China Law Update€¦ · rights arising from sales, ... including the pledgor, may ask a creditor/pledgee to change or cancel ... are exempt from duties.

November 2007

China Law Update

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CHINA LAW UPDATE

In this issue of China Law Update, we look back at five sets of rules and regulations that were issued by various branches of the Chinese government in September 2007. Though none is as ambitious or far-reaching as China’s Anti-Monopoly Law (see our October 2007 issue), Labor Contract Law (September 2007) or Property Rights Law ( June 2007), all are relevant to foreigners doing business in China.

Turn to page 4, for example, to read about the Measures on Registration of the Pledge of Receivables, which put in place rules that allow businesses greater flexibility in securing financing.

With passage of the PRC Customs Interim Measures on the Administration of Bonded Port Districts (page 5), China’s State Administration of Customs continues to refine how those important free-trade areas will function.

The Measures on Administration of the Prevention and Control of Environmental Pollution by Electronic Waste (see page 7) touch upon a challenge of great significance: How China manages waste from electronic products.

And finally we look at two sets of rules related to real estate. The Circular on Improving the Management of Credit for Commercial and Residential Real Estate (page 8) represents the latest attempt by the Chinese government to slow price increases in the booming real estate market by controlling credit. And the Provisions on Granting Land Use Rights to State-Owned Construction Land Through Invitation of Bids, Auction and Listing, which we summarize on page 11, refine the procedures and rules for selling state-owned real estate.

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CHINA LAW UPDATE

Banking and Finance4 Measures on Registration of the Pledge of Receivables

Customs5 PRC Customs Interim Measures on the Administration of Bonded Port Districts

The Environment7 Measures on Administration of the Prevention and Control of Environmental Pollution by Electronic Waste

Real Estate8 Circular on Improving the Management of Credit for Commercial and Residential Real Estate

Real Estate11 Provisions on Granting Land Use Rights to State-Owned Construction Land Through Invitation of Bids, Auction and Listing

12 Faegre & Benson’s Greater China Practice

13 Lawyer Contacts for the Greater China Practice

table of contents


CHINA LAW UPDATE

Measures on Registration of the Pledge of Receivables Issuing Body: People’s Bank of China

Issuing Date: September 30, 2007

Effective Date: October 1, 2007

In March 2007, the National People’s Congress passed a sweeping new law governing the ownership of private property in China, the PRC Property Rights Law. We summarized that legislation, which took effect on October 1, 2007, in the June 2007 issue of China Law Update. That landmark legislation recognized and protected various types of ownership rights in both fixed property (real estate) and movable property, such as trucks and boats.

The Measures on Registration of the Pledge of Receivables, which were enacted by the People’s Bank of China (PBOC) and took effect on October 1, 2007, are designed to help implement China’s new property rights law. These new rules allow various types of receivables to be pledged as collateral for a loan, including a mortgage on real property. Five types of rights may be pledged to creditors:

1. rights arising from sales, including the sale of commodities, supply of water, electricity, gas, heat and the license of intellectual rights;

2. rights arising from leases, including the lease of moveable or real property;

3. creditors’ rights arising from the provision of services;

4. toll collection rights on roads, bridges, tunnels and ferries; and

5. rights arising from loans or other credits.

The PBOC’s Credit Investigation Center (CIC) is in charge of the registration of all such pledges and will publish registration information. Registration should be handled by the pledgee/creditor or the authorized agent of the pledgee/creditor. The term of each registration may not exceed five years, but can be extended upon application of the pledgee, if and as stipulated in the pledge agreement. Pledgees should register any change in the registered name or identification number of the pledgor at the CIC within four months of the date when such change takes place, or else registration of the pledge will be terminated.


CHINA LAW UPDATE

Relevant parties, including the pledgor, may ask a creditor/pledgee to change or cancel a registration, or may appeal to the CIC and register an objection. However, the CIC will cancel an objection registration if the objecting party fails to sue the creditor/pledgee for such dispute within 15 days of filing the objection registration.

All entities and individuals may search registration information after registering as a user of the registration system. The CIC will provide an authenticated certificate of registration, if so requested. The CIC is obligated to keep registration records for 15 years after expiration of the registration.

The adoption of these rules allowing the pledge of receivables might help some enterprises deal with interim cash flow pressures and offer some relief from the difficulty of securing corporate financing.

