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2013 Investment Climate Statement - China


2013 Investment Climate Statement
Bureau of Economic and Business Affairs
February 2013
Report
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Openness to, and Restrictions upon, Foreign Investment

China attracted USD 124 billion in foreign direct investment (FDI) in 2011, second only to the United States. China's sustained high economic growth rate and the expansion of its domestic market help explain its attractiveness as an FDI destination. However, foreign investors often temper their optimism regarding potential investment returns with uncertainty about China's willingness to offer a level playing field vis-à-vis domestic competitors. In addition, foreign investors report a range of challenges related to China's current investment climate. These include industrial policies that protect and promote state-owned and other domestic firms, equity caps and other restrictions on foreign ownership in many industries, weak intellectual property rights (IPR) protection, a lack of transparency, corruption, and an unreliable legal system.

China has a legal and regulatory framework that provides the government with discretion to promote investment in specific regions or industries it wishes to develop, and to restrict foreign investment deemed not to be in its national interest or that might compete with state-sanctioned monopolies or other favored domestic firms. Foreign investors report that many regulations contain undefined key terms and standards, and that regulations are often applied in an inconsistent manner by different regulatory entities and localities. Potential investment restrictions in China are thus much broader than those of many developed countries, including the United States.

Investment Policies

The Chinese government has stated that it welcomes foreign investment. In particular, China seeks to promote investment in higher value-added sectors, including high technology research and development, advanced manufacturing, clean energy technology, and select modern services sectors. Export-oriented investments also often receive government support. A major goal of China's investment policies is to encourage the domestic development of technological innovation and know-how. Investment projects that involve the transfer of technology or the potential for "indigenous innovation" tend to be favorably received by China's investment authorities. Foreign investors have said they must often weigh China's market potential and its interest in attracting technology against China's inability or unwillingness to protect investors' intellectual property.

China has indicated that it plans to restrict foreign investment in resource-intensive and highly-polluting industries, citing some kinds of basic manufacturing as an example. In addition, China appears to discourage foreign investments in sectors: 1) where China seeks to develop domestic firms into globally competitive multinational corporations; 2) that have benefited historically from state-sanctioned monopolies or from a legacy of state investment; or 3) deemed key to social stability. It also discourages investments that are intended to profit from currency, real estate, or asset speculation.

China seeks to spread the benefits of foreign investment beyond its relatively wealthy coastal areas by encouraging foreign companies to establish regional headquarters and operations in Central, Western, and Northeastern China. China publishes and regularly revises a Catalogue of Priority Industries for Foreign Investment in the Central-Western Regions, which outlines incentives to attract investment in targeted sectors to those parts of China.

Five-Year Plan

China defines its broad economic goals through five-year macro-economic plans. The most significant of these for foreign investors is China's Five-Year Plan (FYP) on Foreign Capital Utilization. The 12th FYP for Utilization of Overseas Capital and Investment Abroad, issued by the National Development and Reform Commission (NDRC), promises to guide more foreign direct investment (FDI) to an identified set of strategic and newly emerging industries (SEIs), while “strictly” limiting FDI in energy and resource-intensive and environmentally damaging industries; encourage foreign multinationals to set up regional headquarters and research and development (R&D) centers in China; encourage foreign investment in production services such as modern logistics, software development, engineering design, vocational skill training, information consulting, technology, and intellectual property services; “steadily open up” banking, securities, insurance, telecom, fuel, and logistics industries; “gradually open up” education and sports; guide foreign capital to enter healthcare, culture, tourism, and home services; and encourage foreign capital to enter creative design. The plan aims to accelerate the introduction and utilization of international innovation resources and further integrate the Chinese innovation system with the global innovation network so as to promote and strengthen indigenous innovation capacities and the shift in the economic growth model. Support measures include supporting foreign-invested firms to team up with domestic firms or research institutions to apply for national R&D programs and innovation capacity building programs, and for certification of national technology centers; establishing an IPR review system to support R&D; promoting fair competition between foreign and domestic firms; and strengthening IP protection, among other things.

