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PROVISIONS OF THE STATE COUNCIL CONCERNING THE ENCOURAGEMENT OF INVESTMENT IN DEVELOPING HAINAN ISLAND

    Article 1  These Provisions are formulated with a view to absorbing
investment from within and without so as to accelerate the development and
construction of Hainan Island.

    Atticle 2  The State implements more flexible open economic policies for
Hainan Special Economic Zone and endows the People's Government of Hainan
Province with greater decision-making power.

    Article 3  The State encourages enterprises, other economic organizations
or individuals at home and from abroad (hereinafter referred to as investors)
to invest in the development of Hainan Island and establish various economic
and social undertakings.

    Article 4  The State shall protect investors' legitimate rights and
interests according to law, and shall not nationalize or requisition the
assets of the investors. Under special circumstances, where public interests
call for action, the State may resort to requisitioning in accordance with
legal procedures and due compensation shall be made.

    Investors shall abide by China's laws and regulations.

    Article 5  Investors may make investment and conduct operations on Hainan
Island in the following forms:

    (1) making investment in establishing equity joint ventures,
Chinese-foreign contractual joint ventures, foreign-capital enterprises
(hereinafter referred to as enterprises with foreign investment) as well as
other kinds of enterprises permitted by law. The period of operation for any
kind of enterprise shall be specified in the contract by the parties of
investment through consultation or approved by the relevant competent
authorities;

    (2) purchasing shares, bonds and other negotiable securities;

    (3) operating enterprises through purchasing, holding shares, contracting
or leasing;

    (4) investing and operating in the investment modes obtaining throughout
the world, conducting economic and technological cooperation and exchanges.

    Article 6  The use of State-owned land on Hainan Island shall be
non-gratuitous.

    The People's Government of Hainan Province may, according to law, grant
non gratuitously the right to the use of the State-owned land to investors.
The duration of right granted to land-use shall be laid down in the contract
in accordance with the specific conditions of different industries and
projects, with a maximum duration of 70 years; where there is the need to
continue using the land after the expiry of the contract, the duration may
be extended upon approval.

    Investors may, in keeping with the relevant provisions of the State,
transfer non-gratuitously the right granted to land-use.

    Article 7  Mineral resources on Hainan Island shall be exploited with
compensation according to law. The exploitation of some mineral resources
specifically designated by the State shall be subject to approval by the
relevant competent authorities of the State; the exploitation of other
mineral resources shall be subject to approval by the People's Government of
Hainan Province. Investors are allowed to explore and develop the mineral
resources by setting up equity joint ventures, contractual joint ventures, or
foreign-capital enterprises.

    Article 8  Investors may, in the form of an equity or contractual joint
ventures, invest in the construction of infrastructure on Hainan Island such
as ports, wharves, airports, highways, railways, power stations, coal mines
and water conservancy projects or may also engage in facilities with
exclusive investment. They may also invest in various business and service
enterprises related to the above-mentioned facilities in accordance with the
relevant regulations of the State to undertake comprehensive operations.

    Article 9  Foreign-capital banks, banks with joint Chinese and foreign
investment or other financial institutions may be set up on Hainan Island
with the approval of the People's Bank of China in light of the needs of
economic development.

    Article 10  The investment in the establishment of various economic and
social undertakings on Hainan Island shall be subject to examination and
approval by the People's Government of Hainan Province. Where the investment
scope and total amount exceed the authorization by the State, the investment
shall be submitted for examination and approval according to the procedures
laid down by the State.

    Article 11  The importation of building materials, production and
managerial equipment as investment of an enterprise whose establishment has
already been approved, the importation of raw materials, accessories and
parts, packaging materials and other materials and items required for
production and operation, and the importation of means of transport and
office equipment for enterprise's own use, are to be examined and approved
by the People's Government of Hainan Province itself.

    Article 12  The enterprise income tax shall be levied at a rate of 15
percent on the income derived from production, operation and other sources by
enterprises established on Hainan Island (State banks and insurance companies
excepted). In addition, a local surtax of 10 percent of the assessed income
tax shall be levied. Among the above-said enterprises:

    (1) those engaged in the construction and operation of infrastructures
such as ports, wharves, airports, highways, railways, power stations, coal
mines and water conservancy projects etc., and those involved in agricultural
development, with an operation period of 15 years or longer, shall enjoy
a five-year income tax exemption beginning from the first profit-making year,
and shall be granted a 50 percent reduction in income tax from the sixth to
the tenth year;

    (2) those engaged in industrial, communications and transportation and
other production enterprises with an operation period of 10 years or longer,
shall enjoy a two-year income tax exemption starting from the first
profit-making year and shall then be granted a tax reduction by one half from
the third to the fifth year; those acknowledged by the People's Government of
Hainan Province as technologically advanced shall further enjoy a tax
reduction by one half from the sixth to the eighth year;

    (3) after the expiration of the stipulated period for the reduction of or
exemption from enterprise income tax according to the State, enterprises
engaged in industry, agriculture, and other production businesses, shall have
their enterprise income tax reduced to 10 percent in the year when the value
of their export products amounts to 70 percent or more of their output value
of that year;

    (4) those involved in service trades, with a total investment of or over
US$ 5 million or RMB 20 million yuan and an operation period of 10 years or
longer, shall be exempt from enterprise income tax in the first profit-making
year and enjoy a 50 percent reduction in income tax in the next two years.

