China

Executive Summary

The People’s Republic of China (PRC) is the top global Foreign Direct Investment (FDI) destination after the United States due to its large consumer base and integrated supply chains.  In 2019, China made some modest openings in the financial sector and passed key pieces of legislation, including a new Foreign Investment Law (FIL).  China remains, however, a relatively restrictive investment environment for foreign investors due to restrictions in key economic sectors.  Obstacles to investment include ownership caps and requirements to form joint venture partnerships with local Chinese firms, industrial policies such as Made in China 2025 (MIC 2025), as well as pressures on U.S. firms to transfer technology as a prerequisite to gaining market access.  These restrictions shield Chinese enterprises – especially state-owned enterprises (SOEs) and other enterprises deemed “national champions” – from competition with foreign companies.

The Chinese Communist Party (CCP) in 2019 marked the 70th anniversary of its rule, amidst a wave of Hong Kong protests and international concerns regarding forced labor camps in Xinjiang.  Since the CCP 19th Party Congress in 2017, CCP leadership has underscored Chairman Xi Jinping’s leadership and expanded the role of the party in all facets of Chinese life:  cultural, social, military, and economic.  An increasingly assertive CCP has caused concern among the foreign business community about the ability of future foreign investors to make decisions based on commercial and profit considerations, rather than CCP political dictates.

Key investment announcements and new developments in 2019 included:

  • On March 17, 2019, the National People’s Congress passed the new FIL that effectively replaced previous laws governing foreign investment.
  • On June 30, 2019, the National Development and Reform Commission (NDRC) and Ministry of Commerce (MOFCOM) jointly announced the release of China’s three “lists” to guide FDI.  Two “negative lists” identify the industries and economic sectors from which foreign investment is restricted or prohibited based on location, and the third list identifies sectors in which foreign investments are encouraged.  In 2019, some substantial openings were made in China’s financial services sector.
  • The State Council also approved the Regulation on Optimizing the Business Environment and Opinions on Further Improving the Utilization of Foreign Investment, which were intended to assuage foreign investors’ mounting concerns with the pace of economic reforms.

While Chinese pronouncements of greater market access and fair treatment of foreign investment are welcome, details and effective implementation are needed to improve the investment environment and restore investors’ confidence.  As China’s economic growth continues to slow, officially declining to 6.1% in 2019 – the slowest growth rate in nearly three decades – the CCP will need to deepen its economic reforms and implementation.  Moreover, the emergence of the Coronavirus (COVID-19) pandemic in Wuhan, China in December 2019, will place further strain on China’s economic growth and global supply chains.

Table 1: Key Metrics and Rankings
Measure Year Index/Rank Website Address
Transparency International’s Corruption Perceptions Index 2019 137 of 180 http://www.transparency.org/
research/cpi/overview
World Bank’s Doing Business Report 2019 31 of 190 http://www.doingbusiness.org/
en/rankings
Global Innovation Index 2019 14 of 126 https://www.globalinnovationindex.org/
analysis-indicator
U.S. FDI in partner country ($M USD, stock positions) 2018 USD116,518 https://apps.bea.gov/international/
factsheet/
World Bank GNI per capita 2018 USD9,460 http://data.worldbank.org/indicator/
NY.GNP.PCAP.CD

3. Legal Regime

Transparency of the Regulatory System

One of China’s WTO accession commitments was to establish an official journal dedicated to the publication of laws, regulations, and other measures pertaining to or affecting trade in goods, services, trade related aspects of intellectual property rights (TRIPS), and the control of foreign exchange.  Despite mandatory 30-day public comment periods, Chinese ministries continue to post only some draft administrative regulations and departmental rules online, often with a public comment period of less than 30 days.  U.S. businesses operating in China consistently cite arbitrary legal enforcement and the lack of regulatory transparency among the top challenges of doing business in China.  Government agencies often do not make available for public comment and proceed to publish “normative documents” (opinions, circulars, notices, etc.) or other quasi-legal measures to address situations where there is no explicit law or administrative regulation in place.  When Chinese officials claim an assessment or study was made for a law, the methodology of the study and the results are not made available to the public.  As a result, foreign investors face a regulatory system rife with inconsistencies.

In China’s state-dominated economic system, the relationships are often blurred between the CCP, the Chinese government, Chinese business (state- and private-owned), and other Chinese stakeholders.  Foreign-invested enterprises (FIEs) perceive that China prioritizes political goals, industrial policies, and a desire to protect social stability at the expense of foreign investors, fairness, and the rule of law.  The World Bank Global Indicators of Regulatory Governance gave China a composite score of 1.75 out 5 points, attributing China’s relatively low score to the futility of foreign companies appealing administrative authorities’ decisions to the domestic court system; not having easily accessible and updated laws and regulations; the lack of impact assessments conducted prior to issuing new laws; and other concerns about transparency.

For accounting standards, Chinese companies use the Chinese Accounting Standards for Business Enterprises (ASBE) for all financial reporting within mainland China.  Companies listed overseas or in Hong Kong may choose to use ASBE, the International Financial Reporting Standards, or Hong Kong Financial Reporting Standards.

International Regulatory Considerations

As part of its WTO accession agreement, China agreed to notify the WTO Committee on Technical Barriers to Trade (TBT) of all draft technical regulations.  However, China continues to issue draft technical regulations without proper notification to the TBT Committee.

Legal System and Judicial Independence

The Chinese legal system borrows heavily from continental European legal systems, but with “Chinese characteristics.”  The rules governing commercial activities are found in various laws, regulations, and judicial interpretations, including China’s civil law, contract law, partnership enterprises law, security law, insurance law, enterprises bankruptcy law, labor law, and several interpretations and regulations issued by the Supreme People’s Court (SPC).  While China does not have specialized commercial courts, it has created specialized courts and tribunals for the hearing of intellectual property disputes, including in Beijing, Guangzhou, and Shanghai.  In October 2018, the National People’s Congress approved the establishment of a national SPC appellate tribunal to hear civil and administrative appeals of technically complex intellectual property (IP) cases.

China’s constitution and various laws provide contradictory statements about court independence and the right of judges to exercise adjudicative power free from interference by administrative organs, public organizations, or powerful individuals.  In practice, regulators heavily influence courts, and the Chinese constitution establishes the supremacy of the “leadership of the communist party.”  U.S. companies often avoid challenging administrative decisions or bringing commercial disputes before local courts due to perceptions of futility or government retaliation.

Laws and Regulations on Foreign Direct Investment

China’s new investment law, the FIL, was passed on March 2019 and came into force on January 1, 2020, replacing China’s previous foreign investment framework.  The FIL provides a five-year transition period for foreign enterprises established under previous foreign investment laws, after which all foreign enterprises will be subject to the same domestic laws as Chinese companies, such as the Company Law and, where applicable, the Partnership Enterprise Law.  The FIL intends to abolish the case-by-case review and approval system on market access for foreign investment and standardize the regulatory regimes for foreign investment by including the negative list management system, a foreign investment information reporting system, and a foreign investment security review system all under one document.  The FIL also seeks to address common complaints from foreign business and government by explicitly banning forced technology transfers, promising better IPR protection, and establishing a complaint mechanism for investors to report administrative abuses.  However, foreign investors complain that the FIL and its implementing regulations lack substantive guidance, providing Chinese ministries and local officials significant regulatory discretion, including the ability to retaliate against foreign companies.

In addition to the FIL, in 2019, the State Council issued other substantive guidelines and administrative regulations, including:

System for Mergers and Acquisitions of Domestic Enterprises by Foreign Investors (Notice 6);

  • Regulation on Optimizing the Business Environment (Order No. 722); and
  • Opinions on Further Improving the Utilization of Foreign Investment (Opinions 2019).

Other relevant legislation issued by government entities in 2019, include:

Draft legislation issued by other government entities in 2020:

  • Draft Amendments to the Anti-Monopoly Law;

In addition to central government laws and implementation guidelines, ministries and local regulators have issued over 1,000 rules and regulatory documents that directly affect foreign investments within their geographical areas.  While not comprehensive, a list of published and official Chinese laws and regulations is available at:  http://www.gov.cn/zhengce/ .

FDI Laws on Investment Approvals

Foreign investments in industries and economic sectors that are not explicitly restricted or prohibited on the foreign investment negative or market access lists do not require MOFCOM pre-approval.  However, investors have complained that in practice, investing in an industry not on the negative list does not guarantee a foreign investor “national treatment,” or treatment no less favorable than treatment accorded to a similarly-situated domestic investor.  Foreign investors must still comply with other steps and approvals like receiving land rights, business licenses, and other necessary permits.  When a foreign investment needs ratification from the NDRC or a local development and reform commission, that administrative body is in charge of assessing the project’s compliance with a panoply of Chinese laws and regulations.  In some cases, NDRC also solicits the opinions of relevant Chinese industrial regulators and consulting agencies acting on behalf of Chinese domestic firms, creating potential conflicts of interest disadvantageous to foreign firms.