Catalogue for the Guidance of Foreign Investment in Industries

China outlines its specific foreign investment objectives primarily through its Catalogue for the Guidance of Foreign Investment in Industries, most recently revised in December 2011. The catalogue delineates sectors of the economy where foreign investment is "encouraged," "restricted," and "prohibited." Investment in sectors not listed in the catalogue is considered permitted. China "encourages" investment in sectors where it believes it will benefit from foreign assistance or technology. Investment is "restricted" and "prohibited" in sectors that China deems sensitive, that touch on national security, or which do not meet the goals of China's economic development plans. The catalogue also notes many sectors where equity caps limit foreign ownership, often to a minority share, giving Chinese partner-firms significant control and allowing them to benefit from technology transfer.

Problems with the Catalogue

The catalogue reflects China's market access restrictions. Contradictions between the catalogue and other measures have confused investors and added to the perception that investment guidelines do not provide a secure basis for business planning. Even in “encouraged” and “permitted” sectors, regulations apart from the catalogue often detail additional restrictions on the specific forms of investment that are allowed. Chinese regulators have maintained the flexibility to ignore the catalogue’s guidance in some instances, and to restrict or approve foreign investment for reasons other than those specified. The government may also adopt new regulations or establish industrial policies that supersede the most recently published edition of the catalogue. Uncertainty as to which industries are being promoted and how long such designations will be valid undermines confidence in the stability and predictability of the investment climate.

China’s Foreign Investment Approval Regime

According to the Interim Measures for the Administration of Examining and Approving Foreign Investment Projects, issued in October 2004 and still in effect, all proposed foreign investment projects in China must be submitted for “verification” and approval to the National Development and Reform Commission (NDRC) or to provincial or local Development and Reform Commissions, depending on the sector and value of the investment. The (For-Comment Draft) Measures for the Administration of Verification of Foreign Investment Projects, issued by NDRC in August 2012, would codify the easing of foreign investment “verification” criteria so that only investments of above $300 million in the “encouraged” and “permitted” categories (up from a previous threshold of $100 million), and above $50 million in the “restricted” category, would be subject to NDRC “verification.” The new draft measures also add “security review” as one item for review and would require, when necessary, solicitation of public opinion if a project could have an adverse effect on the public interest. NDRC's approval process includes assessing the project's compliance with China's laws and regulations, its national security implications, and its economic development ramifications. In some cases, NDRC also solicits the opinions of relevant Chinese industrial regulators and "consulting agencies," which may include industry associations that represent domestic firms. The State Council may also weigh in for high-value projects in "restricted" sectors.

Once NDRC approves a project, investors apply to the Ministry of Commerce (MOFCOM) for approval to legally establish a company. MOFCOM (or, depending on the sector and value of the investment, the provincial or local Department of Commerce) is responsible for three types of review: 1) a general review of all proposed foreign investment in China (including both greenfield investment projects, as well as mergers and acquisitions); 2) an anti-monopoly review of certain proposed mergers and acquisitions; and 3) a security review of certain proposed mergers and acquisitions. Foreign investors next apply for a business license from the State Administration of Industry and Commerce (SAIC), which allows the firm to operate. Once a license is obtained, the investor registers with China's tax and foreign exchange agencies. Greenfield investment projects must also seek approval from China's Environmental Protection Ministry and its Ministry of Land Resources.

The actual implementation of China’s foreign investment approvals process may vary in specific cases, depending on the details of a particular investment proposal and local rules and practices.

Mergers and Acquisitions and the Anti-Monopoly Law

MOFCOM's Anti-Monopoly Bureau reviews mergers and acquisitions (M&A) above a certain threshold and meeting certain criteria specified in China's Anti-Monopoly Law (AML). While the AML calls for evaluation of the merger's effect on competition, it also allows antitrust regulators to consider factors beyond consumer welfare, such as national security and other issues deemed relevant to national economic development. The AML states that China will protect the "lawful activities" of state-regulated monopolies and state-owned enterprises (SOEs).

As of the end of September 2012, MOFCOM‘s Anti-Monopoly Bureau accepted 562 cases and has completed 510, among which 487 (95 percent) were unconditionally approved while 15 transactions were approved with conditions. Twelve of the M&A cases approved with conditions involved offshore transactions between foreign parties. As of September 2012, MOFCOM's Anti-Monopoly Bureau had dealt with three American acquisitions of Chinese companies, rejecting one and approving the others.

