Investment companies set up by foreign investors are now allowed to enter into more commercial sectors after the newly revised Provisions on the Establishment of Investment Companies by Foreign Investors took effect yesterday.

The revised provisions, issued by the Ministry of Commerce, has only minor changes compared with the one enacted in March this year. The major modification involved is in Article 11.

Under the new article, investment companies of foreign investors can expand their business scope to wholesale, retail and franchise sectors instead of confining them to manufacturing sectors.

"Investment companies of foreign investors are encouraged to step into domestic circulation sector as foreign investors can bring in both capital and state-of-the-art technologies," said Jin Bosheng, a researcher from the Academy of International Trade and Economic Co-operation of the Ministry of Commerce.

Currently, foreign investors, mainly from the United States, European countries, Japan and South Korea have established around 250 investment companies in China.

According to Zhang Yudong, a senior lawyer with Seafront Law Firm, foreign investment companies refer to wholly foreign-owned companies or Sino-foreign joint ventures engaged in direct investment.

"The major difference between investment companies and manufacturing companies is that the former are forbidden to directly take part in production," Zhang told China Daily.

Foreign investors can benefit from setting up investment companies which can in turn be ordinary or controlling shareholders in domestic companies, Zhang said.

This will enable foreign investors to conduct more efficient management of their investments in China.

As investment companies can integrate the advantages of subsidiary companies and enjoy some favourable policies in term of loans, guarantees and taxation, more and more foreign companies are keen to set up investment companies in China.

However, quite a number of foreign companies have had to give up their plans as the threshold for establishing investment companies is still high although the Ministry of Commerce has revised the provisions several times.

According to the latest provisions, the foreign investor who intends to establish an investment company shall meet the following conditions:

It is in good credit status and has the necessary economic strength to establish an investment company, with its total amount of assets during the year before the application no less than US$400 million, and it has established a foreign-invested enterprise inside the territory of China, with the amount of registered capital it has actually contributed being US$10 million or more;

It is in good credit status and has necessary economic strength to establish an investment company, and has established 10 or more foreign-invested companies inside the territory of China;

If it establishes an investment company by means of joint venture, the Chinese investor shall be in good credit status and have necessary economic strength to establish an investment company, with its total amount of assets during the year before the application being no less than 100 million yuan (US$12 million);

The registered capital of an investment company shall be no less than US$30 million. The foreign investor that applies to establish an investment company shall be a foreign company or enterprise or economic organization. If there are two or more foreign investors, there shall be at least one foreign investor holding major stock rights.

"These criteria are still quite critical for us," an foreign investor who declined to be named told China Daily. "To a large extent, only those among top 500 companies in the world can satisfy the provisions."

(China Daily December 24, 2005)