Competition and Anti-Trust Laws

The Anti-Monopoly Bureau of the SAMR enforces China’s Anti-Monopoly Law (AML) and oversees competition issues at the central and provincial levels.  The agency reviews mergers and acquisitions, and investigates cartel and other anticompetitive agreements, abuse of a dominant market position, and abuse of administrative powers by government agencies.  SAMR issues new implementation guidelines and antitrust provisions to fill in gaps in the AML, address new trends in China’s market, and help foster transparency in AML enforcement.  Generally, SAMR has sought public comment on proposed measures and guidelines, although comment periods can be less than 30 days.  In 2019, the agency put into effect provisions on abuse of market dominance, prohibition of monopoly agreements, and restraint against abuse of administrative powers to restrict competition.  In January 2020, SAMR published draft amendments to the AML for comment, which included, among other changes, stepped-up fines for AML violations and expanded factors to consider abuse of market dominance by Internet companies.  (This is the first step in a lengthy process to amend the AML.)  SAMR also oversees the Fair Competition Review System (FCRS), which requires government agencies to conduct a review prior to issuing new and revising existing laws, regulations, and guidelines to ensure such measures do not inhibit competition.

While these are seen as positive measures, foreign businesses have complained that enforcement of competition policy is uneven in practice and tends to focus on foreign companies.   Foreign companies have expressed concern that the government uses AML enforcement as an extension of China’s industrial policies, particularly for companies operating in strategic sectors.  The AML explicitly protects the lawful operations of government monopolies in industries that affect the national economy or national security.   U.S. companies have expressed concerns that SAMR consults with other Chinese agencies when reviewing M&A transactions, allowing other agencies to raise concerns, including those not related to antitrust enforcement, in order to block, delay, or force transacting parties to comply with preconditions in order to receive approval.  Foreign companies have also complained that China’s enforcement of AML facilitated forced technology transfer or licensing to local competitors.

Expropriation and Compensation

Chinese law prohibits nationalization of FIEs, except under vaguely specified “special circumstances” where there is a national security or public interest need. Chinese law requires fair compensation for an expropriated foreign investment, but does not detail the method used to calculate the value of the foreign investment.  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 through the annual 527 Investment Dispute Report of several cases of concern.

Dispute Settlement

ICSID Convention and New York Convention

China is a contracting state to the Convention on the Settlement of Investment Disputes (ICSID Convention) and has ratified the United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards (New York Convention).  Chinese legislation that provides for enforcement of foreign arbitral awards related to these two Conventions includes the Arbitration Law adopted in 1994, the Civil Procedure Law adopted in 1991 (later amended in 2012), the law on Chinese-Foreign Equity Joint Ventures adopted in 1979 (amended most recently in 2001), and a number of other laws with similar provisions.  The Arbitration Law embraced many of the fundamental principles of the United Nations Commission on International Trade Law’s Model Law on International Commercial Arbitration.

Investor-State Dispute Settlement  (ISDS)

Initially, China was disinclined to accept ISDS as a method to resolve investment disputes based on its suspicions of international law and international arbitration, as well as its emphasis on state sovereignty.  China’s early BITs, such as the 1982 China–Sweden BIT, only included state–state dispute settlement.  As China has become a capital exporter under its initiative of “Going Global” and infrastructure investments under the OBOR initiative, its views on ISDS have shifted to allow foreign investors with unobstructed access to international arbitration to resolve any investment dispute that cannot be amicably settled within six months.  Chinese investors did not use ISDS mechanisms until 2007, and the first known ISDS case against China was initiated in 2011 by Malaysian investors.  On July 19, 2019, China submitted its proposal on ISDS reform to the United Nations Commission on International Trade Law (UNCITRAL) Working Group III.  Under the proposal, China reaffirmed its commitment to ISDS as an important mechanism for resolving investor-state disputes under public international law.  However, it suggested various pathways for ISDS reform, including supporting the study of a permanent appellate body. including supporting the study of a permanent appellate body.

International Commercial Arbitration and Foreign Courts

Chinese officials typically urge private parties to resolve commercial disputes through informal conciliation.  If formal mediation is necessary, Chinese parties and the authorities typically prefer arbitration to litigation.  Many contract disputes require arbitration by the Beijing-based China International Economic and Trade Arbitration Commission (CIETAC).  Established by the State Council in 1956 under the auspices of the China Council for the Promotion of International Trade (CCPIT), CIETAC is China’s most widely utilized arbitral body for foreign-related disputes.  Some foreign parties have obtained favorable rulings from CIETAC, while others have questioned CIETAC’s fairness and effectiveness.  Besides CIETAC, there are also provincial and municipal arbitration commissions.  A foreign party may also seek arbitration in some instances from an offshore commission.  Foreign companies often encounter challenges in enforcing arbitration decisions issued by Chinese and foreign arbitration bodies.  In these instances, foreign investors may appeal to higher courts.  The Chinese government and judicial bodies do not maintain a public record of investment disputes.  The SPC maintains an annual count of the number of cases involving foreigners but does not provide details about the cases.  Rulings in some cases are open to the public.
In 2018, the SPC established the China International Commercial Court (CICC) to adjudicate international commercial cases, especially cases related to the OBOR initiative.  The first CICC was established in Shenzhen, followed by a second court in Xi’an.  The court held its first public hearing on May 2019, involving a Chinese company suing an Italian company, and issued its first ruling on March 2020, siding with the Chinese company.  Parties to a dispute before the CICC can only be represented by Chinese law-qualified lawyers, as foreign lawyers do not have a right of audience in Chinese courts.  Unlike other international courts, foreign judges are not permitted to be part of the proceedings.  Judgments of the CICC, given it is a part of the SPC, cannot be appealed from, but are subject to possible “retrial” under the Civil Procedure Law.  Local contacts and academics note that to-date, the CICC has not reviewed any OBOR or infrastructure related cases and question the CICC’s ability to provide “equal protection” to foreign investors.

China has bilateral agreements with 27 countries on the recognition and enforcement of foreign court judgments, but not with the United States.  However, under Chinese law, local courts must prioritize China’s laws and other regulatory measures above foreign court judgments.

Bankruptcy Regulations

China introduced formal bankruptcy laws in 2007, under the Enterprise Bankruptcy Law, which applied to all companies incorporated under Chinese laws and subject to Chinese regulations.  However, courts routinely rejected applications from struggling businesses and their creditors due to the lack of implementation guidelines and concerns over social unrest.  Local government-led negotiations resolved most corporate debt disputes, using asset liquidation as the main insolvency procedure.  Many insolvent Chinese companies survived on state subsidies and loans from state-owned banks, while others defaulted on their debts with minimal payments to creditors.  After a decade of heavy borrowing, China’s growth has slowed and forced the government to make needed bankruptcy reforms.  China now has more than 90 U.S.-style specialized bankruptcy courts.  In 2019, the government added new courts in Beijing, Shanghai and Shenzhen.  Court-appointed administrators—law firms and accounting firms that help verify claims, organize creditors’ meetings, and list and sell assets online as authorities look to handle more cases and process them faster.  China’s SPC recorded over 19,000 liquidation and bankruptcy cases in 2019, double the number of cases in 2017.  While Chinese authorities are taking steps to address mounting corporate debt and are gradually allowing some companies to fail, companies generally avoid pursing bankruptcy because of the potential for local government interference and fear of losing control over the bankruptcy outcome.  According to experts, Chinese courts not only lack the resources and capacity to handle bankruptcy cases, but bankruptcy administrators, clerks, and judges lack relevant experience.

4. Industrial Policies

Investment Incentives

To attract foreign investment, different provinces and municipalities offer preferential packages like a temporary reduction in taxes, resources and land use benefits, reduction in import or export duties, special treatment in obtaining basic infrastructure services, streamlined government approvals, research and development subsidies, and funding for initial startups.  Often, these packages stipulate that foreign investors must meet certain benchmarks for exports, local content, technology transfer, and other requirements.  The Chinese government incentivizes foreign investors to participate in initiatives like MIC 2025 that seek to transform China into an innovation-based economy.  Announced in 2015, China’s MIC 2025 roadmap has prioritized the following industries:  new-generation information technology, advanced numerical-control machine tools and robotics, aerospace equipment, maritime engineering equipment and vessels, advanced rail, new-energy vehicles, energy equipment, agricultural equipment, new materials, and biopharmaceuticals and medical equipment.  While mentions of MIC 2025 have all but disappeared from public discourse, a raft of policy announcements at the national and sub-national levels indicate China’s continued commitment to developing these sectors.  Foreign investment plays an important role in helping China move up the manufacturing value chain.  However, foreign investment remains closed off to many economic sectors that China deems sensitive due to broadly defined national or economic security concerns.

Foreign Trade Zones/Free Ports/Trade Facilitation

In 2013, the State Council announced the Shanghai pilot FTZ to provide open and high-standard trade and investment services to foreign companies.  China gradually scaled up its FTZ pilot program to 12 FTZs, launching an additional six FTZs in 2019.  China’s FTZs are in: Tianjin, Guangdong, Fujian, Chongqing, Hainan, Henan, Hubei, Liaoning, Shaanxi, Sichuan, Zhejiang, Jiangsu, Shandong, Hebei, Heilongjiang, Guanxi, and Yunnan provinces.  The goal of all of China’s FTZs is to provide a trial ground for trade and investment liberalization measures and to introduce service sector reforms, especially in financial services, that China expects to eventually introduce in other parts of the domestic economy.  The FTZs promise foreign investors “national treatment” for the market access phase of an investment in industries and sectors not listed on the FTZ negative list, or on the list of industries and economic sectors from which foreign investment is restricted or prohibited.  However, the 2019 FTZ negative list lacked substantive changes, and many foreign firms have reported that in practice, the degree of liberalization in the FTZs is comparable to opportunities in other parts of China.  The stated purpose of FTZs is also to integrate these areas more closely with the OBOR initiative.