Problems with China's Foreign Investment Approval Regime and the Anti-Monopoly Law

All proposed foreign investments in China are evaluated on a case-by-case basis, allowing significant discretion on the part of Chinese regulators to impose unexplained restrictions on new investment projects and to take into account the interests of domestic competitors. This ad hoc system diminishes the transparency of China's investment regulations and adds to investor uncertainty. Although the law does not expressly state that joint ventures fall under its scope, MOFCOM requires joint ventures to submit notification under the AML. AML implementation also suffers from lengthy review timelines and a lack of decision-making transparency. MOFCOM decisions to block or conditionally clear proposed M&A transactions are the only administrative decisions required to be publicized. In Fall 2012, MOFCOM released a list of 458 M&A cases unconditionally approved during the period August 2008 to the end of September 2012.

Merger & Acquisition Security Review

In February 2011, China released the State Council Notice Regarding the Establishment of a Security Review Mechanism for Foreign Investors Acquiring Domestic Enterprises. The notice established an interagency Joint Conference, led by NDRC and MOFCOM, with the authority to block foreign mergers and acquisitions of domestic firms that it believes may have an impact on national security. The Joint Conference is instructed to consider not just national defense security but also national economic security and basic social order implications when reviewing transactions. Some provincial and municipal departments of commerce have posted on the Internet a Security Review Industry Table that lists industries not related to defense, which are potentially subject to this review mechanism; however, MOFCOM has declined to confirm that this list reflects official Chinese policy.

Investment Restrictions in "Vital Industries and Key Fields"

The December 2006 Guiding Opinions Concerning the Advancement of Adjustments of State Capital and the Restructuring of State-Owned Enterprises called on China to consolidate and develop its state-owned economy, including enhancing its control and influence in "vital industries and key fields relating to national security and national economic lifelines." The document defined "vital industries and key fields" as "industries concerning national security, major infrastructure and important mineral resources, industries that provide essential public goods and services, and key enterprises in pillar industries and high-tech industries."

At the time the document was published, the Chairman of the State-owned Assets Supervision and Administration Commission (SASAC) listed industries in which the state should maintain "absolute control" (aviation, coal, defense, electric power and the state grid, oil, and petrochemicals, shipping, and telecommunications) and "relative control" (automotive, chemical, construction, exploration and design, electronic information, equipment manufacturing, iron and steel, nonferrous metal, and science and technology). China maintains that these lists do not reflect its official policy. In some cases, more than fifty percent ownership in some of these industries has been permitted on a case-by-case basis, especially if a particular expertise or technology is deemed important at the time.

China's State Assets Law is intended to safeguard China's economic system, promote the "socialist market economy," fortify and develop the state-owned economy, and enable SOEs to play a leading role in China's economy, especially in "vital industries and key fields." The law requires China to adopt policies to encourage SOE concentration and dominance in industries vital to national security and "national economic security."

Additional Laws Related to Foreign Investment

China's State Secrets Law gives the government broad authority to classify information as a “state secret,” creating uncertainty and potential risk for investors negotiating with SOEs or operating in sensitive sectors. The Contract Law encourages contractual compliance by providing legal recourse for a breach of contract, although enforcement of judgments continues to be a problem. Additional investment-related laws include, but are not limited to: the Administrative Permissions Law; the Arbitration Law; the Corporate Income Tax Law; the Enterprise Bankruptcy Law; the Foreign Trade Law; the Government Procurement Law; the Insurance Law; the Labor Contract Law; the Law on Import and Export of Goods; and the Securities Law.

Rankings

The following table lists China's most recent rankings by organizations that monitor economies' economic freedom, business regulations, and perceived level of corruption.

Indicator

Year

Score

Rank

Transparency International Corruption Perceptions Index

2011

3.6/10

75/183

Heritage Foundation and Wall Street Journal Index of Economic Freedom

2011

52/100

135/183

World Bank Ease of Doing Business Index

2012

N/A

91/183

Conversion and Transfer Policies

Foreign-invested enterprises in China do not need pre-approval to open foreign exchange accounts and are allowed to retain income as foreign exchange or convert it into renminbi without quota requirements. Foreign exchange transactions on China's capital account no longer require a case-by-case review by the State Administration of Foreign Exchange (SAFE). Instead, designated foreign exchange banks review and directly conduct foreign exchange settlements.

The Chinese government registers all commercial foreign debt and limits foreign firms' accumulated medium and long-term debt from abroad to the difference between total investment and registered capital. Foreign firms must report their foreign exchange balance once per year.

