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Australia’s direct investment in China has mainly been concentrated on China’s eastern coastal areas, such as in the Pearl River Delta. However the level of competition and the expense of doing business in these developed areas, even in China terms, is becoming prohibitive. For that reason, foreign business investors are looking inland.

A number of Australian industry sectors, especially in services such as urban town planning, architecture, ICT, waste water management, transportation management and tourism management, are looking at opportunities to engage in the development of new special territories. But in so doing they are moving away from areas which have relatively sound and well-understood regulatory environments.

Professional assistance to understand the matrix of risks and opportunities in the new special territories, and to effectively manage the challenges presented, is critical.

Where to invest your time and money?                    

The Chinese Government’s geographical focus on foreign trade and investment promotion has undergone significant change in the past two decades. Following the impressive economic boom in the Pearl River Delta in the 1980s, and in the Yangtze River Delta in the 1990s, China’s leadership has been attempting to identify new areas to continue to sustain the inflow of foreign capital and technology into the country.

One recent example is the Tianjin Binhai region in north China, where the central government has offered a series of financing and policy incentives to support development. Boosted by Ministry of Finance grants of RMB 1 billion (approx. AUD 160 million) in specific subsidies over five years, fixed asset investment in the Binhai region in 2006 has now reached RMB 86.4 billion (approx. AUD 13.9 billion). Notable amongst the foreign investment projects attracted to Binhai is the Airbus A320 general assembly line, with a total investment amount of EUR 7 billion.

The special economic privileges given to the Tianjin Binhai region and the apparent success of this strategy have compelled other Chinese cities to follow. The latest areas to qualify for special support from the central government are Chongqing and Chengdu.

First Tianjin Binhai, now Chongqing and Chengdu             

At the annual plenary meeting of the National People’s Congress (China’s top legislature) in Beijing in March 2007, Premier Wen Jiabao announced the central government’s intention to identify other spots to qualify for incentives like those enjoyed by Tianjin Binhai. In response to this, legislative representatives from Chongqing Municipality, Sichuan Province, Hubei Province, Hunan Province, Liaoning Province, Guangdong Province, Hainan Province and Guangxi Autonomous Region all initiated lobbying activities for the central government’s preferential consideration of their regions.

On 7 June, China’s top macroeconomic planning administration authority, the National Development and Reform Commission (NDRC), released the Circular on the Approval of Chongqing and Chengdu to Set Up Model Areas for the Comprehensive Reforms between Rural and Urban Areas (the Circular).

As a result, Chongqing and Chengdu now stand out as China’s favoured areas for new investment.

Chongqing and Chengdu have already excited Australian trade interest             

Chongqing is a southwest Chinese metropolis on the Yangtze River. It is one of the four Chinese municipalities directly governed by the central government, and has a population of around 28 million people. In recent years, it has progressed to become a major financial and commercial centre in the west China region. International banks and insurance institutions such as Standard Chartered, HSBC and ING have established operations in Chongqing. In 2005, Chongqing successfully held the Asia Pacific Cities Summit, and signed a comprehensive sister city cooperation agreement with Brisbane.

Chengdu, the capital city of China’s populous Sichuan Province, is a booming southwest metropolis which has received considerable amounts of foreign investment in recent times. It is also one of the few western cities in China in which Austrade has established a branch office.

Liberalisation of rules for investment                

As well as the availability of subsidy programs, the model areas set up by the Circular are given significant regulatory freedoms to assist their development. In basic terms, foreign investment projects in special territories do not face the same central government approval processes as in other places, and the local governments in the special territories are given more regulatory freedom in dealing with foreign investors. These freedoms extend to more autonomous exercise of discretion for land use; simplification of foreign exchange trading; and substantially favourable financing incentives and taxes.

Important legal and regulatory questions for investors               

The new special territories sound like appealing places to invest, however important legal and regulatory issues must be addressed by investors. For example:

  • To what extent do the local government agencies have discretion to deal with proposed foreign investment projects, where regulatory approval previously resided with the central government?
  • Have the specific measures of the local government agencies implementing the Circular been properly promulgated?
  • How can the new rules developed by local governments be reconciled with those of central government agencies as well as other counterpart government agencies in China?

In an economy where governments still play a pivotal role in any foreign-related business dealings, proper attention and management of those legal and regulatory issues is absolutely critical.

A joint venture dispute in one of the new special territories, between a local company and a US-based beverage giant, presently features heavily in international media. Its resolution will touch upon the rules and practices of the special territory concerned, and how those rules and practices conform to other Chinese laws.

Strategically located in Australia’s national capital, Moulis Legal has developed an extensive business network in China. We actively monitor the latest legal and commercial issues that affect our clients and contacts. By way of carefully selecting and closely working with competent local PRC professional service providers, we are able to offer our clients the ideal combination of Australian professionalism and legal service standards, with real and up-to-date China knowledge, connections and on-the-ground resources, in an efficient and cost-effective way.

This memo presents an overview and commentary of the subject matter. It is not provided in the context of a solicitor-client relationship and no duty of care is assumed or accepted. It does not constitute legal advice.

© Moulis Legal 2007