Performance and Data Localization Requirements

As part of China’s WTO accession agreement, the PRC government promised to revise its foreign investment laws to eliminate sections that imposed on foreign investors requirements for export performance, local content, balanced foreign exchange through trade, technology transfer, and research and development as a prerequisite to enter China’s market.  In practice, China has not completely lived up to these promises.  Some U.S. businesses report that local officials and regulators sometimes only accept investments with “voluntary” performance requirements or technology transfer that help develop certain domestic industries and support the local job market.  Provincial and municipal governments will sometimes restrict access to local markets, government procurement, and public works projects even for foreign firms that have already invested in the province or municipality.  In addition, Chinese regulators have reportedly pressured foreign firms in some sectors to disclose IP content or provide IP licenses to Chinese firms, often at below market rates.

Furthermore, China’s evolving cybersecurity and personal data protection regime includes onerous restrictions on firms that generate or process data in China, such as requirements for certain firms to store data in China.  Restrictions exist on the transfer of personal information of Chinese citizens outside of China.  These restrictions have prompted many firms to review how their networks manage data.  Foreign firms also fear that PRC laws call for the use of “secure and controllable,” “secure and trustworthy,” etc. technologies will curtail sales opportunities for foreign firms or pressure foreign companies to disclose source code and other proprietary intellectual property.  In October 2019, China adopted a Cryptography Law that includes restrictive requirements for commercial encryption products that “involve national security, the national economy and people’s lives, and public interest.”  This broad definition of commercial encryption products that must undergo a security assessment raises concerns that implementation will lead to unnecessary restrictions on foreign information and communications technology (ICT) products and services.  Further, prescriptive technology adoption requirements, often in the form of domestic standards that diverge from global norms, in effect give preference to domestic firms.  These requirements potentially jeopardize IP protection and overall competitiveness of foreign firms operating in China.

5. Protection of Property Rights

Real Property

The Chinese state owns all urban land, and only the state can issue long-term land leases to individuals and companies, including foreigners, subject to many restrictions.  Chinese property law stipulates that residential property rights renew automatically, while commercial and industrial grants renew if the renewal does not conflict with other public interest claims.  Several foreign investors have reported revocation of land use rights so that Chinese developers could pursue government-designated building projects.  Investors often complain about insufficient compensation in these cases.  In rural China, collectively owned land use rights are more complicated.  The registration system suffers from unclear ownership lines and disputed border claims, often at the expense of local farmers whom village leaders exclude in favor of “handshake deals” with commercial interests.  China’s Securities Law defines debtor and guarantor rights, including rights to mortgage certain types of property and other tangible assets, including long-term leases.  Chinese law does not prohibit foreigners from buying non-performing debt, but such debt must be acquired through state-owned asset management firms, and PRC officials often use bureaucratic hurdles to limit foreigners’ ability to liquidate assets.

Intellectual Property Rights

In 2019, China’s legislature promulgated multiple reforms to China’s IP protection and enforcement systems.  In January, the Guidelines on Interim and Preliminary Injunctions for Intellectual Property Disputes came into force. These SPC guidelines provide added clarity to the IP injunction process and offer additional procedural safeguards for trade secret cases.  In April, the Standing Committee of the National People’s Congress passed amendments to the Trademark Law, the Anti-Unfair Competition Law (AUCL), and the Administrative Licensing Law, among other legislation that increases the potential punitive penalty for willful infringement to up to five times the value of calculated damages.  China also amended the Administrative Licensing Law to provide administrative penalties for government officials who illegally disclose trade secrets or require the transfer of technology for the granting of administrative licenses.  Similarly, in March, China’s State Council revised several regulations that U.S. and EU enterprises and governments had criticized for discriminating against foreign technology and IP holders.  Finally, in November, the Amended Guidelines for Patent Examination came into effect.  This measure provides further procedural guidance and defines patentability requirements for stem cells and graphical user interfaces.

Despite the changes to China’s legal and regulatory IP regime, some aspects of China’s IP protection regime fall short of international best practices.  Ineffective enforcement of Chinese laws and regulations remains a significant obstacle for foreign investors trying to protect their IP, and counterfeit and pirated goods manufactured in China continue to pose a challenge.  U.S. rights holders continued to experience widespread infringement of patents, trademarks, copyrights, and trade secrets, as well as problems with competitors gaming China’s IP protection and enforcement systems.  In some sectors, Chinese law imposes requirements that U.S. firms develop their IP in China or transfer their IP to Chinese entities as a condition to accessing the Chinese market, or to obtain tax and other preferential benefits available to domestic companies.  Chinese policies can effectively require U.S. firms to localize research and development activities, making their IP much more susceptible to theft or illicit transfer.  These practices are documented in the 2019 Section 301 Report released by the Office of the U.S. Trade Representative (USTR).  The PRC also remained on the Priority Watch List in the 2020 USTR Special 301 Report, and several Chinese physical and online markets were listed in the 2019 USTR Review of Notorious Markets for Counterfeiting and Piracy.  Under the recently signed U.S.-China Phase One trade agreement, China is required to make a number of structural reforms to its IP regime, which will be captured in an IP action plan.

For detailed information on China’s environment for IPR protection and enforcement, please see the following reports:

6. Financial Sector

Capital Markets and Portfolio Investment

China’s leadership has stated that it seeks to build a modern, highly-developed, and multi-tiered capital market.  Since their founding over three decades ago, the Shanghai and Shenzhen Exchanges, combined, are ranked the second largest stock market in the world with over USD5 trillion in assets.  China’s bond market has similarly expanded significantly to become the third largest worldwide, totaling approximately USD13 trillion.  Direct investment by private equity and venture capital firms has increased significantly, but has faced setbacks due to China’s capital controls, which complicate the repatriation of returns.  In December 2019, the State Council and China’s banking and securities regulatory authorities issued a set of measures that would remove in 2020 foreign ownership caps in select segments of China’s financial sector.  Specifically, foreign investors can wholly own insurance and futures firms as of January 1, asset management companies as of April 1, and securities firms as of December 1, 2020.

China has been an IMF Article VIII member since 1996 and generally refrains from restrictions on payments and transfers for current international transactions.  However, the government has used administrative and preferential policies to encourage credit allocation towards national priorities, such as infrastructure investments.  As of 2019, over 40 sovereign entities and private sector firms, including Daimler and Standard Chartered HK, have since issued roughly USD48 billion in “Panda Bonds,” Chinese renminbi (RMB)-denominated debt issued by foreign entities in China.  China’s private sector can also access credit via bank loans, bond issuance, and wealth management and trust products.  However, the vast majority of bank credit is disbursed to state-owned firms, largely due to distortions in China’s banking sector that have incentivized lending to state-affiliated entities over their private sector counterparts.

The Monetary and Banking System

China’s monetary policy is run by the People’s Bank of China (PBOC), China’s central bank.  The PBOC has traditionally deployed various policy tools, such as open market operations, reserve requirement ratios, benchmark rates and medium-term lending facilities, to control credit growth.  The PBOC had previously also set quotas on how much banks could lend, but abandoned the practice in 1998.  As part of its efforts to shift towards a more market-based system, the PBOC announced in 2019 that it will reform its one-year loan prime rate (LPR), which will serve as an anchor reference for Chinese lenders.  The LPR is based on the interest rate for one-year loans that 18 banks offer their best customers.  Despite these measures to move towards more market-based lending, China’s financial regulators still influence the volume and destination of Chinese bank loans through “window guidance” – unofficial directives delivered verbally – as well as through mandated lending targets for key economic groups, such as small and medium sized enterprises.

The China Banking and Insurance Regulatory Commission (CBIRC) oversees China’s roughly 4,000 lending institutions.  At the end of the first quarter of 2019, Chinese banks’ total assets reached RMB 276 trillion (USD40 trillion).  China’s “Big Five” – Agricultural Bank of China, Bank of China, Bank of Communications, China Construction Bank, and Industrial and Commercial Bank of China – dominate the sector and are largely stable, but over the past year, China has experienced regional pockets of banking stress, especially among smaller lenders.  Reflecting the level of weakness among these banks, in November 2019, the PBOC announced that about one in 10 of China’s banks received a “fail” rating following an industry-wide review.  The assessment deemed 420 firms, all rural financial institutions, “extremely risky.”  The official rate of non-performing loans among China’s banks is relatively low: below two percent as of the end of 2019.  However, analysts believe the actual figure may be significantly higher.  Bank loans continue to provide the majority of credit options (reportedly around 66 percent in 2019) for Chinese companies, although other sources of capital, such as corporate bonds, equity financing, and private equity are quickly expanding their scope, reach, and sophistication in China.  In December 2019, the Coronavirus (COVID-19) pandemic emerged in Wuhan, China.  In response, the PBOC established a variety of programs to stimulate the economy, including a re-lending scheme of USD4.28 billion and a special credit line of USD50 billion for policy banks.  In addition, the Ministry of Industry and Information Technologies established a list of companies vital to COVID-19 efforts, which would be eligible to receive additional loans and subsidies from the Ministry of Finance.