Expropriation and Compensation

Chinese law prohibits nationalization of foreign-invested enterprises except under "special" circumstances. Chinese officials have said these circumstances include national security and obstacles to large civil engineering projects, but the law does not define the term. Chinese law requires compensation of expropriated foreign investments but does not describe the formula to be used in calculating the amount. The Department of State is not aware of any cases since 1979 in which China has expropriated a U.S. investment, although the Department has notified Congress of several cases of concern.

Dispute Settlement

Chinese officials typically urge firms to resolve disputes through informal conciliation. If formal mediation is necessary, Chinese parties and the authorities typically promote arbitration over litigation. Many contracts prescribe arbitration by the China International Economic and Trade Arbitration Commission (CIETAC). Some foreign parties have obtained favorable rulings from CIETAC, while others question CIETAC's procedures and effectiveness. Other arbitration commissions exist and are usually affiliated with the government at the provincial or municipal level. For contracts involving at least one foreign party, offshore arbitration may be adopted. Arbitration awards are not always enforced by Chinese local courts. Investors may appeal to higher courts in such cases.

Formal commercial disputes between investors are heard in economic courts. In practice, China's court system is not independent of the government, and the government often intervenes in disputes. Corruption may also influence local court decisions and local officials may disregard the judgments of domestic courts. China's legal system rarely enforces foreign court judgments.

Reports of business disputes involving violence, death threats, hostage-taking and travel bans involving Americans continue to increase, although American citizens and foreigners in general do not appear to be more likely than Chinese nationals to be subject to this treatment. Police are often reluctant to intervene in what they consider to be internal contract disputes.

Investor-state disputes leading to arbitration are rare in China. China has never lost an arbitration case resulting from an investment dispute. China is a member of the International Center for the Settlement of Investment Disputes (ICSID) and has ratified the United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the New York Convention).

Performance Requirements and Incentives

China has committed to eliminate export performance, trade and foreign exchange balancing, and local content requirements in most sectors. China has also committed to enforce only technology transfer rules that do not violate World Trade Organization (WTO) standards on intellectual property and trade-related investment measures.

In practice, however, local officials and some regulators prefer investments that develop favored industries and support the local job market. Provincial and municipal governments often restrict access to their local markets, government procurement, and public works projects even to firms that have invested in the province or municipality. In addition, Chinese regulators have reportedly pressured foreign firms in some sectors to disclose intellectual property content or license it to competitors, sometimes at below market rates.

Many localities – including special economic zones, development zones and science parks – court foreign investors with packages of reduced income taxes, resource and land use fees, and import/export duties, as well as priority treatment in obtaining basic infrastructure services, streamlined government approvals, and funding support for start-ups. These packages may also stipulate export, local content, technology transfer, or other requirements.

Right to Private Ownership and Establishment

In China, all commercial enterprises require a license from the government. There is no broad right to establish a business. Disposition of an enterprise is also tightly regulated.

The Administrative Permissions Law requires reviews of proposed investments for conformity with Chinese laws and regulations and is the legal basis for China's complex approval system for foreign investment.

Protection of Property Rights

The Chinese legal system mediates acquisition and disposition of property. Chinese courts have an inconsistent record in protecting the legal rights of foreigners.

Tangible Property Rights

All land in China is owned by the state. Individuals and firms, including foreigners, can own and transfer long-term leases for land, structures, and personal property, subject to many restrictions. China's Property Law stipulates that residential property rights will be automatically renewed while commercial and industrial grants shall be renewed absent a conflicting public interest. A number of foreign investors have seen their land-use rights revoked as neighborhoods are slated by the government for development. Investors report compensation in these cases has been nominal.

China's Securities Law defines debtor and guarantor rights and allows mortgages of certain types of property and other tangible assets, including long-term leases as described above. Foreigners can buy non-performing debt through state-owned asset management firms, but bureaucratic hurdles limit their ability to liquidate assets.

Intellectual Property Rights

China acceded to the World Intellectual Property Organization (WIPO) Copyright Treaty and the WIPO Performances and Phonograms Treaty in 2007. China is also a member of the Paris Convention for the Protection of Industrial Property, the Berne Convention for the Protection of Literary and Artistic Works, the Madrid Trademark Convention, the Universal Copyright Convention, and the Geneva Phonograms Convention, among other conventions.

