Effective November 1, 2000, two major foreign investment laws were amended in anticipation of China's entry into the World Trade Organization ("WTO"). The Chinese government amended both the law on Sino-foreign cooperative joint ventures ("CJVs") and the law on wholly foreign-owned enterprises ("WFOE"), removing earlier restrictions in the areas of foreign exchange management, raw material sourcing, sale of products and reporting of business plans.

The relevant foreign investment legislation was promulgated in 1979, 1986 and 1988, respectively, and constitutes an important part of the fundamental legal basis for the establishment, operation and regulation of foreign-invested enterprises (FIEs) in China. These legislative amendments represent the first major step on the part of the Chinese government to honor its commitments under its pending WTO membership.

We highlight and summarize the key amendments below. Proposals for similar amendments to the Sino-Foreign Equity Joint Venture Law (the "EJV Law") have been submitted to the People's Congress and are expected to be approved next year, as China continues to implement new law relating to the WTO.

Foreign exchange balance requirement no longer applies.

The Sino-Foreign Cooperative Joint Venture Law (the "CJV Law") previously stipulated, "A CJV shall rely on itself to maintain balance of its foreign exchange income and expenses." The previous Wholly Foreign-Owned Enterprises Law (the "WFOE Law") contained a similar requirement. Pursuant to the earlier requirements, where a CJV or a WFOE desired to make payments or remittances in foreign currency outside of China, these had to be made from the company's own foreign exchange funds. The foreign exchange balancing requirement has now been deleted from the law. CJV's and WFOE's can now purchase foreign currency from commercial banks under the new legal regime, subject to satisfaction of the relevant foreign exchange control rules.

FIEs allowed to equal access to domestic and overseas suppliers.

Foreign-invested enterprises (FIEs) were required under previous law to give priority to domestic suppliers when sourcing their raw materials and equipment. The new amendments permit free sourcing of raw materials, fuel, components, etc. from either China's domestic market or from overseas, without priority requirements favouring domestic suppliers.

Mandatory export requirement removed.

Previously, the WFOE Law required WFOEs to export at least 70% of their products, except where special exemptions were granted, such as for advanced technology contributions. Mandatory export requirements were also imposed on CJVs, in order to support the earlier foreign exchange balance requirement. Under the newly adopted amendments, no export requirement is mandatorily imposed. Rather, the State will encourage the use of advanced technology and the export of products, but each FIE shall be free to allocate sale of its products to either the China's domestic or export market.

Business plan filing no longer required.

Previously, the WFOE Law required that the production and business plan of the WFOE be filed with the relevant government authority. The newly adopted amendments repeal this requirement, as the current focus for government control is on macro economic matters, rather than the operations of an individual enterprises.

Forecast on future legal changes relating to China's Entry into the WTO.

Apart from the proposals for similar amendments to the Equity Joint Venture Law which are expected to be promulgated next year, other legal changes are expected as well. For example, it has been reported China's Tax Bureau is seriously considering the merger of its bifurcated tax regime, bringing together the separate taxation systems for foreign and foreign-invested companies, on one hand, and Chinese companies, on the other. Among other things, this could potentially lead to the modification or termination of the special tax holidays and benefits which are now granted broadly to FIEs, in favor of a unified taxation approach without such privileges which heretofore have been solely available to foreign investors. Further developments in this area will be reported in future China Briefings of Morrison & Foerster LLP.

Because of the generality of this newsletter, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.