PRC Customs Interim Measures on the Administration of Bonded Port Districts Issuing Body: State Administration of Customs


Effective Date: October 3, 2007

Bonded port districts are a relatively new concept in China, designed to promote international free trade by providing preferential (usually duty-free) treatment for all goods that are stored, packaged, processed or manufactured within designated port areas. Related logistics services are also given preferential treatment. All bonded port districts must be approved by China’s State Council and operate under the strict supervision of local customs offices. As of October 1, 2007, China had four bonded port districts.

The PRC Customs Interim Measures on the Administration of Bonded Port Districts, which were published in September by the State Administration of Customs, define bonded port districts (Port Districts) and clarify customs supervision policies governing Port Districts.


CHINA LAW UPDATE

The law broadly defines the types of businesses that are permitted to operate in Port Districts:

1. storage of imported commodities and commodities that are to be exported;

2. international trade, including the entrepot trade (i.e., distribution and transshipment);

3. international outsourcing, distribution and delivery;

4. international commodities transit;

5. product testing and after-sales service;

6. commodities display;

7. research and development, processing and manufacturing;

8. port operations; and

9. other businesses approved by authorized customs officials.

In most cases, only independent legal person enterprises are allowed to register in Port Districts. Under special circumstances, however, enterprises registered outside Port Districts may, with the approval of local customs officials, establish branches (which do not themselves have legal person status) inside the Port District.

Processing businesses registered in Port Districts are not governed by the processing deposit, contract verification and raw material-consumption management policies that apply to processing factories outside Port Districts.

Unless otherwise provided in laws or regulations, machines, equipment and reasonable office facilities imported to Port Districts, as well as commodities exported from Port Districts, are exempt from duties. Similarly, neither China’s nationwide import and export quota policy nor its import and export permit policy apply to commodities imported or exported between Port Districts and foreign countries.

For trade within Port Districts, commodities may be freely transferred between and among enterprises registered in such districts. Enterprises are required, however, to report to customs in a timely manner the name, number and amount of the transferred commodities.


CHINA LAW UPDATE

All individuals and transportation vehicles will be checked by customs when entering or leaving a Port District. Passengers with private belongings will also be checked, subject to cross-border exit-entry rules, when they enter or leave.

Measures on Administration of the Prevention and Control of Environmental Pollution by Electronic Waste Issuing Body: State Environmental Protection Administration


Effective Date: February 1, 2008

China has previously attempted to control pollution caused by electronic products during the original manufacturing, import and sales processes, enacting the Measures on the Administration of Controlling Pollution Caused by Electronic Information Products (the EIP Measures) in February 2006. We summarized that comprehensive law, which took effect on March 1, 2007, and related standards in the November 2006 issue of China Law Update. We also provided a subsequent update in April 2007.

With passage of the Measures on Administration of the Prevention and Control of Environmental Pollution by Electronic Waste (the Electronic Waste Measures), China has now begun to regulate the business of disassembly, reuse and disposal of electronic waste, combating pollution arising from such business by establishing higher entry thresholds and requiring better environmental protection facilities. The Electronic Waste Measures regulate hazardous substances, including those covered by the EIP Measures enacted in February 2006—lead, mercury, cadmium, hexavalent chromium, polybrominated biphenyls (PBBs) and polybrominated diphenyl ethers (PBDEs).

The Electronic Waste Measures were issued by China’s State Environmental Protection Administration (SEPA), with responsibility for enforcing the laws mostly being delegated to provincial, regional and local offices of the Environmental Protection Bureau (EPB). The new law requires all operators of disassembly, reuse and disposal businesses (Electronic Waste Operators) to be registered at the local EPB. Electronic Waste Operators are required to comply with all relevant environmental protection standards in operating their business. Their environmental facilities must also be verified and approved by the appropriate EPB. Those who disassemble, reuse or dispose of electronic waste without the verification and approval of the EPB may be penalized by a fine of as much as 100,000 RMB.


CHINA LAW UPDATE

The Electronic Waste Measures also require manufacturers, importers and sellers of electronic products to disclose: (1) the presence of hazardous substances in products or equipment; (2) the possible impact on the environment or human body if such products or equipment are misused; and (3) information about how to reuse or dispose of the product or equipment in an environmentally friendly manner. Manufacturers, importers and sellers are likewise required to establish a recycling system to reclaim abandoned electronic products or equipment, and are responsible for storing, reusing or disposing of waste in an environmentally friendly manner. However, the Electronic Waste Measures neither clarify how the EPB will supervise such a disclosure and recycling system, nor provide penalties for violations. Such gaps will likely be dealt with by forthcoming rules and regulations.