China has updated many of its laws and regulations to comply with the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS). However, there are still aspects of China’s IPR regime that the United States believes fall short of international best practices, and, if improved, would provide greater protection to intellectual property. Industry associations representing software, entertainment, consumer goods, and others continue to report high levels of IPR infringement in China. Trademark and copyright violations are widespread, and U.S. companies and industry associations report increasing concerns related to patent infringement, and bad faith trademark registration as well. A recent increase in cases involving the theft of trade secrets in China, as well as cases of trade secret theft that occur outside China for the benefit of Chinese entities, also demonstrate that there is a systemic lack of effective protection and enforcement of IPR. During its "Special IPR Campaign" from October 2010 through June 2011, China emphasized criminal prosecutions against IPR violations, particularly in the copyright area. In general, however, criminal penalties for infringement are not applied on a frequent and consistent enough basis to significantly deter ongoing infringement. Furthermore, administrative sanctions are typically non-transparent and are so weak as to also lack a deterrent effect. Because of relatively low damage awards, civil litigation against IPR infringements continues to be of limited effect.

Significant regional differences exist in IPR infringement and enforcement, with some areas showing higher levels of IPR protection and enforcement, while there are reports of others offering safe harbors to local trademark counterfeiters and copyright pirates. While many Chinese officials are increasing enforcement efforts, infringement generally continues to outpace enforcement. Lack of coordination among various government agencies also continues to hamper many enforcement efforts. Although China announced the creation in November 2011 of a permanent, State-Council-led IPR enforcement office to coordinate intellectual property protection at the national level, with corresponding organizations serving this role in provinces and municipalities, the United States continues to encourage the further implementation of systemic enhancements to the protection and enforcement of IPR in order to significantly reduce levels of IPR-infringement in China.

Transparency of the Regulatory System

China's legal and regulatory system is complex and generally lacks consistent enforcement. Foreign investors rank inconsistent and arbitrary regulatory enforcement and lack of transparency among the major problems they face in China's market.

The State Council's Legislative Affairs Office (SCLAO) has issued instructions to Chinese agencies to publish all foreign trade and investment related laws, regulations, rules, and policy measures in the MOFCOM Gazette, in accordance with China's WTO accession commitment. In addition, it has also issued notices to require its own departments and other central government agencies to post proposed economic-related regulatory policies on the official SCLAO website for public comment. Although SCLAO posts many proposed regulations and draft rules on its website for public comment, often for no less than 30 days, many central government ministries and agencies still only post a limited number of draft trade and economic-related departmental rules on their own ministry websites for public comment. Comment periods can be extremely brief, and the impact of public comments on final regulations is not clear.

Moreover, there are an increasing number of regulatory policies for which public comment is not sought before they are finalized. Foreign investors report that Chinese regulators at times rely on unpublished internal guidelines that nonetheless affect their businesses.

State actions motivated by a perceived need to protect social stability or achieve other political goals can affect foreign investors. Access to foreign online resources, including news, cloud-based business services, and virtual private networks (VPNs), is often and increasingly restricted without official acknowledgement or explanation. Foreign-invested companies have also reported threats of retaliation by the government for actions taken by the U.S. and other foreign governments at the WTO and in regards to outward Chinese investment.

Efficient Capital Markets and Portfolio Investment

Bank loans continue to provide the majority of credit in China, although other sources of capital, such as corporate bonds, trust loans, equity financing, and private equity financing are expanding their scope, reach and sophistication. Regulators use administrative methods, such as reserve requirements, lending quotas, and loan-to-deposit ratios, to control credit growth.

The People's Bank of China (PBOC), China's central bank, allowed some flexibility in mid-2012 for banks to set deposit and lending rights. This has squeezed the net interest margin of banks (i.e., the gap between deposit and lending rates), which has cut into the profits of China’s banking sector. Favored borrowers, particularly SOEs, benefit from greater access to capital and lower financing costs, as lenders perceive these entities to have an implicit government guarantee and hence lower risk profiles. Small- and medium-sized enterprises (SMEs), by contrast, experience the most difficulty obtaining bank financing, instead financing investments through retained earnings or informal channels, including other Chinese firms or private lenders. The Chinese government has expressed concerns over the potential risks that China’s “shadow banking” poses to the financial sector and has implemented pilot programs, for example in Wenzhou city, to encourage private capital to move into official channels that can be monitored and regulated.

