Laws of the People's Republic of China

General Office of Ministry of Commerce

General Office of Ministry of Commerce Circular on Transmitting Reply of Legislative Affairs Office of the State Council on Specific Applicable Problems of Investment and Liquidation of Foreign-invested Enterprises

Shang Fa Zi [2005] No. 32

Administrative commercial sectors in all the provinces, autonomous regions, municipalities directly under central government, separately listed cities and Xinjiang production and construction corps of CPLA:

Several Provisions Concerning the Investments Made by the Various Parties to Chinese-foreign Equity Joint Ventures (approved by the State Council on Dec 30, 1987, "Investment Provisions" for short in the following), Supplementary Provisions to Several Provisions Concerning the Investment Made by the Various Parties to Chinese-foreign Equity Joint Ventures (approved by the State Council on Sep 2, 2997, and promulgated by Ministry of Foreign Trade and Economic Cooperation and State Administration of Industry and Commerce Decree No.2, 1997) and Procedures for Liquidation of Foreign-Funded Enterprises (approved by the State Council on Jun 15, 1996, and promulgated by Ministry of Foreign Trade and Economic Cooperation Decree No.2, 1996) are playing a very important role in regulating use of foreign investment and promoting the health development of foreign-invested enterprises, however, some relevant hard problems still exist in working of Ministry of Commerce and local administrative commercial departments of different levels. For example, in case the interested parties cannot agree on payment, how to use Article 7 of Investment Provisions; or how to use Article 7 of Procedures for Liquidation of Foreign-Funded Enterprises to avoid loose of Liquidation enterprises because of halt of the original regular business. Ministry of Commerce summed up problems and sent a letter to the legislative affairs office of the State's Council for explanations, and received reply a few days ago.

The reply plays an important role in guiding the local administrative commercial departments of different levels to correctly implement relevant administrative regulations and strictly administer by law. For an exact understanding of the reply of all local administrative commercial departments of different levels, Ministry of Commerce Letter for Explanation of Applicable Problems of Relevant Administrative Investment Provisions and Liquidation of Foreign-invested Enterprises (Refer to Appendix No.2) and Reply to Ministry of Commerce Letter for Explanation of Applicable Problems of Relevant Administrative Investment Provisions and Liquidation of Foreign-invested Enterprises (refer to Appendix No.1) are now transmitted to you all. Please all local administrative commercial departments shall study the documents earnestly and keep improving administration by law. If any problem is encountered, please report to Ministry of Commerce in time.

General Office of Ministry of Commerce

Mar 18, 2005 Appendix I:Reply of Legislative Affairs Office of State Council to Ministry of Commerce Letter for Specific Application Problems on Relative Regulations of Investments Made by the Various Parties to Chinese-foreign Equity Joint Ventures and Procedures for Liquidation of Foreign-Funded Enterprises

Guo Fa Han [2005] No. 10

Ministry of Commerce:

Ministry of Commerce Letter for Explanation of Applicable Problems on Relative Regulations of Investments Made by the Various Parties to Chinese-foreign Equity Joint Ventures and Procedures for Liquidation of Foreign-Funded Enterprises has been received. With studies, your questions on Several Provisions Concerning the Investments Made by the Various Parties to Chinese-foreign Equity Joint Ventures ("Investment Provisions" for short in the following), Supplementary Provisions to Several Provisions Concerning the Investment Made by the Various Parties to Chinese-foreign Equity Joint Ventures ("Supplementary Provisions to Investment" for short in the following) and Procedures for Liquidation of Foreign-Funded Enterprises ("Liquidation Procedures" for short in the following) are explained as follows:

I.

For problem of whether the fund raised by investor in ways like asking for a loan in his own name belongs to what the Article 2 of Investment Provisions called "cash belong to investor only", our answer is affirmative.

II.

For problem of how the former examining and approving organ confirms that one party offend Article 7 of Investment Provisions: In case one party of the joint venture ask for approval of the former examining and approving organ to disband joint venture or look for other participants in accordance with Article 7 of Investment Provisions, the former examining and approving organ should confirm that one party offend Article 7 of Investment Provisions and authorize disbandment of the joint venture or authorize observant party to look for other participants in accordance with effective arbitrations of court or relevant arbitral agencies.

III.

On problem of specific explanation of "enterprise decision-making authority" referred in Supplementary Provisions to Investment: "enterprise decision-making authority" referred in Supplementary Provisions to Investment refers to all decision-making authorities of funds providers of enterprises.

IV.