    Reduction of or exemption from local income tax for enterprises within
Hainan Island shall be determined by the People's Government of Hainan
Province.

    Article 13  For investors from outside China who have no offices on
Hainan Island, a 10 percent income tax shall be levied on their dividends,
interests, rents, franchise, royalties and other incomes derived from the
island except those exempt from income tax according to law. The People's
Government of Hainan Province shall decide as to who are to enjoy income
tax reduction or exemption.

    Article 14  Enterprises with foreign investment and enterprises with 25
percent of their shares held by foreign businessmen shall enjoy the right to
conduct import and export operations, and other enterprises may enjoy the
same right, if so approved by the People's Government of Hainan
Province - i.e. to import the goods necessary for the production and
operations of their enterprises, and export their own products.

    Article 15  Customs duty, product tax and value-added tax shall be
exempted on the machinery and equipment, raw materials and parts, means
of transport and other materials and items as well as office equipment that
the enterprises within Hainan Island need to import for their own production
and operations.

    Customs duty, product tax or value-added tax shall be reduced by one half
on the goods imported for sale on the market in Hainan by enterprises on the
island.

    Article 16  The State encourages enterprises on Hainan Island to export
their manufactured products. Products manufactured by enterprises to be
exported shall be exempt from export duties, and product tax or value-added
tax already collected thereon shall be reimbursed, except for crude and
refined oil, as well as a few other products specifically designated by the
State.

    Article 17  The products manufactured by enterprises on Hainan Island and
to be marketed in Hainan are exempt from product tax or value-added tax,
whereas mineral oil, tobacco, liquor and a few other products specially
designated by the People's Government of Hainan Province are subject to a 50
percent product tax or value-added tax. Where the manufactured products
contain certain imported parts and materials, customs duty, product tax or
value-added tax shall be exempted or levied retroactively in accordance with
the stipulations of Article 15.

    Products manufactured by the aforesaid enterprises and to be marketed to
other parts in China, may be sold by enterprise themselves, except for
products whose importation is restricted by the State and which are subject
to approval in accordance with the relevant regulations of the State. But
product tax or value-added tax shall be levied on these products according
to relevant provisions. Customs duties, product tax or value-added tax on
the manufactured products containing imported parts and materials shall be
levied retroactively in accordance with relevant stipulations.

    Where the enterprises with foreign investment within Hainan Island are to
sell on the domestic market their products which conform to the standards
specified in the methods governing import substitution by the State, they may
apply to sell their products as import substitutes.

    Article l8  Foreign exchange earnings derived by enterprises within
Hainan Island from their product export and from other business activities,
may be retained in foreign currency as earned and shall be handled in keeping
with the regulations of the local People's Bank of China.

    The enterprises may adjust the surplus and deficits of their foreign
exchange and effect a balance of foreign exchange receipts and disbursements
at the foreign exchange adjustment markets located on Hainan Island or in
other parts of China.

    Article 19  Investors from abroad may freely remit from the enterprise's
foreign exchange deposit account at the bank the profits they earn from the
enterprises they set up on Hainan Island. The amount remitted shall be exempt
from income tax.

    Investors from abroad who reinvest the profit they earn from their
enterprises within the Island, for a period of not less than five years shall
enjoy a reimbursement of 40 percent of the income tax paid on the amount to
be reinvested, and 100 percent of the income tax already paid on the amount
to be reinvested shall be reimbursed if the investors elect to reinvest their
profit earnings in the construction of infrastructure and agricultural
development enterprises, export-oriented and technologically - advanced
enterprises within the Island.

    Investors from other parts of China shall be free to remit their profit
earnings from the enterprises on the Island. And no retroactive income tax
shall be levied on the profit earnings remitted to other parts of China
within ten years beginning from the first profit-making year.

    Article 20  When coming to Hainan island to negotiate investment or trade,
promote economic and technological exchange, visit relatives or to tour,
foreigners from countries or regions having diplomatic relations or official
trade links with China, may apply for entry visas at the port of Haikou or
Sanya if their stay in Hainan does not exceed 15 days; those who need to stay
in Hainan longer or who want to go on to other parts of China on justifiable
grounds, may apply for an extension of visa or obtaining an additional visa
endorsement according to relevant provisions.

    Foreigners who permanently live on Hainan Island, or who invest in the
establishment of local enterprises or participate in the development of the
island, and their accompanying family members may upon application be granted
multiple entry visas by the authorities concerned under the People's
Government of Hainan Province.

    Article 21  Compatriots from Hong Kong, Macao and Taiwan as well as
overseas Chinese holding valid passports or documents issued by the competent
authorities under the State Council or by their authorized agencies may come
to Hainan Island or proceed to other places within China without visas.
Compatriots from Taiwan may, at the ports in Hainan Island, directly apply for
Travel Certificate for Compatriots from Taiwan.

    The People's Government of Hainan Province is authorized to examine and
approve the dispatch abroad of personnel by domestic organizations in Hainan
Province that are to set up economic, trade or tourism offices or to
establish enterprises abroad, except otherwise provided by the State.

    Article 22  Matters not covered in these Provisions may be handled by the
People's Government of Hainan Province according to the provisions concerning
special economic zones.

    The rules for the implementation of these Provisions shall be formulated
by competent departments under the State Council in conjunction with the
People's Government of Hainan Province.

    Article 23  These Provisions shall enter into force as of the date of
promulgation.?