Multinational corporations (MNCs) are moving to restructure their business in China into holding companies given new relaxed rules on investment and the country's rising position in their global strategy, an authoritative report stated.

The report, released by the Chinese Academy of International Trade and Economic Cooperation under the Ministry of Commerce, said multinationals will centralize management to enhance their competitiveness in the large market.

Previous government rules on foreign investment forced MNCs to set up separate legal entities with every investment, said Wang Zhile, author of the report.

The need to form joint ventures with different partners at different locations, limitations on business scope approvals and local registration requirements have caused MNCs to have sizable management teams in finance, sales and human resources, Wang said.

In certain cases, some MNCs have over 50 separate legal entities in China.

With their investment in China increasing, more MNCs plan to restructure their fragmented management system by setting up a holding company, Wang said.

Unlike other manufacturing and trading foreign companies, which are limited to conducting business where they are registered, holding companies are permitted to invest in projects all over China.

"The latest government policy also supports these MNCs moves," Wang said.

China allowed the establishment of foreign holding companies in 1995 but numerous limitations made the corporate structure impractical.

The situation changed after China implemented its promises to the World Trade Organization in 2003, Wang said.

Holding companies are now able to conduct domestic and international trading by selling products manufactured by its affiliates and by providing after-sale services.

Holding companies are also permitted to provide inter-company financial services.

A regulation issued by the Ministry of Commerce last June allows holding companies to take part in a broader range of industries.

Japan's Matsushita has begun the move to transform Matsushita Electric (China) from a support firm for Matsushita China businesses to a holding company.

The company will assume control of Matsushita's shares in its 50 subsidiaries and factories in China, which previously belonged to different departments of the Japanese parent company.

Besides the policy incentives, China's rising position in MNCs' global strategy highlights the need for improved local management, Wang said.

MNCs are changing their assessment on China from a world factory to a world market, Wang said.

"Besides having investments in China to produce for exports, they find China is actually emerging as a large consumer market," he added.

To support the change, MNCs are setting up research and development centers and service departments especially for the market, Wang said.

The change also requires stronger local management by setting up a holding company, Wang said.

The separate ventures in China are usually managed by different departments of the overseas parent company, which often results in slow response to market change.

Samsung Group, which has strong centralized management in China, topped the MNCs in China in terms of revenue by US$10.5 billion, according to Wang.

(China Daily April 8, 2004)