As part of a broad campaign to reduce debt and financial risk, Chinese regulators over the last several years have implemented measures to rein in the rapid growth of China’s “shadow banking” sector, which includes wealth management and trust products.  These measures have achieved positive results: the share of trust loans, entrusted loans, and undiscounted bankers’ acceptances dropped a total of seven percent in 2019 as a share of total social financing (TSF) – a broad measure of available credit in China.  TSF’s share of corporate bonds jumped from a negative 2.31 percent in 2017 to 12.7 percent in 2019.  In October 2019, the CBIRC announced that foreign owned banks will be allowed to establish wholly-owned banks and branches in China.  However, analysts noted there are often licenses and other procedures that can drag out the process in this sector, which is already dominated by local players.  Nearly all of China’s major banks have correspondent banking relationships with foreign banks, including the Bank of China, which has correspondent banking relationships with more than 1,600 institutions in 179 countries and regions.  Foreigners are eligible to open a bank account in China, but are required to present a passport and/or Chinese government issued identification.

Foreign Exchange and Remittances

Foreign Exchange

While the central bank’s official position is that companies with proper documentation should be able to freely conduct business, in practice, companies have reported challenges and delays in obtaining approvals for foreign currency transactions by sub-national regulatory branches.  Chinese authorities instituted strict capital control measures in 2016, when China recorded a surge in capital flight that reduced its foreign currency reserves by about USD1 trillion, stabilizing to around USD3 trillion today.  China has since announced that it will gradually reduce those controls, but market analysts expect they would be re-imposed if capital outflows accelerate again.  Chinese foreign exchange rules cap the maximum amount of RMB individuals are allowed to convert into other currencies at approximately USD50,000 each year and restrict them from directly transferring RMB abroad without prior approval from the State Administration of Foreign Exchange (SAFE).  In 2017, authorities further restricted overseas currency withdrawals by banning sales of life insurance products and capping credit card withdrawals at USD5,000 per transaction.  SAFE has not reduced the USD50,000 quota, but during periods of higher than normal capital outflows, banks are reportedly instructed by SAFE to increase scrutiny over individuals’ requests for foreign currency and to require additional paperwork clarifying the intended use of the funds, with the express intent of slowing capital outflows.

China’s exchange rate regime is managed within a band that allows the currency to rise or fall by 2 percent per day from the “reference rate” set each morning.  In August 2019, the U.S. Treasury Department designated China a “currency manipulator,” given China’s large-scale interventions in the foreign exchange market.  Treasury removed this designation in January 2020.

Remittance Policies

According to China’s FIL, as of January 1, 2020, funds associated with any forms of investment, including investment, profits, capital gains, returns from asset disposal, IPR loyalties, compensation, and liquidation proceeds, may be freely converted into any world currency for remittance.  Under Chinese law, FIEs do not need pre-approval to open foreign exchange accounts and are allowed to retain income as foreign exchange or to convert it into RMB without quota requirements.  The remittance of profits and dividends by FIEs is not subject to time limitations, but FIEs need to submit a series of documents to designated banks for review and approval.  The review period is not fixed and is frequently completed within one or two working days of the submission of complete documents.  For remittance of interest and principal on private foreign debt, firms must submit an application form, a foreign debt agreement, and the notice on repayment of the principal and interest.  Banks will then check if the repayment volume is within the repayable principal.  There are no specific rules on the remittance of royalties and management fees.  In August 2018, SAFE raised the reserve requirement for foreign currency transactions from zero to 20 percent, significantly increasing the cost of foreign currency transactions.

Sovereign Wealth Funds

China officially has only one sovereign wealth fund (SWF), the China Investment Corporation (CIC), which was launched to help diversify China’s foreign exchange reserves.  Established in 2007 with USD200 billion in initial registered capital, CIC currently manages over USD940 billion in assets as of the close of 2018 and invests on a 10-year time horizon.  CIC has since evolved into three subsidiaries:

  • CIC International was established in September 2011 with a mandate to invest in and manage overseas assets.  It conducts public market equity and bond investments, hedge fund, multi-asset and real estate investments, private equity (including private credit) fund investments, co-investments, and minority investments as a financial investor.
  • CIC Capital was incorporated in January 2015 with a mandate to specialize in making direct investments to enhance CIC’s investment in long-term assets.
  • Central Huijin makes equity investments in Chinese state-owned financial institutions.

CIC publishes an annual report containing information on its structure, investments, and returns.  CIC invests in diverse sectors, including financial services, consumer products, information technology, high-end manufacturing, healthcare, energy, telecommunications, and utilities.  China also operates other funds that function in part like sovereign wealth funds, including:  China’s National Social Security Fund, with an estimated USD325 billion in assets; the China-Africa Development Fund (solely funded by the China Development Bank), with an estimated USD10 billion in assets; the SAFE Investment Company, with an estimated USD417.8 billion in assets; and China’s state-owned Silk Road Fund, established in December 2014 with USD40 billion in assets to foster investment in OBOR partner countries.  Chinese state-run funds do not report the percentage of their assets that are invested domestically.  However, Chinese state-run funds follow the voluntary code of good practices known as the Santiago Principles and participate in the IMF-hosted International Working Group on SWFs.  The Chinese government does not have any formal policies specifying that CIC invest funds consistent with industrial policies or in government-designated projects, although CIC is expected to pursue government objectives.  CIC generally adopts a “passive” role as a portfolio investor.

7. State-Owned Enterprises

China has approximately 150,000 wholly-owned SOEs, of which 50,000 are owned by the central government, and the remainder by local or provincial governments.  SOEs, both central and local, account for 30 to 40 percent of total gross domestic product (GDP) and about 20 percent of China’s total employment.  Non-financial SOE assets totaled roughly USD30 trillion.  SOEs can be found in all sectors of the economy, from tourism to heavy industries.  In addition to wholly-owned enterprises, state funds are spread throughout the economy, such that the state may also be the majority or largest shareholder in a nominally private enterprise.  China’s leading SOEs benefit from preferential government policies aimed at developing bigger and stronger “national champions.”  SOEs enjoy favored access to essential economic inputs (land, hydrocarbons, finance, telecoms, and electricity) and exercise considerable power in markets like steel and minerals.  SOEs have long enjoyed preferential access to credit and the ability to issue publicly traded equity and debt.  A comprehensive, published list of all Chinese SOEs does not exist.

PRC officials have indicated China intends to utilize OECD guidelines to improve the professionalism and independence of SOEs, including relying on Boards of Directors that are independent from political influence.  Other recent reforms have included salary caps, limits on employee benefits, and attempts to create stock incentive programs for managers who have produced mixed results.  However, analysts believe minor reforms will be ineffective if SOE administration and government policy remain intertwined, and Chinese officials have made minimal progress in fundamentally changing the regulation and business conduct of SOEs.  SOEs continue to hold dominant shares in their respective industries, regardless of whether they are strategic, which may further restrain private investment in the economy.  Among central SOEs managed by the State-owned Assets Supervision and Administration Commission (SASAC), senior management positions are mainly filled by senior CCP members who report directly to the CCP, and double as the company’s party secretary.  SOE executives outrank regulators in the CCP rank structure, which minimizes the effectiveness of regulators in implementing reforms.  The lack of management independence and the controlling ownership interest of the state make SOEs de facto arms of the government, subject to government direction and interference.  SOEs are rarely the defendant in legal disputes, and when they are, they almost always prevail.  U.S. companies often complain about the lack of transparency and objectivity in commercial disputes with SOEs.

Privatization Program

Since 2013, the PRC government has periodically announced reforms to SOEs that included selling SOE shares to outside investors or a mixed ownership model, in which private companies invest in SOEs and outside managers are hired.  The government has tried these approaches to improve SOE management structures, emphasize the use of financial benchmarks, and gradually infuse private capital into some sectors traditionally monopolized by SOEs like energy, telecommunications, and finance.  In practice, however, reforms have been gradual, as the PRC government has struggled to implement its SOE reform vision and often preferred to utilize a SOE consolidation approach.  Recently, Xi and other senior leaders have increasingly focused reform efforts on strengthening the role of the state as an investor or owner of capital, instead of the old SOE model in which the state was more directly involved in managing operations.

8. Responsible Business Conduct

General awareness of RBC standards (including environmental, social, and governance issues) is a relatively new concept to most Chinese companies, especially companies that exclusively operate in China’s domestic market.  Chinese laws that regulate business conduct use voluntary compliance, are often limited in scope, and are frequently cast aside when other economic priorities supersede RBC priorities.  In addition, China lacks mature and independent non-governmental organizations (NGOs), investment funds, worker unions, and other business associations that promote RBC, further contributing to the general lack of awareness in Chinese business practices.  The Foreign NGO Law remains a concern for U.S. organizations due to the restrictions on many NGO activities, including promotion of RBC and corporate social responsibility (CSR) best practices.  For U.S. investors looking to partner with a Chinese company or expand operations, finding partners that meet internationally recognized standards in areas like labor, environmental protection, worker safety, and manufacturing best practices can be a significant challenge.  However, the Chinese government has placed greater emphasis on protecting the environment and elevating sustainability as a key priority, resulting in more Chinese companies adding environmental concerns to their CSR initiatives.  As part of these efforts, Chinese ministries have signed several memoranda of understanding with international organizations such as the OECD to cooperate on RBC initiatives.  As a result, MOFCOM in 2016 launched the RBC Platform, which serves as the national contact point on RBC issues and supplies information to companies about RBC best practices in China.