In addition, the Electronic Waste Measures require entities that are manufacturers, sellers, importers or users of electronic products, as well as Electronic Waste Operators who cannot completely and properly dispose of electronic waste, to deliver electronic waste to capable Electronic Waste Operators that have been registered with the EPB. Entities that bring industrial electronic waste to Electronic Waste Operators should keep a record of the type and amount of such waste and report disposal information to the EPB. Entities and Electronic Waste Operators that violate the above provisions may be imposed a fine of up to 30,000 RMB.

Circular on Improving the Management of Credit for Commercial and Residential Real Estate Issuing Body: People’s Bank of China and China Banking Regulatory Commission


Effective Date: September 27, 2007

China’s banking regulators have previously attempted to restrict credit for real estate development through such legislation as the Circular on Further Strengthening the Administration of Real Estate Credit, which was enacted in July 2006. Now China’s top banking authorities, the People’s Bank of China (PBOC) and the China Banking Regulatory Commission (CBRC), are again requiring all banks, including foreign-invested banks, to implement stringent criteria on lending to commercial real estate


CHINA LAW UPDATE

developers, individuals intending to purchase larger or second homes, and individuals and entities that want to purchase business real estate. The Circular on Improving the Management of Credit for Commercial and Residential Real Estate (the Credit Management Circular) tightens a number of lending rules, apparently in an effort to slow booming real estate prices.

Loans to DevelopersThe Credit Management Circular places a number of restrictions on loans to real estate developers:

• Banks are prohibited from making any type of loan for real estate development projects where the developer has not contributed at least 35 percent of the project capital from its own funds, or where the land use right certificate, construction land zoning permit, construction planning permit and construction work commencement permit have not all been obtained.

• Banks are not supposed to provide loans to any developer that has been determined to be a speculator in land or housing by competent land and construction authorities.

• Banks may not accept the real estate that is to be developed as collateral for a mortgage, if such real estate has been unused and empty for more than three years.

Loans that meet the above criteria should be used only for the local development project, and not for projects located elsewhere, unless otherwise approved by the supervising authority.

Loans to ConsumersFor individual housing loans, the PBOC and the CBRC require banks to focus on providing loans to borrowers who intend to purchase their first small- to medium-sized apartment for personal use. The Credit Management Circular institutes a number of restrictions on residential as well as commercial loans:

• Banks may only lend money to borrowers who are purchasing an apartment in a building that has already been completed. Those purchasing an unfinished apartment cannot get loans from a bank.

• Borrowers shall pay no less than 20 percent of the purchase price as an initial down payment for loans to buy a first personal-use apartment that is 90 square meters or less in size.

• Borrowers wishing to purchase a first apartment for personal use shall pay at least 30 percent of the price as a down payment if the apartment is larger than 90 square meters.


CHINA LAW UPDATE

• Borrowers who are purchasing a second or additional home shall pay at least 40 percent of the purchase price as an initial down payment and pay at least 110 percent of the current interest rate published by the PBOC (7.83 percent on a five-year loan, as of September 15, 2007).

• The interest rate and minimum initial down payment also increase according to the number of apartments the borrower has purchased.

With respect to loans for purchasing business real estate, the Credit Management Circular requires the initial down payment to be not less than 50 percent of the purchase price; the term of the loan should not exceed ten years; and the interest rate should be not less than 110 percent of the current rate published by the PBOC. The above-mentioned credit policies also apply to loans for purchasing “dual purpose” (business and living) real estate, except that the minimum down payment required for such loans is 45 percent of the purchase price, 5 percent lower than the rate for business real estate.

SupervisionAll banks, including wholly foreign-owned banks and China branches of foreign banks, are asked to implement new rules in order to carry out the policies contained in the Credit Management Circular. Such implementing rules should be reported to and filed at the PBOC and the CBRC. How banks fulfill this mandate—for example, in carrying out the second-home policy—will greatly influence this law’s effect.

China’s top authorities have struggled for several years to slow booming real estate and housing prices. This Credit Management Circular is intended to control and tighten the cash flow of real estate developers, thus forcing them to reduce sales prices. However, it is difficult to predict the influence of these new credit rules.


CHINA LAW UPDATE

Provisions on Granting Land Use Rights to State-Owned Construction Land Through Invitation of Bids, Auction and Listing Issuing Body: Ministry of Land and Resource


Effective Date: November 1, 2007

The Ministry of Land and Resources (MLR) issued the Provisions on Granting Land Use Rights to State-Owned Construction Land Through Invitation of Bids, Auction and Listing on September 28, 2007. These provisions extensively amend a previous version of the same law, which was issued in May 2002.

