on the Recognition and Enforcement of Foreign Arbitral Awards, an arbitral award obtained in a member state is enforceable in others. The parties sometimes might choose litigation to resolve their disputes. Unlike arbitration, the parties can only choose a court which has actual nexus to the case in dispute. Moreover, the judgment made by a foreign court may not be enforceable in China if the two countries do not have a treaty or a reciprocal relationship to such effect. How do companies protect their patents and intellectual property in China? The IP law and regulations in China are quite comprehensive and like many other countries there is a registration system. However, enforcement is often a problem and the Chinese Government is taking forward a number of measures to combat piracy. Therefore, developing a self-protection system is very important before companies bring their technologies into China. European investors are encouraged to register their trademarks and patents in China. Meanwhile, it is also advisable that confidentiality clauses shall be put in technology contract or separate confidentiality agreement shall be entered into. Given the fact that machinery and electrical equipments and hi-tech products account for 90% of the total importation from EU last year, European manufacturers are advised to adopt technical know-how to protect their core technologies. However, to our best knowledge, most of the EU companies have developed effective systems to protect their IP rights. Are the UK concepts of freehold and leasehold similar or are there huge cultural and legal differences? If becoming established, how easy is it to buy property and how secure is the title to it? There are huge cultural and legal differences. There is no private ownership of land. China’s version of leasehold is called ‘land use rights’. A land use right is distinct and separate from land ownership. Similar to leasehold, the land use right is a property right enjoyed by private parties and protected by law. It is enforceable. However, compared with leasehold, it has significant restrictions and limitations, such as the city planning requirements and the mandatory limitation on the period of time for land use. In addition, having a land use right does not include the right to use the natural resources, minerals or treasure under the land. Generally, a person may get three types of land use rights from the government: ‘granted’, ‘allocated’ or ‘rented’ land use rights. However, as the Chinese government has been strengthening its land policy since the last few years, the major way to acquire land use right is by way of grant, which means, a person shall buy a land use right from the government. Maximum term of a granted land use right are 40, 50 or 70 years depending on different proposed uses of the land (i.e. for industrial use, the maximum period shall be 50 years). Being a land user (instead of a land owner), a person, however, can own the buildings and structures built on the land. There are county-level land and housing registration departments, normally part of the local administration authorities. Their responsibilities include handling the registration of the land use right and house ownership and issuing what is called ‘certificate for real estate ownership’, or, in some regions two separate certificates called ‘certificate of land use right for state-owned land’ and ‘certificate of house ownership’. Can European banks lend securely against Chinese real property Yes. But the European banks need to pay attention that the mortgage of the property is required to be duly registered with local competent real estate registry where the property locates. The security is only enforceable after due registration. Besides, if the European banks lend in foreign currency to companies established in China, the loan agreements are required to be registered or approved by State Administration of Foreign Exchange or its local competent counterparts. Is there such a thing as a chattel mortgage to secure lending against machineries and other assets? Yes. According to Chapter III of PRC Security Law, chattel mortgage is applicable to secure lending against machinery and other assets. Notably, machineries, raw materials and products mortgage are required by State Administration of Industry and Commerce to be registered with its local counterpart. Transportation devices such as vehicles, vessel and airplanes mortgage are required to be registered with their original registry. The mortgage agreements in respect of these properties are only effective upon registration. However, chattels mortgage in respect of other properties are not subject to registration. Similarly, if a chattel is mortgaged to a foreign institute, such mortgage shall be registered or approved by State Administration of Foreign Exchange or its local competent counterparts. What scope exists for UK and US banks to develop all-asset finance deals in China - does the legal system encompass this medium? Chapter III and Chapter IV of PRC Security Law have set forth the general rules for the mortgage/pledge of real property, chattel assets and interests/rights. Similar to the mortgage of real property and certain chattel assets, there are complicated registration requirements for the mortgage/pledge/charge of certain types of interests/rights. For example, a charge on shareholding interest will need to be registered with State Administration of Industry and Commerce and/or the Stock Exchange (in the case of listed shares) and may need to be approved by Ministry of Commerce (in the case of foreign investment) depending on the nature of the shareholding interest. A charge of proprietary IP rights is subject to registration with the State Intellectual Property Office, the National Copyright Administration or the State Administration of Industry and Commerce responsible for such IP rights. Banks will need to make sure that all the required registrations are duly completed to protect their rights on the secured assets or interests/rights. In the event of company failure, is the liquidation/realisation situation favourable to lenders? In China, a company can be closed in the event of insolvency or dissolution. In either case, liquidation procedures shall be properly followed. Dissolution may be conducted by the company where the company is capable to pay off its debts. Whereas the liquidation procedures for insolvency can only be conducted by the court. The lenders’ interest may be adversely impact if the company goes insolvent. Banks will have priority to the secured assets against other creditors of the company. However, banks may only exercise such priority if the company (i) has made payment under employment including wages, compensation for work injury, allocation to the employees’ pension and medical social insurance funds and other compensation to employees as required by law; (ii) has made allocation to the employees’ other social insurance funds and has paid all the taxation. Furthermore, banks do not take priority over contractors for recovery of the costs and remunerations for construction of the secured real property. Can UK and European companies acquire companies in China? It really depends on the business nature of the targets and how the authority would recognize the possible impact of the transaction on Chinese economy. Industries are divided into 4 catalogues in respect of foreign investment, namely “prohibited”, “restricted”, “permitted” or “encouraged”. Foreign companies are not allowed to acquire a company in China if its business falls within the prohibited category. There may be restrictions on the percentage of the foreign partner’s shareholding interest in the company if its business falls within the restricted category. Catalogue for the Guidance of Foreign Investment Industries (“Investment Catalogue”) provides guideline on prohibited, restricted and encouraged industries. Those not stipulated in the Investment Catalogue shall be regarded as permitted. The Investment Catalogue is subject to amendment by authority from time to time. The latest amendment was in 2004. The Regulations on Merger and Acquisition of Domestic Enterprises by Foreign Investors (the “M&A Rules”) further regulates the requirements and procedures on the acquisition and merger of companies in China by foreign investors. The M&A Rules tightened control on anti-monopoly transactions conducted onshore and offshore. The M&A Rules also emphasizes the importance of state economic security. It requires that if a transaction (1) involves key industries; (2) has or may have impact on state economic safety; or (3) causes a transfer of actual controlling rights of a domestic enterprise which owns well-known trademarks or Chinese traditional brand names, such transaction must be reported to Ministry of Commerce. Ministry of Commerce could deem the transaction invalid either if the relevant parties fail to report the transaction or if they consider the transaction has a material impact on state economic safety. For media enquiries contact : Lakhbir Rakar CM PR Advisor Pinsent Masons Direct Dial +44 (0)121 260 4005 Fax +44 (0)121 626 1040 E-mail lakhbir.rakar@pinsentmasons.com