9. Corruption

Since Xi’s rise to power in 2012, China has undergone an intensive and large-scale anti-corruption campaign, with investigations reaching into all sectors of the government, military, and economy.  Xi labeled endemic corruption an “existential threat” to the very survival of the CCP.  Since then, each CCP annual plenum has touched on judicial, administrative, and CCP discipline reforms needed to root out corruption.  In 2018, the CCP amended the constitution to enable the CCP’s Central Commission for Discipline Inspection (CCDI) to become a state organ, calling the new body the National Supervisory Commission-Central Commission for Discipline Inspection (NSC-CCDI). The NSC-CCDI wields the power to investigate any public official and those involved in corrupt officials’ dealings.  From 2012 to 2019, the NSC-CCDI claimed it investigated 2.78 million cases – more than the total of the preceding 10 years.  In 2019 alone, the NSC-CCDI investigated 619,000 cases and disciplined approximately 587,000 individuals, of whom 45 were officials at or above the provincial or ministerial level.  The PRC’s overseas fugitive-hunting campaign, called “Operation Skynet,” has led to the capture of more than 7,500 fugitives suspected of corruption who were living in other countries.  The PRC did not notify host countries of these operations.  In 2019 alone, NSC-CCDI reported apprehending 2,041 alleged fugitives suspected of official crimes, including 860 corrupt officials, as well as recovering about USD797.5 million in stolen money.

Anecdotal information suggests the PRC’s anti-corruption crackdown is inconsistently and discretionarily applied, raising concerns among foreign companies in China.  For example, to fight rampant commercial corruption in the medical/pharmaceutical sector, the PRC’s health authority issued “black lists” of firms and agents involved in commercial bribery, including several foreign companies.  Anecdotal information suggests many PRC officials responsible for approving foreign investment projects, as well as some routine business transactions, delayed approvals so as not to arouse corruption suspicions, making it increasingly difficult to conduct normal commercial activity.  While central government leadership has welcomed increased public participation in reporting suspected corruption at lower levels, direct criticism of central government leadership or policies remains off-limits and is seen as an existential threat to China’s political and social stability.

China ratified the United Nations Convention against Corruption in 2005 and participates in the Asia-Pacific Economic Cooperation (APEC) and OECD anti-corruption initiatives.  China has not signed the OECD Convention on Combating Bribery, although Chinese officials have expressed interest in participating in the OECD Working Group on Bribery meetings as an observer.

Resources to Report Corruption

The following government organization receives public reports of corruption:  Anti-Corruption Reporting Center of the CCP Central Commission for Discipline Inspection and the Ministry of Supervision, Telephone Number:  +86 10 12388.

10. Political and Security Environment

Foreign companies operating in China face a low risk of political violence.  However, protests in Hong Kong in 2019 exposed foreign investors to political risk due to Hong Kong’s role as an international hub for investment into and out of China.  The CCP also punished companies that expressed support for Hong Kong protesters — most notably, a Chinese boycott of the U.S. National Basketball Association after one team’s general manager expressed his personal view supporting the Hong Kong protesters.  In the past, the PRC government has also encouraged protests or boycotts of products from countries like the United States, South Korea, Japan, Norway, Canada, and the Philippines, in retaliation for unrelated policy decisions.  Examples of politically motivated economic retaliation against foreign firms include boycott campaigns against Korean retailer Lotte in 2016 and 2017 in retaliation for the South Korean government’s decision to deploy the Terminal High Altitude Area Defense (THAAD) to the Korean Peninsula; and the PRC’s retaliation against Canadian companies and citizens for Canada’s arrest of Huawei Chief Financial Officer Meng Wanzhou.

PRC authorities also have broad authority to prohibit travelers from leaving China (known as an “exit ban”) and have imposed exit bans to compel U.S. citizens to resolve business disputes, force settlement of court orders, or facilitate government investigations.  Individuals not directly involved in legal proceedings or suspected of wrongdoing have also been subject to lengthy exit bans in order to compel family members or colleagues to cooperate with Chinese courts or investigations.  Exit bans are often issued without notification to the foreign citizen or without clear legal recourse to appeal the exit ban decision.

11. Labor Policies and Practices

For U.S. companies operating in China, finding, developing, and retaining domestic talent at the management and skilled technical staff levels remain challenging for foreign firms.  In addition, labor costs, including salaries along with other production inputs, continue to rise.  Foreign firms continue to cite air pollution concerns as a major hurdle in attracting and retaining qualified foreign talent.  Chinese labor law does not provide for freedom of association or protect the right to strike.  The PRC has not ratified the International Labor Organization conventions on freedom of association, collective bargaining, or forced labor, but it has ratified conventions prohibiting child labor and employment discrimination.  Foreign companies complain of difficulty navigating China’s labor and social insurance laws, including local implementation guidelines. Compounding the complexity, due to ineffective enforcement of labor contract laws, Chinese domestic employers often hire local employees without contracts, putting foreign firms at a disadvantage.  Without written contracts, workers struggle to prove employment, thus losing basic protections such as severance if terminated.  Moreover, in 2018 and 2019, there were multiple U.S. government, media, and NGO reports that persons detained in internment camps in Xinjiang were subjected to forced labor in violation of international labor law and standards.  In October 2019, CBP issued a Withhold Release Order barring importation into the United States of garments produced by Hetian Taida Apparel Co., Ltd. in Xinjiang, which were determined to be produced with prison or forced labor in violation of U.S. import laws.  The Commerce Department added 28 Chinese commercial and government entities to its Entity List for their complicity in human rights abuses.

The All China Federation of Trade Unions (ACFTU) is the only union recognized under the law.  Establishing independent trade unions is illegal.  The law allows for “collective bargaining,” but in practice, focuses solely on collective wage negotiations.  The Trade Union Law gives the ACFTU, a CCP organ chaired by a member of the Politburo, control over all union organizations and activities, including enterprise-level unions.  ACFTU enterprise unions require employers to pay mandatory fees, often through the local tax bureau, equaling a negotiated minimum of 0.5 percent to a standard two percent of total payroll.  While labor laws do not protect the right to strike, “spontaneous” worker protests and work stoppages regularly occur.  Official forums for mediation, arbitration, and other similar mechanisms of alternative dispute resolution often are ineffective in resolving labor disputes.  Even when an arbitration award or legal judgment is obtained, getting local authorities to enforce judgments is problematic.

13. Foreign Direct Investment and Foreign Portfolio Investment Statistics

Table 2: Key Macroeconomic Data, U.S.  FDI in Host Country/Economy
Host Country Statistical source* USG or international statistical source USG or International Source of Data:
BEA; IMF; Eurostat; UNCTAD, Other
Economic Data Year   Amount Year Amount
Host Country Gross Domestic Product (GDP ($M USD) 2019*   $14,380,000 2018 $13,608,000 www.worldbank.org/en/country 
Foreign Direct Investment Host Country Statistical source* USG or international Source of data:
BEA; IMF; Eurostat; UNCTAD, Other
U.S.  FDI in partner country ($M USD, stock positions) 2018(**)     $109,958 2018          $116,518 BEA data available at
https://www.bea.gov/international/
direct-investment-and-multinational-
enterprises-comprehensive-data
 
Host country’s FDI in the United States ($M USD, stock positions) 2018(**)      $39,557 2018          $39,473 BEA data available at
https://www.bea.gov/international/
direct-investment-and-multinational-
enterprises-comprehensive-data
 
Total Inbound Stock as a % of GDP 2018(**) 15.9% 2018 12.1% UNCTAD data available at
https://unctad.org.en/Pages/DIAE/
World%
 

20Investment%20Report/
Country-Fact-Sheets.aspx 
 

*China’s National Bureau of Statistics (converted at 6.8 RMB/USD estimate)
**China’s 2019 Yearbook (Annual Economic Data from China’s Economic Ministries:  MOFCOM, NBS, and Ministry of Finance)

Table 3:  Sources and Destination of FDI
Direct Investment from/in Counterpart Economy Data
From Top Five Sources/To Top Five Destinations (US Dollars, Millions)
Inward Direct Investment Outward Direct Investment
Total Inward $2,814,067 100% Total Outward $1,982,270 100%
China, PR: Hong Kong $1,378,383 48.96% China, PR: Hong Kong $958,904 48.37%
British Virgin Islands $302,553 10.75% Cayman Islands $237,262 11.96%
Japan $166,817 6.13% British Virgin Islands $119,658 6.03%
Singapore $115,035 4.08% United States $67,038 3.38%
Germany $78,394 2.78% Singapore $35,970 1.81%
“0” reflects amounts rounded to +/- USD 500,000.

