While the Chinese government is opening an increasingly large number of industries to foreign investment, there remain many still closed to foreign companies without a Joint Venture partner. In this instance, the Chinese government encourages local companies to work with foreign partners to gain technology and management expertise, while the foreign companies gain early access to the Chinese market and the ability to secure more or existing market share.
China recognizes two forms of Joint Venture partnerships between foreign and Chinese firms. The first of these is the EJV or Equity Joint Venture with limited liability and in which the foreign partner invests no less than 25% of the registered capital of the new entity. The second type of joint venture is the CJV or Cooperative Joint Venture, which itself has two versions, limited and unlimited liability, where the former does not require a new entity to be formed and where both parties both assume unlimited liability.
Equity Joint Ventures provide a means by which foreign and Chinese companies can collaborate on projects within China with limited liability, where the foreign and Chinese partners contribute to the equity in the venture in alignment with their shareholdings. In this kind of joint venture, the minimum that a foreign investor can contribute is 25% of the equity in the company, which increases depending on the total registered capital investment of the joint venture up to 70% for companies with less than USD 3 million in registered capital. This capital is to be invested within a certain time-frame with failure to invest within the term incurring a penalty. There is no minimum capital requirement for the Chinese partner in the joint venture.
Cooperative Joint Ventures come in two forms, limited and unlimited liability. In a limited liability CJV, the regulations are very similar to that of an EJV above in that the foreign entity will typically provide the majority of the capital whereas the Chinese partner will provide land, structures, and staff within China. The key difference between the EJV and limited liability CJV is that there are no capital minimums placed on the foreign partner, enabling that company to take a minority shareholding in the venture.
The unlimited liability CJV is starkly different from both the EJV and the limited liability CJV. Unlike the former, an unlimited CJV provides a means by which a negotiated partnership can be affected by two partners. In this way, a foreign partner can provide capital or expertise that is not directly tied to equity in the partnership. What this means, is that the partner can take a minority stake in the partnership. Whatsmore, the partners do not need to establish a new entity to represent them; both partners in the joint venture provide funds, assets, and technology directly in line with the articles of the joint venture, including levels of management. As control of the partnership is not dependant on equity stakes, the foreign partner may also recover their investment in the event that the joint venture ends and reverts back to the Chinese partner, so long as those terms are written in the articles at the start of the venture.
There remain many industries that are closed to foreign companies in China, often on the grounds of heritage or national security. For instance, hospitality, chemical, and automotive companies.
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