Non-bank financing has expanded over the last few years, including through public listing of stock, either inside or outside of China, and more firms are issuing debt. Most foreign portfolio investment in Chinese companies occurs on foreign exchanges, primarily in New York and Hong Kong. In addition, China has significantly expanded quotas for certain foreign institutional investors to invest in domestic stock markets. Direct portfolio investment by private equity and venture capital firms is also rising rapidly, although from a small base.

Competition from State-Owned Enterprises

China's leading SOEs benefit from preferential government policies and practices aimed at developing bigger and stronger national champions. SOEs enjoy administrative monopolies over the most essential economic inputs (land, hydrocarbons, finance, telecoms, electricity) and considerable power in the markets for others (steel, minerals). SOEs have long enjoyed preferential access to credit. According to some Chinese academics, provincial governments have used their power to manipulate industrial policies to deny operating licenses in order to persuade reluctant owners to sell out to bigger state-owned suitors.

China has two sovereign wealth funds: The China Investment Corporation (CIC) and SAFE. CIC is overseen by a board of directors and a board of supervisors. SAFE is a government agency that reports directly to the PBOC. The SAFE Administrator serves concurrently as a PBOC Vice Governor. CIC and SAFE invest a very limited amount of their funds domestically. The funds are required neither to submit their books to independent audit nor to publish annual reports, although CIC issued its first annual report in 2009.

Corporate Social Responsibility

Corporate social responsibility (CSR), or what is increasingly known as sustainability, is a relatively new concept for domestic companies in China and is less widely accepted there than in the United States. Investors looking to partner with Chinese companies or expand operations with Chinese suppliers face challenges ensuring domestic firms meet internationally recognized, voluntary industry standards in such areas as labor, the environment, and good manufacturing practices. China's 12th Five-Year Plan highlights sustainability issues as a means to draw attention to the subject. Foreign-invested enterprises tend to follow generally accepted CSR principles, and most report annually on their CSR policies and achievements.

Political Violence

The risk of political violence directed at foreign companies operating in China remains small. Some violent but unconnected protests have occurred in all parts of China, but such mass incidents generally involved local residents protesting corrupt officials, environmental and food safety concerns, confiscated property, and wage disputes. In the fall of 2012, against a backdrop of rising tensions between China and Japan over territorial issues, some businesses owned or perceived to be owned by Japanese in multiple Chinese cities faced Chinese protests. Economic activity between China and Japan suffered as a result, but has since shown signs of recovery.

Corruption

Corruption remains endemic in China. Sectors requiring extensive government approval are the most affected, including banking, finance, and construction. The lack of an independent press, as well as the fact that all bodies responsible for conducting corruption investigations, are controlled by the Communist Party hamper anti-corruption efforts. Senior officials and family members are suspected of using connections to avoid investigation or prosecution for alleged misdeeds.

According to Chinese law, accepting a bribe is a criminal offense with a maximum punishment of life in prison or death in "especially serious" circumstances. The maximum punishment for offering a bribe to a Chinese official is five years in prison, except when there are "serious" or "especially serious" circumstances, when punishment can range from five years to life in prison. A February 2011 amendment to the Criminal Law made offering large bribes to foreign officials or officials of international organizations a punishable offense, although there has yet to be a prosecution.

The Supreme People's Procuratorate and the Ministry of Public Security investigate criminal violations of laws related to anti-corruption, while the Ministry of Supervision and the Communist Party Discipline Inspection Committee enforce ethics guidelines and party discipline. China's National Audit Office also inspects accounts of state-owned enterprises and government entities.

China ratified the United Nations Convention against Corruption in 2005 and participates in Asia-Pacific Economic Cooperation (APEC) and Organization for Economic Cooperation and Development (OECD) anti-corruption initiatives. China has not signed the OECD Convention on Combating Bribery.

Bilateral Investment Agreements

China has bilateral investment agreements with over 100 countries and economies, including Austria, the Belgium-Luxembourg Economic Union, Canada, France, Germany, Italy, Japan, South Korea, Spain, Thailand, and the United Kingdom. China's bilateral investment agreements cover expropriation, arbitration, most-favored-nation treatment, and repatriation of investment proceeds. They are generally regarded as weaker than the investment treaties the United States seeks to negotiate.

The United States and China concluded a bilateral taxation treaty in 1984. In the fall of 2012, the United States resumed negotiation of a bilateral investment treaty.