Source:  IMF Coordinated Direct Investment Survey (CDIS)

Table 4:  Sources of Portfolio Investment
Portfolio Investment Assets
Top Five Partners (Millions, US Dollars)
Total Equity Securities Total Debt Securities
All Countries $560,250 100% All Countries $303,4000 100% All Countries $256,849 100%
China, PR: Hong Kong $179,672 32.0% China, PR: Hong Kong $121,883 40.1% China, PR: Hong Kong $57,789 22.5%
Cayman Islands $47,917  8.5% Cayman Islands  $28,323  9.3% British Virgin Island  $38,230 14.8%
British Virgin Island $40,270  7.1% Luxembourg  $8,786  2.8% Cayman Islands  $19,594 7.6%
Luxembourg  $13,712  2.4% Japan  $7,012  2.3% Germany  $7,660 2.9%
Germany  $12,294  2.1% Ireland  $6,829  2.2% Singapore  $7,122 2.7%

14. Contact for More Information

Mayra Alvarado
Investment Officer – U.S.  Embassy Beijing Economic Section
55 Anjialou Road, Chaoyang District, Beijing, P.R.  China
+86 10 8531 3000
beijinginvestmentteam@state.gov

Macau

Executive Summary

Macau became a Special Administrative Region (SAR) of the People’s Republic of China (PRC) on December 20, 1999. Macau’s status since reverting to Chinese sovereignty is defined in the Sino-Portuguese Joint Declaration (1987) and the Basic Law. Under the concept of “one country, two systems” articulated in these documents, Macau enjoys a high degree of autonomy in economic matters, and its economic system is to remain unchanged for 50 years following the 1999 reversion to Chinese sovereignty. The Government of Macau (GOM) maintains a transparent, non-discriminatory, and free-market economy. The GOM is committed to maintaining an investor-friendly environment.

In 2002, the GOM ended a long-standing gaming monopoly, awarding two gaming concessions and one sub-concession to consortia with U.S. interests. This opening encouraged substantial U.S. investment in casinos and hotels and has spurred rapid economic growth.

Macau is today the biggest gaming center in the world, having surpassed Las Vegas in terms of gambling revenue. U.S. investment over the past decade is estimated to exceed USD 23.8 billion. In addition to gaming, Macau hopes to position itself as a regional center for incentive travel, conventions, and tourism, though to date it has experienced limited success in diversifying its economy. In 2007, business leaders founded the American Chamber of Commerce of Macau.

Macau also seeks to become a “commercial and trade cooperation service platform” between mainland China and Portuguese-speaking countries. The GOM has various policies to promote these efforts and to create business opportunities for domestic and foreign investors.

In September 2016, the GOM announced its first Five-Year Development Plan (2016-2020). Highlights include establishing a trade cooperation service platform between mainland China and Portuguese-speaking countries, improving the structure of industries, increasing the quality of life, protecting the environment, and strengthening government efficiency.

Table 1: Key Metrics and Rankings
Measure Year Index/Rank Website Address
TI Corruption Perceptions Index N/A x of 175 http://www.transparency.org/
research/cpi/overview
World Bank’s Doing Business Report N/A x of 190 http://www.doingbusiness.org/en/rankings
Global Innovation Index N/A x of 129 https://www.globalinnovationindex.org/
analysis-indicator
U.S. FDI in partner country ($M USD, historical stock positions) 2016 USD 2,541 https://apps.bea.gov/international/factsheet/
World Bank GNI per capita 2018 USD 79,110 http://data.worldbank.org/
indicator/NY.GNP.PCAP.CD

3. Legal Regime

Transparency of the Regulatory System

The GOM has transparent policies and laws that establish clear rules and do not unnecessarily impede investment. The basic elements of a competition policy are set out in Macau’s Commercial Code.

The GOM will normally conduct a three-month public consultation when amending or making legislation, including investment laws, and will prepare a draft bill based on the results of the public consultation. The lawmakers will discuss the draft bill before putting it to a final vote. All the processes are transparent and consistent with international norms.

Public comments received by the GOM are not made available online to the public. The draft bills are made available at the Legislative Assembly’s website http://www.al.gov.mo/zh/, while this website http://www.io.gov.mo/ links to the GOM’s Printing Bureau, which publishes laws, rules, and procedures.

Macau’s anti-corruption agency the Commission Against Corruption (known by its Portuguese acronym CCAC) carries out ombudsman functions to safeguard rights, freedoms, and legitimate interests of individuals and to ensure the impartiality and efficiency of public administration.

Macau’s law on the budgetary framework (Decree 15/2017) aims to reinforce monitoring of public finances and to enhance transparency in the preparation and execution of the fiscal budget.

International Regulatory Considerations

Macau is a member of WTO and adopts international norms. The GOM notified all draft technical regulations to the WTO Committee on Technical Barriers to Trade.

Macau, as a signatory to the Trade Facilitation Agreement (TFA), has achieved a 100 percent rate of implementation commitments.

Legal System and Judicial Independence

Under “one country, two systems”, Macau maintains Continental European law as the foundation of its legal system, which is based on the rule of law and the independence of the judiciary. The current judicial process is procedurally competent, fair, and reliable. Macau has a written commercial law and contract law. The Commercial Code is a comprehensive source of commercial law, while the Civil Code serves as a fundamental source of contractual law. Courts in Macau include the Court of Final Appeal, Intermediate Courts, and Primary Courts. There is also an Administrative Court, which has jurisdiction over administrative and tax cases. These provide an effective means for enforcing property and contractual rights. At present, the Court of Final Appeal has three judges; the Intermediate Courts have nine judges; and the Primary Courts have 31 judges. The Public Prosecutions Office has 38 prosecutors.

Laws and Regulations on Foreign Direct Investment

Macau’s legal system is based on the rule of law and the independence of the judiciary. Foreign and domestic companies register under the same rules and are subject to the same set of commercial and bankruptcy laws (Decree 40/99/M).

Competition and Anti-Trust Laws

Macau has no agency that reviews transactions for competition-related concerns, nor a competition law. The Commercial Code (Law No. 16/2009) contains basic elements of a competition policy with regard to commercial practices that can distort the proper functioning of markets. While the GOM has stated that existing provisions are adequate and appropriate given the scale and scope of local economy, it announced in March 2019 that it was studying a fair competition law that would protect against monopolies and price-fixing. The GOM has since not disclosed the progress of the study.

Expropriation and Compensation

The U.S. Consulate General is not aware of any direct or indirect actions to expropriate. Legal expropriations of private property may occur if it is in the public interest. In such cases, the GOM will exchange the private property with an equivalent public property based on the fair market value and conditions of the former. The exchange of property is in accordance with established principles of international law. There is no remunerative compensation.

Dispute Settlement

ICSID Convention and New York Convention

Both the Convention on the Settlement of Investment Disputes between States and Nationals of Other States (ICSID Convention) and the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (New York Convention) apply to Macau. The Law on International Commercial Arbitration (Decree 55/98/M) provides for enforcement of awards under the 1958 New York Convention.

Investor-State Dispute Settlement

The U.S. Consulate General is aware of one previous investment dispute involving U.S. or other foreign investors or contractors and the GOM. In March 2010, a low-cost airline carrier was reportedly forced to cancel flight services because of a credit dispute with its fuel provider, triggering events which led to the airline’s de-licensing. Macau courts declared the airline bankrupt in September 2010. The airline’s major shareholder, a U.S. private investment company, filed a case in the Macau courts seeking a judgment as to whether a GOM administrative act led to the airline’s demise. The Court of Second Instance held hearings in May and June 2012. In November 2013, the Court of Second Instance rejected the appeal. Private investment disputes are normally handled in the courts or via private negotiation. Alternatively, disputes may be referred to the Hong Kong International Arbitration Center or the World Trade Center Macau Arbitration Center.

International Commercial Arbitration and Foreign Courts

Macau has an arbitration law (Decree 55/98/M), which adopts the UN Commission on International Trade Law (UNCITRAL) model law for international commercial arbitration. The GOM accepts international arbitration of investment disputes between itself and investors. Local courts recognize and enforce foreign arbitral awards.

Macau established the World Trade Center Macau Arbitration Center in June 1998. The objective of the Center is to promote the resolution of disputes through arbitration and conciliation, providing the disputing parties with alternative resolutions other than judicial litigation.

Foreign judgments in civil and commercial matters may be enforced in Macau. The enforcement of foreign judgments is stipulated in Articles 1199 and 1200 of the Civil Procedure Code. A foreign court decision will be recognized and enforced in Macau, provided that it qualifies as a final decision supported by authentic documentation and that its enforcement will not breach Macau’s public policy.

Bankruptcy Regulations

Commercial and bankruptcy laws are written under the Macau Commercial Code, the Civil Procedure Code, and the Penal Code. Bankruptcy proceedings can be invoked by an application from the bankrupt business, by petition of the creditor, or by the Public Prosecutor. There are four methods used to prevent the occurrence of bankruptcy: the creditors meeting, the audit of the company’s assets, the amicable settlement, and the creditor agreement. According to Articles 615-618 of the Civil Code and Article 351-353 of the Civil Procedure Code, a creditor who has a justified fear of losing the guarantee of his credits may request seizure of the assets of the debtor. Bankruptcy offenses are subject to criminal liability.

There is no credit bureau or other credit monitoring authority serving Macau’s market.

4. Industrial Policies

Investment Incentives

To attract foreign investment, the GOM offers investment incentives to investors on a national treatment basis. These incentives are contained in Decrees 23/98/M and 49/85/M and are provided so long as companies can prove they are doing one of the following: promoting economic diversification, contributing to the promotion of exports to new unrestricted markets, promoting added value within their activity’s value chain, or contributing to technical modernization. There is no requirement that Macau residents own shares. These incentives are categorized as fiscal incentives, financial incentives, and export diversification incentives.

