Laws of the People's Republic of China

The General Office of the State Council

Circular of the General Office of the State Council on Issues Related to the Proper Disposal of Existing Projects with Guaranteed Fixed Returns for Foreign Investors

GuoBanFa [2002] No.43

September 10, 2002

The people's governments in all provinces, autonomous regions, and municipalities directly under the Central Government, all ministries and commissions of the State Council, and all agencies directly under the State Council:

Since the promulgation of the Circular of the State Council on Strengthening the Administration of Foreign Exchange and External Debt and Launching Inspection on Foreign Exchange and External Debt (GuoFa [1998] No.31) in September 1998, all the localities have successively begun to check up and rectify the projects with guaranteed fixed returns for foreign investors (hereinafter referred to as projects with fixed returns). Over the years, quite a number of projects with fixed returns have been rectified, almost no new project with fixed returns has come into being, the interests of the State and the lawful rights and interests of investors concerned have been protected effectively. However, there are still some projects with fixed returns that have not been appropriately dealt with. After the promulgation of the Circular of the State Council on Further Strengthening and Improving the Administration of Foreign Exchange Receipt and Payment (GuoFa [2001 ] No.10), all localities have checked the existing projects with fixed returns as required and put forward recommendations on their disposal.

In order to further regulate the activities of attracting foreign funds, appropriately resolve issues left over from the past, promote the sound development of foreign funds inflow, with the approval of the State Council, a circular on issues related to the disposal of projects with fixed returns is given hereunder:

1.

Basic principles for the disposal of the existing projects with fixed returns

The practice of guaranteeing fixed returns for foreign investors does not tally with the principle of sharing interests and risks between Chinese investors and foreign investors, and violates the provisions of relevant laws and regulations on Chinese and foreign equity joint venture and Chinese and foreign contractual cooperative enterprise. Under current favorable circumstances of domestic funds being relatively abundant, financing cost being relatively low, and overall situation for attracting foreign funds being sound, local governments at all levels shall take strong measures to appropriately dispose of the existing projects with fixed returns.

The basic principles for the disposal of the existing projects with fixed returns are: abiding by the Law on Chinese-foreign Equity Joint Ventures, the Law on Chinese-foreign Contractual Joint Ventures, and other relevant policies, sticking to the principle of Chinese and foreign parties enjoying equality and mutual interests and sharing profits and risks, proceeding from benefiting the normal operation of the projects and the development of local economy, and holding adequate consultation with all parties concerned, the local government and competent department of projects concerned shall, according to the specific conditions of the projects, take effective measures to rectify them and safeguard the sound environment for attracting foreign funds.

2.

Various measures to appropriately dispose of different types of projects with fixed returns

According to the above-mentioned principles, different types of projects with fixed returns shall be disposed of in different ways listed below:

(1)

For a project where the fixed returns on the foreign investor's investment have been paid with the profits from the project, the Chinese and foreign parties concerned shall, on the basis of adequate consultation, amend the contracts or agreements, and replace the way of fixed returns with a lawful way of income distribution such as an advanced recovery of investment.

(2)

For a project where losses have incurred or income has been insufficient, part or the majority of the fixed returns on the foreign investor's investment has been paid with funds from outside the project, or original committed returns on investment have not been paid to the foreign investor, the ways of amendment, purchase, conversion and termination may be adopted in their disposal according to the specific conditions of the project.

i.

Amendment. The articles of fixed returns in the contract shall be cancelled or amended and the way and proportion of income distribution for the Chinese and foreign parties re-defined via adequate consultation of all parties concerned. The sources for advanced recovery of investment or income priority of the foreign investor shall be confined to the disposable operating income and other lawful income of the project.

In case the fixed returns to the foreign investor have been guaranteed by agreement beyond the contract, or guaranteed or committed to by local governments, local fiscal authorities, other administrative organs and units, relevant agreements and guarantee documents shall be disannulled.

ii.

Purchase. After agreement is reached via consultation, with the approval of relevant agencies, the Chinese party may purchase all of the foreign investor's stake at a rational price. The implementation of related contracts or agreements shall be terminated; remaining problems shall be handled properly according to relevant provisions; and the enterprise concerned shall be administered as a Chinese-funded enterprise after the purchase. Matters involving the purchase of foreign exchange shall be handled by the SAFE office concerned according to regulations.

iii.

Conversion. For a project with sufficient solvency for or having found an entity to repay its external debt, with agreement reached among parties concerned via consultation, an application may be filed for the conversion of the original foreign investment into the Chinese party's external debt on rational terms. With the joint approval of the SDPC, the MOFTEC and the SAFE, registration of external debt shall be conducted, and thereafter, foreign exchange purchase and payment shall be made as for external debt service. The project after the conversion shall be administered as a Chinese-funded enterprise.

iv.

Termination. For an enterprise that has made heavy losses or is unable to continue its operation, or that meets the conditions for dissolution prescribed in the contract or constitution, with the approval of the relevant competent agency, the implementation of the cooperative contracts may be terminated according to legal procedure, and liquidation may be proceeded according to relevant laws and rules.

(3)

Projects of which the anticipated returns on foreign investment are realized exclusively through purchase agreements of electricity shall not be incorporated into the current rectification of projects with fixed returns, and shall be handled in a proper and step-by-step manner in the future under the framework of overall plan for the reform of electricity system and related supporting policies.

3.

Close cooperation and strict enforcement of laws and regulations to safeguard the sound environment for attracting foreign funds

The people's government in the province (autonomous region, municipality directly under the Central Government) where the projects with fixed returns have not been handled appropriately shall, according to the above-mentioned principles and instructions, take effective measures to handle the existing projects with fixed returns and finish the rectification before the end of 2002. The administrative agencies of planning, foreign trade and economic cooperation, foreign exchange, finance and taxation, and industry and commerce at all levels and designated foreign exchange banks shall actively support this work, go through relevant procedures and appropriately handle all the specific problems involved in the rectification of the said projects according to relevant laws, regulations and policies. All the local governments shall make satisfactory explanation to the outside, and conduct adequate consultation with foreign parties concerned to avoid disputes due to simple method of work, and report in time to the SDPC and the MOFTEC any special case or problem that can not be resolved through negotiation.

As from January 1,2003, without the approval of the SAFE, the designated foreign exchange banks shall not go through the procedure of foreign exchange sale and payment for a project with fixed returns whose distributed returns to the foreign investor exceed its disposable operating income and other lawful incomes.

When actively attracting foreign investment to promote economic development, local governments at all levels shall at the same time strictly implement relevant laws, regulations, rules and policies so as to safeguard the sound environment for attracting foreign funds. Henceforth, no entity shall violate the regulations of the State by guaranteeing fixed returns for foreign investors, or borrow external debt in the name of attracting foreign investment. Once found, the violator shall be given heavier punishment; all the contracts and agreements signed shall be disannulled, and additionally, responsibilities of relevant persons in charge and person liable shall be investigated.