General Introduction
While the Chinese government is continuously opening various categories of industries for foreign investors, there are still limitations and restrictions in specific areas for foreign companies without a Joint Venture partner.
However, the Chinese government encourages local corporations to join together with foreign investors to integrate technics, investment, and management experience, while foreign companies obtain easier access to the market and expand their market share.
Types Of Joint Ventures In China
There are two forms of joint venture partnerships between foreign and Chinese corporations recognized by the Chinese government: equity joint ventures and cooperative joint ventures, depending on investment method and liability.
Equity Joint Venture
An equity joint venture (EJV) is formed by the contribution of equity from both foreign and Chinese partners on the principle of mutual benefits and limited liability. The foreign investors need to contribute at least 25% of the equity of the company. This ratio is subject to increase to a maximum of 70% (up to USD 3 million) depending on the total registered capital of the joint venture. Investment can be in the forms of cash, real estate, industrial property, equipment, or technology, whose “market value” needs to be assessed by an independent third party. Failure to land the investment capital within a certain time window may lead to a penalty of fines.
Cooperative Joint Venture
A Cooperative Joint Venture (CVJ), also known as a contractual joint venture, comes into two forms: limited liability or unlimited liability. The requirements and regulations of forming a limited liability CJV are very similar to that of an EJV. The foreign entity should provide the majority of the funds and technology, while the Chinese partner contributes land, facilities, natural resources, manpower, and a limited amount of money. Compared to EJV, the major difference is that there is no minimum capital requirement for foreign investors.
The unlimited liability CJV is starkly different from EJC and limited liability CJV. Unlike the former, an unlimited CJV provides a means by which a negotiated partnership can be affected by two partners. In this way, a foreign partner can provide capital or expertise that is not directly tied to equity in the partnership. What this means, is that the partner can take a minority stake in the partnership. What‘s more, the partners do not need to establish a new entity to represent them; both partners in the joint venture provide funds, assets, and technology directly in line with the articles of the joint venture, including levels of management. As control of the partnership is not dependent on equity stakes, the foreign partner may also recover their investment in the event that the joint venture ends and reverts to the Chinese partner, so long as those terms are written in the articles at the start of the venture.
Are Joint Ventures Even Necessary Today?
There remain many industries that are closed to foreign companies in China, often on the grounds of heritage or national security. For instance, hospitality, chemical, and automotive companies. If you are planning to operate in those limited areas, you still need to cooperate with a Chinese partner to form a joint venture.