Fiscal incentives include full or partial exemption from profit/corporate tax, industrial tax, property tax, stamp duty for transfer of properties, and consumption tax. The tax incentives are consistent with the WTO Agreement on Subsidies and Countervailing Measures, as they are neither export subsidies nor import substitution subsidies as defined in the WTO Agreement. In 2019, the GOM put forward an enhanced tax deduction for research and development (R&D) expenditure incurred for innovation and technology projects by companies whose registered capital reached USD 125,000, or whose average taxable profits reached USD 62,500 per year in three consecutive years. The tax deduction amounts to 300 percent for the first USD 375,000 of qualifying R&D expenditure and 200 percent for the remaining amount, subject to a limit of USD 1.9 million in total). In addition, income received from Portuguese speaking countries is exempt from the corporate tax, provided such income has been subject to tax in its place of origin.

Two new laws to encourage financial leasing activities in Macau became effective in April 2019. Under the new regime, the minimum capital requirement of a financial leasing company is reduced from USD 3.75 million to USD 1.25 million. In addition, the acquisition by the financial leasing company of a property exclusively for its sole use has an exemption of up to USD 62,500 from a stamp duty.

Financial incentives include government-funded interest subsidies. Export diversification incentives include subsidies given to companies and trade associations attending trade promotion activities organized by IPIM. Only companies registered with Macau Economic Services (MES) may receive subsidies for costs such as space rental or audio-visual material production. Macau also provides other subsidies for the installation of anti-pollution equipment.

Foreign Trade Zones/Free Ports/Trade Facilitation

Macau is a free port; however, there are four types of dutiable commodities: liquors, tobacco, vehicles, and petrol (gasoline). Licenses must be obtained from the MES prior to importation of these commodities.

In order to promote the MICE (meetings, incentives, conventions, and exhibitions) and logistics industries in Macau, the GOM has accepted the ATA Carnet (Admission Temporaire/Temporary Admission), an international customs document providing an efficient method for the temporary import and re-export of goods that eases the way for foreign exhibitions and businesses.

The latest CEPA addition established principles of trade facilitation, including simplifying customs procedures, enhancing transparency, and strengthening cooperation.

Performance and Data Localization Requirements

Macau does not follow a forced localization policy in which foreign investors must use domestic content in goods or technology.

There are no requirements by the GOM for foreign IT providers to turn over source code and/or provide access to surveillance (i.e., backdoors into hardware and software or turning over keys for encryption).

According to the Personal Data Protection Act (Decree 8/2005), if there is transfer of personal data to a destination outside Macau, the opinion of the Office for Personal Data Protection — the regulatory authority responsible for supervising and enforcing the Act — must be sought to confirm if such destination ensures an adequate level of protection.

In December 2019, Macau’s Cybersecurity Law came into force. With this law, public and private network operators in certain industries have to meet obligations, including providing real-time access to select network data to Macau authorities, with the stated aim of protecting the information network and computer systems. For example, network operators must register and verify the identity of users before providing telecommunication services. The new law creates new investment and operational costs for affected businesses, and has raised some privacy and surveillance concerns.

One major U.S. cloud computing company reported that Macau’s Gaming Inspection and Coordination Bureau had refused permission for potential clients in the gaming sector to export personal data-to-data centers located outside of Macau.

5. Protection of Property Rights

Real Property

Private ownership of property is enshrined in the Basic Law. There are no restrictions on foreign property ownership. Macau has a sound banking mortgage system, which is under the supervision of the Macau Monetary Authority (MMA). There are only a small number of freehold property interests in the older part of Macau.

According to the Cartography and Cadaster Bureau, 21 percent of land parcels in Macau do not have clear title, for unknown reasons. Industry observers commented that no one knows whether these land parcels will be privately or publicly owned in the future.

The Land Law (Decree 10/2013) stipulates that provisional land concessions cannot be renewed upon their expiration if their leaseholders fail to finish developing the respective plots of land within a maximum concession period of 25 years. The leaseholders will not only be prohibited from renewing the undeveloped concessions – regardless of who or what caused the non-development – but also have no right to be indemnified or compensated.

Intellectual Property Rights

Macau is a member of the World Intellectual Property Organization (WIPO). Macau is not listed in USTR’s Special 301 Report. Macau has acceded to the Bern Convention for the Protection of Literary and Artistic Works. Patents and trademarks are registered under Decree 97/99/M. Macau’s copyright laws are compatible with the WTO’s Agreement on Trade-Related Aspects of Intellectual Property Rights, and government offices are required to use only licensed software. The GOM devotes considerable attention to intellectual property rights enforcement and coordinates with copyright holders. Source Identification Codes are stamped on all optical discs produced in Macau. The MES uses an expedited prosecution arrangement to speed up punishment of accused retailers of pirated products. The copyright protection law has been extended to cover online privacy. Copyright infringement for trade or business purposes is subject to a fine or maximum imprisonment of four years.

Macau Customs maintains an enforcement department to investigate incidents of intellectual property (IP) theft. Macau Customs works closely with mainland Chinese authorities, foreign customs agencies, and the World Customs Organization to share best practices to address criminal organizations engaging in IP theft. In 2019, Macau Customs seized a total of 3,849 pieces of counterfeit goods, including 3,329 garments, 7 leather products, and 513 electronic appliances. In 2019, the MES filed a total of 15,391 applications for trademark registrations.

In 2019, the MES filed a total of 15,391 applications for trademark registrations.

6. Financial Sector

Capital Markets and Portfolio Investment

Macau allows free flows of financial resources. Foreign investors can obtain credit in the local financial market. The GOM is stepping up its efforts to develop finance leasing businesses and exploring opportunities to establish a system for trade credit insurance in order to take a greater role in promoting cooperation between companies from Portuguese-speaking countries.

Since 2010, the People’s Bank of China (PBoC) has provided cross-border settlement of funds for Macau residents and institutions involved in transactions for RMB bonds issued in Hong Kong. Macau residents and institutions can purchase or sell, through Macau RMB participating banks, RMB bonds issued in Hong Kong and Macau. The Macau RMB Real Time Gross Settlements (RMB RTGS) System came into operation in March 2016 to provide real-time settlement services for RMB remittances and interbank transfer of RMB funds. The RMB RTGS System is intended to improve risk management and clearing efficiency of RMB funds and foster Macau’s development into an RMB clearing platform for trade settlement between China and Portuguese-speaking countries. In December 2019, the PBoC canceled an existing quota of RMB 20,000 exchanged in Macau for each individual transaction.

Macau has no stock market, but Macau companies can seek a listing in Hong Kong’s stock market. Macau and Hong Kong financial regulatory authorities cooperate on issues of mutual concern. Under the Macau Insurance Ordinance, the MMA authorizes and monitors insurance companies. There are 11 life insurance companies and 13 non-life insurance companies in Macau. Total gross premium income from insurance services amounted to USD 2.7 billion in the third quarter of 2019.

In October 2018, the Legislative Assembly took steps to tackle cross-border tax evasion. Offshore institutions in Macau, including credit institutions, insurers, underwriters, and offshore trust management companies, will be abolished by the end of 2020. Decree 9/2012, in effect since October 2012, stipulates that banks must compensate depositors up to a maximum of MOP 500,000 (USD 62,500) in case of a bank failure. To finance the deposit protection scheme, the GOM has injected MOP 150 million (USD 18.75 million) into the deposit protection fund, with banks paying an annual contribution of 0.05 percent of the amount of protected deposits held.

Money and Banking System

The MMA functions as a de facto central bank. It is responsible for maintaining the stability of Macau’s financial system and for managing its currency reserves and foreign assets. At present, there are thirty-one financial institutions in Macau, including 12 local banks and 19 branches of banks incorporated outside Macau. There is also a finance company with restrictive banking activities, two financial leasing companies and a non-bank credit institution dedicated to the issuance and management of electronic money stored value card services. In addition, there are 11 moneychangers, two cash remittance companies, two financial intermediaries, six exchange counters, and one representative office of a financial institution. The BoC and Industrial and Commercial Bank of China (ICBC) are the two largest banks in Macau, with total assets of USD 79.8 billion and USD 33.9 billion, respectively. Banks with capital originally from mainland China and Portugal had a combined market share of about 86 percent of total deposits in the banking system at the end of 2016. Total deposits amounted to USD 83.8 billion by the end of 2019. In the fourth quarter of 2019, banks in Macau maintained a capital adequacy ratio of 14.2 percent, well above the minimum eight percent recommended by the Bank for International Settlements. Accounting systems in Macau are consistent with international norms.

The MMA prohibits the city’s financial institutions, banks and payment services from providing services to businesses issuing virtual currencies or tokens.

Foreign Exchange and Remittances

Foreign Exchange

Profits and other funds associated with an investment, including investment capital, earnings, loan repayments, lease payments, and capital gains, can be freely converted and remitted. The domestic currency, Macau Official Pataca (MOP), is pegged to the Hong Kong Dollar at 1.03 and indirectly to the U.S. Dollar at an exchange rate of approximately MOP 7.99 = USD 1. The MMA is committed to exchange rate stability through maintenance of the peg to the Hong Kong Dollar.

Although Macau imposes no restrictions on capital flows or foreign exchange operations, exporters are required to convert 40 percent of foreign currency earnings into MOP. This legal requirement does not apply to tourism services.

Remittance Policies

There are no recent changes to or plans to change investment remittance policies. Macau does not restrict the remittance of profits and dividends derived from investment, nor does it require reporting on cross-border remittances. Foreign investors can bring capital into Macau and remit it freely.