The new version of this law contain three major amendments: 1) it allows industrial land to be put up for public bid, auction or listing to transfer ownership; 2) it allows construction land use rights to be granted in layers (above-the-ground/air rights; the surface of the land; and underground); and 3) the new version of the law permits the Construction Land Use Rights Certificate (the Construction Certificate) to be issued only after a buyer has paid land grant fees in full.

Enterprises that purchase industrial, commercial, touring, recreational and commercial housing land with plans to build on such land will be greatly affected by the amended provisions on issuance of a Construction Certificate. Under the new provisions, if the buyer is not able to pay all land grant fees, the land bureau will not issue a certificate. Without a Construction Certificate, the buyer may not be able to apply for other necessary permits and the title, even if construction has been completed. And banks will not accept the land as collateral for a mortgage if the buyer does not have the Construction Certificate for such land. In addition, the MLR is not supposed to permit lower-level land bureaus to issue a pro-rated Construction Certificate for part of the subject land, if the buyer pays a certain percentage (but not all) of the land grant fees.

It is not clear whether local land bureaus will strictly implement this last provision, since the MLR has issued similar regulations in the past. If it is strictly implemented, however, real estate developers and enterprises that plan to purchase land and build their own facilities may face a tighter cash flow in order to pay land grant fees during the first phase of construction.


CHINA LAW UPDATE

Faegre & Benson’s Greater China PracticeFaegre & Benson llp has extensive experience advising U.S., European and Asian clients on entering the China business environment, as well as on investment, trade and commercial matters throughout the Greater China region. From our offices in Shanghai and Minneapolis, lawyers in our China practice regularly provide international structuring, documentation and negotiation assistance for transactions both inbound to and outbound from Mainland China, Taiwan and Hong Kong.

The core of our team includes highly experienced legal professionals who have studied and practiced in both the U.S. and in China. In addition, we collaborate with an extensive informal network of local law firms, which possess expertise vital in an often ambiguous regulatory environment, where local custom and practice can vary.

Lawyers in our China practice represent clients ranging from privately held emerging companies to Fortune 50 multinationals in connection with their cross-border business dealings involving China. Our experience includes work in the industrial manufacturing, consumer products, telecommunications, hospitality, financial services, software, automotive, engineering, chemical products, pharmaceuticals, infrastructure, restaurant, and construction industries.

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CHINA LAW UPDATE

George D. Martin Phone: 612 766 7055 | Email: [email protected] leads the firm’s Greater China practice, and is a partner in the firm’s Minneapolis office. He has extensive experience in both China and Central Europe, advising U.S. and European multi-national companies on investment and operational matters including international joint ventures, mergers and acquisitions, and franchising; establishment of wholly foreign owned enterprises, including assembly and processing facilities in free trade zones; licensing and technology transfer arrangements, including trade secret protection; commercial contracting for overseas operations; investment restructuring and review; Foreign Corrupt Practices Act compliance; and government relations, negotiations, and approvals.

Peter A. Neumann Phone: +86 21 6279 8738 | Email: [email protected] is a partner in the Shanghai office, has been resident in China since 1993 and is fluent in spoken and written Mandarin Chinese. Peter practices principally in broad-based foreign direct investment, mergers and acquisitions, private equity, technology and commercial matters. He has represented a wide range of publicly-held and privately-held companies based in the U.S., Europe, UK and Asia in such industries as electronics, industrial manufacturing, fine chemicals, software, telecommunications and Internet. Peter’s experience includes advising and assisting companies on acquisitions, greenfield investments, financing, restructuring, sourcing, sales and distribution, site acquisitions, customs and foreign exchange controls and regulatory compliance.

Yiqiang (Lee) Li Phone: +86 21 6279 8988 | Email: [email protected] is a partner in the corporate practice in Shanghai office and provides a full range of legal services in connection with foreign investment and commercial matters in China. He is also licensed to practice law in the United States. Lee’s practice is focused on the telecommunications, automotive, manufacturing, architectural, hospitality, insurance and finance industries, as well as restructuring and bankruptcy matters.

Lawyer Contacts for the Greater China Practice

© 2007 Faegre & Benson llp. All rights reserved.

China Law Update€¦ · rights arising from sales, ... including the pledgor, may ask a creditor/pledgee to change or cancel ... are exempt from duties.

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