OPIC and Other Investment Insurance Programs

The United States suspended Overseas Private Investment Corporation (OPIC) programs in the aftermath of China's crackdown on Tiananmen Square demonstrators in June 1989. OPIC honors outstanding political risk insurance contracts. The Multilateral Investment Guarantee Agency, an organization affiliated with the World Bank, provides political risk insurance for investors in China. Some foreign commercial insurance companies also offer political risk insurance, as does the People's Insurance Company of China.

Labor

Human resource issues remain a major concern for American companies operating in China. Difficulties in hiring appropriately skilled labor, navigating many new and often ill-defined labor and social safety net laws, restrictions on the mobility of workers, and the lack of independent trade unions combine to create a challenging environment for foreign-invested enterprises.

Independent trade unions are illegal in China. Officially sanctioned trade unions must affiliate with the All-China Federation of Trade Unions (ACFTU), which is an arm of the Communist Party. It is illegal for employers to oppose efforts to establish ACFTU unions. While worker protests and work stoppages occur regularly, the right to strike is not protected by law.

China has not ratified core International Labor Organization conventions on freedom of association and collective bargaining, but has ratified conventions prohibiting child labor and employment discrimination. Apart from a lack of freedom of association and the right to strike, Chinese labor laws generally meet international labor standards. However, enforcement of existing labor regulations is inconsistent and poor.

Foreign Trade Zones/Free Trade Zones

China's principal bonded areas include Shanghai, Tianjin, Shantou, three districts within Shenzhen (Futian, Yantian and Shatoujiao), Guangzhou, Dalian, Xiamen, Ningbo, Zhuhai, and Fuzhou. Besides these official duty-free zones identified by China's State Council, numerous economic development zones and open cities offer similar privileges and benefits to foreign investors.

Foreign Direct Investment Statistics

Data Limitations

Investment from and to some economies, including but not limited to the British Virgin Islands, the Cayman Islands, Hong Kong, and Macau, may mask the ultimate source/destination of the investment. Some analysts have noted that investment from and to Taiwan may be underreported.

Chinese FDI data do not include much of the high dollar-value minority equity stakes that American financial services firms have taken in major Chinese lenders. In addition, China does not classify reinvested locally-generated profits as new investment.

FDI as a Percentage of Gross Domestic Product

According to the United Nations Conference on Trade and Development, China's FDI stock equaled 16 percent of its gross domestic product (GDP) in 2011; China's FDI inflows equaled 2 percent of GDP.

Foreign Direct Investment Flows for 2011 (Top 10 Sources of Origin)

Country/Economy of Origin

Millions of U.S. Dollars

Hong Kong

70,500

British Virgin Islands

9,725

Japan

6,330

Singapore

6,097

South Korea

2,551

United States

2,369

Cayman Islands

2,242

Taiwan

2,183

Samoa

2,076

Mauritius

1,139

Source: China Commerce Yearbook 2012

Cumulative* Foreign Direct Investment for 2011 by Selected Source of Origin

Country/Economy of Origin

Millions of U.S. Dollars

Hong Kong

788,396

British Virgin Islands

121,571

Japan

79,895

United States

67,592

Taiwan

54,199

South Korea

49,854

Singapore

52,956

Cayman Islands

23,830

Germany

18,311

United Kingdom

17,666

Source: China Commerce Yearbook 2012

*Cumulative values are totals of the data collected each year, are not adjusted for inflation, and do not account for divestment.

Flow of Outbound Direct Investment for 2011 (Top 10 Destinations)

Destination

Millions of U.S. Dollars

Hong Kong

35,654

British Virgin Islands

6,208

Cayman Islands

4,936

France

3,482

Singapore

3,269

Australia

3,165

United States

1,811

UK

1,420

Luxembourg

1,265

Sudan

912

Source: China Commerce Yearbook 2012

Stock of Outbound Direct Investment for 2011 (Top 10 Destinations)

Destination

Millions of U.S. Dollars

Hong Kong

261,519

British Virgin Islands

29,261

Cayman Islands

21,692

Australia

11,041

Singapore

10,602

United States

8,993

Luxembourg

7,082

South Africa

4,060

Russia

3,764

Canada

3,728

Source: China Commerce Yearbook 2012

Web Resources

Chinese Government:

United States Government:

2012 Non-Governmental Reports on China’s Investment Climate:



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