A Memorandum of Understanding on AML actions between MMA and PBoC, increased information exchanges between the two parties, as well as cooperation on onsite inspections of casino operations. Furthermore, Macau’s terrorist asset-freezing law, which is based on United Nations (UN) Security Council resolutions, requires travelers entering or leaving with cash or other negotiable monetary instruments valued at MOP 120,000 (USD 15,000) or more to sign a declaration form and submit it to the Macau Customs Service.

In December 2019, the PBoC increased a daily limit set on the amount of RMB-denominated funds sent by Macau residents to personal accounts held in mainland China from RMB 50,000 to RMB 80,000.

Sovereign Wealth Funds

The International Monetary Fund (IMF) suggested in July 2014 that the GOM invest its large fiscal reserves through a fund modeled on sovereign wealth funds to protect the city’s economy from economic downturns. In November 2015, the GOM decided to establish such a fund, called the MSAR Investment and Development Fund (MIDF), through a substantial allocation from the city’s ample fiscal reserves. However, the GOM in 2019 withdrew a draft bill that proposed the use of USD 7.5 billion to seed the MIDF over public concerns about the government’s supervisory capability. The MMA said it will conduct a consultation in mid-2020 to help the public better understand the regulations and operations of the fund.

7. State-Owned Enterprises

Macau does not have state-owned enterprises (SOEs). Several economic sectors – including cable television, telecommunications, electricity, and airport/port management, are run by private companies under concession contracts from the GOM. The GOM holds a small percentage of shares (ranging from one to 10 percent) in these government-affiliated enterprises. The government set out in its Commercial Code the basic elements of a competition policy with regard to commercial practices that can distort the proper functioning of markets. Court cases related to anti-competitive behavior remain rare.

Privatization Program

The GOM has given no indication in recent years that it has plans for a privatization program.

8. Responsible Business Conduct

The six gaming concessionaires that dominate Macau’s economy pay four percent of gross gaming revenues to the government to fund cultural and social programs in the SAR. Several operators also directly fund gaming addiction rehabilitation programs. Some government-affiliated entities maintain active corporate social responsibility (CSR) programs. For example, Companhia de Electricidade de Macau, an electric utility, provides educational programs and repair services free-of-charge to underprivileged residents. One of the nine aspects that the GOM will consider for the renewal of gaming licenses is casino operators’ CSR performance. In November 2019, the Business Awards of Macau presented the Gold Award to Galaxy Entertainment Group for its corporate social responsibility initiatives.

Macau is not a member of the OECD, and hence, the OECD Guidelines for Multinational Enterprises are not applicable to Macau companies.

9. Corruption

Mainland China extended in February 2006 the United Nations Convention Against Corruption to Macau. Macau has laws to combat corruption by public officials and the private sector. Anti-corruption laws are applied in a non-discriminatory manner and effectively enforced. One provision stipulates that anyone who offers a bribe to foreign public officials (including officials from mainland China, Hong Kong, and Taiwan) and officials of public international organizations in exchange for a trade deal could receive a jail term of up to three years or fines.

The CCAC is a member of the International Association of Anti-Corruption Authorities and a member of the Anti-Corruption Action Plan for Asia and the Pacific. The CCAC’s guidelines on prevention and repression of corruption in the private sector and a booklet Corruption Prevention Tips for Private Companies provide rules of conduct that private companies must observe. In January 2019, the GOM completed a public consultation on public procurement in order to create a legal framework through which the GOM will seek to promote an efficient and transparent regime. The GOM expected that a draft bill will be ready in the second half of 2020.

Resources to Report Corruption

CHAN Tsz King, Commissioner
Commission Against Corruption
105, Avenida Xian Xing Hai, 17/F, Centro Golden Dragon, Macau
+853- 2832-6300
ccac@ccac.org.mo

10. Political and Security Environment

Macau is politically stable. The U.S. Consulate General is not aware of any incidents in recent years involving politically motivated damage to projects or installations.

11. Labor Policies and Practices

Macau’s unemployment rate in January 2020 was 1.7 percent. Foreign businesses cite a constant shortage of skilled workers – a result of the past decade’s boom in entertainment facilities – as a top constraint on their operations and future expansion. The government is studying proposals to resolve the human resources problem. For example, Macau has labor importation schemes for unskilled and skilled workers who cannot be recruited locally. However, both local and foreign casino operators in Macau are required by law to employ only Macau residents as croupiers. Taxi and bus drivers must also be local residents. There is no such restriction imposed on any other sector of the economy.

Macau does not have any policies that waive labor laws in order to attract or retain investment. The rights for workers to form trade unions and to strike are both enshrined in the Basic Law, but there are no laws in Macau that specifically deal with those rights. The law does not provide that workers can collectively bargain, and while workers have the right to strike, there is no specific protection in the law from retribution if workers exercise this right. Labor unions are independent of the government and employers, by law and in practice.

According to the Labor Relations Law, a female worker cannot be dismissed, except with just cause (e.g., willful disobedience to orders given by superiors, or violation of regulations on occupational hygiene and safety), during her pregnancy or within three months of giving birth. In practice, either the employer or the employee may rescind the labor contract with or without just cause. In general, any circumstance that makes it impossible to continue the labor relation can constitute just cause for rescission of the contract. If the employer terminates the contract with the worker without just cause, the employer must pay the employee severance pay. In addition, Macau’s social security system, which is regulated by Decree 84/89/M, provides local workers with economic aid when they are old, unemployed, or sick.

Workers who believe they were dismissed unlawfully can bring a case to court or lodge a complaint with the Labor Affairs Bureau. Even without formal collective bargaining rights, companies often negotiate with unions, although the government may act as an intermediary. There is no indication that past disputes or appeals were subject to lengthy delays.

The Labor Relations Law does not contain provisions regarding collective bargaining, which is not common at the company or industry level.

The GOM has put measures in place to replace some foreign workers with Macau residents. Macau has a law imposing criminal penalties for employers of illegal migrants and preventing foreign workers from changing employers in Macau. The government has used the proceeds of a tax on the import of temporary workers for retraining local unemployed people.

Effective September 1 2019, the statutory minimum hourly wage rate increased from USD 3.8 to USD 4.0. The Legislative Assembly is discussing a draft bill on mandating across-the-board minimum wages.

12. U.S. International Development Finance Corporation (DFC) and Other Investment Insurance Programs

Overseas Private Investment Corporation coverage is not available in Macau.

13. Foreign Direct Investment and Foreign Portfolio Investment Statistics

Table 2: Key Macroeconomic Data, U.S. FDI in Host Country/Economy
Host Country Statistical source* USG or international statistical source USG or International Source of Data: BEA; IMF; Eurostat; UNCTAD, Other
Economic Data Year Amount Year Amount
Host Country Gross Domestic Product (GDP) ($M USD) 2018 $55,040 2018 $55,084 www.worldbank.org/en/country 
Foreign Direct Investment Host Country Statistical source* USG or international statistical source USG or internationalSource of data: BEA; IMF; Eurostat; UNCTAD, Other
U.S. FDI in partner country ($M USD, stock positions) 2018 $398 N/A N/A BEA data available at
https://www.bea.gov/international/
direct-investment-and-multinational-
enterprises-comprehensive-data
 
Host country’s FDI in the United States ($M USD, stock positions) N/A N/A 2017 $51 BEA data available at
https://www.bea.gov/international/
direct-investment-and-multinational-
enterprises-comprehensive-data
 
Total inbound stock of FDI as % host GDP 2018 67% 2018 53% UNCTAD data available at
https://unctad.org/en/Pages/DIAE/
World%20Investment%20Report/
Country-Fact-Sheets.aspx
 

* Source for Host Country Data: Macau Statistics and Census Service

Table 3: Sources and Destination of FDI
Direct Investment from/in Counterpart Economy Data
From Top Five Sources/To Top Five Destinations (US Dollars, Millions)
Inward Direct Investment Outward Direct Investment
Total Inward 34,911 100% Total Outward 2,930 100%
China, P.R.: Hong Kong 9,800 28% China, P.R.: Mainland 1,631 56%
British Virgin Islands 9,123 26% China, P.R.: Hong Kong 1,141 39%
China, P.R.: Mainland 6,241 18% Cayman Islands 74 3%
Cayman Islands 6,078 17% British Virgin Islands 70 2%
Portugal 1,134 3% Cyprus 0 0%
“0” reflects amounts rounded to +/- USD 500,000.
Table 4: Sources of Portfolio Investment
Portfolio Investment Assets
Top Five Partners (Millions, current US Dollars)
Total Equity Securities Total Debt Securities
All Countries 11,324,581 100% All Countries 7,929,155 100% All Countries 3,395,426 100%
Cayman Islands 1,686,670 15% Cayman Islands 1,234,954 16% Canada 505,494 15%
United Kingdom 1,346,345 12% United Kingdom 929,469 12% Cayman Islands 451,716 13%
Japan 1,003,988 9% Japan 775,570 10% United Kingdom 416,876 12%
Canada 975,929 9% Canada 470,435 6% C Japan 228,418 7%
France 558,074 5% Switzerland 442,195 6% Netherlands, The 184,339 5%

14. Contact for More Information

U.S. Consulate General Hong Kong
26 Garden Road, Central
Hong Kong SAR, PRC
+852-2841-2489
information_resource_center_hk@yahoo.com

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