On problem of offending Article 6 of Liquidation Procedures, failing to submit Liquidation reports within time limit: Liquidation committee organized by foreign-invested enterprises should strictly follow Article 6 and Article 32 of Liquidation Procedures, submitting liquidation reports to the former examining and approving organ as scheduled. In case the liquidation committee fails to submit liquidation reports within time limit, former examining and approving organ should give punishment in accordance with Article 47 of Liquidation Procedures.

V.

As regard to problem of whether enterprise can continue its regular business operations in the principle of non-eliminating enterprise property during liquidation, the answer is negative.

Legislative Affairs Office of the State's Council

Jan 20, 2005 Appendix II:Ministry of Commerce Letter for Specific Application Problems on Relative Regulations of Investments Made by the Various Parties to Chinese-foreign Equity Joint Ventures and Procedures for Liquidation of Foreign-Funded Enterprises

Shang Fa Han [2004] No. 27

Legislative affairs office of State Council:

While implementing Several Provisions Concerning the Investments Made by the Various Parties to Chinese-foreign Equity Joint Ventures (hereinafter referred to as Investment Provisions), Supplementary Provisions to Several Provisions Concerning the Investment Made by the Various Parties to Chinese-foreign Equity Joint Ventures (hereinafter referred to as Supplementary Provisions to Investment) and Procedures for Liquidation of Foreign-Funded Enterprises (hereinafter referred to as Liquidation Procedures), Ministry of Commerce and responsible commercial sectors of all levels found out some legal items should be further clarified, mainly including:

I.

Investment Provisions, Item 2: Funds provided by Various Parties of Chinese-foreign Equity Joint Ventures in accordance with relative contract shall be all the cash owned by the Parties themselves.

In practice, some parties may, in their own names, raise money for the enterprises by means of loans to provide funds. Some relative departments consider the money raised not belong to "cash owned by the Parties themselves".

In our opinion, any cash possessed and dominated, no matter by what means it is obtained, shall be considered as "cash owned by the Parties themselves".

In case disunity happens during administrative execution, please clarify how to comprehend "cash owned by the Parties themselves" in the Provision.

II.

Investment Provisions, Item 7: Either Party of Chinese-foreign Equity Joint Ventures, not providing funds in time or in full amount, shall be considered as violating the accord. The party that honors the accord shall urge the violating party to provide funds in time or in full amount within one month. Otherwise, the party that honors the accord shall apply to press relative punishment on the violating party.

In practice, case that one party unilaterally claim that the other party's failure to providing funds in time or in full amount often happens, and apply to press relative punishment on the other party (violating party) as the party that honors the accord.

In our opinion, relative Examine and Approval Institutions have no rights to judge, by right of one party's unilateral claim, which party shall be the " the party that honors the accord" or "the party that violates the accord".

In our opinion, relative Examine and Approval Institutions have to make the decisions in accordance with the effective Decision of relative Arbitration Institutions or Courts.

III.

Supplementary Provisions to Investment, Item 1: Foreign investors that establish foreign funded enterprises by means of purchase asset or stock of domestic enterprises shall pay, in full account, the purchase money within 3 month since promulgation date of Business License. Enterprise decision authority shall not be obtained until the purchase money is fully paid.

Which specific rights are included in Enterprise decision authority shall be clarified.

IV.

Liquidation Procedures, Item 6: Liquidation duration of enterprises shall be no longer than 180 days since the starting date of Liquidation till Liquidation Report is submitted to Examine and Approval Institutions. In special situations, enterprises shall apply for an extension 15 days before the expiration of Liquidation duration. The extension shall be no longer than 90 days.

In practice, case that Liquidation Report is only submitted 180 days later, sometimes even far more than 270 days, to the Examine and Approval Institutions. In such cases, whether or not the Liquidation Report is legally effective.

In our opinion, the legal effectiveness of the Liquidation Report shall be admitted, in the premise that the rights and interests of creditor or investor are not violated.

V.

Liquidation Procedures, Item 7: No new business activities shall be developed during the Liquidation of the enterprises.

In practice, the business activities of some enterprises, such as hotel, melting factory, chemical plant, are successive, and business suspension may cause damage to the enterprises, investors and creditor's rights and interests.

In our opinion, under the principle of not reducing enterprise property, it is reasonable to continue regular business activities, which do not violate the rules of "no new business activities shall be developed".

The problems often occurred in the implementation practice of Investment Provisions, Supplementary Provisions to Investment and Liquidation Procedures are listed as above. In accordance with the regulations of Article 31 , Article 32 , and Article 33 of Statutes on Administrative Law Constitution Procedure and State Council General Office Circular on Administrative Law Explanation Rights and Procedure Problems, Ministry of Commerce raised five specific questions as above-mentioned. Please research them and reply by letter.

Ministry of Commerce

April 29, 2004